"Kee Points" with Jim Kee, Ph.D.

One thing that was worth noting last week was the The Wall Street Journal’s article on the US petrochemical industry, which has been a big beneficiary of US fracking as it uses oil and gas as inputs to produce things like plastics. “Staggering” is how they described the scale of investment in the sector, with chemical plant expenditures alone accounting for half of all capital investment in manufacturing last year. Most of this is along the Gulf Coast. Another thing that caught my eye was Indian Prime Minister Narendra Modi’s article in Monday’s WSJ. This was of interest not so much because of his focus on India and the US as partners for growth (that assertion is expected), but because of his description of the tremendous amount of capital needed for India’s future for, “the planned 100 smart cities, the massive modernization of ports, airports, and road and rail networks, the construction of affordable housing for all (1.3 billion people; the US has 325 million)...rapidly expanding aviation needs, and our increasing demand for gas, nuclear, clean coal and renewables.” 


As expected, MSCI (Morgan Stanley Capital Index) will start including a small weighting of mainland China stocks (China A-shares) in their emerging market index. This will begin in August of 2018 with an initial weighting of .73%, which is 2.49% of the MSCI China Index. I know most of you are thinking, “they didn’t do that already?,” but China still has some way to go institutionally in order to earn a stronger presence. Of more importance, in my opinion, was MSCI’s decision not to move Argentina back up to emerging market status from its current “frontier" market status. At the beginning of the 20th century Argentina had a per-capita GDP that was starting to rival that of the US and the UK; it was on the way up. But it went down a bleak road of political and monetary instability, and this is where it ended up. That’s tragic, and a key lesson is that “progress isn’t inevitable.”  


Finally, GOP leaders are still asserting that the Senate will vote on a bill that overhauls the Affordable Care Act (ACA), but Senate Majority Leader Mitch McConnell has delayed a vote on the legislation until after the July 4th recess while he works to bring the half a dozen or so wavering republicans (WSJ) on-board. The Congressional Budget Office (CBO) reported that the bill in its current form would result in 22 million fewer insured by 2026 compared to the ACA, which has led to dissent by some republicans and a critique of the CBO’s forecasting track record by others. Again, republicans would like to pass a bill that reduces expected expenditures (mostly through reduced Medicaid spending) before they take on tax reform, which reduces future revenues and increases projected deficits. Having taught “Health and Medical Economics” over twenty years ago, I can tell you that few economists liked the health care system as it was before the ACA, or the ACA itself, or the current replacement bill. Reminds me of the tax code!


And speaking of the tax code, there is some debate as to which is a more effective stimulant to growth, a corporate income tax cut or 100% expensing of capital purchases. Recall that businesses don’t get to deduct 100% of purchases of capital equipment at the time of purchase. Instead, they can only deduct a portion of the purchase in the current year, with the rest deducted in future years. That means their income tax bill is higher in current years, which is one of the reasons politicians favored “depreciation” over “expensing” in the first place (going back to the 1930s, although Section 179 of the tax code modifies this a bit). The best way to think about the two is that increasing the amount of capital purchases that businesses can expense is aimed more at new capital investment; less so with a corporate income tax rate cut.