Category Archives: income inequality

The Great Republican Giveaway: Their Not So New Tax Plan

Good day, It’s time for our daily reminder that the GOP’s grand idea that Tax Cuts cure all ills is quack medicine. To hear ads from the Business Roundtable and associated PACs one might think that merely enacting a tax cut will cause Business To Boom, Wages To Rise, and, who knows, flowers to bloom.  Probably not, and probably not for some obvious economic reasons.

The proposed tax cut is deficit financed.   Yes, tax cuts are lovely, BUT:

“Tax cuts have the potential to grow the economy, but their benefit depends on how they are structured and financed. For tax changes to promote growth, changes should encourage work and investment through lower rates, efficiently encourage new economic activity (rather than providing a windfall for previous investments), reduce economic distortions, and create minimal (if any) increases in the budget deficit.” [CRFB]

The current proposal doesn’t really encourage new activity, it doesn’t reduce economic distortions (income inequality, etc.) and it certainly doesn’t reduce the budget deficits.

Reducing the statutory tax rate is meaningless if not paired with closing corporate tax loopholes and incentives.   Under the current system AT&T paid an effective tax rate of 8% from 2008-2015.  How do these corporations pull this off?  They can book most of their profits overseas, out of the IRS reach.  The GOP proposal assumes that if the statutory rate is reduced to 20%, the companies will reflexively book profits here, and decide to avoid other techniques which reduce the statutory rate to almost 0.   Here’s a brief list of popular tax dodges:

American Electric Power, Con Ed and Comcast, qualified for accelerated depreciation, enabling them to write off most of the cost of equipment and machinery before it wore out.

Facebook, Aetna and Exxon Mobil, among others, saved billions in taxes by giving options to top executives to buy stock in the future at a discount. The companies then get to deduct their huge payouts as a loss. Facebook used excess tax benefits from stock options to reduce its federal and state taxes by $5.78 billion from 2010 to 2015, the institute found.

Individual industries have successfully lobbied for specific tax breaks that function as subsidies: for instance, drilling for gas and oil, building Nascar racetracks or railroad tracks, roasting coffee, undertaking certain kinds of research, producing ethanol or making movies (which saved the Walt Disney Company $1.48 billion over eight years, the report says).  [NYT]

Nice, and nothing in the current proposal should give anyone any comfort that if given a 20% statutory rate major corporations won’t try to pull the same tricks to get into the 0%-8% effective tax rate.  It just makes it easier to get there.

Reduced statutory tax rates don’t automatically create employment.  For the 1 millionth time (?)  — There is one reason, and only one rationale reason, for hiring anyone ever:  The company doesn’t have sufficient numbers of employees to deliver goods and services demanded by clients and customers at an acceptable level of customer service.   That’s it. That’s all there is to it.  An employer might give preference to a veteran IF there is a need to hire someone (and get a tax break for doing so), or an employer might decide to hire someone to create a more diverse workplace, or a workplace that is more flexible.  However, that hire will take place IF and ONLY if there is a need to hire someone in the first place.  Put more mundanely,  if having four check out clerks on every shift is enough to insure that no one waits longer than 5 minutes in the grocery check out lanes, then the fifth won’t be hired.

Secondly,  there is no evidence that tax cuts themselves produce increased employment.  If one is referring to the Reagan Era tax cuts for evidence — be careful — one of the prime drivers following that tax cut was the Fed’s monetary policy. [CAP] Otherwise there is preciously little research concluding that tax cuts for millionaires and billionaires spurs employment or even wage growth for working Americans.  [CNBC] [CBPP] [NYT] [WallStJournal]

A third point — the argument that “tax incentives” encourage entrepreneurship is almost risible.  No one starts a business because of the “tax environment.”  Listen to one successful entrepreneur:

“While I can imagine tax regimes that would create disincentives for entrepreneurship, we don’t have that situation today in America, where tax rates on capital gains (the primary way that founders of successful start-ups make money) are already far lower than rates on ordinary income. Indeed, some of the most admired entrepreneurs — Bill Gates, Steve Jobs, Jeff Bezos — started their companies under significantly higher tax regimes. This is consistent with empirical research; the economists Robert Moffitt and Mark Wilhelm, for example, found that the large cuts in marginal tax rates in 1986 did not induce high-income men to work longer hours.”

There are two things to unpack from this analysis: (1) Companies aren’t formed because of the tax environment; and (2) Companies ARE formed because of the availability of capital.   Now, take a look at the FRED trends in real gross domestic investment. See any downward trends? Seems like there’s been a steady upward trend from 1950 onward.  This doesn’t argue for a lack of capital being a major problem for start ups.

And then there are the details, summarized by Patriotic Millionaires:

– On the elimination of the Estate tax: “We can’t wait to hear President Trump try to explain how a $4 billion tax cut for Ivanka and Tiffany helps the middle class.”

– On the elimination of the AMT: “The elimination of the Alternative Minimum Tax will virtually guarantee that thousands of Americas wealthiest people will pay no tax at all. How will be left holding the bill for that lost revenue? The middle class.”

– On the territorial tax system: “President Trump’s big plan to boost the middle class starts by helping multinational corporations avoid paying any taxes at all? That is absurd.”

– On reducing the number of tax brackets: “If anything, we need more tax brackets. Someone making $5 million, $10 million, or $50 million a year should definitely pay higher taxes than someone making $400,000 a year. How can we even debate this?”

That last question is a good one, as are the other items in the list.  How is demand for goods and services increased by (1) giving tax breaks to corporations which can use the windfall to pay higher executive compensation, indulge in more mergers and acquisitions, or enjoy the fruits of stock buy-backs; (2) eliminating taxes on millionaires and billionaires and placing more of the burden on working Americans; (3) eliminating the estate tax which doesn’t apply to most American taxpayers and helps only the few at the expense of the many? —

“For decedents in 2017 (with an exemption of $5.49 million), the Tax Policy Center estimates there will be only about 11,300 estate tax returns filed, of which 5,500 will be taxable. Estate tax liability will total $19.9 billion after credits.” [TPC] (Note: There were 150,493,263 returns filed in 2015. (download) Divide 5,550 by 150 million and your plastic brains will yield an infinitesimally small number complete with exponents.]

