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Defining Rich IV: Corporate vs Personal Tax collection patterns 1934 to present

When I left this series in September, I had introduced the idea of looking at past tax tables as a means of understanding how We the People define rich. One specific note from history was a surcharge on top of themarginal tax rates to pay for the Great One (WWII). Obviously, that aspect of our moral character has gone right out the window.

Also for a brief period (1936 to 1943,on 6 occasions) business paid more of the income tax revenue collected than did people. I also noted that 1983 and 2009 the corporate share of income tax revenue was just over 6% of the totalrevenues (FICA included). Its lowest points. Reagan/Bush II. However, interestingly enough, Bush II did manage to get thecorporate tax collections as a percentage of personal collections(excluding FICA) up to 33.9%! Clinton only managed 26.6% in 1995. The last time we saw a ratio where corporate collections were in the30% range was 1979. In 1959 it was 47.1%. 1980 heralded the new standard of the mid to low 20% range. Of course Reagan wins thispersonal verses corporate relationship with a corporate total that is only 12.8% of the personal in 1983.

One other very interesting aspect ofour tax history using the same table is that from 1934 to 1983 when tax revenue from personal collections became less than the year prior, this was only for one year with the exception of 1945/46. Corporate revenue follows the same pattern except for 3 periods where there was a decline for 2 years running: 1946/47, 1958/59 and1961/62. From 1983 until 2001 the personal revenue is more every year than the year prior. It’s like a switch was thrown after 1983. The corporate revenue declines twice for 1 year each in this 1983 –2001 span; 1990 and 1999. Starting in 2001, the decline in revenuecollections for both personal and corporate last for 3 years running;2001 to 2003 and 2008 to 2010. Someone threw a double pole switchhere. We’ll have to wait to see for 2011.

Obviously, from this bit of history we can see a few trends at least. We have been reducing the burden on corporations as paying their share for the use of the commons. From1984 to 2000 the personal collections never declined yet thecorporate did twice. Prior to 2001, our tax tables and all their loop holes produced a fairly stable ever rising stream of revenue. However, after 2001, the stability is less in that any time there isa reduction in revenue collections, it lasts 3 times longer. Finally, except for 2005 to year ending 2007, since 1980 we think that corporations should only pay between 20 to 26% of what We thePeople pay in to our government.
I mention all the above because it isevident that more than just the marginal rates are changing and, as far as my assessment of these changes go, they are leading us to anever less stable adjusted gross income base for then calculating the tax due. That is, the base has been adjusted such that it is moresensitive to down turns in the economy. Prior to the Reagan taxrevolution, both the personal and corporate base were fairly evenlysensitive with the corporate being maybe a little more sensitive.
For 50 years (1934 to 1983) there wereonly 3 periods in which the corporate collections were less for 2years in a row and none of them were the back to back Reaganrecessions. After 1983, the base for personal taxation has changedsuch that it is not effected by any recession. However, thecorporations got relief twice. Considering that from 1934 to 1982there are only 2 recessions listed by NBER as lasting more than a year (1973/75and 1981/82, 16 months each) 1 year of less revenue does not seembad. However, for the last 2 recessions, the revenue collectionshave been less each year for 3 consecutive years for both thepersonal and the corporate collections even though the latestrecession is listed as lasting 18 months.
Withinthis 3 year pattern, we also see that the declines are greater. Fromthe high to the low for 2000 to 2003, by 2003 personal collectionsare 79% of the high and corporations are 63% of their high. For thepresent recession personal became 78.4% of the high and corporationswas 62.9% of their high. Even in 1983, when Reagan wins thepersonal/corporation differential the declines were only 97% personaland 75.2% corporations. For another perspective, that 2 year declineof personal revenue collections for 1945/46 the personal declinedonly to 81.7% of the high. During this period the corporations onlydeclined for 1 year (1947) to 72.5% of the high. In 1947, corporaterevenue collections were 48% of the personal collections. In 2000,the peak corporations revenue was 20.6% and in 2008 it was 26.6% ofthe personal revenue collections.
Obviously we made more than marginalrate changes after 1980. We changed the way the base is calculatedsuch that corporations paid significantly less as a share of thetotal income taxes and was more tied to a change in the economy suchthat corporate taxes due were less during a recession where as thepeople had no reprieve. How’s that for fairness? Then came Bush II. The base changed even more… so such that now the decline inrevenue collected lasted longer than the recession and the declineswere greater.
We do not just need to raise the rates,we need to return to a broader base. That is, when all thedeductions are done, the adjusted gross income needs to be higher. On the other hand, what we are seeing here could be the results ofthe massive shift of income up the line combined with the decreasedrates. Considering this history, the cry to lower rates and get ridof loop holes just will not work. This is a cry for flattening theincome tax, which is what we have been doing since the 60’s which wasaccelerated since Reagan. It will create a tax base that is moreunstable and thus runs even greater deficits during times of economicdecline not to mention the overall decline in total revenue collectedduring good times. And, it totally ignores the issues of equality ofpower along with the concept of the commons. You know, that We thePeople premise.

