The Solid Surfer.com

Warren Buffet Invests in Israel

Kudos to billionaire investor Warren Buffett and his company Berkshire Hathaway, who recently purchased Israeli machine tool maker Iscar Metalworking and several other local businesses. The Iscar investment, valued at over $4 billion, spurred an immediate boost to Israel's business climate, as both the Tel Aviv stock exchange and the value of the shekel subsequently hit record highs.

At a time of such great political uncertainty, the Buffett investments show some much welcomed (and in many ways, much needed) confidence in the future of the Jewish state. Furthermore, the "Sage of Omaha" isn't the only backer of Israeli ventures; computer chipmaker Intel, for one, recently announced plans to build a new hi-tech microchip factory in the nation as well.

Israel's economy and its people are alive and kicking, and regardless of what certain anti-Semitic Iranian nutcases may think, the Jewish nation will surely remain that way.

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Update: If you're interested in learning more about Israel's vibrant business, medical, and technology sectors, Israel21c is a superb and fascinatingly interesting resource.

Illegal Immigrants and the U.S. Economy

Dennis Prager has written an insightful article explaining why, contrary to popular perception, illegal immigrants have not actually taken jobs away from most Americans. America's economy, Prager demonstrates, has been so strong that regardless of immigration numbers, virtually anyone searching for a job will eventually find one. This essay is not a blanket support of illegal immigration (Prager worries about properly assimilating them and recommends building a fence between the U.S. and Mexico), but it raises some excellent points that should allay certain economic fears.

On a similar note, I'd like to refute another common misperception - the belief that illegals are necessary to perform certain jobs that Americans refuse to do. Quite simply, it's not true. Illegals indeed comprise a large percentage of workers in relatively menial fields such as housecleaning, construction, farmwork, and (NY mayor Michael Bloomberg's favorite) golf course maintenance. But they occupy these jobs not because Americans flat-out refuse such positons, but because Americans refuse such positions at current wage rates.

This is a highly important distinction. The problem with housekeeping is not that we Americans consider the work beneath us; it's that the work generally pays less than $10/hour. If cleaning homes paid, say, $50/hour, we'd be lining up to do it by the thousands.

For many illegals, however, $10/hour is a large sum compared to salaries back home. These people hence certainly don't mind (and are often quite thrilled at the prospect of) working such jobs. The presence of so many illegals in these low-wage positions is not evidence that Americans have lost their work ethic, but rather a function of basic economics.

So what would happen if the illegals weren't here? Americans would, of course, perform these jobs, but the wage rate would rise to meet their higher salary demands. This in turn would drive employers to compensate at first through cost-cutting measures (primarily layoffs and outsourcing), but later through innovation and increased productivity. Reducing illegal immigration, then, will likely hurt our economy in the short run, but greatly help it long term.

Economics and Taxes: The Laffer Curve Explained

In his recent interview on our site, Texas congressional candidate Van Taylor raised an important economic point that I'd like to clarify for anyone who may be unfamiliar: the phenomenon of how lowering tax rates can lead to increased, and not decreased, government revenue.

As Mr. Taylor mentioned, when President Bush's lowered our nation's capital gains tax by 25%, federal government revenue from that tax doubled from $300 million to $600 million. But how can this be, you might be thinking; given that taxes are the primary source of government income, wouldn't higher taxes logically lead to more money in federal coffers?

In reality, the answer is sometimes it does, sometimes it doesn't. And the explanation behind this apparent contradiction is best demonstrated through a graph called the Laffer Curve, which plots government revenue from maximum to minimum along a scale of taxation from zero to 100%.

So how do we make sense of it? Let me explain with an example. Say you have a hypothetical nation that has no taxes. Naturally, this means the government receives no tax revenue. But our government doesn't like having no money, so it decides to raise the tax rate on its citizens' incomes to 1%. Now, all of a sudden, the government has some funds, and it is happy. So it decides to raise the rate again to 10%. And now the government makes even more money and is happier still.

So far so good, but now the government gets greedy. It decides to raise the tax rate all the way to 100%, thinking it will maximize revenue. But all of a sudden, the nation's citizens decide to stop working, because what use is work if they don't get to keep any of their money? Government revenue hence plummets back to zero, and the government is as broke as when it charged no taxes at all.