A final point — Nevadans (and residents of the other 49 states) should be aware that many of the arguments set forth by proponents of the Republican tax plan are couched in vague or highly generalized terms.  Not many politicians want to have to explain why eliminating the Alternative Minimum Tax will benefit lower income Americans.  Quick answer: It doesn’t.  Or, the arguments may be set forth in platitude form, for example: This will put money back in your pockets.  The major question is WHOSE pockets and for how long.  It’s no secret that the GOP tax plan puts the majority of the benefits into the pockets of the ultra-rich, something like 80% of the benefits accrue to the top income earners.

Apologists may take a step or two further.  “Democrats are engaging in class warfare.”  Well, if it’s the ultra-rich vs. the other 99%, so far the 1% are winning very nicely, thank you. And, then there’s the “Democrats want to punish success.” Please spare me.  First, it’s not “punishment” to pay for the military that defends you, the schools that educate you, the national parks you visit, the hospitals that treat you, the roads that smooth the way for you get to work… Secondly, no one is talking about punishing anyone, it’s just a matter of equity — we should all be paying our fair share.

Please contact your Representatives and Senators to oppose this egregious handout to the multi-national corporations and the millionaires and billionaires who stand to reap 80% of the benefits of this Great Republican Giveaway.

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Filed under Economy, income inequality, Politics, Taxation

Conflated Issues Inflated Fears

Inflation chart cause

There’s fear, right here in the outback, that raising the minimum wage will drive up inflation.  The Humboldt Sun (Sept. 18, 2015 p3)  includes a long LTE titled, “$15 minimum wage would stimulate inflation.”   The author writes:

“The government requires businesses to pay employees more by passing minimum wage legislation. This increase is not because workers are more productive, so it costs more to produce goods and services. Businesses might lay off workers to bring down labor costs, but that results in less output. Ultimately, they must raise the cost of consumer goods.”

Conflation

There are several macro-economic concepts mashed into this, but let’s assume that the writer is speaking of the form of inflation diagrammed in Chart 2 above, “Cost-Push Inflation,”  defined as follows:

Cost-push inflation … occurs when prices of production process inputs increase. Rapid wage increases or rising raw material prices are common causes of this type of inflation. The sharp rise in the price of imported oil during the 1970s provides a typical example of cost-push inflation (illustrated in Chart 2). Rising energy prices caused the cost of producing and transporting goods to rise. Higher production costs led to a decrease in aggregate supply (from S0 to S1) and an increase in the overall price level because the equilibrium point moved from point Z to point Y. [SFFRB]

Cost-Push inflation might be presented as the Inflation Monster, IF it were the only kind of inflation possible – it isn’t.  There’s also Demand-Pull.  And we return to the San Francisco Federal Reserve for its basic definition:

“Demand-pull inflation occurs when aggregate demand for goods and services in an economy rises more rapidly than an economy’s productive capacity. One potential shock to aggregate demand might come from a central bank that rapidly increases the supply of money. See Chart 1 for an illustration of what will likely happen as a result of this shock. The increase in money in the economy will increase demand for goods and services from D0 to D1. In the short run, businesses cannot significantly increase production and supply (S) remains constant. The economy’s equilibrium moves from point A to point B and prices will tend to rise, resulting in inflation. [SFFRB]

And how does a central bank increase the supply of money? Monetary policy.  The textbook way, prior to September 2008, was that if the opportunity costs for holding noninterest-bearing bank reserves was the nominal short-term interest rate (federal funds rate), then we’d have a situation in which if the funds rate were low the quantity of reserves banks would want to hold would increase. [SFFed]  Note: the banks have an interest in putting reserves to work by lending them.  If a bank found itself with “excess” reserves the obvious thing to do would be to find borrowers and earn a return on the money. Thus the situation wherein the cost to the banks of borrowing money is essentially zero, in a post 2007-08 effort to support the financial markets and kick-start the economy.  Now what?

Why hasn’t there been some awesome Demand-Pull Inflation?  Monetary Policy. The situation has changed, although few outside the financial commentators have paid much notice.

“The change is that the Fed now pays interest on reserves. The opportunity cost of holding reserves is now the difference between the federal funds rate and the interest rate on reserves. The Fed will likely raise the interest rate on reserves as it raises the target federal funds rate (see Board of Governors 2011). Therefore, for banks, reserves at the Fed are close substitutes for Treasury bills in terms of return and safety. A Fed exchange of bank reserves that pay interest for a T-bill that carries a very similar interest rate has virtually no effect on the economy. Instead, what matters for the economy is the level of interest rates, which are affected by monetary policy.” [SFFed]

If Demand-Pull inflation is corralled by monetary policy which is based on the Federal Reserve now paying interest on reserves, doesn’t this argue against raising wages which will increase unit costs of production and hence raise consumer prices?  Not necessarily.

The author of the LTE maintains: “The Federal Reserve has held interest rates at near 0 percent for several years. Some claimed cheap loans would stimulate the economy. The problem is that banks have been fiscally conservative, with few loans and little interest rate to savers.”

A crucial part of this puzzle is the press release from October 6, 2008 from the Federal Reserve stating:

“The Federal Reserve Board on Monday announced that it will begin to pay interest on depository institutions’ required and excess reserve balances. The payment of interest on excess reserve balances will give the Federal Reserve greater scope to use its lending programs to address conditions in credit markets while also maintaining the federal funds rate close to the target established by the Federal Open Market Committee.”

