One of Spain’s largest defense splurges may also be one of its most embarrassing. After spending nearly one-third of a $3 billion budget to build four of the world’s most advanced submarines, the project’s engineers have run into a problem: the submarines are so heavy that they would sink to the bottom of the ocean.
Miscalculations by engineers at Navantia, the construction company contracted to built the S-80 submarine fleet, have produced submarines that are each as much as 100 tonnes (110 US tonnes) too heavy. The excess weight sounds paltry compared to the 2,000-plus tonnes (2,205 US tonnes) that each submarine weighs, but it’s more than enough to send the submarines straight to the ocean’s floor.
Given the mistake, Spain is going to have to choose between two costly fixes: slimming the submarines down, or elongating them to compensate for the extra fat. All signs point to the latter, which will be anything but a breeze—adding length will still require redesigning the entire vessel. And more money on top of the $680 million already spent.
The Senate hearings on Apple’s alleged manipulation of corporate tax laws have taken a rather unexpected turn. The usual political grandstanding even when it makes no logical sense has taken place, to wit John McCain’s comments:
“Apple’s corporate tax strategy reflects a flawed corporate tax system that allows large multinational corporations to shift profits offshore to low-tax jurisdictions. For years, Apple has opted to forgo fully contributing to the U.S. treasury and to American society by shifting profits and circumventing U.S. taxes. In the last four years alone, Apple has avoided paying taxes on $44 billion in income.”
Note the cognitive dissonance in the statement. On the one hand Apple operates its business in accordance with a poor tax system while on the other it nefariously moves around money in order to bilk the government and US society of its just due. Do you doubt that the legal system which these same senators allow to flourish would not tear into the company with all manner of strike suits were it to voluntarily pay several billion dollars more than it owed to the government.
So things were moving along as scripted until Senator Rand Paul essentially said that the hearing was perhaps the biggest sham to hit the Hill in , say, the past week.
Here is his text in case you prefer it that way.
I am offended by the tone and tenor of this hearing. I am offended by a $4 trillion government bullying, berating and badgering one of America’s greatest success stories.
Tell me one of these politicians up here that doesn’t minimize their taxes. Tell me a chief financial officer that you would hire if he didn’t try to minimize your taxes legally. Tell me what Apple has done that is illegal.
I am offended by a government that uses the IRS to bully groups such as the Tea Party but I am also offended by a government that convenes a hearing to bully one of American’s success stories.
I am offended by the spectacle of dragging in here executives from an American company that is not doing anything illegal. If anyone should be on trial here, it should be Congress.
I frankly think the Committee should apologize to Apple. I frankly think Congress should be on trial here for creating a bizarre and byzantine tax code that runs into the tens of thousands of pages, for creating a tax code that simply doesn’t compete with the rest of the world.
This committee will admit: Apple has not broken any laws. Yet, they are forced into a show trial at the whims of politicians, when in fact; Congress should be on trial for chasing the profits of great American companies overseas. You haul before this committee one of America’s greatest success stories and you want applause?
I say, instead of Apple executives, you should have brought in a giant mirror, so we could look at the reflection of Congress because this problem is solely and completely created by the awful tax code.
If you want to assign blame, the Committee needs to look in the mirror and see who created this mess, see who created the tax code that drives American companies overseas.
Our corporate tax is more than double Canada’s. I never thought I would be complimenting Canada’s tax code our tax code is double Canada’s. Our corporate tax is over ten points higher than Europe. Instead of saying theirs is too low, why don’t we set about to work that ours is too high.
Apple has 600,000 jobs they’ve created, American jobs and we want to drag them before this committee to chastise them. I find it abominable. Just in my state, we have $700 million in sales from Dow Corning. They make Gorilla Glass.
They were virtually out of business. In the 1990s, Apple struggled if I had to guess, unfortunately, I didn’t guess enough to invest in Apple, but the thing is that in the ’90s, people were worried they might go out of business. You know they had one computer that wasn’t doing well and then all of a sudden the innovation that came about. And we want to bring them forward and chastise them for their success.
A couple years, we did repatriation of foreign capital. If we want the capital to come home, don’t double tax it. We tax it 35 percent. Let’s tax it at 5 percent.
I have a bill that would repatriate profits from foreign companies at 5 percent and put it into infrastructure. Our country is woefully short of money for infrastructure. But you’re not going to get it at 35 percent– you are getting zero. Let’s make it 5 percent and create and infrastructure fund.
