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Lane Kenworthy series


Consider the Evidence and Crooked Timber April 16-18, 2009 post a series by Lane Kenworthy on income inequality. Our own Robert Waldmann has thoughts of his own as well.

How to pay for inequality reduction: follow-up
April 20, 2009

One way to make some progress in reducing income inequality is to significantly increase redistributive transfers and public services. I’ve suggested that it will be difficult to fund that solely by heightening taxes on those at the top of the income distribution. Robert Waldmann asks, quite reasonably: Where’s the math?

Here’s an answer. I’ll use numbers for 2006, since that’s the most recent year for which we have good income and tax data from the Congressional Budget Office.

He is worth the visit.

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Interest rates versus leverage

(hat tip ronin 8317…A very good paper by John Geanakoplos on the leverage cycle..)

John Geanakoplos on the leverage cycle

At least since the time of Irving Fisher, economists, as well as the general public, have regarded the interest rate as themost important variable in the economy. But in times of crisis, collateral rates (equivalently margins or leverage) are far more important.

Despite the cries of newspapers to lower the interest rates, the Fed would sometimes do much better to attend to the economy-wide leverage and leave the interest rate alone. The Fed ought to rethink its priorities.

When a homeowner (or hedge fund or a big investment bank) takes out a loan using say a house as collateral, he must negotiate not just the interest rate, but how much he can borrow. If the house costs $100 and he borrows $80 and pays $20 in cash, we say that the margin or haircut is 20%, and the loan to value is $80/$100 = 80%. The leverage is the reciprocal of the margin, namely the ratio of the asset value to the cash needed to purchase it, or $100/$20 = 5. In standard economic theory, the equilibrium of supply and demand determines the interest rate on loans. It would seem impossible that one equation could determine two variables, the interest rate and the margin. But in my theory, supply and demand do determine both the equilibrium leverage (or margin) and the interest rate.

It is apparent from everyday life that the laws of supply and demand can determine both the interest rate and leverage of a loan: the more impatient borrowers are, the higher the interest rate; the more nervous the lenders become, the higher the collateral they demand. But standard economic theory fails to properly capture these effects, struggling to see how a single supply-equals-demand equation for a loan could determine two variables: the interest rate and the leverage. The theory typically ignores the possibility of default (and thus the need for collateral), or else fixes the leverage as a constant, allowing the equation to predict the interest rate.

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Forbes and the "Self-Made" Label

by cactus

Forbes and the “Self-Made” Label

I’m kinda busy these days, but this topic is small pet peeve of mine: what the heck is up with Forbes and the “self-made” label? On occasion, I’ve gone through the Forbes 400 list of richest Americans and marveled at who Forbes manages to decide qualifies as self-made.

Case in point. Take Aubrey McClendon, head of Chesapeake Energy, the largest independent gas producer in the US. His great-uncle was a governor and a three-time senator, and also co-founded a large oil company. His father worked for the company for 35 years, and one imagines he wasn’t a janitor or nightwatchman.

McClenond himself will tell you:

I had some early financial advantages in life that probably let me take a chance or two that I wouldn’t have been able to

But to Forbes, McClendon is a self-made man.

A few spots up from McClendon is another self-made dude (according to Forbes), Paul Tudor Jones II. The “II” is not an automatic marker of wealth, but it should have been a tip-off to Forbes that perhaps it was worth visiting “teh google”, which would have been kind enough to guide them toward this interview:

I already had an appreciation for trading because my uncle, Billy Dunavant, was a very successful cotton trader. In 1976, after I finished college, I went to my uncle and asked him if he could help me get started as a trader. he sent me to Eli Tullis, a famous cotton trader, who lived in New Orleans. Eli is the best trader I know, he told me. I went down to see Eli and he offered me a job on the floor of the New York Cotton Exchange.