Yes, the interest rate remained low, but the banks with excess reserves on hand had less incentive to loan out those reserves if they could simply leave them on the books and earn interest.  The Financial Services Regulatory Relief Act of 2006 allowing this situation  [S 2856 109th] was quite generous to the bankers, such as section 201 which “(1) authorize payment of interest on funds maintained by a depository institution at a Federal Reserve bank; and (2) authorize the Federal Reserve Board to reduce to 0% the reserves required to be maintained by a depository institution against its transaction accounts. (The current requirement ranges from 3% to 14%.)” [GovTrack]

While the Federal Reserve makes a nice scapegoat for those who believe in broader extensions of consumer credit, it really doesn’t do to belabor its role (or lack thereof) in stimulating the consumer end of the economy when Congress provided the vehicle by which the wall between brokers and bankers was breached (Title 1, Section 101) and compounded the issue by enacting authorization for banks to sit on reserves in order to earn interest (Title 2, Section 202).

And, here’s where the LTE author swims in shark territory – a monetary policy which encourages broader consumer lending would also be a factor in the creation of Demand-Push inflationary pressures.  A person really can’t have it both ways.

How much is too much?

There are, in both fact and theory TWO forms of inflation.  Nor can we assume that inflation is always a bad thing.  Most economists like an inflation rate of just under 3%. [Investopedia]  Why? Because the alternative – deflation —  is even worse.  During deflationary periods workers get laid off, consumers spend less, people hold off major purchases believing prices will fall further, and the spiral continues – downward.

Consumer Price Index 2005 to 2015 The blue line includes items like energy/food which are inherently more volatile, the line for all others shows a fairly consistent rate of inflation right around the 2.5% mark – remember 3% is the economist’s ideal. It’s also useful to note that the wide variances occur between January 2008 and January 2010 – when the U.S. economy was trembling before and  in the wake of the financial crash.

Consumer Price Index chart If fact, before we become too alarmed by inflationary trends we might want to take a look at the column highlighted above from the Bureau of Labor Statistics, and note that we are well below that 3% threshold.  In other words, it’s time to stop worrying excessively about inflation – both forms – and start being concerned with why wages and salaries have tended to stagnate over the past thirty years?  [Pew]

“…after adjusting for inflation, today’s average hourly wage has just about the same purchasing power as it did in 1979, following a long slide in the 1980s and early 1990s and bumpy, inconsistent growth since then. In fact, in real terms the average wage peaked more than 40 years ago: The $4.03-an-hour rate recorded in January 1973 has the same purchasing power as $22.41 would today.” [Pew] see also: [EPI]

Our local author is still alarmed, “Recent price spikes are more noticeable than the usual gradual increases.  That naturally leads to call for a minimum wage increase. But if granted, the inflation cycle will begin again.”  To which we’d have to ask:

  • What recent price spikes? The annual inflation rate as calculated by the BLS Consumer Price Index, the figures the economists use, has been less than 2.5% since 2006.  Further, the prices of gasoline has dropped from about $4.11 in July 2008 to $2.73 as of August 2015. [EIA]
  • If not those phantom price spikes, then what else could raise the call for an increase in the minimum wage?  The trends in stagnant wages and salaries?
  • What inflation cycle?  The annual increase in inflation hasn’t risen above 2.5% since 2006 and 3% is the threshold used by most economists to determine a “significant” increase.  During five of the last ten years we’ve experienced inflation of less than 2%.
  • However, let’s not assume that the author is referring to the here and now but to the ubiquitous “awfulness to come somewhere down the road about which we should be terribly alarmed.”  Is there anything in the statistical tables indicating that an increase in the federal minimum wage would yield inflation rates in excess of traditionally  held economic standards?  Given that the federal minimum wage has been raised 22 times since first authorized in 1938, has there been any drop in the real GDP per capita in the last 75 years? (Hint: no)

If it’s not consumer spending driving an inflation cycle in the modern economic environment – what is?  There is something about which we ought to be worried, but it’s not your father’s inflation cycle – it’s the climate created by the financialists:

“Both gross and net business debt have continued to rise since 2007, but the proceeds have been almost entirely recycled into financial engineering—including more than $2 trillion of stock buybacks and many trillions more of basically pointless M&A deals.

This diversion of the $2 trillion gain in business debt outstanding since 2007 to financial engineering is owing to the near zero after-tax cost of corporate debt. The latter has caused the enslavement of the C-suite to the instant gratification of rising share prices and stock options value in the Fed’s Wall Street casino.” [ZeroHedge]

Not to put too fine a point to it, but the brakes will be applied to any inflationary pressure by the bursting of the next financial bubble.

References and Sources: Federal Reserve Bank of San Francisco, “What are some of the factors that contribute to a rise in inflation?’ October 2002.  John C. Williams, “Economic Research: Monetary Policy, Money, and Inflation,” Federal Reserve Bank of San Francisco, Economic Letters, July 9, 2012.  Bernard Shull, “The impact of financial reform on Federal Reserve Autonomy,” Levy Economics Institute of Bard College, working paper 735, November 2012. (pdf)  Douglas Rice, “Inflation: It’s a Good Thing,” Investopedia, May 22, 2009.  Bureau of Labor Statistics: Consumer Price Index, 12 month percentage change. (2015) “For most workers wages have barely budged for decades,” Pew Research Center, October 9, 2014.  EPI, wage stagnation in nine charts, January 6, 2015.  CBPP, “A guide to statistics on historical trends in Income Inequality,” revised July 15, 2015.  L.E. Hoglund, “Gasoline prices: cyclical trends and market developments,” Beyond the Numbers, BLS, May 2015. (pdf) EIA, “Petroleum and Other Liquids: Retail Prices all grades and formulations, August 2015.  Department of Labor, “Minimum Wage Mythbusters.”  CNN, “Minimum wage since 1938,” interactive graphic.  “Meet the New Recession Cycle,” Zero Hedge, April 4, 2015.

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Filed under Economy, financial regulation, income inequality, Minimum Wage, Nevada politics, Politics

Happy Fourth of July: A More Perfect Union

Flag July 4th

It’s a good 4th of July weekend.  The benefits of citizenship have been affirmed for members of the LGBT community, but as the founders told us we’re on a path to create “a more perfect union.”  Therefore, there’s more work to be done to insure that housing, employment, and other areas of American life aren’t stumbling blocks of discrimination. We will have to keep up efforts toward building that “more perfect” union.

