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All Time Record Level of Severe Poverty

Robert Waldmann

The Census Bureau has released estimates of poverty in 2009. Coverage focused on the headline poverty rate which is horrible enough. Much worse, 6.3% of people in the USA suffered severe poverty, that is lived in households with income less than half the poverty line. This is the highest severe poverty rate on record (the series only goes back to 1975 — I don’t know why).

Look at Table Five.

That means that over 19 million people in the USA live in households with income less than half the poverty line (severe poverty implies income significantly less than $ 11,000 yr for a family of four)

I blame welfare reform.

Like the poverty rate, the severe poverty rate goes up in recessions, goes up when inequality increases and goes down when per capita income grows. However, the pattern is very different with a long term trend of increasing severe poverty and no correspond trend of the headline poverty rate.

I think it is clear that this can be explained with two acronyms AFDC and TANF. In 1975 the economy was in bad shape, the poverty rate was 12.3 % which is not that much lower than the 2009 poverty rate of 14.3%. The severe poverty rate was 3.7 % less than 60% of the current rate. The fraction of people in poverty but not severe poverty was actually lower in 1975 than it is now.

During the period of high inflation, the real value of welfare benefits declined. This explains at least part of the increase in severe poverty. In 1983 the poverty rate peaked at 15.2% and the severe poverty rate peaked at 5.9%. Compared to 1983 a smaller fraction of people are in poverty but a larger fraction of people are in severe poverty. I think that welfare reform is the only plausible explanation.

If the ratio of number in severe poverty to number in poverty were the same as in 1983 the severe poverty rate would be less than 5.6%. In other words the number of severely poor people in the USA would be lower by more than 2,250,000.

It is basically universally agreed that welfare reform was a great success (as argued for example by Barack Obama in “The Audacity of Hope”). I think this conclusion is based on two gross and obvious errors.

First the matter was considered to have been decided by 2000. Only specialists reconsidered the analysis of welfare reform with any data not collected during the amazing boom of the late 90s.

Second a huge amount of attention is focused on the poverty rate and almost no one ever looks at the severe poverty rate. It is as if people think that it doesn’t matter how poor one is once one is under the poverty line. This is more extreme than not caring about income distribution.

But it is accepted as a fact that welfare reform worked like a charm. Evidence which isn’t less than 10 years old and the fact that $11,000
It’s almost as if most people had no clue what it is like to be poor so that they don’t even know that the poor are much poorer than they used to be.

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Congressional Oversight Panel Report today

There are a lot of interpretations about President Obama’s appointment of Elizabeth Warren as an ‘assistant to the President’ to oversee the creation and development of the Consumer Protection Agency.

Yves Smith sees this as a way to neutralize her either as a head of an agency or as an outsider evaluating the work and structure of the agency, and a lost opportunity to gain publicity for her point of view in confirmation hearings.

Others are either more neutral or more hopeful for her role with this administration.

In the Congressional Oversight Panel Reports September 16, 2010 pdf is available at the website today. I have read Elizabeth Warren has ‘recused’ herself from the current document.

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Buttonwood up your mouth

Robert Waldmann

Matty Yglesias has an amazing catch. He says that competitive devaluations achieved via unsterilized interventions would be a good thing, becuase they would cause inflation. He notes that someone disagrees.

The Economist’s Buttonwood

“The result is like a game of deflationary pass the parcel…”

Of course, Mr or Ms Buttonwood should have written

“The result is like a game of inflationary pass the parcel…” which is Yglesias’s point.

The dark ages of macro. I think what is happening is that Buttonwood is sure that selfish begger thy neighbor policies are bad and that allegedly painless remedies based on printing money and buying stuff are unwise, that he or she has noticed that these days deflation is even more feared than inflation and thus decided that printing currency and buying stuff must be deflationary.

Bagehot is turning over in his grave.