And the name “Dunavant” should have rung a bell to Forbes – after all, Forbes ranks Dunavant Enerprises as one of the 400 largest private firms in the US. Another thirty seconds of “research” would have told the folks at Forbes this:

His paternal grandfather, Colonel William P. Dunavant, was in the railroad business and created one of the main cotton transporting railroads of the time, a railroad that grew into the southern leg of the famous Frisco Railroad. Billy’s father, William Dunavant, began working for T. J. White and Company at the age of twenty-one. After White retired, the company was passed to William Dunavant; however, because of the untimely death of his father in 1961, Billy Dunavant took over the company at the age of twenty-nine.

I’ll concede that a stream of events where all this is true and Tudor Jones was none-the-less a penniless guy who pulled himself up by his bootstraps in a way that the rest of us were just too lazy to accomplish. It does seem unlikely, though. A more reasonable description of events is that this is another example (I’ve had a post or two on this in the past) that Forbes simply has a tendency label some very unlikely individuals as being self-made. And from what I can tell, this is a Forbes thing; most of the folks Forbes gives this label to that the rest of us might not don’t go around insisting they’re self-made. (I believe I recall one counter-example.) So what’s up with Forbes and the use of this label?
by cactus

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Torture: Obama Is on a Slippery Slope

By Stormy

Can a President rule out an “inquiry into possible criminal behavior”?

President Obama has “vowed not to prosecute C.I.A. officers” who tortured prisoners because those officers were “acting on legal advice….”

According to the New York Times, Philip D. Zelikow, former state department advisor to President Bush, says, “No.” Obama cannot rule out such an inquiry.

I agree with Zelikow.

Apparently, President Obama does not want to demoralize the C.I.A with an investigation.

To allow a President to constrain or stop such an investigation–for whatever reason–violates the very fabric of our society. The President is not the law; nor can he place himself above it; nor is he the one to interpret it. Nor is he the one to decide if they can be absolved merely because they were acting on legal advice.

Obama does not want to hold those who presumably tortured prisoners to be held accountable. (According to released memos, two prisoners were “waterboarded” a total of 266 times.) President Obama has said nothing, so far, about prosecuting the lawyers who framed the Bush policy on torture.

Let us be clear here. No one is above the law. We have heard before the old argument, “They made me do it. It was my job to obey my superiors. They told me it was right and patriotic to do so.”

As far as the Bush lawyers are concerned, were they pushed to frame the policy on torture? All arguments of justification, no matter how seemingly pragmatic, become, in the final analysis, politically self-serving.

Cheney claims that if we do have an investigation, then we should hear the confessions gleaned from such torture. Setting aside for a moment the questionable veracity of such confessions–who among us would not say anything after being waterboarded even once or twice?–, torture is torture. Presumably we do not allow it. To argue torture’s effectiveness is beside the point. That kind of argument we presumably settled a long time ago. Whoever is complicit in breaking the law must be held accountable. That includes the highest officials in the land. That includes Cheney.

Obama is on a slippery slope here, and I suspect he knows it. But power is power; its allure is tempting. Presidential power is especially tempting. Justifications can always be found. “We cannot disrupt morale of an important agency. ” “We cannot divide the body politic.” “We have more important tasks at hand. “

If he yields to that kind of temptation, then he is no better than those who broke the law in the first place. He should step aside; let the investigations continue; let justice run its course.

The soul of a nation is its ideals embodied in the fabric of its laws. To ignore those laws is to risk tearing that soul asunder. If one law can be ignored, why not another….and another, and yet another?

This is not to say that justice cannot be tempered with mercy. But that decision is for the courts alone to decide–or the President if he wishes to exercise his right of pardon after the fact. But he cannot prejudge; he can act only after justice has run its course. Zelikow is exactly right when he said:

If a Republican president tried to do this, people would be apoplectic.

Let the chips fall where they may and let’s be done with it.

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EPA Moves on Greenhouse Gases

By Stormy

Big changes in the economy begin to take shape.

On April 2, 2007, the Supreme Court ruled that the EPA has the authority to regulate CO2 and three other greenhouse gases. Ironically, Massachusetts and eleven other states initiated the court hearing, claiming that global climate change was adversely affecting them. For an overview of the ruling, see here. For the actual ruling, see here.