There are probably 70 votes for that in Congress but nobody will bring it up. Why? They saw, “Oh it’s the sweetener for overall tax reform, which is illusive and a hill too tall to climb that it never seems to get here.”
Why not tomorrow pass it? Why do you think people are frustrated with Congress? Because we don’t do the right thing. Everybody admits, even those that want to drag Apple before this committee, they admit that the tax code is our problem.
But if we had repatriation at 5 percent, then they would bring money home. Why don’t we just pass it? Instead it has to be revenue neutral, scored by the CBO just pass it if it’s the right thing to do.
I would say what we really need to do is to apologize to Apple, compliment them for the job creation they are doing, and get about doing our job.
Look in the mirror and let’s make the tax code better, fairer, and more competitive world-wide. Money goes where it is welcome and currently our tax code makes money not welcome in our country.
Thank you, Mr. Chairman.
I’m no fan of either of the Pauls, Ron or Rand, but I will give it up to him for these remarks. The idea of offering some sort of one-off deal to lower the rate to induce repatriation of offshore funds which would be dedicated to infrastructure spending is about a third or fourth best alternative but at least it is a constructive suggestion. For more fundamentally sound reform ideas I suggest you read MeganMcArdle’s column on the subject.
Senators Levin and McCain along with other members of their tribe set out to create a bit of political theater. They got upstaged badly and in the process exposed the abomination which they created.
A bit off the beaten path for this blog but one worth visiting in light of recent events is Walter Russell Mead’s post on the latest from the culture police. He’s writing about the joint letter from the Department of Justice and Department of Education setting forth new criteria for determining the existence of sexual harassment. The Cliff Notes version of the test – if someone finds a remark offensive it’s harassment. They pair their new criteria with a lowering of the bar for conviction of the crime.
Walter Russell Mead has a very good post on the new policy which you should read in its entirety. For now consider his thoughts on the broader implications.
Sexual harassment is wrong, and anyone who spends time on an American campus knows that the problem of improper and unwanted sexual advances and conduct is both serious and real. But the clumsy efforts of bureaucrats to regulate the romantic lives of millions of teenagers and early twenty-somethings by ill judged official decrees will not help.
The Obama administration seems to be doing its level best to convince the American people that a large and powerful federal government is a threat to liberty. From IRS zealots blatantly using their powers against political enemies to prosecutors overreaching in attacks on journalists to deranged bureaucrats attacking fundamental standards of fairness on campus, the federal government is daily demonstrating the danger of giving it too many missions.
This is not a Tea Party blog and there are no pictures of Ayn Rand in our boardroom. With George Washington and Alexander Hamilton we believe in a federal government that is active and strong enough to secure the general welfare. But the sprawling, overreaching, under-managed, over-priced clumsy behemoth stumbling across the American landscape today is something very different from the government the United States needs.
It’s illogical to think that in the early part of the 21st century we are going to roll back government to something resembling its reach in, say 1920. Too many people want a more expansive government presence, their is demonstrable good which has come from efforts to take the rougher edges off of a free market capitalist society as well as advance social justice and, frankly, much of it is too ingrained in society to rip out. That being said, Mead is absolutely right that what we now have is government which has morphed into something we need to fear. Yes, it has been given too many missions but more to the point a faceless bureaucracy accountable to no one has expanded, interpreted and even created missions never intended according to the whims, biases and goals of its denizens.
Like Mead I am not a Tea Party type, but I am less reluctant than I was last week to label their reservations about government as paranoid reaction.
This is a post I started to write last week, got sidetracked and now it seems a bit timely once more. I’m talking about Tesla, the electric car manufacturer, and frankly I don’t see what the hype is about, why the stock has gone through the roof and why anyone would buy into the secondary offering at these prices.
Let’s start with the business. Tesla makes an electric car, specifically a high-end fairly expensive electric car. Fans rave about the fit, finish and the performance. The reviews from the automotive press have been no less effusive. Fair enough, the company has managed to build a beautiful piece of machinery. But it’s a piece of machinery with a fatal flaw – it can’t go very far with out stopping for a long time to recharge. The now infamous NY Times article about a road trip in an earlier model highlighted the challenges of operating an electric vehicle outside of a fairly limited box. But let’s leave the discussion about the utility of electric vehicles to another day, this is about the financial and stock performance of the company.
