Relevant and even prescient commentary on news, politics and the economy.

Michigan Lame Duck Legislature

The Republican controlled House and Senate has been largely busy passing bills in the few days left in 2016. This particular one caught my eye.

Michigan had put in place a new Unemployment System (Michigan Data Automated System or MiDAS) to help in detecting unemployment fraud. With the passage of Senate Bill 1008 by the Republican led House, $10 million is transferred from the Unemployment Contingent Fund to the General Fund to be done with in the General Fund as determined by the Republican held Legislature.

Just a little history; MiDAS was put in place (2013) by Governor Rick Snyder of Flint, Michigan fame to automate the system away from the manual process. The system sends out a series of questions, which the Unemployment Applicant has to answer picking from listed answers. There is no room for explanation. The claimants chosen answers from the list of answers are then loaded into the MiDAS data base and notification is sent to the former employer who then confirms the answers the claimant has listed in the system. If there is any discrepancy, MiDAS assumes the claimant has committed a potential fraud.

Another questionnaire is then sent to the claimant, which is also limited to listed responses. If you do not respond in 10 days, it is assumed a fraud has been committed as determined by MiDAS. A notice is “supposedly” sent out and the claimant has 30 days to answer. If no notice is sent out and the claimant does not answer, MiDAS assumes fraud and the issue goes to collections where just about anything can take place to collect the unemployment funds already given to the claimant. There is little or no human interaction throughout the process and little can be done to explain circumstance during the process.

The Michigan Unemployment Insurance Agency, partly at the request of the federal government and partly on its own, reviewed 22,427 cases in which a computer determined a claimant had committed civil fraud between October 2013 and October 2015 and found that 20,965 of those cases did not involve fraud. Unemployment Insurance Agency spokesman Dave Murray said on Wednesday. That’s an error rate of more than 93%.”

The $10 million will be transferred from the Unemployment Contingent Fund which had already grown by 400% after the MiDAS caused spike in fraud cases of which nearly all of them unfounded. Senate Bill 1008 is balancing the state budget on the backs of innocent citizens wrongfully accused of false unemployment claims.

Governor Rick Snyder spent $47 million of taxpayer funds to install MiDAS which has been shown to be correct in determining fraud < 7% of the time. Rather than give the funds to those who were unjustly denied Unemployment Compensation by MiDAS, the Republican led Michigan legislature and Republican governor Rick Snyder are keeping much of it in the Unemployment Contingent (used to train workers and for rainy days) and will also transfer $10 million of it to the General Fund to help balance the budget. This is the same as using the additional Medicaid funding received from the expansion to balance the budget rather than set it aside for later years which would have kept Michigan from having to add to Medicaid funding till 2027. It too was used to balance the budget. By doing so in both cases, the Republicans do not have to raise taxes on the rich in income.

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Topical Comments and Open Threads

It appears many of the “Topical Posts”are being used to discuss anything and everything. It is important to keep to the main topic of the post. It also shows courtesy to the poster by being topical and not hijacking the post for other topics.

AB does have “Open Thread Posts where just about any Topic can be discussed. Please use them for this purpose.

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Just Rumor(s) Today in Detroit

- Chrysler Fiat sold the car division sans Jeep, MiniVan and Trucks to the Chinese. They also closed production on Chrysler 200 and Dodge Dart June of this year. It will be the first time Chrysler/Dodge have not had Cars if this is true. 200 (UF) and Dodge Dart (PF) never did met forecast so it closing down production for these two cars is not a surprise. Overall, cars were not a Chrysler strong suit. Trucks and Jeeps were followed up by MiniVans.

- Yazaki (Tier 1) in Canton Michigan supposedly laid off 150 at Corporate Headquarters which is about a 10% workforce reduction. Yazaki is about $20 billion in size and a Japanese company.

I heard it from pretty good sources; but, one never knows. We will have to see if it is real or not. I wonder if Trump/Congress will intercede for this one?

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“America Belongs to White Men”

A Leading Intellectual according to Trump’s Chief Strategist Steve Bannon and founder of the Alt-Right, Richard Spencer “We won . . . .” I am playing the entire newscast rather than just the abbreviated version of the speech which is popping up all over. Sorry about the commercial. This took place at Texas A&M at the same time the University was holding a Unity meeting

America

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Tom Price for Healthcare and Human Services

For those of you who may have missed it, Rep. Tom Price (R-Georgia) is Pres. Trump’s pick to be the head of the Department of Health and Human Services. Price is an Orthopedic Surgeon (former?) and has been in the House for 12 years now and a member of the Congressional Healthcare Caucus. It appears he has all of the required qualifications to be the head of the Department of Health and Human Services. The minority representative American Medical Association for doctors has endorsed Tom Price as an excellent choice.

