Apr 202011

Canadian taxes, S&P’s warning that it might downgrade U.S. debt and Zillow’s proposed public offering were the my principal topics on Weekday on KUOW today.

Earlier in the hour, Weekday host Steve Scher and Vancouver Sun political correspondent Vaughn Palmer had discussed why Canadians pay much higher prices for everday purchases, even though the Canadian dollar has achieved parity with the U.S. dollar. I pointed out that neither of them had mentioned Canadia’s high sales tax.  Effective July 1, 2010, consumers in British Columbia pay 12%, including 7 percentage points for the province and 5 point for the federal government. Washington consumers pay high sales taxes (currently 9.5% in King County, 10% in restaurants), but do not pay state income taxes.

I should also have said that Canadians pay high prices for the same reason that beer costs so much at the ballpark. Context matters. Canadians behave the same way Washingtonians who live close to Oregon (no sales tax) do. When they can, they cross a political border to get a better price.

When Scher asked for my take on the S&P warning that it may downgrade U.S. debt, I said I was not surprised. I have been saying in speeches for at least 18 months that “sovereign risk” is rising for the U.S.

Washington Post columnist Robert Samuelson is one of my favorite experts on the issues raised by the United States government spending more than it takes in. Here is some of what Samuelson wrote in November 2009:

The idea that the government of a major advanced country would default on its debt — that is, tell lenders that it won’t repay them all they’re owed — was, until recently, a preposterous proposition. Argentina and Russia have stiffed their creditors, but surely the likes of the United States, Japan or Britain wouldn’t. Well, it’s still a very, very long shot, but it’s no longer entirely unimaginable. Governments of rich countries are borrowing so much that it’s conceivable that one day the twin assumptions underlying their burgeoning debt (that lenders will continue to lend and that governments will continue to pay) might collapse.

What Samuelson 18 months ago called “no longer entirely unimaginable” has, in fact, planted itself squarely in the middle of the political dialogue in the United States. Samuelson noted that both Japan and the United States were borrowing at exceptionally low rates. He added:

But the correct conclusion to draw is not that major governments (such as Japan and the United States) can easily borrow as much as they want. It is that they can easily borrow as much as they want until confidence that they can do so evaporates — and we don’t know when, how or whether that may happen.

Then Samuelson delivered the coup de grace, which reads extraordinarily well roughly 17 months on:

Wealthy societies everywhere face a similar dilemma. Debt is ballooning from already high levels.. . . Higher interest rates would aggravate the debt burden. . . . [C]ontaining debt by spending cuts or tax increases would involve wrenching and unpopular measures that might, perversely, weaken the economy and worsen deficits. . . .Against [unpopular] choices . . . some advanced country might decide that a partial or complete default, though dire, would be less damaging economically and politically than the alternatives.

I said on air today that default can take many forms. In fact, today’s extraordinarily low interest rates amount to a de facto default by weakening the value of the dollar and reducing its purchasing power. Low returns to savers are another form of default, just ask your elderly relative who needs to renew a safe bank deposit that was paying a much higher rate of interest.

On Zillow’s pending IPO, I said that the company seems designed for an earlier time when people wanted to check the value of their houses quite frequently for a sense of financial well-being.

That’s not true today. Homeowners are like equity investors three or four years ago. They don’t want to look. I wish all Pacific Northwest companies well, and would be delighted to see a revival of the IPO market for regional companies. On Zillow, founded in 2004 but still in the red, I’m from Missouri. Show me a a stream of rising profits, or at least the prospect of same, before I’m interested in owning shares.

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