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

SOCIAL SECURITY AT BERNIESTOCK

by Dale Coberly

SOCIAL SECURITY AT

BERNIESTOCK

Last Sunday I gave a very short talk about Social Security at a political rally and outdoor party called Berniestock in Lebanon, Oregon.

It was not a venue conducive to detailed explanations or suggesting ways people could try to tell what was true from what was pretending to be true, so I suggested that those interested in learning more should come to Angry Bear where we could explore the issue more carefully.

The purpose of this post is to give anyone who follows up on my invitation at least a place to start if they login to Angry Bear within the next few days.

What I said at Berniestock was limited to telling them that Social Security is paid for by the workers themselves and has nothing to do with the Federal government debt. Nor can Social Security borrow money…or acquire debt… on its own. So all the claims that Social Security was somehow responsible for a huge “looming deficit” were not true.

But, I told them, Social Security does have a problem of its own, which fortunately is easy to fix.

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Crowding Out and the Social Overhead Costs of Labor

Crowding Out and the Social Overhead Costs of Labor

Another strange twist in the convoluted lump-of-labor saga. Chartist leader Feargus O’Connor refuted the “Treasury View” — aka “crowding out” — in 1844. O’Connor’s tract is long-winded and sentimentalized an idyllic past but it also contains some cogent analysis of why workers were (and should still be) wary of the exploitative use of technology by capitalist firms.

O’Connor’s critique took the form of a dialogue, which parodied and refuted an earlier dialogue, “The Employer and Employed,” that had been published in Chambers’s Miscellany of Useful and Entertaining Tracts. In the Chambers dialogue, the mill owner, Mr. Smith explains to a worker, Mr. Jackson, how the immutable laws of economics harmonize their interests. Smith’s elaboration of the doctrine of wages was described elsewhere as “right orthodox, and admirably clear too.” I will return to O’Connor’s rebuttal in more detail later, but first I would like to set the stage by briefly reviewing the contemporary relevance and the historical background of the central argument in the two dialogues.

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Foxconn cashes in for $3 billion-plus: Analysis

Foxconn hit the jackpot with Wisconsin on Wednesday, when CEO Terry Gou and Governor Scott Walker signed a memorandum of understanding for the company to invest $10 billion in southeastern Wisconsin in return for $3 billion in state subsidies and an undetermined amount of local incentives in the form of tax increment(al) financing (TIF).*

The basic outline of the deal, sent to me by John Haynes of the Milwaukee Journal-Sentinel, is pretty simple: Foxconn is required to invest $10 billion and employ 13,000 workers within six years at an average pay rate of $53,875 a year plus benefits. In return, the state will give Foxconn $1.5 billion in tax credits for the 13,000 new jobs, $1.35 in tax credits for the $10 billion investment, and $150 million in sales tax breaks on construction materials for the plant. The tax credits are refundable, so Foxconn will receive a check if it doesn’t owe much or anything in state income tax in any given year. The state credits will total $200-$250 million a year for up to 15 years, or until Foxconn has received the entire $3 billion. All this must be approved by the state legislature by September 30. According to the state, if Foxconn does not create all the jobs or make the entire investment, it does not get the full subsidy.

In addition, the legislature must also amend the state’s TIF law by lifting the 12% cap on the ratio of TIF’d property value to a municipality’s total property value, and extending the allowable life of TIF bonds. Together, these would make larger TIFs and greater municipal debt possible. It is unclear exactly how much more this will add to the subsidy package, since a final site hasn’t been chosen in the Kenosha-Racine area. But Kansas City has certainly managed to give hundreds of millions of TIF dollars to companies in the past, so a large local component to the incentives package is certainly possible.

Is this a good deal for Wisconsin? As the state’s press release points out, it’s better than the deals Boeing has gotten in Washington state, including a much lower cost per job — but that’s a pretty low bar. As I discussed last time, Foxconn wanted desperately to locate in the United States due to its fear of U.S. protectionism, so the country as a whole was actually in a very strong bargaining position. However, the possibility of a bidding war between different states negated this, even though the individual states (Wisconsin at 3.1%) had very low unemployment rates and thus greater bargaining power than otherwise. Without EU-style rules to restrict bidding wars, there was a high probability of Foxconn hitting the jackpot.

With EU-type rules, it would be impossible to give a $3 billion investment incentive, since $9.9 billion of the $10 billion would only be eligible for 34% of any region’s maximum aid intensity. The maximum conceivable subsidy would be a little over $1 billion.** We might say this consideration is the high bar, but it’s worth knowing what is already achievable with a different set of rules.