But before you get to excited aboutthis suggesting or, that I am saying that the poor need to pay moretaxes and the rich are over taxed consider the tax table from 1936,its lowest income tax bracket is 4%. This is on an income up to$4000. Let’s bring that forward to 2010 using my favorite money converter. CPI states that $4000 is now $60,400. Today’s rate for $16,750 to $68,000 is 15% instead of 4%. Of course,I like the unskilled labor and nominal GDP/capita numbers of $145,000and $275,000 respectfully.

Alright, I’ll be fair. The lowest rate in1967 is 14% for up to $1000. That figures to 2010 of $6540 CPI,$6670 unskilled and $11200 nominal GDP/capita. Though, the $4000 in1936 is $9640 in 1967 which puts one in the 22% bracket ofthat year. Using the $12000 for the top of that 1967 bracket brings us to$78,300 CPI adjusted gross income for 2010. $78,300 puts one in the25% bracket for 2010. Obviously another issue we have here when itcomes to setting up marginal rates based on historical records is howmuch the base (adjusted gross income) is effected by how the CPI iscalculated. Any way you figure it, we have been pushing the marginalrate higher and deeper into the lower end of the income pool.

Ok, onto the fondly remembered tax yearof 1936. Next post.

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EA BoP Guide: CA and KA – EA too Dependent on Portfolio Inflows?

by Rebecca Wilder

EA BoP Guide: CA and KA – EA too Dependent on Portfolio Inflows?

This is part two of my multi-post commentary on the Euro area Balance of Payments (BoP). Yesterday, in part one, I compared the EA current account balance to its country-level cross section. Today’s post will be more instructive in nature, as I dig into the components of the EA current account (CA) and capital account (KA) balances.

My general conclusion is that the EA is highly dependent on foreign demand for EA assets in the identity of its international accounts.

As a note: remember the standard international finance identity: CA + KA + errors and omissions = 0, where CA + KA is generally referred to as the Balance of Payments. An international guide to the BoP can be found at the IMF website . Generally, the EA BoP statistics adhere to the IMF definitions.

The Current Account

The chart below illustrates the 3-month accumulated current account balance as the sum of its components: the goods balance (exports minus imports of goods), the service balance (exports minus imports of services), net foreign income, and unilateral transfers. The goods, services, and income balance is € 16.2 for the three months ending in September, which is more than offset by the unilateral transfer balance, -€ 28.1 billion.

The transfer debits are generally to and from other EU institutions and other non-EU and non G7 countries (see section 7.3, table 9), which reflects subsidies from the EA to EU budgets, remittance payments, and aid to developing economies. Given the stability in these outflows, this should be no cause for concern at this time. Of note, the goods balance shrunk spanning 2003 to current, while the service balance improved. In Q3 2011, the goods balance was just €1 billion, while the services balance was €15.

The trade and income balances balances generally fund the transfer outflows. However, recently the transfer balance has picked up (-€28.1 bn in the three months ending in September, which is up from -€19 or -€20 bn in the same month of 2004 and 2005). Given the dropoff in the trade and income balance, something is funding these unilateral outflows: the capital account.

The Capital Account

The chart below illustrates the 3-month accumulated capital account balance as a sum of its components: net portfolio flows (Port Inv – Bal, generally financial assets), foreign direct investment (FDI, or stickier capital flows), financial derivatives, ‘other investments’, and official reserves (ECB asset accumulation).