Ravenal Bridge

There may be some dead-enders, some battle flag flying remnants of blatant racism, but no matter how hard the Klan and their allies try, their proposed demonstration will be nothing compared to the thousands who walked along the Ravenal Bridge in Charleston, South Carolina.  We’re closer to being a nation of people who are taking Dr. Martin Luther King Jr.’s message to heart:

“When evil men plot, good men must plan.  When evil men burn and bomb, good men must build and bind.  When evil men shout ugly words of hatred, good men must commit themselves to the glories of love. “

At least two churches in the south have been the target of recent arson attacks, so in order to form that more perfect union it’s time for people of good will to build and bind.   It’s been a long walk from the bridge in Selma to the bridge in Charleston, but we’re getting there.  We still have to acknowledge the often painful accuracy of Winston Churchill’s backhanded compliment, “You can always count on the Americans to do the right thing, after they’ve tried everything else.”  

In a more perfect union, we’d not have maps showing that a person earning minimum wages cannot achieve a point at which only 30% of his income can pay for a one bedroom apartment.

Rent map

The darker the blue the worse the problem.  We’ll have a more perfect union when we address the complications of living on inadequate wages.  It does no good to march behind banners proclaiming that hard working Americans should “save for the future,” – when simply meeting basic needs for food, housing, and adequate clothing consume all the family’s income. It takes us no closer to a more perfect union to proclaim, “if the poor would just work harder they’d get ahead,” when elements of our judicial system, parts of our educational system, and the myopia of commerce combine to force workers into multiple jobs at minimal wages.  We are no closer to forming a more perfect union when we reward those who prosper at the expense of those who produce.

Unassisted graph

In a more perfect union this graph would be significantly lower.  How do we care for the least able among us? The learning disabled young man with nerve damage, but not quite enough to meet disability standards?  Unmarried, with no dependent children, unemployed except for odd jobs paying about $10 per hour?  A victim of child abuse, and now a victim of a system in which he doesn’t qualify for benefits because he’s never been able to find employment which sustains them. [Reuters]

We’ll be a more perfect union when we are more aware that the able-bodied are not necessarily able to fully function in our modern economy.  In a more perfect union there is more educational, job, housing, and food support for those who live on the margins of despair.

I look to the diffusion of light and education as the resource most to be relied on for ameliorating the condition, promoting the virtue and advancing the happiness of man.” Thomas Jefferson to Cornelius Blatchly, October 1822

And yet:

“About seven in 10 (69%) college seniors who graduated from public and private nonprofit colleges in 2013 had student loan debt. These borrowers owed an average of $28,400, up two percent compared to $27,850 for public and nonprofit graduates in 2012.   About one-fifth (19%) of the  Class of 2013’s debt was comprised of private loans, which are typically more costly and provide fewer consumer protections and repayment options than safer federal loans.”  [TICAS]

In a more perfect union, education advances the “happiness of man,” not merely the bottom line of banking institutions, and certainly not the unrestrained avarice of some for-profit operations who once having the federal funds in hand look to more recruitment without much concern for those already recruited.

And, then – predictably – there’s the Wall Street Casino, which has created SLABS (Student Loan Asset Based Securities).  While certainly not in the mortgage meltdown class, these are problematic because:

“What I find most disturbing about SLABS is that they create a system where an increase in tuition (and the debt-burden on the borrower) equals an increased profit for the investor. When you consider the role that unscrupulous speculators played in the mortgage crisis, one can’t help but wonder if a similar over-valuation of college tuition is taking place for the benefit of SLABS investors. With the cost of attending college increasing nearly 80% between 2003-2013 while wages have decreased, it’s no wonder that so many people are having difficulty paying off their student loans.” [MDA]

This situation is NOT the way to “diffuse light and education.”

There are countless other topics and issues on which we might dwell, assistance for the elderly, transportation, trade, economic security, police and community relations, infrastructure issues, voting rights,  domestic terrorism, domestic violence, gun violence, climate change … the list is  as long as the population rolls, as we try to create that more perfect union of imperfect human beings.

What we need is Churchill’s optimism – that eventually, after avoiding problems, exacerbating problems, tinkering with problems – we’ll do the right thing.

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Filed under banking, civil liberties, education, financial regulation, Global warming, homelessness, income inequality, Minimum Wage, poverty, racism

Income Inequality and The Great American Disconnect

There’s an interesting piece describing the results of a Northwestern University study on the political/economic perspectives of the top 1% of income earners in the United States:

“First and foremost, rich people care about the deficit. More than 85 percent of the survey participants said they considered the nation’s budget deficit to be a “very important” problem facing the country, the researchers found. In addition, nearly one-third of those surveyed said the budget deficit and too much government spending is the nation’s biggest issue.”  [HuffPo]

So, 85% of the ultra-rich in this country are focused on the national budget deficit — what of the other 99% of the American people?   The article reports that as of a CBS poll taken in 2011 only 7% of the nation as a whole are similarly concerned.   If we bring this a bit closer to today’s date we might be seeing the impact of continual  publicity given to the deficit issue as Congress lurches from manufactured crisis to manufactured crisis.  The Pew Center and Roper Center surveyed Americans in March 2013 with the following results:

Economic Poll

A CBS News poll in February 2013 showed about 11% of Americans focused on the deficit as the top national priority, the Quinnipiac Polling in January showed 20% giving the top priority to deficit reduction.  CNN showed 23% in January,  and Bloomberg polling reported 19% in December. [TPR]  The point may well be that in the last three months the number of people in the United States who view the budget deficit as the top national priority has never topped 23%.   There’s at least a ten percent gap — about 33% of the top 1% cite budget deficits.

We might be perilously close to a political situation in which the Congress of the United States of America is obsessing on a topic of major concern to only a few of its richest citizens.