On a strict cost basis, if the deal works out as claimed, you still have a cost per job of $231,000 and an aid intensity of 30%. These would be normal numbers for an automobile assembly plant, but Foxconn will only be paying a tiny bit over the Wisconsin average wage, certainly less than auto assembly pays. So these are basically just average jobs getting a lot of money. Many average jobs, certainly, but there is a good argument that you have diminishing returns. The more jobs there are, the more pressure that gets put on schools and infrastructure as people move to southeast Wisconsin, and the greater the number of jobs that will likely go to Illinois residents (indeed, Greg LeRoy of Good Jobs First says Illinois is the biggest winner of this deal after Foxconn itself). So you really shouldn’t be spending 10 times the incentive dollars for 10 times the jobs.

What seems worst to me is that not only did Foxconn definitely need to be in the United States, but it probably wanted to locate in the Congressional District of House Speaker Paul Ryan all along. This was a very short bidding war. Wisconsin municipal officials were only notified about two months ago, and we have seen no stories about competing bids, nothing about other governors making a pilgrimage to Asia. This seems like it was never much of a competition. If that’s true, Wisconsin got taken to the cleaners. Even if there was a genuine competition, the deal was way too rich.

 

* In Wisconsin and a few other states, the program is known as tax incremental financing, but in most of the country, it is simply tax increment financing.

** According to EU rules, the maximum aid intensity of 50% of investment is only allowable in regions with less than 45% of EU average per capita income. These areas are unlikely to be the site of an advanced manufacturing facility. The next highest maximum is 35% (down from 40%, such as Dresden, Germany, which has quite a bit of high-level manufacturing, such as microchip fabrication), and 34% of that is 11.9%. 11.9% of $10 billion is obviously $1.19 billion, which is why I say the maximum conceivable subsidy is just over $1 billion, and $3 billion is simply impossible under these rules.

Cross-posted from Middle Class Political Economist.

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Lack of Hope in America: The High Costs of Being Poor in a Rich Land

(Dan here…I found Yves intro more appealing than the research…)

Yves here. While this article gives a very good high-level summary about how inequality is becoming institutionalized in American and the costs to those who see themselves as having lost the most, I wonder about the emphasis on hope as a remedy. Perhaps this is such a strong cultural bias in the US that there’s no escaping it as a motivator for most people. But I take to heart the interpretation of the Pandora’s Box myth that Hope being at the bottom of the box of all the evils she let loose was not a show of mercy by the gods, but simply a torment in disguise.

It’s not hard to imagine that the psychological damage done by loss of mobility and the relative status decline of lower-middle class individuals, particularly in rural areas, is made worse by media. Not only does TV show how the better-off half lives, TV and the movies regularly depict characters living in better circumstances than the incomes that go with their jobs would allow. One reason is that it’s almost impossible to shoot a scene in anything smaller than a pretty big room, so Americans (outside those meant to be upper class) in movies and TV look better housed than they generally would be in their real lives. And of course they all have great teeth.

Lack of Hope in America: The High Costs of Being Poor in a Rich Land is worth a quick read but I agree it is only a conversation starter for this blog. However, how our expectations are set and what we ascribe to ourselves and others is telling.

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LOOK AT THE BIG DIVERGENCE BETWEEN “SOFT” AND “HARD” DATA … Ummm ..never mind….

LOOK AT THE BIG DIVERGENCE BETWEEN “SOFT” AND “HARD” DATA … Ummm ..never mind….

Since this year the Doomers haven’t even been able to rouse themselves up enough to call for OMG recession imminent!!!, they have had to settle for how slow the growth in the economy has been.  Their favorite theme has been the alleged divergence between the “soft” consumer confidence and ISM survey data, and the “hard” data, like industrial production:

Oh, wait!  Never mind …

Well, then, how about durable goods?  Since it was just updated this morning, let’s take a look at that:

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Minimums of understanding

Update on Wells Fargo

Via Reuters Wells Fargo drags feet:

Wells Fargo last September settled with three regulators after revelations that branch staff set up as many as 2.1 million accounts without customer authorization in order to hit sales targets. Since then, the bank has replaced its CEO and other top executives have either resigned or been fired.

The bank has been hit with several regulatory inquiries and lawsuits.

“The extent of fraud at Wells Fargo was stunning,” Stringer said in a statement sent to Reuters on Thursday. “Executives have been held responsible — but now directors must answer for their part… This board needs to be refreshed — today.”

 

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Science and Technology advice

Via Science magazine, Trump’s White House science office still small and waiting for leadership:

…Trump has yet to nominate an OSTP director, who traditionally also serves as the president’s science adviser. Nor has he announced his choices for as many as four other senior OSTP officials who would need to be confirmed by the Senate.

Still pending is the status of the President’s Council of Advisors on Science and Technology, a body of eminent scientists and high-tech industry leaders that went out of business at the end of the Obama administration.

Via NYT, The Climate Lab That Sits Empty:

There are only a handful of labs in the United States and elsewhere with the equipment to reliably make these measurements at the high precision required for atmospheric research. None has the capacity the Boulder lab would have to run the necessary number of measurements — about 5,000 per year. And the Boulder lab, unlike others with similar equipment, would be fully dedicated to monitoring global greenhouse gas emissions.