There was a lot of oohing and aahing about the Q1 results the company announced last week. The company came in with earnings of .12 cents a share and sales were up to $562 million. All impressive but they still so far as I can see aren’t producing automobiles profitably. Gross revenues included $6.6 million from the production of power trains for Toyota and $67.9 million in zero emission vehicle credits (ZEV from now on). From the 10Q it appears as if they exclude the Toyota payments from automotive sales but include the ZEV credits. Take out the ZEV credits only and you’re looking at a loss of around $56 million.
So all of this sent the stock soaring.
Now the initial explanation for the pop about a week ago was that there was a lot of shorts and the earnings report had them running for cover. The numbers don’t lie, more than 40% of the stock is sold short. That made a lot of sense when the stock popped after earnings came out but I can’t believe that it’s the whole story, particularly when Morgan Stanley raises its price target from $47 to $103. There’s mania here, folks.
Now Tesla’s management group is not made up of a lot of fools, so they took a look at this and figured out that if people were willing to pay this much for a share of the company they should just sell them a lot more. Thus, today, they announced the sale of an additional 2.7 million shares plus $450 million in convertible debt. And that is why I decided to write this deferred little missive.
I’m going to suggest to you that anyone who subscribes to the new stock offering at any price near the current level deserves our pity. This is a company that produces a product that has a market a mile wide and an inch deep. It is not yet profitably producing automobiles and there is reason to doubt that the vehicle can perform up to specifications outside of optimal operating conditions. The real value of the stock is opaque due to the short interest. What’s to like?
Tesla probably has a good chance of surviving and probably will carve out a nice niche for itself in the luxury market. I hope it succeeds but right now the stock looks like something out of 1999. We were supposed to have learned that the fundamentals matter and the hype is nothing more than that.
As the exceptionally well-informed readers of this little blog know, the Fed has signaled that once the unemployment rate reaches 6.5% it will declare “Mission Accomplished” and begin to unwind it’s various monetary stimulus programs. As this little snippet from the WSJ blog points out, getting to that magic number doesn’t necessarily mean that everything is hunky-dory.
Using average monthly growth of 208,000, the Atlanta Fed says at the current participation rate of 63.3% — last seen in 1979 — unemployment would drop to 6.5% from the current 7.5% in June 2014.
Reaching that unemployment is key as it’s a benchmark the FOMC has said is liable to warrant some ending of QE. If participation ticks up to 63.6%, that would mean 7% unemployment, and it would remain at 7.5% if the participation rate rebounded to 64%, a level last seen in December 2011.
So, there’s a chance that we will either have or not have the beginning of the end of QE depending upon how many people say they are or are not in the workforce. All of this, of course, derived from a statistical number that most economists consider highly speculative when viewed in isolation. I suspect, or perhaps hope is the better word, that the Fed has more sophisticated metrics than the unemployment rate they’ll use to get out. Then again declaring victory and bugging out is not a strategy unfamiliar to our government.
Political scandals aren’t really up my alley, but the Benghazi and IRS affairs are too juicy to pass up completely.
I will leave it to others much wiser than I to decide if what happened in Benghazi was of great import or just a bad case of bureaucratic bumbling – both before and after. What intrigues me is the dynamic being created between the two powerhouses of the Democratic Party – the houses of Clinton and Obama. In a perfect world the Obama team would find a head to deliver to Congress and the press. That head should have no connections to the White House and preferably wouldn’t come from the intelligence community (those guys are better left alone). So that obviously leaves the State Department (forget blaming any branch of the Armed Services, they’re untouchable). In a perfect world the head of the State Department at the time Benghazi occurred would be a distinguished public servant who enjoys public admiration, has since retired from the position and could probably be fairly confident that falling on a sword wouldn’t do more than slightly dent a sterling reputation. Heads can be served up in such a case, not necessarily the Secretary’s but someone high enough to placate the press and Congress, which reflects on the former Secretary but only results in the aforementioned dent.
Fits the current description of someone, doesn’t it? Except that person just might have some aspirations in 2016, is part of a political family that doesn’t like to roll over very much and can cause the President lots of grief between now and the end of his term. That’s President Obama’s dilemma. In a different reality this would be easily finessed. That’s not the one he now inhabits. Piss off the Clintons and you have a machine that however rusty is still formidable. Besmirch Hillary and you lose a goodly part of the press that has been solicitous to a fault up to now, and face the next three years with a party splitting into camps. Don’t think the Republicans are unaware of this dynamic. For them it’s a chance for a two-fer. Damage a potentially formidable candidate and split off a big part of the President’s support. Gotta love politics.