What are most of the other people saying?  In the Pew/Roper polling 32% of respondents said JOBS and employment issues were their highest priority;  in the CBS polling 40% chose that topic; in the Quinnipiac polling 40% responded “the economy.”  The CNN poll showed 46% choosing “the economy,” and in the Bloomberg Poll 34% said “jobs and unemployment.” [TPR]  A person does have to statistically massage these numbers to reach the conclusion that the ultra-rich are focused on budget deficits while the remaining 99% are thinking about jobs and unemployment.

Needless to say, the top 1% saw “entitlement spending” as a problem and supported cuts to Social Security, Medicare, and Medicaid as a “solution.”

“On policy, it wasn’t just their ranking of budget deficits as the biggest concern that put wealthy respondents out of step with other Americans. They were also much less likely to favor raising taxes on high-income people, instead advocating that entitlement programs like Social Security and healthcare be cut to balance the budget. Large majorities of ordinary Americans oppose any substantial cuts to those programs.” [LAtimes]

While the effects of drum beating by conservatives that the Social Security Administration is “in trouble” is evident in some polling, there’s one interesting question raised in the August 2012 AP/Roper survey:

“If you had to choose, which would you prefer: raising Social Security taxes so that the benefits can be kept the same for everyone, OR, keeping Social Security taxes at the same rate they are at now, but reducing the benefits for future generations?”

The results:  Raise taxes, same benefits = 53%; Same tax, reduce benefits = 36%; unsure 9%, refused question 3%.   In other words, when push meets shove, most Americans are willing to accept higher Social Security taxation than risk reducing the benefits for ALL retirees.   This is hardly an indication that most Americans would be willing to cut Social Security in order to balance a federal budget.   There are other divides to bridge between the rich and the rest as well:

“While the wealthy favored more government spending on infrastructure, scientific research and aid to education, they leaned toward cutting nearly everything else. Even with education, they opposed things that most Americans favor, including spending to ensure that all children have access to good-quality public schools, expanding government programs to ensure that everyone who wants to go to college can do so, and investing more in worker retraining and education.”  [LAtimes]

In 2012  Pew Research polling, 53% of self identified upper class respondents and upper middle class ($100,000 annual earnings) had college degrees.   Thus, the rejection of educational opportunity programs for others smacks a bit of “I’ve got mine, now you’re on your own.”    This may be a function of the differentiation between the problems faced by the rich and those faced by the remainder of the population.  [Pew 8/2012]

 Upper Class Problems

Given the information in the Pew graph it’s hard NOT to see that most of  the upper echelon of our American economic elite have not had to face the same challenges as those in middle and lower income brackets.   What is disturbing about these graphics and analysis is the looming prospect that the interests of the economic elite take media and political precedence over the interests and needs of those who are not included in those upper brackets.   Trickle down politics (If it’s good for the rich it’s good for everyone) is no more genuine than trickle down economics (If it’s good for corporations it’s good for everybody.)

For more information see: “Rich Americans obsessed with budget…” Huffington Post;  “Inside the heads of the 1%…” Los Angeles Times; “Yes, the rich are different…” Pew Research Center; “Field of Degree and Earnings…” pdf Census Bureau.

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Filed under Federal budget, income inequality, Politics, Social Security

S. 3468: It’s Baaack…and shouldn’t be

Heads Up!  They’re back, againS. 3468 is yet another attempt by the financialists and related banking lobbyists to hamstring efforts to regulate the financial services sector.   It’s not like these interests have ever given up their campaign to revert to Business As Usual  such that the Wall Street Wizards can become yet another font of ill advised, incomprehensible, albeit highly profitable synthetic or otherwise manufactured financial products — You know, things like those adorable synthetic CDO’s which flooded the financial market with valueless toxic paper.

Here’s the CRS summary of the bill submitted by Senator Rob Portman (R-OH) on behalf of the banking sector:

Independent Agency Regulatory Analysis Act of 2012 – Authorizes the President to require an independent regulatory agency to: (1) comply, to the extent permitted by law, with regulatory analysis requirements applicable to other federal agencies; (2) provide the Administrator of the Office of Information and Regulatory Affairs with an assessment of the costs and benefits of a proposed or final significant rule (i.e., a rule that is likely to have an annual effect on the economy of $100 million or more and is likely to adversely affect sectors of the economy in a material way) and an assessment of costs and benefits of alternatives to the rule; and (3) submit to the Administrator for review any proposed or final significant rule.

Prohibits judicial review of the compliance or noncompliance of an independent regulatory agency with the requirements of this Act.

Translation: If any of the financial regulatory agencies, like the SEC, the OCC, the FDIC, or the CFTC wants to approve regulations which might have a “significant effect” on some bank’s bottom line, then the agency would have to present a “cost – benefit analysis,” and submit the rule for administrative (read executive branch) review.

There are some very cogent reason to be extremely skeptical about this bill.

#1.  It dramatically changes the relationship between the administration (executive branch) and the independent financial regulators.   The SEC, et. al. are supposed to be independent of the executive branch, which is why their leadership is subject to confirmation.  To require that the agencies present their proposed rules for executive approval inserts presidential politics directly into the rule making process.

Those who find the diminution of regulatory oversight disturbing will not be pleased with this proposal. Nor will those who decry the transference of yet more power to the executive branch.   There’s nothing here for either end of the political and ideological spectrum.

#2.  It invites endless litigation.  S. 3468 could be alternately named the Wall Street Attorneys’ Full Employment Act.  For those of us who believe that the interminable foot-dragging on CFTC regulations of the derivatives market has gone on long enough, this is entirely too much, [CFTC law] the Portman bill merely serves to add yet another bureaucratic roadblock before regulations can be finalized.  [Lieberman/Collins pdf]

#3. It prevents agencies from acting in a timely manner.  Again, inserting a secondary layer of “review” invites both executive interference and financial sector slow walking before any effective oversight of financial institutions can be effected.