AMA “strongly supports the nomination of Dr. Tom Price to become the next secretary of Health and Human Services (HHS). His service as a physician, state legislator and member of the U.S. Congress provides a depth of experience to lead HHS. Dr. Price has been a leader in the development of health policies to advance patient choice and market-based solutions as well as reduce excessive regulatory burdens that diminish time devoted to patient care and increase costs,” said AMA Board of Trustees Chair Dr. Patrice A. Harris.”

The choice of Tom Price is a no brainer for Pres. Trump as he is also in line with Republicans wanting to repeal the PPACA and put in its place vouchers for healthcare, Medicare, and Medicaid. Paul Ryan and Mitch McConnell’s jobs suddenly became easier. Mr. Price’s 2009 bill “would allow refundable, age-adjusted tax credits with amounts tied to average insurance for people who buy insurance on the individual market and don’t have access to a government or employer plan.” One can see the widow-peaked Paul Ryan smiling all the way to the House floor.

The AMA in 2012 represented ~17% of all practicing doctors and students. Overall numbers have been in a downward slide over the years. Does the AMA represent the majority view of doctors and how they view the PPACA? “Only 26 percent of all primary care physicians viewed the law ‘very unfavorably’. So it might be said that just one out of four primary care physicians “hate” Obamacare.” Indeed, all the scare tactics of decreased care put forth by the opposition about the PPACA have failed to materialize (Kaiser). It does not matter to Republicans what the finding are and to some on our side of the table can only speak of “crapification” due to the PPACA as it is a bill signed by Pres. Obama

A growing number of doctors have come out in opposition to the AMA as led by Doctor Manik Chhabra, Navin Vij and Jane Zhu on their new blog Clinician Action. At the time (December 1, 2016) of Neil Versel’s article “Pushback begins against controversial HHS pick Tom Price”, 2500 doctors had signed their petition. As of December 4, 2016; >4600 doctors have signed the petition in opposition.

“We are practicing physicians who deliver healthcare in hospitals and clinics, in cities and rural towns; we are specialists and generalists, and we care for the poor and the rich, the young and the elderly. We see firsthand the difficulties that Americans face daily in accessing affordable, quality healthcare. We believe that in issuing this statement of support for Dr. Price, the AMA has reneged on a fundamental pledge that we as physicians have taken ?—? to protect and advance care for our patients.

We support patient choice. But Dr. Price’s proposed policies threaten to harm our most vulnerable patients and limit their access to healthcare. We cannot support the dismantling of Medicaid, which has helped 15 million Americans gain health coverage since 2014. We oppose Dr. Price’s proposals to reduce funding for the Children’s Health Insurance Program, a critical mechanism by which poor children access preventative care. We wish to protect essential health benefits like treatment for opioid use disorder, prenatal care, and access to contraception.”

The rest of their stetment can be found on their blog; Clinician Action.

Whether Tom Price carries some of his views beyond an agenda to reform healthcare and repeal the PPACA, we will not know until he is appointed and has spent some time in the position. It is worthwhile to point out;

“Tom Price is a member of the Association of American Physicians and Surgeons, a conservative group that publishes a journal that has promoted discredited views — including the supposed link between ‘vaccines and autism.’”

The Association of American Physicians and Surgeons also came out with a statement on Living Wills:

“Living wills are not needed to prevent overtreatment in days when hospital procedures have ‘produced the imperative to ‘move things along.’” Death is usually “orchestrated by professionals in hospitals, … a transition that has markedly shortened the ‘waiting time’ for dying.”

The “Tucson, Arizona-based AAPS is also listed on Quackwatch (“Your Guide to Quackery, Health Fraud and Intelligent Decisions”).”

There is more to be said here and I hope you take a moment to read Neil Versel’s article, some of the other references, and visit Clinician Action.

“Pushback begins against controversial HHS pick Tom Price” MedCity News, Neil Versel, December 1, 2016

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Crony Capitalism

Teabagger and maybe Trump nominee for something (hopefully other than the Sec. of the VA), Sarah Palin slams Trump and Pence in a Randian manner on bailing out Carrier and Carrier workers calling it as an intrusion on free enterprise. Afterwards she gushes; “I am ecstatic for Carrier employees! Their bosses just decided to keep shop onshore. What a relief for hundreds of workers. Merry Christmas Indiana!”