Since the crisis started, there’s been an stark inflow of foreign money (positive green bars) into the Euro area. It’s probably worth looking at this alongside the US TIC data to gauge interest in USD denominated assets for a proxy of global portfolio diversification – another post – I digress. The EA foreign direct investment is, and has generally been, negative. Foreign direct investment is long-term investment in other countries, including the retention of earnings for investment, equity investment, or long and short term loans. Most of the FDI is leaving the EA for the UK, ‘other EU countries (those not UK, Sweden, or Denmark, and “other countries” (likely EM countries in Asia and Latin America). You can see this information in section 7.3, Table 9. Official reserve asset accumulation is generally very small – one can barely see it in this illustration – and picks up in times of stress (like in 2008).

One interesting aspect of this data has been the persistently negative flows in ‘other investments’. Section 7.3, Tables 5-6 indicate this is driven by outflows in the banking sector (MFI’s). I’ll attend to this in another post; but there’s been a steady reduction to EA MFI’s via short-term loans.

The important feature of recent developments in the capital account is the sharp dropoff of the portfolio balance in September, just €31.5 bn over the last three months from €104.5 bn in the three months through August. This could be a one-off event; but the reduced foreign demand for EA assets could be problematic if a trend forms.

I would say that the EA BoP is not the most stable of all international flows. It’s now heavily dependent on portfolio flows – the green bars in the chart above – given the persistently negative foreign direct investment flows. Better put: the EA current account deficit is now funding through international asset flows into debt, equity, and lending markets. Given the deterioration of the sovereign debt crisis, I wouldn’t be surprised if these flows slowed further in coming months/quarters without a broad policy response from within Europe. Given the persistence of the transfer outflows, waning foreign demand for EA assets would pressure the currency downward if trade remains sluggish.

originally published at The Wilder View…Economonitors

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Peter Diamond, Emmanuel Saez, Paul Krugman and Me!! Looking at Optimal Tax Rates

by Mike Kimel

Peter Diamond, Emmanuel Saez, Paul Krugman and Me!! Looking at Optimal Tax Rates

Via Paul Krugman, I learned of this paper by Peter Diamond and Emmanuel Saez. Diamond, of course, is a Nobel Laureate. I will be shocked if Saez isn’t one too in ten or fifteen years.

Long story made very short, Diamond and Saez jump through a lot of hoops and find that the optimal top marginal income tax rate (all in, that is, including federal, state and local), which they define as maximizing social welfare, is about 73%.

Now, long time readers may recall I’ve been doing this sort of analysis for years, though of course I’ve been looking at tax rates that maximize real GDP growth. Simply put, you cannot maximize long run social welfare if you aren’t maximizing economic growth.

My approach is much simpler than that followed by Diamond and Saez. I like to think its much more intuitive and easier to explain. I note that US data shows a simple quadratic relationship between real GDP growth from one year to the next and tax rates:

growth in real GDP, t to t+1 = f(top marginal tax rate, top marginal tax rate squared, other variables)

One recent post on the topic is here. (Unlike the Laffer curve, the coefficients come out statistically significant and with the right signs.)

I mention all this to note that no matter what I throw into the equation, I find that the top marginal tax rate that maximizes economic growth is somewhere around 65%. Of course, I’ve focused only on federal tax rates… add in state and local it comes pretty close to what Diamond and Saez have found.

As I noted above, my approach is somewhat simpler, and easier to follow than that of Diamond and Saez. Part of the reason is that they come at it from a point of view of elasticities. But with all due respect to my betters (Diamond and Saez, and Krugman as well considering the explanation in his post) I think this is the wrong way to consider the problem. It requires all sorts of assumptions and generalizations about people’s behavior, some of which are both false and create resistance from folks on the right.

For example, there is a notion that raising tax rates will reduce people’s willingness to work… which is only true above certain thresholds. (That threshold, of course, varies per individual.) As anyone who has ever had a business will tell you (when they’re not busy demanding tax reductions), you don’t pay taxes on income from the business if you turn around and reinvest that income. (An accountant would talk to you about decreasing your tax liability by increasing expenses which amounts to the same thing.) You only pay taxes on that income you take that income out, presumably for consumption purposes.

