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When You Don’t Spend Any, the Velocity of Money becomes Zero

Edmoney is tracking the allocation and spending of education-related stimulus grants. The map is here. Some states have gotten the funds into circulation better than others. Selected states below (GA was highlighted by them):

  1. California, 78%
  2. New Jersey, 63%
  3. Georgia, 62%
  4. Indiana, 60%
  5. Oklahoma, 50%
  6. Mississippi, 42%
  7. Massachusetts, 41%
  8. Michigan, 41%
  9. Kentucky, 39%
  10. Pennsylvania, 35%
  11. Ohio, 29%
  12. New York, 25% (but NYC 60%)
  13. Texas, 25%

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Dealing with the Sunset of the Bush Tax Cuts (Part V in a series)–dividends at capital gains rate

by Linda Beale
crossposted with Ataxingmatter

Dealing with the Sunset of the Bush Tax Cuts (Part V in a series)–dividends at capital gains rate

IN this series, i’ve been discussing the merits of enacting a new series of tax cuts that mimic, at least in part, the Bush temporary tax cut legislation that expires at the end of this year.

The primary arguments for the original Bush temporary tax cuts were either bogus to start with or proven weak over the period of the tax cuts.

1.The Republicans who pushed the cuts claimed first that they were intended to return to taxpayers the surplus. Of course, that argument was laughable from the beginning: Bush deficits started in the first year of the Bush regime and got worse for the long term as the costs of a military budget pumped up by preemptive war and other augmenting of government spending at the same time that tax revenues were cut again and again throughout the regime.

2.Various Republicans also admitted that their goal was to cut the size of government–though they didn’t mean the military and they did mean any programs that protect average Americans (such as Social Security, unemployment compensation, environmental programs, OSHA, etc.). But the size of government grew in spite of the reductions in revenue, resulting in expanding deficits.

3.The various expensing provisions; repatriation with almost no taxation (in the 2004 “American Jobs Creation Act”); tax breaks for oil and other natural resource companies; international tax breaks; and other corporate-favorable provisions were supposed to stimulate entrepreneurial activity and job creation. Instead, businesses used the low-tax repatriated income to pay managers more and workers less, and laid off workers at the same time. The expensing provisions allowed corporations tax breaks for equipment they would have bought anyway, but didn’t create new jobs–the Bush regime’s jobs record was terrible, barely keeping up with inflation and certainly not spurring new job growth. The tax breaks for natural resource companies fed their complacency about everything from jobs to safety to environmental protection–giving companies more for less doesn’t create better citizens and doesn’t get us cheaper energy either. The record from the tax cuts as far as entrepreneurialism and job creation was dismal–the mainstream neoconservative and neoliberal theories of market fundamentalism didn’t work out as claimed.

4.The lowering of capital gains taxation and the taxation of dividend as a net capital gain at the lower rate were also heralded as ways to spur investment in new businesses (entrepreneurialism) and job creation. Bullshit. Most of the result was just more money in the pocket of the richest Americans who own most of the financial assets, and that money in the pocket was as likely to be invested in offshore bank accounts as put to work supporting a new business here in the US. The dividend tax cut didn’t even lead to much in the way of dividend payouts–except perhaps for firms whose managers and directors saw a chance to benefit themselves. Even if those expiring tax cuts are not renewed with new tax legislation, it is not likely to have much of an effect on companies’ dividend policies. See Higher Taxes May Not Push Firms to Cut Dividends, Wall St. J., Aug. 30, 2010.

5.The cuts in individual rates were supposed to provide more money as an economic stimulus. But the Republicans who passed those rate cuts knew that the AMT would act as a clawback to the cuts over time, except for those at the very top who were always subject to the AMT and those in the bottom who are hardly ever subject to the AMT. And they knew that amending the AMT to conform to the temporary tax cuts would be tremendously expensive–at least a trillion in revenue lost for the decade of the tax cuts, where the “temporary” nature of the bill had been necessary to claim that the cost was “just” 1.3 trillion over a decade. In other words, the tax cut bills passed during the Bush regime with the 2010 sunsetting gimmick were a sham from the beginning–they cost much more than those who passed them wanted to admit, and they carried with them a clawback mechanism that would undo the cuts in rates for many individuals. The various annual “patches” to the AMT are extraordinarily costly in terms of lost tax revenues since they are essentially an extension of the tax cuts to an even broader base, and the corporate changes to the AMT have reduced its effectiveness in cutting back on corporate preferences while costing the fisc billions.