On April 17, 2009, the EPA presented findings that

atmospheric concentrations of greenhouse gases endanger public health and welfare within the meaning of Section 202(a) of the Clean Air Act.

the Administrator is proposing to define the “air pollution” referred to in section 202(a) of the CAA to be the mix of six key directly emitted and long-lived greenhouse gases: carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulfur hexafluoride (SF6). It is the Administrator’s judgment that the total body of scientific evidence compellingly supports a positive
endangerment finding for both public health and welfare.

Interestingly enough, the EPA has expanded the number of greenhouse gases from 3 to 6.

The findings do not automatically entail enforcement, although they might. If they do, then enforcement will initiate sweeping changes in transportation and energy production. For an example of one alarmed sector, the automotive industry, see here.

Curiously, the Bush EPA argued that the Clean Air Act did not give it the authority to regulate emissions. The court found otherwise. Indeed, under the Clean Air Act, the EPA had the duty of protecting health and safety of U.S. citizens.

The Court found EPA’s argument that regulating emissions from the transportation sector “might hamper the President’s ability to persuade key developing nations to reduce emissions” to be insufficient. Rather, according to the Court, “A reduction in domestic emissions would slow the pace of global emissions increases, no matter what happens elsewhere.” Further, the Court ruled that “under the Act’s clear terms, EPA can avoid promulgating regulations only if it determines that greenhouse gases do not contribute to climate change or if it provides some reasonable explanation as to why it cannot or will not exercise its discretion to determine whether they do.” Finally, the Court found unreasonable EPA’s argument that regulation of CO2 in the transportation sector would not make significant reductions in emissions, noting that although enforcing regulations may not by itself reverse global warming, it is the duty of EPA to take such a step in order to “slow or reduce” global warming.

The battle over pollution and global warming has been joined. For me, we have no option but to begin the hard task of refashioning our economy. Those who have stalled and procrastinated, those whose profit margins are now on the line, and those who have refused to move forward, must now face not only hard facts but also perhaps an administration’s willingness to do something.
Congress could, of course, redefine the Clean Air Act, section 202(a). How fast we proceed will be the question.

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How is Bruce Bartlett Cheating: Let us Count the Ways

Robert Waldmann

Steve Benen made a graph out of a table from a column by Bruce Bartlett. Bruce Bartlett is an interesting figure — a heterodox conservative who praises Reagan and criticizes Bush Jr. The figure sure fits Bartlett’s line. It shows the effective tax rate on families with median income. Sad to say, Steve Benen’s web page is a *.mht ??? and I don’t know how to steal the figure [see UPDATE below] so just click.

Bartlett identified the “effective federal income tax rate — taxes paid as a share of income — for a family with the median income. The median is the exact middle of the income distribution — half of families are above and half are below. It’s as close as we can get, statistically, to the typical American family.”

[UPDATE: I do know how to steal graphics, but you should read the Benen piece as well. Graphic above by Steve Benen, from data presented by Bruce Bartlett. -klh]

It shows an increase up until the election of saint Ronnie, then a decrease, a sharp decrease in 1986, more decline when the GOP took control of Congress, a down tick when Bush was elected and Bartlett still supported him, then a gradual increase as Bartlett became a critic.

Oh how convenient. I describe how he is cheating after the jump.

As anyone who has ever filled out a 1040EZ must know, this is nonsense. Effective tax rates do not depend only on income. The table would be meaningful if Bartlett had calculated the average effective tax rate of families with the median income, but that’s not what he said. I suspect that he used a “tax family” with median income and characteristics such that the graph looked the way he wanted.

Of course, Bartlett is talking about the income tax only. The increase in FICA under Reagan doesn’t appear. That is par for the course for a Republican.

Less importantly for the median family, he doesn’t consider the capital gains tax. However, the average family with median income pays positive capital gains tax (the average of a non negative variable must be positive).

I’m guessing that Bartlett’s “median family” has 2 earners and 2 children. I see a big drop when the marriage penalty was reduced.

The average family with median income has less than 2 earners and less than 2 children. The family which pays the median effective tax rate … I have no idea.