So to simplify, consider an example…. is a successful businessperson more likely to take money out of the business if his/her tax rate is 70% or if its 25%? In general, a person is more likely to take that money at 25%, as there’s less of a penalty. At 70% tax rates, there is more of an incentive to reinvest in the business, creating more growth in the business in subsequent years, and more economic growth thereafter. 70% tax rates are more likely to generate faster economic growth than 25% tax rates precisely because people are self-interested and the higher tax rates induce people to continue investing in things they do well.

(Of course, tax rates can get too high. At 95%, people will reinvest almost every dime… even if they have exhausted every good investment opportunity they have. Thus, to avoid taxes they’ll be making lousy investments which in turn slow economic growth.)

Still, its gratifying to see others who are more, er, credentialed doing similar work. If I might end on a digression, though, I can think of a number of examples of work being done on blogs by people who are essentially hobbyists which is somewhat ahead of the academic literature. However, to a large extent, if something wasn’t published in the academic literature, for all practical purposes it didn’t happen. Which is a shame, because most of us who aren’t academics don’t have time or the resources required for such publication (such as access to econlit). That inevitably slows economic development three ways:

1. the lack of recognition discourages hobbyists who have the potential and otherwise would have the willingness to improve on the existing literature
2. should such hobbyists persist and do the research, that research will not be widely disseminated even if it is an improvement over the academic literature
3. it maintains an insular attitude among those who are not hobbyists. As smart as Diamond, Saez, and Krugman all are, none of them are thinking the way someone running a business thinks of they’d have realized immediately how people who are running a business react to higher and lower tax rates. I have read a lot of academic papers on taxation and have yet to stumble on one that gets it right.

Thanks to Steve Roth of Asymptosis and Jazzbumpa of Retirement Blues for notifying me of Krugman’s post.

And since I always offer… if anyone wants any spreadsheets showing the quadratic relationship between tax rates and economic growth or anything else I’ve done, drop me a line. I’m at my first name (mike) then a period then my last name (kimel – with one m only!!!) at gmail.com.

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How Keynesian Policy Led Economic Growth In the New Deal Era: Three Simple Graphs

by Mike Kimel

In this post, I will show that during the New Deal era, changes in the real economic growth rate can be explained almost entirely by the earlier changes in federal government’s non-defense spending. There are going to be a lot of words at first – but if you’re the impatient type, feel free to jump ahead to the graphs. There are three of them.

The story I’m going to tell is a very Keynesian story. In broad strokes, when the Great Depression began in 1929, aggregate demand dropped a lot. People stopped buying things leading companies to reduce production and stop hiring, which in turn reduced how much people could buy and so on and so forth in a vicious cycle. Keynes’ approach, and one that FDR bought into, was that somebody had to step in and start buying stuff, and if nobody else would do it, the government would.

So an increase in this federal government spending would lead to an increase in economic growth. Even a relatively small boost in government spending, in theory, could have a big consequences through the multiplier effect – the government hires some construction companies to build a road, those companies in turn purchase material from third parties and hire people, and in the end, if the government spent X, that could lead to an effect on the economy exceeding X.

This increased spending by the Federal government typically came in the form of roads and dams, the CCC and the WPA and the Tennessee Valley Authority, in the Bureau of Economic Analysis’ National Income and Product Accounts (NIPA) tables it falls under the category of nondefense federal spending.

Now, in a time and place like the US in the early 1930s, it could take a while for such nondefense spending by the federal government to work its way through the economy. Commerce moved more slowly back in the day. It was more difficult to spend money at the time than it is now, particularly if you were employed on building a road or a dam out in the boondocks. You might be able to spend some of your earnings at a company store, but presumably the bulk of what you made wouldn’t get spent until you get somewhere close to civilization again.

So let’s make a simple assumption – let’s say that according to this Keynesian theory we’re looking at, growth in any given year a function of nondefense spending in that year and the year before. Let’s keep it very simple and say the effect of nondefense spending in the current year is exactly twice the effect of nondefense spending in the previous year. Thus, restated,

(1) change in economic growth, t =
f[(2/3)*change in nondefense spending t,
(1/3)*change in nondefense spending t-1]

For the change in economic growth, we can simply use Growth Rate of Real GDP at time t less Growth Rate of Real GDP at time t-1. The growth rate of real GDP is provided by the BEA in an easy to use spreadsheet here.