6.The estate tax scaleback and one-year repeal was the most gimmicking of all. Cutting the budget by $30 billion a year in order to fund a giveaway to the wealthiest and most privileged Americans is hard to justify in any budgetary climate. So Republicans pushing estate tax repeal and the various “coalitions” funded by wealthy families like the Walton heirs have painted a facade of “helping little guy farmers and businesses” on their efforts–a facade that many Americans may have bought hook, line, and sinker since they do not tell the truth, much less the whole story. Very few family farms and very few small businesses are threatened at all by the estate tax.

So what should this list of bogus and failed reasoning tell us about what the Congress should do on taxes for 2011 and thereafter?

1.I say let the Bush cuts expire according to the way they were written. But enact a new set of tax cuts that are better targeted to jumpstart the economy and to put money where it is needed.

2.Let the corporate giveaways expire as slated.

3.Let the estate tax mess expire as slated. Enact a new estate tax law that (i) increases the exemption amount to a reasonable level (say, $2 million) and indexes it for inflation and (ii) enacts a progressive rate structure (ranging from 55% on the estate that exceeds the exemption amount, up to some higher rate of 65% or 70% on multi-billion-dollar estates.

4.Let the capital gains changes die as slated, and do not enact any further capital gains preferences (so dividends would go back to being treated as ordinary income).

5.Let the individual rate changes die as slated, and enact a new tax cut for individuals making $100,000 or less, with a temporary tax cut for individuals making up to $200,000 for a three year period to aid us in getting out of this recession.

6.Enact genuine AMT reform–in which capital gains are treated as a preference and which provides a significant exemption amount based on gross income. See the earlier articles (2005-2006) in ataxingmatter on AMT reform for more specifics about the kinds of reforms to the AMT that make sense.

7.In conntection with the rate cut and AMT legislation, enact measures to pay for the tax cut, including
(i) a carried interest provision taxing all profits interests as ordinary income
(ii) a corporate tax provision limiting the benefits of tax-free reorganizations and consolidations, and
(iii) a charitable contribution provision eliminating the deduction of value in excess of basis.

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"Why is Social Security Under Examination?"

This is the title of a post of a diary at another site, one of no particular interest on its own because it just puts people on the wrong road.

A straight out analysis of the economic numbers underlying Social Security ‘crisis’ shows pretty clearly that there is no ‘there’ there. To the extent that there is a gap between future projected income and cost it is small, distant, based on pessimistic assumptions, and totally fixable even if we waited years to take the first step. You can show this on paper or in pixels and I have spent much of the last six years doing that here and there and mostly without numeric push-back, the counter-arguments tending to be thematic and not number based at all.

So why do they push this? Well simple, the Right cannot afford to have a Social Security system that is perceived to be working going forward. They can survive people liking Social Security as is, after all they can spin that as people just enjoying a Free Lunch via that ol’ Backwards Transfer pushed by the nice folk at AEI, that just helps their overall ‘mushy headed liberal’ narrative, a modern day Grasshopper and the Ant. What kills them is to find out that the Grasshopper actually has an actuarial sound insurance policy in his back pocket, and one guaranteed by the Federal government, such a realization might lead the rest of the ants to doubt the ‘Big Government is not the Solution, Big Government is the Problem’ message being spread by the Ant Queen and her Drones.

In 1993 the anti-Social Security narrative revolved around Trust Fund Depletion, which was a real event which would have real consequences, if not as significant as people would have them (see ‘Rosser’s Equation’ at a Google near you), but by the late 90’s Trust Fund Depletion had been pushed so far out in time even as the cost to address it steadily dropped that there grew the need for a new crisis narrative. And so ‘Phony IOU’ was born. But otherwise nothing much had changed, the definition of ‘crisis’ was malleable but the solution was always the same: we needed to Destroy Social Security in Order to Save It.

Typically people on the Left tend to assign three motives for the desire of the Right to ‘reform’ Social Security. One is to get their hands on the assets in the Trust Funds. This is a total category mistake, those assets though real as real are not tappable in the way this narrative would require. A second is to get their hands on surpluses going forwards. Well this is the same mistake with a slightly different twist, cash surpluses which were as real as real could be in 1999 are existentially different today. And a third motive advanced was the fees that would be generated on private accounts. Well I don’t think this pencils out as well as people would think at least for the accounts of people in the lower 50% of income, if it were a pure scheme for extracting account fees they wouldn’t be pushing for universality, but instead for opt-out for higher-income workers.

Nope in my opinion the fundamental motive for opposing Social Security is not driven by greed as such but instead an ideology that depends crucially on the perception that Big Government is always and everywhere a failure, and that the bigger the counter-example the higher the risk to that overall paradigm. If Social Security was just headed for the cliff, its enemies would just stand back and watch it go, arguably this is where they were at in 1993. It is only when they see the coach driver beginning to get the team under control and steer it away from the cliff that they have to jump in and try to spook the horses again.