Now as for that IRS scandal, I tend to believe that this is pretty minor stuff. Should we all be shocked that a bunch of bureaucrats decided to make life difficult for some people who don’t like them. Come on we’re all adults here. Now, it appears as if there might be more bureaucrats in Washington who were in on the game, but, once again, should we be that surprised. That this would reach anywhere into the White House or Treasury is doubtful, after all no President or his functionaries would be stupid enough to engage in something like sicking the IRS on his enemies or engaging in some sort of bungled burglary or anything else similarly stupid, would they.
All that aside, I think there is something a bit disturbing about this little episode. Assuming it doesn’t become a “high crimes and misdemeanors” sort of situation, the whole kerfuffle does represent a disturbing trend in American governance. Specifically, the seemingly expanding assumption among the government worker class that they can and do make policy, write and administer as they choose the rules of the game. Here is a bit from Foseti [1] responding to Senator Susan Collins comments.
Susan Collins has been a Senator for 17 years and she apparently has no idea how government works. Worse, she believes that government employees would be just as likely to target progressives as they would be to target conservatives and that they might actually be fired for working to help progressives!
In fairness, I should point out that the article goes on to note that some higher level officials may have known about this problem a couple years, but the officials are still a couple levels down from anyone that’s politically appointed.
Indeed, the most salient facts of the case are: 1) that the IRS was used to target Republican groups and no one directed the IRS employees to do this; 2) the employees’ managers may have known but probably agreed with their decisions and certainly didn’t object; 3) no one that is appointed to the IRS by the President knew or probably could have stopped it – in other words it doesn’t matter who wins any given election, this behavior is “above politics”; and 4) no one is likely to lose their job because of these actions.
Now ask yourself, given these facts, who’s in charge of whom?
That Dear Reader is the reality of government as we now have it. A bureaucracy with European powers but lacking the Europeans’ pride in at least paying lip service to professionalism over partisanship. Therein lies the real danger inherent in this IRS transgression.
1. Foseti is blogs anonymously and represents himself to be a mid-level employee of the Federal government. I take him at his word much as I do The Epicurean Deal Maker. I read Foseti for much the same reasons that I subject myself to Ezra Klein. It’s a reality check on your notions.
Perhaps ranking as the least surprising revelation of the year, the Detroit emergency manager has reported that the city is bankrupt.
“The City of Detroit continues to incur expenditures in excess of revenues despite cost reductions and proceeds from long-term debt issuances,” Mr. Orr wrote. “In other words, Detroit spends more than it takes in — it is clearly insolvent on a cash flow basis.”
Whether the city, in fact, pursues relief through a Chapter 9 bankruptcy proceeding is still an open question. Kevyn Orr, the emergency manager, has not put forth such a recommendation though he has made it quite plain that the city’s current mode of operation is unsustainable. The only way out, as he sees it, is through a thorough restructuring of finances and operations. Though he has not so far offered details any restructuring is no doubt going to require haircuts for all – employees, unions and creditors.
If any such plan is going to work it is going to take a big buy-in on the part of all concerned. Not all seem ready to roll up their sleeves.
“It’s not as bad as what they’re trying to make it out to be,” Edward L. McNeil, a local official for the American Federation of State, County and Municipal Employees, said on Sunday. Mr. McNeil had not viewed a copy of Mr. Orr’s report, which was not made public until late Sunday, but he said he had grown accustomed to overly negative assessments of Detroit by the state and its representatives.
“All of this was a cooked deal for them to take control of the city and take the assets,” Mr. McNeil said. “This has been a sham.”
Now to be fair, Mr. McNeil is charged with getting the best deal he can from this mess for his constituency, so there is certainly a bit of negotiation posturing going on here. At the same time, characterizing things as a “cooked deal” meant to disenfranchise the citizens of Detroit wouldn’t seem to represent anywhere near a rational view of reality. One can hope that it’s only theater.
Detroit in one way or another will work through this. Megan McArdle thinks it could be a perfectly nice smaller city. Good luck getting there. Rather than Chapter 9, there will probably be some sort of accommodation that at least affords the city muddle room. And muddle along it will, probably into some sort of eventual oblivion.
If there is a takeaway from all of this it might be how far into crisis government seems to be required to go before hard choices begin to even get laid on the table. Detroit has after all known for years that it was in a death spiral. Allowing a city, state or national government to reach this point inflicts much more pain than ever was necessary. Sorry but here comes that word, a little bit of austerity, a little pain, could have averted all of this. But that’s something that we usually agree should be done when it’s convenient, though as we can learn from Detroit that sweet spot of painless belt tightening just never does seem to arise.
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