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HEALTH CARE thoughts: Obama Administration Gets Tough With Insurers

by Tom aka Rusty Rustbelt

HEALTH CARE: Obama Administration Gets Tough With Insurers

DHHS Secretary Sebelius has lambasted the private health insurance industry in a letter to the industry’s trade association (I’m not a big friend of health insurance companies, FWIW). From the letter:

“There will be zero tolerance for this type of misinformation and unjustified rate increases.”

The issue is premium increases and the cause of the premium increases.

PPACA (Obamacare) requires more lives on some policies and more coverage broadly, so no wonder premiums will be going up in the short and near term (some of us predicted this).

There is little likelihood of bending the cost curve for at least five years, as the various and numerous programs in Obamacare phase in and ramp up. And then, who knows.

Understanding that politicians must by nature take care of politics, this seems a little shrill and over the top.

Having spent the summer going through the deep dark details of PPACA, I’m working on a theory or two on how this will play out.

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Accounting for Scott Sumner

Robert Waldmann

This whole post is after the jump as my accounting is not ready for prime time.

Scott Sumner thinks he is the first to note that the cost to the US government of bailing out the big banks is more likely to be a profit than a cost. Clearly he doesn’t read angry bear much, as I have been predicting that for months.

His accounting strikes me as very odd. Last I hear, the total cost of bailouts (including GSEs, AIG, GM and Chrysler) was predicted to be $87 billion. This does not include the cost of the FDIC honoring its contracts which was not discretionary and not a bailout by any normal use of the word.

Now Sumner reports the good news that the cost not including GM and Chrysler will be only 158 billion ?!?

Huh what happened ? First I think he forgot about roughly 125 billion when he wrote “Last time I wrote on this subject the eventual cost to the government from bailing out the big banks was estimated at a negative $7 billion–in other words a profit to Uncle Sam of $7 billion.” I believe that when he wrote “the government” and “uncle Sam” he meant “The Treasury”. Uncle Sam also has this little organization called the Federal Reserve Board. Last I heard it was predicted to make a profit of 125 billion out of its bailout efforts. Not all of that involved big banks, but I just don’t believe that the government made only 7 billion out of its direct interactions with big banks. In any case, the 125 billion (or probably more now) seems to have escaped Prof. Sumner’s notice entirely.

The news which he reports is that the current guess is that the cost of bailing out AIG is going to be about zero. That is, the amount AIG owes is roughly equal to the expected present value of future repayments.

Sumner gets his huge loss overall because he describes the cost of bailing out Fannie and Freddie as “$165 billion and rising.” I believe this is the amount they owe the Treasury minus zero. Sumner argues that big banks and AIG were OK investments and GSEs weren’t because in one case he includes expected discounted repayments and in the other he decides they are zero.

It is worth noting that the GSE rescue involved loans at 10% per year and the GSE debt is not equal to money transferred from the Treasury to GSEs plus the interest the Treasury paid on that extra debt. Oh no. It is the amount transfered plus penalty interest rates charged on that amount.

Basically, I beleive that Sumner did not stick to a consistent definition of “cost” and redefines the word so as to generate meaningless numbers which confirm his prejudices.

Also he doens’t understand the extent of the US government and thinks it is just the department of the Treasury.

One of us is profoundly confused.

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Fiduciary duty demands for the investing public

From a news alert:

The U.S. Securities and Exchange Commission (SEC) will hear directly this week from U.S. investors about what they want in terms of regulation of financial professionals providing investment advice and the extent to which they are confused as to who is held to a fiduciary duty.

The organizations holding the news conference sponsored the survey in response to concerns that the SEC is receiving extensive feedback from financial industry groups, but relatively little from the U.S. investing public. As required by the Dodd-Frank Act, the SEC is requesting public input, comments, and data on issues related to the effectiveness of existing standards of care for brokers-dealers and investment advisers, and whether there are gaps, shortcomings, and other problem issues in the current legal or regulatory standards.