Which is why people asking why the actions of Social Security opponents don’t seem to be particularly helpful in guiding the stage coach away from the cliff are asking the wrong question, looked at in that way their actions don’t make sense at all. On the other hand if you flip it around a lot of things become clear, there being more than one definition of ‘fixing’.

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Trade in the national accounts

I though a little different perspective on the impact of trade on the real GDP accounts might be interesting.

The first chart is of imports market share, or imports as a share of what we purchase in the US. In the second quarter of this year imports market share rebounded to about where it was at the pre-recession peak, or about 16% of consumption. Since the early 1980’s when the US started borrowing abroad to finance its two structural deficits — federal and foreign–
trades share of consumption has risen from about 6% to some 16%. Normally this has a small negative impact on the US economy, but sometimes you get quarters like the last quarter. Last quarter real domestic consumption rose at a 4.9% annual rate. That was an increase of $162.6 billion( 2005 $). But real imports also increased $142.2 billion (2005 $).
That mean that the increase in imports was 87.5% of the increase in domestic demand.
To apply a little old fashion Keynesian analysis or terminology, the leakage abroad of the demand growth was 87.5%. It does not take some great new “freshwater” theory to explain why the stimulus is not working as expected, simple old fashioned Keynesian models explain it adequately.

So compare this with exports. Import were 16% of domestic demand, but in sharp contrast
exports were only equal to 3.2% of final sales of domestic production. The peak share for exports was 5.9% in the 4th quarter of 2004. The great recession generated the severe world wide downturn in trade, but US imports are obviously rebounding much more than US exports. If you break down the difference between the US economy and the German economy, that so many people are trying to make so much of, this is the difference — Germany exported and the US imported. The difference has little or nothing to do with the difference in US and German economic policy in the Great Recession. Rather it reflects the structural changes that have stemmed from the structural twin deficits in the US since 1980.
It is just another example of how the “starve the beast” strategy does not hurt government.
Rather, it does massive damage to the private economy. The advocates of starve the beast expect a major crises to lead to a reduction in the role of government. But what they do not say, is that the crises they are so eagerly looking forward to is a collapse of the private economy. They consider this a good trade-off.

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Central Banks can target short term interest rates no matter what

Robert Waldmann

Paul Krugman asks a rhetorical question which I dare to answer. He is still considering Kocherlakota’s argument that low interest rates imposed by the monetary authority must cause deflation.

“First of all, if inflation isn’t sticky, how is it that the Fed can set short-term interest rates at all?”

Second of all, there is a short-term nominal interest rate which the Fed can set no matter what — the discount rate. If the Fed loans at some interest rate, then the Fed loans at that interest rate. Second, I think the Federal funds rate has to be no higher than the discount rate*. Why pay a bank more when you can get a loan for less straight from the Fed.

So what happens if there is high inflation and the the central bankkeeps the discount rate low ? Banks borrow lots and lots of money from the central banks so the money supply increases. This can’t be prevented by open market operations. Even if the central bank’s only asset were loans to banks, the money supply can still be huge and rapidly growing.

This is not a hypothetical. From 1918 through 1923 the Reichbank’s discount rate was low (3.5% IIRC). The result was not deflation.

* update: My thought that the Federal funds rate had to be no higher than the discount rate was incorrect (thanks Ken Houghton). The federal funds rate used to be higher than the discount rate. I don’t understand exactly why except that borrowing from the Fed was a sign that a bank was in trouble. My main argument stands, although the Fed might have to both keep the discount rate low and change some aspects of its discount window policy which I don’t understand to achieve a hyperinflation.

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Dean Baker Schools Simpson on Social Security

by Bruce Webb

Dean asks:

1) How much higher are real wages projected to be in 2040 than today? In other words, how much richer do we expect the average worker to be 30 years from now?

2) How did the 2010 Trustees Report change the projections for 2040 wages compared with the 2009 report?

3) If we solve the projected shortfall in Social Security entirely by raising the payroll tax, what percent of the gain in real wages over the next 30 years would have to go to pay the tax?

4) What percent of real wage gains over the last 30 years was absorbed by the increase in Social Security payroll taxes?

5) What percent of the projected long-term budget shortfall is due to the inefficiencies of the US health care system?

6) How much wealth should we expect near retirees to have to support themselves in retirement?

7) What percent of older workers have jobs in which they can reasonably be expected to work at into their late 60s?

Dean Baker takes Al to school. And then to the woodshed out back.
Senator Simpson’s Quick Budget Quiz

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Employment During Recoveries from Recessions – Long Term Trends

by Mike Kimel
Cross posted at the Presimetrics blog

Employment During Recoveries from Recessions – Long Term Trends

The following graph of the employment to population ratio was obtained from the Federal Reserve Economic Database (FRED). The employment to population ratio shows the percentage of American civilians age 16 and over that happen to be employed. Recessions are shaded gray.