#4. It is redundant.  All the agencies involved, with the single exception of the Federal Reserve, are already required to do formal cost-benefit analyses of proposals.  In case no one had noticed during the attempts to get the provisions of the Dodd Frank Act implemented that the banks have been availing themselves of these requirements to slow down the whole process — they have.  All this bill accomplishes is to slow the process down from a crawl to a drag.   Here’s why:

“The thirteen new analytic requirements this legislation could impose are only the beginning of the delays and burdens it would create. The mandated OIRA review of significant rules would take up to six months. In addition, the review process could force agencies to go back to the drawing board or do a re-proposal of the rule, which could add years to the regulatory process. While agencies could overrule an OIRA determination that a rule or a cost-benefit analysis was inadequate, such a step would render the regulation highly susceptible to court challenge. It would make industry attempts to overturn new rules in court almost inevitable. The increased risk of court reversal will discourage independent financial agencies from finalizing any regulation that receives a negative OIRA review.” [AFR pdf] (emphasis added)

In short, what we have here is a bill that simply refuses to die… and one which is unnecessary, unwarranted, and merely serves to benefit the financialists who don’t want oversight of their speculation in the Wall Street Casino.

Perhaps we might initiate newly elected Nevada Senator Dean Heller’s in-box with a few e-mails indicating that this is not a bill which deserves the support of 99.9% of the American public?

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Filed under conservatism, Economy, financial regulation, income inequality, income tax, tax revenue, Taxation

Limits: Stimulus, Austerity, and the Discussion We Should Be Having

There are functional limits to just about everything.  Unfortunately, when political discourse devolves into a polarized face off between two advocates who cannot or will not acknowledge the kernels of accuracy in bifurcated world views then it’s hard to get anything useful out of the discussion.  Compromise doesn’t mean you adjust to fit my agenda, nor that I must adjust to yours.

Consider the Stimulus vs. Austerity economic prescriptions currently on offer.

The readily apparent limitation on stimulative measures such as infrastructure spending and social safety net (or economic automatic stabilizers) support is that at some point the bill comes due, especially if these activities and supports are based on lending.

The equally apparent limitation on austerity and cutting back the social safety net or automatic stabilizers is that at some point deleveraging becomes deflationary and depressive in an economic sense.  Too much “austerity” and demand declines, and declining demand puts the brakes on economic growth.

Consider also the long and short term repercussions of the application of stimulative and austerity driven proposals.

In the long term, advocates of austerity prescriptions and stimulus injections have to cope with a fact of modern economic life — what can be shipped will be shipped.  Beneath layers of rhetoric is the hard sad fact that a corporation which can avail itself of a labor force willing to accept $0.99 per hour with no benefits will avail itself of that labor force.  Further, a corporation which can utilize a labor force willing to accept low wages, while the housing and quotidian needs are subsidized by the public sector, or are booked as an expense, will probably do so.

Also in the long term, advocates of stimulative measures need to acknowledge that physical infrastructure projects have short term durations, and will not necessarily create “sustainable” jobs.  Nor, will those contracts necessarily yield enough jobs to create a viable platform for future job creation.

How do we define success?

One of the problems with each of these views, untempered by any acceptance of the globalization of labor and the impact of robotic technologies, and equally untempered by the obvious fact that demand is an equal side of the free market equation, is that both have very different desired outcomes.

Austerity advocates tend to think in international terms, and see a global economy in which nations measure their success or failure in financial terms.  The nations are adequately capitalized, have limited liabilities, and offer treasury securities which are solid and reliable.   However, when this is  extrapolated to the ideal, the market for treasury notes would be little better than money in the mattress — because none would have greater risk (and hence greater yields or returns) than any other.   Currently, a U.S. treasury note for 30 years pays 2.83%.   [Treas]  By contrast Irish benchmark bonds maturing in 2025 are paying 5.4%.  [NTMA]   In other words, the bond market would like more stability — but not so much that we approach the ideal in which T-notes from any nation are such a sure thing that there’s nothing to be gained by investing in one or another.

Austerity advocates are thus caught in a bit of a bind.  Too much financial “success” and bond rates drop, too little national borrowing and there is less fodder for the bond markets.   What the austerity flock appear to want is a level of national  indebtedness necessary to retain competitive edges in the bond markets, BUT not so much that there is an “unacceptable level of risk” the borrower might default or even that the bankers might take a significant “hair cut.”

Stimulus advocates tend to see the financial picture from their own shores.   As a stimulus advocate myself, I tend to gauge the success of our economy on measures other than financial — an increasing level of aggregate demand, increasing levels of household wealth, increasing manufacturing output, and increasing exports.  While the austerity advocates appear to have an international outlook, but rather narrow definitions of success, the stimulus proponents have broader definitions of economic success but more nationally based perspectives.

Who’s Winning?

Income inequality or distributive impacts are too often discussed in horse race terms.  If the marginal tax rate for those in the top 0.1% are cut by 20% then the ultra-affluent are the obvious winners; but, if the marginal tax rate is raised for that group while we retain the child tax credits and lower the margin for middle income Americans do the ultra-affluent really win anything?  The horses are out of the gate.

In purely financial terms, who’s winning now?

Notice the steep drop between the average family income for the top 0.01% and the top 1%.  Then notice that the average family income for the remaining 90% of Americans is $29,840.

How did the top 0.01% create such a gap? A wealth management specialist, whom I’ve cited previously explains:

“Unlike those in the lower half of the top 1%, those in the top half and, particularly, top 0.1%, can often borrow for almost nothing, keep profits and production overseas, hold personal assets in tax havens, ride out down markets and economies, and influence legislation in the U.S. They have access to the very best in accounting firms, tax and other attorneys, numerous consultants, private wealth managers, a network of other wealthy and powerful friends, lucrative business opportunities, and many other benefits.

Now, why such a gap between the 0.01% and the top 0.1%?

Most of those in the bottom half of the top 1% lack power and global flexibility and are essentially well-compensated workhorses for the top 0.5%, just like the bottom 99%. In my view, the American dream of striking it rich is merely a well-marketed fantasy that keeps the bottom 99.5% hoping for better and prevents social and political instability. The odds of getting into that top 0.5% are very slim and the door is kept firmly shut by those within it.” [Domhoff]

The “winners” in purely financial terms, are the financialists. “Membership in this elite group is likely to come from being involved in some aspect of the financial services or banking industry, real estate development involved with those industries, or government contracting.” [Domhoff]  We should remind ourselves that the definition provided by Domhoff’s article includes the top half of the top half of all American income earners, which includes both columns at the left hand side of the graph.