I will now check my guess (starting 5:59 EDT) by clicking a link.

6:00 AM EDT. Yep he lied. The table which appears when I click his link is Entitled “Average and Marginal Income Tax Rates for Four Person Families …”

That is not “as close as we can get statistically to the typical family.”
The Bureau of the Census projected in 1996 that that in 2005 the average number of persons per family would be 3.09 which is rather less than 4.

It does seem that I was wrong about the number of earners. They assume one earner not two. Median income is for four person families.

Now part of what is going on here is that the “Tax Policy Center” is trying to make Reagan look good. However, that isn’t all that’s going on. They care about what they consider to be normal families. Single adults without children and single mothers with children don’t count. Women are assumed to be housewives. The only people that matter are those in families which consist of one working dad, mom and two children. For families with median income single mothers with three children slip into the sampel (lucky duckies). For half median income they don’t as it is assumed that there are 2 children in the family for the purposes of the EITC.

I think their prejudices about what is normal is even stronger than their Hackitude as Bush Jr would look better if one considered the marriage penalty.

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Yankee Interlude

I’m not really paying attention to (major league) baseball this year, so I should probably leave this to Scott, but, as a query:

For all team that was supposed to have had a major improvement in its middle relief this year, the Yankees appear to have given up a large number (>=7) of runs in the middle and late innings this year.

Is Alan Greenspan the Yankee pitching coach, and assuring the von Steingrabbers that such “bubbles” are ‘Once in a Century’ moments?

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I’ve Got the Under on S/h/e/a/ C/i/t/i/ Taxpayer Field

So the brilliant NFL has “solved” the Yom Kippur problem, moving the starting time for the Jets-Titans game to 1:00p.m.

Which means that, with luck, the game ends around 4:00—probably closer to 4:15.*

It appears that sundown on 27 September 2009—from which time one is expected to fast for 24 hours, so any eating better be done well before that—is going to be just about 6:45pm (assuming EDT).

I’ve driven around the Meadowlands around the time of football games before (mostly by accident; not something anyone wants to do). No one who has done so would agree with Representative Anthony Weiner:

“This commonsense solution is a win for everyone involved,” Weiner said, praising the league’s decision. “The NFL can maximize the greatest audience while Jewish New York Jets fans can support their team and respect their religion.”

In comments, please estimate where a car of fans with midlevel seats, who pack up at the final whistle of a non-Overtime game and are heading East, will be at 6:45p.m. My admittedly-optimistic assumption is the in the title of this post.**

*For analysis, I am going to assume that the game is close and interesting. Perhaps the NFL does not make that assumption?

**Feel free to assume driving up to the GWB and taking the Triborough Bridge: maximum tolls and possibly minimum traffic.

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The Bail-Out as Class Warfare

by cactus

The Bail-Out as Class Warfare

The argument for bailing out AIG essentially amounted to this: Goldman, Welfare, Queen & Sachs the counterparties need to be helped.

I don’t have much sympathy for this argument. See, about a decade ago, my sister had a small business exporting cosmetics from the US to South America. She was doing OK, in a small business edge-of-the-abyss kind of way. And then came the Brazilian devaluation. Overnight, a number of her customers were driven out of business, several of them owing her what to her was a substantial amount of money, though to the folks on Wall Street, of course, it was a mere pittance. The result was she liquidated her stock, wrapped up what was left of the business, got a job in the corporate world, and like most people there, is today worried about keeping that job.

Now, none of the Welfare Queens on Wall Street who has been helped by this whole charade of a bail-out would ever suggest bailing out small businesspeople like my sister, even if the source of the problems faced by these small businesspeople was, for lack of a better term, their counterparties. So for this to be viewed as something other than favoritism, class-warfare of the crudest, most basic form, someone is going to have to show why providing small businesspeople the same help that the Welfare Queens on Wall Street got, or simply handing out equivalent sums of money to the rest of us, would have resulted in an outcome worse than what we’ve seen, are seeing, and will see. I don’t think it can be done.
by cactus

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