The National Oceanic and Atmospheric Administration first sought funding for this program without success in 2012 and is trying yet again this year. But there seems to be little hope that lawmakers will finally provide the roughly $5 million for the machine and attendant research program. Worse, the whole national greenhouse-gas monitoring program may be at risk, if Congress approves President Trump’s proposed cuts to climate science.

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Wisconsin and Foxconn…

Via the New York Times Wisconsin and Foxconn:

Foxconn’s plan for a $10 billion factory in Wisconsin is certainly good news for President Trump and Republican politicians Gov. Scott Walker and Speaker Paul D. Ryan, whose district the plant would call home.

But the deal with Foxconn, the Taiwanese electronics supplier, comes with a heavy price tag for Wisconsin taxpayers: $3 billion in state tax credits that dwarf the typical incentive package companies receive from local governments.

Even as Mr. Walker celebrated the news with Foxconn executives at a rally at the Milwaukee Art Museum on Thursday, experts on the political left and right alike said the rewards were not justified by the cost of the tax breaks.

Over all, the subsidies for the Foxconn plant, which would produce flat-panel display screens for televisions and other consumer electronics, equal $15,000 to $19,000 per job annually.

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FIX THE DEBT WANTS TO SAVE SOCIAL SECURITY BUT WHY?

by Dale Coberly

 

FIX THE DEBT

WANTS TO SAVE SOCIAL SECURITY

BUT WHY?

I received an email a few days ago from Chris Dreibelbis,Fix the Debt, purporting to explain “why the Social Security Trustees urge action.”

“Fix the Debt” is a project of the Committee for a Responsible Federal Budget (CRFB) which is funded in part by Peter Peterson, a very rich person who has made something of a second career writing and saying misleading things about Social Security.  So have CRFB and “Fix the Debt.”

The present email from Dreibelibis looks reasonable enough,  but also misleading enough, that I thought it worth writing this short post.

Dreibelbis quotes the Trustees, “Both Social Security and Medicare face long term shortfalls under currently scheduled benefits and financing….The Trustees recommend that lawmakers take action sooner rather than later to address these shortfalls…”

Dreibelbis says, “The newest report forecasts that Social Security’s combined trust fund will run dry by 2034.  At that point, all recipients will see a 23% cut in benefits.  For example a typical person born in 1990 … will see a cut of over $160,000 dollars in scheduled lifetime benefits.”

To check this, I assumed that person would pay FICA taxes on income equal to 12.4% of the average income each year from 2020 through 2054.  I looked at Table V.C7 (Trustees Report p150} for a person who obtains age 65 in 2055 and retires at age 67 to find a scheduled yearly benefit of $33430.  Since the numbers in the table are given as constant 2017 dollars, I assumed the “real” value of the benefit would not change and multiplied it by the 20 years that person could expect to live in retirement, for a total of 668600 dollars.  Now, if the benefits are cut by 22% that person would lose $158,778 in total benefits over his lifetime. This is close enough to Dreibelbis figure, assuming he may have done the calculation slightly differently.

 

But what Dreibelbis did not do was calculate the cost of avoiding the benefit cut by raising the payroll tax 4%.  This turns out to be $93566 or about 60% of the value of the lost benefits.  Sounds to me like a better deal.  Moreover the tax would be paid out of an income of 2.339,153, leaving him an after the tax total income of $2,245,587, or an average of about $64,159 per year (2017 dollars).   Taking the benefit cut would leave him a total of $509,822 in benefits, or an average of about $25,491 per year to live on when he is old.

There are probably games you can play with “present value”  or “what you could have earned from interest,”   but that does introduce some “if’s.”  In any case, a first look at the numbers suggest that paying the extra tax makes more sense than taking the benefit cut.  It turns out that most workers would only see half the taxes (the other half being paid by the employer:  (i am quite aware of the “employers share is “really” the employees money” argument, but that is a metaphysical argument meant to distract from the payroll facts on the ground.)  Taking that employee’s share only, and phasing in his 2% tax increase one tenth of one percent (about a dollar per week at today’s average wage) per year would leave his total tax cost of avoiding the $153,778 benefit cut at about $35710.  This means every dollar he pays in “extra” taxes would get him $4.31 in saved benefits.

By the way, these numbers are in “real” dollars.  Accounting for inflation would make the benefit of paying the tax look much larger.  Or BE much larger, since any attempt to make up for the SS tax by “personal savings”  would have to first make up for what would be lost to inflation.

Dreibelbis does not address this. He strongly implies we need to cut SS now in order to “know what you can count on in the future.”   He never considers that we could just pay an invisibly larger tax now and keep (earn) the benefits we will will most definitely need in the future.

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