It stands to reason that if the top 0.01% comes from banking or financial services sectors their perspective will be one of Austerity.   The graph illustrates the current wealth distribution but it doesn’t indicate the trends.

The Federal Reserve graph above illustrates the widening gap between the top income earners in the U.S. and those in the lower income brackets since 1967.  So, not only do we have wealth accumulating to the very tip top of the pyramid now, the trend has  been ongoing for the last 45 years.

The Stimulus Argument

One assertion which needs a bit more analysis concerns the tendency to make quick judgments about the nature of the trends.   Capitalism requires the accumulation of wealth such that investments can be channeled from areas of surplus to areas of need.  Arguments about who does the transfer are the hallmark of various forms of political ideologies.   As we can see from the discussion above, especially the observations of Mr. Domhoff, not all government activity which causes the transference of wealth are necessarily socialistic.

If our tax policy, our investment policies, and/or our banking and financial policies favor those who can borrow for almost nothing, can keep production and profits in foreign accounts, can avail themselves of tax havens, and can influence legislation favorable to those elements — then what we have, in essence, is  government intervention which favors the redistribution of wealth to the top 0.01%.   However, the moment anyone objects to this arrangement the financialists immediately cry that this is Communism, or some other form of nefarious -ism, and our Free Enterprise System is Under Attack.

The Core of Capitalism

We all got the message in high school General Business or Economics that capitalism means an economy in which the means of production, distribution, and exchange, are privately or corporately held.   And, that the exchange (or transfer) of wealth is privately distributed.  Also during that first week the teacher explained that finance involves the act of providing funds for business activities, for making purchases necessary for business and commerce, and for investing.    What we ought NOT do is to confuse the two terms.

Nor should we narrow the definition of finance so strictly that it comes to mean only those activities which facilitate the accumulation of wealth.  Finance in a capitalist system means funneling wealth from areas of surplus to areas of need — from the investors or bankers to the contractor who needs a loan to get materials needed for the next job, the car dealer who wants to add inventory, the manufacturer who wants to expand the factory, the restaurant owner who wants to open a new cafe, the garage owner who wants to buy new and more modern engine diagnostic equipment.

Yes, there is a “need” to channel some funds into wealth accumulation — or what good would retirement planning be?  There is nothing intrinsically wrong with some people working very hard in the financial sector to increase the wealth of their investors.  There is something wrong with an investment sector which focuses almost exclusively on increasing investor wealth to the detriment of the real economy.

One more time, let’s return to Tom Armistead’s definition of financialism and its effects:

Financialism is an economic system where the primary activity consists of creating and manipulating financial instruments. Financial instruments – loans, mortgages, stocks, bonds, etc. – are in their original form firmly linked to economic reality: the mortgage finances home ownership; the stock certificate represents ownership of a company that owns physical assets, the bond secures debt incurred to build a factory.

So far so good — the financial instruments are linked to the real economy.  But, remember Armistead’s continuation:

However, when financialism sets in, financial instruments become progressively further removed from their role in supporting commerce in the real world and develop a life of their own, a weird shadow dimension, a hall of mirrors, a distorted alternate reality that intersects and reacts with the real economy in unpredictable and destructive ways. George Soros described this phenomenon as “reflexivity.” Derivatives have a lot to do with it. Leverage and the abuse of easy credit are contributing causes. The shadow banking system is a symptom.

Here’s where the problem begins.  The distorted hall of mirrors in an alternative reality is destructive of the real economy, the one in which those mortgages, car loans, student loans, commercial loans, and business loans are made.   Wall Street stops being a channel by which investment moves, at a profit, from areas of surplus to areas of need and starts being a Casino.

When securitization becomes an end in itself, for the construction of yet more artificial derivatives, and not necessarily for the reduction of risk; when the shadow banking system sucks wealth from the real banks and the real economy — capitalism and finance are in trouble.  The result? Increased volatility, faster cycles of boom and bust, and economic instability.

Let’s ask if the discussion we should be having is NOT one about capitalism vs. “wealth redistribution,” but one in which we talk of capitalism and the incentives to invest in activities which increase real economic growth, not merely the accumulation of wealth for those at the very top of the income period.

If the 0.01% intend to anchor their wealth on something substantial like loans, mortgages, equities, and bonds (from the real economy), or are they content to accumulate wealth in the shadow banking realms and hope the remaining 99.99% don’t fold under the volatile economic  pressures and their declining share of total national wealth?

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Filed under Economy, income inequality

Wynn Joins the P.I.T.Y Party

Poor Steve Wynn — the Nevada gambling mogul isn’t getting the respect he deserves! To hear him tell it:

“I’ll be damned if I want him (President Obama) to lecture me about small business and jobs,” he told Ralston. “I’m a job creator. Guys like me are job creators and we don’t like having a bull’s-eye put on our backs.”

“I can’t stand the idea of being demagogued, that is being put down, by a president who hasn’t created any jobs and doesn’t even understand how the economy works,” he added.”  [LVSun]

Stephen Colbert had some well chosen words for this attitude, and offered a solution — the formation of the Protecting Industry Titans and Yachtsmen, or the P.I.T.Y. Party.  Evidently, Mr. Wynn is seeking membership.

The moguls like Wynn  certainly are getting touchy these days.   Mr. Wynn is sounding ever so much like hedge fund manager Leon Cooperman, from Freeland’s article, and Colbert’s satire:

Cooperman argued that Obama has needlessly antagonized the rich by making comments that are hostile to economic success. The prose, rife with compound metaphors and righteous indignation, is a good reflection of Cooperman’s table talk. “The divisive, polarizing tone of your rhetoric is cleaving a widening gulf, at this point as much visceral as philosophical, between the downtrodden and those best positioned to help them,” Cooperman wrote. “It is a gulf that is at once counterproductive and freighted with dangerous historical precedents.”  [New Yorker]

Excuse me for a moment — as a member of the 53% who did pay federal income tax in 2011, but whose vehicles must do without their own elevators, I have to ask: When did getting your itty-bitty feelings hurt preclude you from making sound business decisions in your own interest?