TO PARTICIPATE: You can join this live, phone-based news conference (with full, two-way Q&A) at 1:30 p.m. EDT on September 15, 2010 by dialing 1 (800) 860-2442. Ask for the “SEC financial reform/fiduciary survey” news event.

CAN’T PARTICIPATE?: A streaming audio recording of the news event will be available on the Web as of 5 p.m. EDT on September 15, 2010 at http://www.hastingsgroup.com/fiduciarysurvey.

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CRUSHING TAX BURDEN (tm

by Dale Coberly

CRUSHING TAX BURDEN ™

I have been putting some information together for an article about the cost of paying the money borrowed from the Social Security Trust Fund, and I found a chart among my papers breaking down the effective tax rate among the different income levels. Unfortunately I don’t know where it came from, so if it’s interesting enough that you to want to know the source, you are going to have to look for it.

It is similar to information I found in Statistical Abstracts … though the information there was for 2007, with total AGI, for example, at 8.0 Trillion. The following link gives similar information for 2006

My chart shows for the year (2008 or 2009?) there were 141 Million income tax returns filed, reporting a total of 8.8 Trillion dollars in Adjusted Gross Income (AGI), and a total of 1.1 Trillion dollars in income taxes paid. This would put the “average” income tax for all income levels at 12.5%.

The breakdown:

The richest one percent of the population, who make more than 410 thousand dollars per year (AGI) pay an income tax rate of 22%. (Rdan…Does not include less taxed capital gains and estate income)

The next top 4% of the population, earning over 160k but less than 410k, pay an income tax rate of 18%

The 5% of the population earning over 113k but less than 160k, pay an income tax rate of 13%

The 15% of the population earning over 67k but less than 113k, pay an income tax rate of 9%

The 25% of the population earning over 33k but less than 67k, pay an income tax rate of 7%

The 50% of the population earning less than 33k, pay an income tax rate of 3%.

You don’t often see the breakdown in these terms. The people who get paid to confuse you want you to think of the top 10% of earners paying 50% of the taxes. Their numbers are meaningless because without knowing what percent of total income such earners get, you don’t even know if this is a flat tax. And of course it “sounds like” they are paying 50% of their income in taxes.

From my perspective, it does not look like any of these groups is “over taxed.” Of course no one, not even me, likes paying taxes. But only the truly simple minded think we can run the country without taxes, and until we can arrive at a consensus about what spending to cut, we need to pay the bills.

These tax rates are 3% lower at the top than they were in 2001, because it was argued that a tax cut at that time would “pay for itself.” It didn’t work out that way.

I will show in an upcoming paper that restoring the tax rate to what it was before the cut… that is, raising it about 3% on incomes over 100k from what it is today, would be sufficient to pay down the deficit that is the subject of so much political angst. Moreover, in order to pay back the money borrowed from the Social Security Trust Fund, these tax increases would only be needed for about the ten years between 2025 and 2035.

This is not onerous. It would result in a tax rate on the richest one percent of about 25%. The next richest 4% would pay a rate of about 21%, and the next richest 5%(those making more than 113k in the present chart) would pay about 16%.

The purpose of this tax raise would be to reduce the National Debt. It has nothing to do with paying for Social Security. It is repaying the money borrowed FROM Social Security that was used to pay FOR National Security. You would expect the high income earners to be glad to pay it in the spirit of patriotism.

Especially since they know that all along they have been effectively borrowing the money themselves in the form of tax cuts, which they have surely invested in growing the economy and increasing their own personal wealth.

(The hard copy Statistical Abstract has the same information, just not as clearly broken out:
129th Statistical Abrstact of the United States, 2010
table 471 on p3i2, and table 476 on p314
http://www.census.gov/statab/www/ )

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One obligation: To increase shareholder value…

by Dan Crawford

Sometimes I will post an article without much of my own comment to offer points of view to readers from other sources. I have yet to find an op-ed that so clearly defines several points of view so well and clearly, so will offer it to readers and frame it my way:

The man has a point of view that I believe is often underlying the pronouncements of political leaders on economic beliefs bandied about the media. It is refreshing to see the op-ed be so clear. I am sure such zeal is needed to compete in the environment in Beijing, and to form the sales platform for his company’s ‘success’ in the first place, and perhaps to be reflected in stock price and/or dividends as part of shareholders’ measuring values.