Now, it would seem to make sense that nondefense spending could simply be adjusted for inflation as well. But it isn’t that simple. Our little Keynesian story assumes a multiplier, but we’re not going to estimate that multiplier or this is going to get too complicated very quickly, particularly given the large swing from deflation to inflation that occurred in the period. What we can say is that from the point of view of companies that have gotten a federal contract, or the point of view of people hired to work on that contract who saved what they didn’t spend in their workboots, or storekeepers serving those people, they would have spent more of their discretionary income if they felt richer and would have spent less if they felt poorer.

And an extra 100 million in nondefense spending (i.e., contracts coming down the pike) will seem like more money if its a larger percentage of the most recently observed GDP than if its a smaller percentage of the most recently observed GDP. Put another way, context for nondefense spending in a period of rapid swings in deflation and inflation can be provided by comparing it to last year’s GDP.

So let’s rewrite equation (1) as follows:

(2) Growth in Real GDP t – Growth in Real GDP t-1
f[(2/3)*change in {nondefense spending t / GDP t-1},
(1/3)*change in {nondefense spending t-1 / GDP t-2}]

Put another way… this simple story assumes that changes in the Growth Rate in Real GDP (i.e., the degree to which the growth rate accelerated or decelerated) can be explained by the rate at which nondefense spending as a perceived share of the economy accelerated or decelerated. Thus, when the government increased nondefense spending (as a percent of how big the people viewed the economy) quickly, that translated a rapid increase in real GDP growth rates. Conversely, when the government slowed down or shrunk nondefense spending, real GDP growth rates slowed down or even went negative.

Note that GDP and nondefense spending figures are “midyear” figures. Note also that at the time, the fiscal year ran from July to June… so the amount of nondefense spending that showed up in any given calendar year would have been almost completely determined through the budget process a year earlier.

As an example… nondefense spending figures for 1935 were made up of nondefense spending through the first half of the year, which in turn were determined by the budget which had been drawn up in the first half of 1934. In other words, equation (2) explains changes in real GDP growth rates based on spending determined one and two years earlier. If there is any causality, it isn’t that growth rates in real GDP are moving the budget.

Since there stories are cheap, the question of relevance is this: how well does equation (2) fit the data? Well, I’ll start with a couple graphs. And then I’ll ramp things up a notch (below the fold).

Figure 1 below shows the right hand side of equation (2) on the left axis, and the left hand side of equation (2) on the right axis. (Sorry for reversing axes, but since the right hand side of the equation (2) leads it made sense to put it on the primary axis.)

Notice that the changes in nondefense spending growth and the changes in the rate of real GDP growth correlate very strongly, despite the fact that the former is essentially determined a year and two years in advance of the latter.

Here’s the same information with a scatterplot:

So far, it would seem that either the government’s changes to nondefense spending growth were a big determinant of real economic growth, or there’s one heck of a coincidence, particularly since I didn’t exactly “fit” the nondefense function.

But as I noted earlier in this post, after the first two graphs, I would step things up a notch. That means I’m going to show that the fit is even tighter than it looks based on the two graphs above. And I’m going to do so with a comment and a third graph.

Here’s the comment: 1933 figures do not provide information about how the New Deal programs worked. After all, the figures are midyear – so the real GDP growth would be growth from midyear 1932 to midyear 1933. But FDR didn’t become President until March of 1933.

So… here’s Figure 2 redrawn, to include only data from 1934 to 1938.

While I’m a firm believer in the importance of monetary policy, for a number of reasons I don’t believe it made much of a difference in the New Deal era. As Figure 3 shows, changes in nondefense spending – hiring people to build roads, dams, and the like, explain subsequent changes in real GDP growth rates exceptionally well from 1934 to 1938. This simple model explains more than 90% of the change in real GDP growth rates over that period.

Of course, after 1938, the relationship breaks down… but by then the economy was on the mend (despite the big downturn in 1938). More importantly (I believe – haven’t checked this yet!), defense spending began to become increasingly important. People who might have been employed building roads in 1935 might have found employment refurbishing ships going to the Great Britain in 1939.

As always, if you want my spreadsheet, drop me a line. I’m at my first name (mike) period my last name (kimel – note only one “m”) at gmail.com.