First, what happened in the recent recovery which might have exacerbated the sense that the 0.1% were raking in far more than might be expected for any small element in the overall economy?

Chrystia Freeland captured the trends in two paragraphs back in 2011:

“Before the recession, it was relatively easy to ignore this concentration of wealth among an elite few. The wondrous inventions of the modern economy—Google, Amazon, the iPhone—broadly improved the lives of middle-class consumers, even as they made a tiny subset of entrepreneurs hugely wealthy. And the less-wondrous inventions—particularly the explosion of subprime credit—helped mask the rise of income inequality for many of those whose earnings were stagnant.

But the financial crisis and its long, dismal aftermath have changed all that. A multibillion-dollar bailout and Wall Street’s swift, subsequent reinstatement of gargantuan bonuses have inspired a narrative of parasitic bankers and other elites rigging the game for their own benefit. And this, in turn, has led to wider—and not unreasonable—fears that we are living in not merely a plutonomy, but a plutocracy, in which the rich display outsize political influence, narrowly self-interested motives, and a casual indifference to anyone outside their own rarefied economic bubble.”  [Atlantic]

BUT, don’t mention any of this or they’ll get their feelings hurt?

Note that both Cooperman and Wynn perceive themselves as members of the focus group formulated Job Creators category.  If one remains hermetically sealed in one’s “rarefied economic bubble,” then this might be understandable.

Thus within the confined realm of their “narrowly self-interested motives,” excluding the needs of any around them, Wynn and Cooperman are free to indulge in the level of self pity necessary to excuse their opposition to paying a mite more in taxes to support the interests of any others. Or, that other 99%.

Secondly, “it’s all about me,” isn’t necessarily a good philosophical foundation for business practices.  Note the arrogance of Wynn’s articulation, “Guys like me are job creators and we don’t like having a bull’s-eye put on our backs.”    Mr. Wynn should know better.  What happened to his business in the wake of the Housing Bubble collapse?

Visitor volume, reported as 54,267,549 for Nevada in 2008 dropped to 49,731,901 in 2009.  It dropped to 49,684,782 in 2010 as the Recession deepened.  [NVRA]  Airport travel, convention attendance, visitor volume, all those statistics Nevadans watch carefully were down.  People de-leveraging from household debt, and especially those who lost jobs, don’t answer Nevada’s siren songs.  Those people are included in a group commonly called CUSTOMERS.

If too many customers are too financially strapped to play with our fancy lights and whistles money grabbing machines or to play at our flashy green tables then Mr. Wynn’s operations decline — back to the bad old days of the Bingo Parlor in Maryland?

Who doesn’t understand how the economy works?

If those who consider themselves the Elite excavate their own custom designed bunkers in which only their economic needs really count, and bombard the political system with their avaricious ideology, then it won’t be too long until the customers they require to sustain their operations evaporate.

Income inequality trends were in place prior to the Recession, as illustrated by this graphic from the Congressional Budget Office:

Income increased by 275% for those in the highest quintile, by 65% for the next highest group, by just under 40% for the next 60% of the income earners, and 18% for those in the bottom quintile. [CBO]


Notice that since 1982 the percentage of wealth accumulating to the top 1% of American income earners has increased, and increased rather dramatically since 2002.

Now it’s time to ask the obvious question:  If wealth accumulation trends continue, and it appears that they have during the recovery period —

“In 2010, average real income per family grew by 2.3% (Table 1) but the gains were very uneven. Top 1% incomes grew by 11.6% while bottom 99% incomes grew only by 0.2%. Hence, the top 1% captured 93% of the income gains in the first year of recovery. Such an uneven recovery can help explain the recent public demonstrations against inequality. It is likely that this uneven recovery has continued in 2011 as the stock market has continued to recover. National Accounts statistics show that corporate profits and dividends distributed have grown strongly in 2011 while wage and salary accruals have only grown only modestly.”  [Saez pdf] (emphasis added)

— then how do the ultra-rich intend to keep their businesses profitable?  Especially in Mr. Wynn’s case, the casinos being essentially entertainment retailing?

One of the time honored ways to determine if a business is in trouble is to see if it is gaining a larger share in a declining market.   Obviously, if a declining number of people have the financial capacity to spend their discretionary income on entertainment, then this doesn’t bode well for entertainment establishments.   Pursuing economic and taxation policies which precipitate further contraction in wealth accumulation among a majority of the population isn’t conducive to creating an expanding market for anyone’s products.  The President appears to have grasp this point, Mr. Wynn and Mr. Adelson perhaps not so much.

Job Creators

Moguls do not create jobs.  Moguls, and other businesses owners, hire people.   If they have a lick of sense they do not hire anyone they don’t need.  Another time honored rule of personnel management says:  If you don’t need Cousin Harry don’t hire him.  Nothing will drive any business into the ground faster than an inflated payroll — especially when it threatens to morph into the  family tree.

For the umpteenth millionth time — staffing levels should only be increased when the current employees cannot make or provide the goods and services demanded by the customers, with an acceptable level of customer service.

Demand is what creates jobs.  For all the self-congratulatory posturing of the economic elite, if no one is buying the vehicles, purchasing the furniture, or spending a night with the slot machines — there will be less demand and with less demand comes the natural restrictions on hiring.  The old Supply Side Hoax was never more than an artificial justification for greed.  It certainly isn’t the way to keep an economy growing.  The President understands this, some of the touchy moguls not so much.

Perhaps someone would like to procure one of Mr. Colbert’s Million Dollar Certificates, suitable for framing, telling Mr. Wynn that at least one person likes him?

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Filed under Adelson, campaign funds, Economy, income inequality, income tax, Obama, Republicans, Steve Wynn, Taxation