I use the word zeal in a religious sense, as devoting one’s life to a cause that overrides other concerns that might occur to him, as sometimes regrettable consequences of his actions but hardly part of the conversation in the planning room.

Hence any considerations of cost remain focused on the bottom line of the company and ‘costs’ is defined as the bottom line of the company, others (not shareholders?) paying the consequent price of actions by his company being solidly in line with that zeal.

My concern with this point of view is not the man and his company…but why on earth would you want him as your friend back home? A distant neighbor yes, even admired for his adventure, but hardly someone you would trust to watch your back unless he owes you something like shareholder value in his company (not his competitor I assume).

“Trust us for your welfare” is the political posture, and really convoluted stories are offered to assure people it becomes somehow true, but I fail to see much connection to voter well being except by accidental consequence. But I do prefer that he be honest with me than sugar coat his intentions with a lobby and political pretension.

One obligation: To increase shareholder value…

Companies that are multinationals with corporate headquarters in the States, regardless of size, have no moral or ethical obligation to do what’s best for America or Americans – unless directed to do so by their shareholders. MNC executives only have one obligation: To increase shareholder value. That’s it. It’s that simple.

If offshoring will improve a Company’s bottom line, then so be it. If a U.S.-headquartered firm’s American shareholders don’t approve of a decision to offshore, then they can raise their concerns in a host of ways.

Taking this a step further from an operational perspective, the smartest and best American executives will pit China and India against each other. And they should. I know that a lot of Chinese and Indians don’t like to hear this, but once again, it’s a best practice if a firm is trying to optimize their bottom line

We’ve all heard the phrase, “God & country.” But it should really be “God & company” (assuming you believe in God). And if “God & country” is more to your liking, well, you can always get a job as a civil servant. Multinationals need executives with vision – a futures-driven global perspective – not executives biased by any sense of Nationalism. McLuhan was right: We’re in a global village. Act accordingly.

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Republicans Attempt Political Suicide Part N

Robert Waldmann

It appears that far right candidate Christine O’Donnell just beat sure thing in the general election hopefulless Mike Castle in the Delaware Republican senatorial primary ! It is widely believed that this is worth almost a full expected seat for the Democrats.

It means a possible narrative post election day might be that Republicans blew it by nominating extremists. George McGovern wasn’t really extreme, but Democrats have not forgotten 1972. Not to get ahead of myself but just to get ahead of myself, the Republicans might learn a lesson this year.

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Nominal Comparisons

Attention Nominal Comparisons of Obama National Debt Figures: Get Real

The conservative blogosphere (with the help of Drudge) is busy citing a story put out by CNSNews’ Terence Jeffrey, whose headline reads: “Obama Added More to National Debt in First 19 Months Than All Presidents from Washington Through Reagan Combined, Says Gov’t Data.”

Unfortunately, this type of simplistic analysis suffers from two major problems:

(1) The implication that the entire increase in the debt since January 20, 2009 is Obama’s fault is ridiculous.

(2) Budget numbers today are larger in nominal terms as a result of inflation, which means you can do this analysis for almost any modern-day president
Continuing on (2), let’s do the same type of analysis for Bush and Reagan:
In his first two years in office (2003 debt amount less 2001 debt amount), Bush increased the national debt by more than all the presidents from Washington through Carter’s 3rd year combined.

In his first two years in office (1995 debt less 1993 debt), Clinton increased the national debt by more than all the presidents from Washington through Nixon combined.
In his first two years in office (1983 debt amount less 1981 debt amount), Reagan increased the national debt by more than all the presidents from Washington through Nixon combined.

(h/t rjsigmund)

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