Foundational to our exceptional nation’s sacred private property rights, a business must have freedom to locate where it wishes. In a free market, if a business makes a mistake (including a marketing mistake that perhaps Carrier executives made), threatening to move elsewhere claiming efficiency’s sake, then the market’s invisible hand punishes. Thankfully, that same hand rewards, based on good business decisions.

But this time-tested truth assumes we’re operating on a level playing field.

When government steps in arbitrarily with individual subsidies, favoring one business over others, it sets inconsistent, unfair, illogical precedent. Meanwhile, the invisible hand that best orchestrates a free people’s free enterprise system gets amputated. Then, special interests creep in and manipulate markets. Republicans oppose this, remember? Instead, we support competition on a level playing field, remember? Because we know special interest crony capitalism is one big fail.

Sarah is correct, incentives to business interests to not leave the country and layoff Labor only leaves the country hostage to corporate interests in the future. Trump’s actions and promises leave the door open for other companies to come through asking for a similar deal to save Labor. If he does not keep the company in the US, Labor will also see his promises to change the country as political rhetoric (if they haven’t already) to get elected and not worth much in the end. It will be interesting to follow his actions.

Come to Michigan which has a tough time fixing roads and infrastructure and yet can spend $billions in subsidies to business. Indiana had RTW laws, had multiple subsidies to business including Carrier, and had tax abatement of which none of it stopped companies from leaving Indiana. Under Pence, Indiana gave $Millions to companies that offshored jobs Companies come and go to states or other countries for other reasons which states can not prevent. Poorly spent money bribing companies to stay can also be hard to get back from the companies who had a change of heart. Indiana has had difficulty in getting the incentives back when companies still leave and the incentives are so poorly written they also do little or nothing to stop the company from closing an unspecified nearby plant.

Sarah Palin: But… Wait… The Good Guys Won’t Win With More Crony Capitalism YC Young Conservatives, December 2, 2016

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Taking the CEO Salary Fight Local

Portland, Oregon’s government will be the first to test the legislative waters on excessive CEO pay by companies if passed the city board December 7, 2016. If the pay of a CEO exceeds 100 times of what a typical company employee makes, a surtax will be assessed the corporation. More than 500 corporations do enough business within Portland to be affected by the new tax. Since the Republican led Congress has failed to act on CEO excessive pay based upon Risk, many states and cities are looking at taking it upon themselves to assess companies who pay their executives in stock options and similar performance methods as it is taxed at a lower level than regular income. With the new tax, Portland is expected to generate up to $3.5 million, which will be used to care for the homeless.

Firms that do business in Portland would owe a 10 percent surtax on the city’s existing business tax if they pay their CEOs more than 100 times what their workers receive. For example, if a large company owes the city $100,000 and has a pay ratio of 175-to-1, its surtax would be $10,000. Other cities such as San Francisco are considering taking similar action.

Peter Drucker had strong feelings on the subject and he once termed sky-high CEO compensation ‘a serious disaster,’ which was well worth revisiting in light of the news that the men who sat atop Fannie Mae and Freddie Mac (FRE) (BusinessWeek, 9/10/08) could be eligible for as much as $24 million in severance and other benefits after being ousted from their positions. Last week the federal government was forced to step in and rescue the faltering mortgage giants in a move that could cost taxpayers billions.”

Around that time CEO’s had income packages worth $10.5 million or about 344 times what the average worker was making. Peter Drucker felt a CEO’s pay should not exceed 20 times (1984) what the average worker was making in income. As of 1993 the problem has worsened as companies dodge corporate income tax by paying their CEO is stock options which can be deducted from corporate income tax and are tax at a lower rate than ordinary income tax at ~39%.

References:

“Put A Cap on CEO Pay” , Rick Wartzman, Bloomberg, September 12, 2008.

“Take The CEO Pay Fight Local”, Sarah Anderson, US News, October 21, 2016.

Institute for Policy Studies — Talking Points —, Sarah Anderson, October, 2016.

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Wall Street CEO Bonus Loophole

Sarah Anderson at Institute for Policy Studies writes about how the 1993 reform to rein in runaway CEO pay by capping tax deductions of executive compensation at $1 million created a loophole as it did not apply to stock options and other performance pay methods. More-performance-measured-income to executives paid out, the lower the company income tax presently.

What was the impact?

CashingInOnTheCrisis-Graphic-1-1[1]
$2 billion in fully deductible performance bonuses by top 20 U.S. banks to their top five executives over the past four years at a 35 percent corporate tax rate resulted in a taxpayer subsidy of > $725 million or $1.7 million per executive per year.

CashingInOnTheCrisis-Graphic-2-1
On-the-hot-plate Wells Fargo Bank between 2012 and 2015 received $54 million in tax subsidies for CEO John Stumpf bonuses. During those years, CEO John Stumpf’s bank faced $10.4 billion in misconduct penalties.