Figure 1.

The graph shows that between about 1960 and 2000, the percentage of civilians that were employed tended to rise over time, though those increases were interrupted with big drops in the ratio during recessions. That increase has a number of explanations, among them that women in the workplace is no longer a scandalous thing, that a single paycheck is often no longer enough to sustain the typical household, and that as manual labor’s share of the workforce has fallen retiring later has become more and more feasible.

Since 2000, the picture is more nuanced – there has still been an increase in the percentage of American civilians that are employed during non-recessionary periods, but that increase has not been enough for many people who lost their jobs during recessions find new employment. In fact, the recent drop in the employment to population ratio has brought the percentage of civilians with jobs down to levels last seen in 1983.

So what is going on here?

One clue can be seen by looking at how quickly the economy has regenerated lost jobs after each recessions. The following graph shows the employment to population ratio in months following recessions relative to the employment to population ratio in the month that a recession ends. Thus, if the employment to population ratio has risen since the end of a recession, that number should be above 100%, and if it has fallen, that number should be below 100%. Every recession since 1948 – the first year for which employment to population data is available – is shown on the graph. Because, for reasons that will be evident in a moment, I had to label each recession (or rather, post-recession period), the graph is a little busy. Note also that I am assuming that the most recession ended in June of 2009, even if the recovery has been very weak and unpleasant since.

Figure 2.

Now, assuming that the latest recession ended in June of 2009, we’re about 14 months out from last recession. The first thing the graph shows us is that for most of the recessions in our sample, the employment to population ratio continued decreasing after the recession ended; that is to say, job losses continued after the recession ended. And for four of the eleven recessions (including the latest one), the employment to population ratio 14 months after the end of the recession is still below where it was when the recession ended.

But look closer, and you see something else, something more disconcerting. It seems that the more recent the recession, the poorer the job recovery. In fact, three worst job recoveries came after the last three recessions, and the 1991 and 2001 recessions were pretty mild. (And, to repeat a point from above… the job market never quite recovered after the 2001 recession.)

Possible reasons for this long term trend in the worsening of job recoveries that come to mind include:

1. simple mathematics – as the employment to population ratio rises, recovering to that high level becomes harder and harder. Of course, the latest recession belies that, though in fairness, it was a much more severe downturn.
2. it has, over time, become easier to fire employees and move the jobs to jurisdictions where the new employees are less likely (i.e., able) to complain. In the 50s and 60s, jobs started migrating from the Midwest to the South (more union to less union), and now they’re migrating out of the country altogether. That makes it easier for a company to operate with fewer employers for extended periods of time, and thus expand for a while after the end of a recession without bringing on new workers.

Your thoughts?

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Offshore Banking Secrecy–more on the UBS case

by Linda Beale
crossposted with Ataxingmatter

Offshore Banking Secrecy–more on the UBS case

The IRS announced today that the Swiss government has completed its processing of the 4450 UBS accounts of U.S. taxpayers that were the subject of the August 2009 agreement for deferred prosecution of UBS and ending of the John Doe summons request. The IRS has already received about 2000 names and expects to receive the rest of the information very soon.

It will be interesting to see the developments this fall as the IRS begins to use the information it has received to prosecute indviduals for tax fraud and to pursue attorneys, accountants or others that have helped Americans hide their assets overseas.

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Infrastructure and Human Capital Interlude

Busy week, so just a couple of things of note.

  1. Via Dr. Black, my old neighborhood gets a chance to build a better future:

    “It’s a great partnership among a number of researchers from academia, the private sector and national laboratories. It’s a great collaboration for a solid project that will help the environment,” said Penn State spokeswoman Annemarie Mountz.

    Foley said the project “will spur real innovation and job growth for Philadelphia, the region and the nation. We have a world class team of universities, corporations, and economic development entities that made this proposal come to life. There is no better place to do this work than in the Philadelphia Navy Yard.”

    My mother would have agreed, but she stopped working there (coincidentally) around the time Tom was born. Indeed, the renovation of the Navy Yard has been an American Success Story (driven by a Norwegian shipbuilding firm and a clothing retailer), and we can almost pretend that the area has “recovered.”

  2. Similarly, the results of the Race to the Top came in a couple of days ago. You may have heard that our Superstar Governor was cruelly betrayed by Washington bureaucrats and/or the evil NEA.

    Well, until the actual video was released, after which point yet another Republican decided to prove that people collecting unemployment are Just Lazy (though he does claim not to have lied to Superstar Governor, leaving the question of where the story from the Governor should be sourced).

So the old area is gaining because of Federal government management, and the current area is suffering because of State government mismanagement. It’s almost enough to make me think that there’s a difference when people want to accomplish something.

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