As we can see, then, taxing people both too little and too much can hurt government revenue. Tax too low and you won't receive enough from each citizen, but tax too high and you'll disincentivize people to work and invest, thereby reducing the number of taxpayers available to fund you.

The optimal tax rate that maximizes government revenue, then, is somewhere between these two high and low extremes. It is this relationship, as expressed on a chart, that we notate as the Laffer Curve.

Being only a representation of data, the curve cannot by itself determine the optimal tax rate (the sample curve above may appear to be maximized at 50%, but this is only a random example); only real-life data can do so. And according to it, the optimal tax rate is very low - perhaps 15% or 17% on income tax.

But whatever the actual optimal rate, if your current tax rate lies above it, lowering taxes will move you towards the optimum and will increase government revenue. If, on the other hand, your current tax rate lies below the optimal rate, raising taxes will move you towards the optimum and therefore increase government revenue. The tax cut to which Mr. Taylor referred raised government revenue precisely because the original tax rate lay above the optimal rate, and cutting it helped bring it closer to maximization.

The question the federal government should ask itself, then, is not whether to raise or lower taxes purely to achieve a rise or cut, but how to adjust taxes accordingly so that they reach the optimal revenue-maximization point on the Laffer Curve. Right now, America's tax rates seem to be above the optimal rate, so cutting taxes toward that rate (but not overshooting it by reducing taxes too much) is quite certain to increase the government's pockets. Given that tax cuts also greatly boost private-sector economic performance, they seem in this situation like a win-win proposal for all involved.

Iran's Oil Bourse: A Threat to America?

In addition to nuclear weapons threats, Iran apparently has begun an economic offensive against America. According to Israel Insider (and several other publications), the Mullahs plan to open an international oil bourse (a European term for trading exchange) on March 20 that would trade petroleum using euros as currency. Currently the entire world uses American dollars for such trading, and Iran believes a euro-based exchange will encourage other nations to withdraw their ample dollar reserves involved. This, the Mullahs hope, would trigger massive dollar inflation and greatly increase the cost of and risk of default on foreign debt, sending the U.S. economy into a tailspin.

The article's author believes America is vulnerable both because foreign nations have accumulated large dollar reserves to help finance petroleum purchases and because America borrows large sums from these same nations to support its own budgetary overspending. With the euro available as an alternate currency, the foreigners will want to diversify so to hedge against any dollar depreciation, and the necessary dollar dumping will flood the U.S. market causing hyperinflation. Furthermore, without such high reserves, the foreigners will become less inclined to lend to America, and the cost of said borrowing (and hence the default risk) will rise. Collectively, the author predicts, this will lead to long term stagflation and the end of American economic dominance.

So now we must ask - is this threat legit? Does Iran really have such power over us? The possibility certainly seems alarming, but I wouldn't be so sure. Surely Iran aims to harm us, but whether their plan will succeed is another matter entirely. I believe Iran's strategy will fail due to several key factors the article's author overlooks.

First, oil trading is not a large part of our economy. Even if foreigners decide to trade oil entirely in euros, they are still likely to maintain their dollar reserves as backup for their enormous investments in U.S. stocks, funds, real estate, and other equities.

Secondly, even if they do begin to dump dollars, long-term inflation is no sure bet. America can always counter by lowering the cost of using dollars on its own NYMEX exchange, and naturally the foreigners will return to greenbacks to get a better deal. (See the first comment at the end of this article.)

In addition, a rise in the cost of foreign debt (unlikely anyway due to the two above principles) would have far less impact on the economy than the author conveys, because compared to GDP the debt itself is actually minimal. As long as GDP growth keeps up with debt percentage-wise (and we have little reason to believe it won't), we should run no greater risk of default than ever before.

Iran may intend to undercut the U.S. economy, but I don't believe their strategy will work. That's not to say they won't hurt us at all, but it shouldn't be nearly as catastrophic as they hope. The Mullahs may be overconfident as always, but then again, they haven't exactly been known for levelheaded political thinking. America must monitor this situation intently and respond as necessary, but market principles and our internal productivity should allow us to strongly pull through.

If we attack Iran, it will be motivated not by oil or economics, but to stop a fanatic regime from threatening the world with WMDs. As opposed to the oil bourse situation, on this issue we must hurry and act accordingly.