CashingInOnTheCrisis-Graphic-3-1-400x200[1]
The same top 20 executives received ~ $800 million in stock-based “performance” pay, before stockholders were out of the red and the bank’s stocks returned to pre-2008 levels.

CashingInOnTheCrisis-Graphic-4-1[1]
Jamie Dimon CEO of JP Morgan cashed in fully deductible $23 Million in bonuses in Feb/March 2010 while the nation was still reeling from the crisis. Since 2010 JP Morgan has received $28 billion in penalties for mortgage misconduct.

The same as Main Street bailing out Wall Street for their malfeasance, Main Street was also subsidizing Wall Street Executive bonuses. Some potential solutions:

Implement Sec. 956 of Dodd-Frank: Rigorous limitation by regulators of Bank excessive risk taking and the banning of excessive bonus based upon risk – “not yet been implemented and this proposal does not go far enough to prevent the type of behavior that led to the 2008 crash.” Sec 956 allows lenient bonus deferrals, weak stock-based pay restrictions, and discretionary enforcement left to bank managers.

Close the hedge and private equity loophole which allows private equity and hedge fund managers to pay a 20 percent capital gains rate on the bulk of their income rather than the 39.6 percent ordinary income rate. The Carried Interest Fairness Act of 2015 (HR 2889/S 1689) requires that the “carried interest” compensation received by private equity and hedge fund managers be taxed at ordinary income rates. Due to a lack of activity by Congress some states such as New York are implementing their own legislation to close the loop hole generating $3 billion in new revenue.

The Stop Subsidizing Multimillion Dollar Corporate Bonuses Act (S. 1127 and HR 2103) eliminates “performance pay” exemptions and caps the deductibility of compensation at $1 million for every employee.

Reference:

Executive Excess 2016: The Wall Street CEO Bonus Loophole, Sarah Anderson and Sam Pizzigati, Institute for Policy Studies, August 31, 2016. “The first report to calculate how much taxpayers have been subsidizing executive bonuses at the nation’s largest banks.”

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How Does Diversity Affect Economic Growth?  A Look at Data on Immigration, Tax Rates and Real GDP per Capita

Authored by Mike Kimel

In this post, I will explain the annualized growth rate in real GDP per capita using tax rates and the percentage of the population that is foreign born using data for the United States.  The data shows the following:

A. the tax rate that maximizes economic growth is higher than you think
B. immigration from countries with advanced economies whose population resembles the US correlates with faster economic growth over subsequent years
C. increasing rates of immigration from countries with diverse populations does not correlate with faster future economic growth

You can skip ahead to the results of the regression if you want.  Otherwise, if you care about the details, here goes…

I used to occasionally write posts where I would build models based on fitting models of the following form: 

growth in real GDP per capita, t to t+1 = f(tax rate at t, tax rate squared at t)

In that formulation, tax rate = top marginal income tax rate.  The quadratic form allows us to find a tax rate that maximizes growth rates if the real world has such a thing (which, happily, it does as we will see below).   

More recently, I have been looking at how immigration has affected the economy.  In particular, I had a few posts looking at this relationship:

job growth, t to t+10 = f(foreign born % at t)

Why the ten year look-ahead?  To be frank, I just got tired of arguing with readers about causality.  Comparing X today to Y over the next ten years puts a halt to chicken and egg arguments tout suite.  

I’ve also had a few essays speculating about the effect of changes in immigration law in 1965 on the economy but in those posts, I relied only on logical and not on data.  

In this post, I want to combine those three (well, really two and a half) issues. I will fit the following model:

1. Dependent variable:  annualized growth in real GDP per capita, t to t+10
2. Explanatory variables i and ii are tax rate and tax rate squared, both at time t
3. The next explanatory variable is the % of the population that is foreign born at time t.   But…  if immigration, and its impact on the economy, changed as a result of the 1965 Immigration Act as I’ve stated in earlier posts, what we really need is two variables:
3a.  Foreign Born as a % of the Pop Until 1965 (and zero otherwise)
3b.  Foreign Born as a % of the Pop After 1965 (and zero otherwise)

Tax rates came from the IRS’s historical table # 23.  The foreign born percentage was obtained from the Migration Policy Institute (MPI).  The MPI’s data originated with the Census, but they organized it a bit better so I downloaded it from them rather than the Census.  Data is available in ten year increments from 1850 to 2010, and annually from 2010 to 2015.   I annualized the decennial data by simply assuming a linear annual change between every tenth year’s figures.  

The entire set of data was organized in Excel, but the regression itself was run in R.  The output (click on figure for larger size) appears below:

OutputFromRGrowthTaxesForeignBorn

The first thing to note is that the model explains about half of the variation in the ten year economic growth rate.  Not bad for tax rates and immigration alone.  

Next, the coefficient on tax rates is positive, the coefficient on tax rates squared is negative, and both are significant.  (That’s the quadratic relationship mentioned earlier.)  If you do the math, it turns out that the rate that maximizes the ten year annualized growth in real GDP per capita is 55%. This is about what most of my previous estimates over the years have come up with as well.  

Moving on, the next variable is the percentage of the population that is foreign born in years prior to 1965.  That variable is positive and significant even at the 1% level.  In plain English, before 1965, more immigrants -> faster economic growth. 

But the next variable is problematic, and spits out a result that is, at a minimum, politically incorrect. That variable, the percentage of the population that is foreign in years after 1965 is negative though not quite significant.  If we are worried about being reported by the neighbors, we could with a straight face, stop here and state from this that immigration has not not affected growth since 1965.  For the moment, let’s do that.  

The coefficients and relative significance of the last two variables essentially restate what I have been writing in the last few weeks.  As a result, I can explain what is going on by more or less plagiarizing myself.  So, at a high level, why does pre-1965 immigration clearly boost economic growth and post-1965 immigration clearly not?  As I noted in earlier posts, from 1921 to 1965, about 70% of the immigrants came from Germany, Great Britain and Ireland.  The 1965 Immigration Act was designed to allow more immigration from the rest of the world.  

Before 1965 immigrants would have fit in more seamlessly. After all, the US had been strongly shaped by previous immigrants from the very same countries where the new immigrants had just left.  Furthermore, most of the people the immigrants would encounter in their new land would have experience with other immigrants from the same culture. Additionally, in the last century technology was an important driver of growth, and the countries which supplied the most immigrants before 1965 also happened to be fairly technological advanced countries.  One more thing to keep in mind – the percentage of the population that was foreign born shrunk steadily from close to 12% in 1929 to about 5% in 1965.

Since 1965, of course, the story is very different.  The foreign born population has been increasing, reaching 13.5% in 2015.  Post-1965 immigrants have been far more heterogeneous in ethnic composition and skillset than the earlier group.  May have come from poorer, less technologically advanced societies.  Some have cultural traits that are not entirely compatible with accepted norms in the US which results in a variety of frictions.   

My guess, from the results, is that if more granular data was available on post 1965 immigration (say, by country of origin, or better still, by education level and education quality), it would turn out that some subsamples of post 1965 immigration had positive and significant effects on growth, but proportionately larger subsamples would have negative and significant coefficients.  I will dig a bit harder to see if I can find data that can confirm or repudiate my guess.  

A few closing comments.  Given the election is coming up, it is worth noting that Hilary and Trump are on opposite sides of both the tax and immigration issues.  Hilary’s proposed tax changes are likely to generate faster economic growth, Trump’s proposed tax changes are likely to slow the economy.  On the other hand, Trump’s immigration proposals (to the extent that they can be coherently defined) suggest an interest in pre-1965 style policies.  Hilary, though, will probably accelerate the path we are already following.  

For what it is worth, both tax and immigration policies have consequences.  However, it is easier to change direction, or to reverse the effects of earlier policies if those relate to the fiscal rather than the immigration arena.  That’s why the Roman Empire could survive crazy behavior by madmen like Caligula and Nero, but one mistake by a dry technocrat like Valens led inexorably to the sacking of Rome.  

In future posts, I will try to understand what some of the impediments have been to integration of post-1965 immigrants.  I am also interested in whether and how those impediments can be reduced.    

Finally, as always – if you want my data, drop me a line at my first name (mike) dot my last name (kimel – and that’s with one m, not two) at gmail which of course is followed by a dot com.  I’d be happy to share my Excel spreadsheets and if you want it, the trivial amount of R code that went into this.  If you contact me within a month of this post going up, I’ll send it to you.  Beyond that, I will probably send it to you but no guarantees.  I reserve the right to have my computer stolen, go into a coma, move on with my life, etc.  But of course, the data is pretty easy to recreate.  

One postscript…  This post kind of reminds of me of Presimetrics, the book I wrote with Michael Kanell.  I like to think the book never found an audience because we went where the data took us, rather than towing either the Republican or the Democrat Party lines.  As a result, some of the results we presented were in line with Republican beliefs, and some with Democrat beliefs, but neither side could embrace the results.  Had we been smart enough to be partisan hacks, perhaps the book would have sold much better. 

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