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Comments section misbehaving

The comments section (js kit) is not registering correctly at the comment label but are actually being left…please click on comments to take you to the whole post page and leave them. If you have noticed missing comments let me know via angrybearblog at gmail.

The error appears to be in the permalink code and needs repair. On it but am learning a new set of function and lines.

Dan

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PSA: FRB St. Louis Webcast Tonight, and Some from History

The Federal Reserve Bank of St. Louis, without whose FRED database and Excel Add-in Economics Bloggers (and Matt Yglesias) would be Even More Boring, has been running a series of Discussions explaining why the Fed is incompetent—er, Why They Don’t Follow Their Dual Mandate—er, well, something about how They’re Doing The Best They Can.*

The Federal Reserve Bank of St. Louis will offer a live webcast of the finale of its fall evening discussion series for the general public, “Dialogue with the Fed: Beyond Today’s Financial Headlines,” on Monday, Nov. 21, 2011.

The dialogue will be streamed live from the St. Louis Fed’s Gateway Conference Center beginning at 7 p.m. CT/8 p.m. ET. It can be viewed at www.stlouisfed.org/live. No registration is necessary.

Christopher Waller, the St. Louis Fed’s senior vice president and director of research, will discuss “Understanding the Unemployment Picture.” After his presentation, Waller, along with St. Louis Fed economists David Andolfatto and Natalia Kolesnikova, will take questions from the on-site audience at the Bank.

If you cannot catch the live webcast, it will be archived and available on the St. Louis Fed web site within a few days of the event, along with videos of the first two dialogues.

View Lessons Learned from the Financial Crisis with Julie Stackhouse, senior vice president, Banking Supervision & Regulation
Held Sept. 12, 2011

View Bringing the Federal Deficit Under Control with William Emmons, assistant vice president and economist
Held Oct. 18, 2011

Attend, enjoy, ask them about the Beige Book. David Andolfatto tries to be One of the Good Guys (well, for a Simon Fraser guy**, at least). Give him some love, attention, and Questions He Will Love to Answer.

*Whether you find this idea even more disappointing than the others is left as an exercise, unless you’re looking for work, in which case:

**Think A Canadian Koch Brothers, but where the work is done in the Selection Bias.

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EA Balance of Payments: the Current Account

by Rebecca Wilder

EA Balance of Payments: the Current Account

I’ve been doing quite a bit of research on the balance of payments flows within the Euro Area (EA). Given the complexity of the balance of payments, there are too many angles to tackle in one post. Therefore, spanning the next week I will dedicate my commentary to the EA balance of payments. In this post, we start with square one: the current account.

The Euro area (EA) current account

Often times I hear comparison of the EA sovereign debt crisis to past emerging market balance of payments crises. This is not correct, since the EA runs only mild current account deficits, -0.9% of total EA GDP as of Q2 2011 (Q3 data reported in December). There’s no need for a sharp revaluation of the euro to drive the balance of payments to its identity – remember, the current account (CA) + capital account (KA) + official reserves + errors/ommissions = 0.

The standard emerging market-style balance of payments crisis goes something like this: large current account deficits must be financed by foreign inflows of capital (financial account surpluses), so that the currency comes under pressure when foreigners lose confidence in said emerging market economy. As foreign capital flows start to reverse, the currency comes under pressure to balance the financial and current accounts. Under currency depreciation, relative costs rise (via imported goods), so the central bank ‘defends’ the level of the currency through FX intervention (they sell down FX reserves and buy the domestic currency). With the central bank’s stock of FX reserves depleting quickly, speculators can sell the domestic currency for much longer than the national central bank can buy up those assets. Eventually, the whole thing comes crashing down. The currency depreciates (quite materially in some cases) and brings the current account into balance.

The EA initial condition for a balance of payments crisis is just not there: the current account is, well, rather ‘balanced’. Within the EA, country-level current accounts are well out of balance. This is the central theme associated with the EA sovereign debt crisis: debtor countries are reliant on foreign inflows of capital from the credit countries to support current spending.


The chart above illustrates the 4-quarter moving average current account deficit (red)/surplus (green) as a % of national GDP ending in Q2 2011.

In the context of the standard balance of payments crisis, Greece and Portugal would/should have seen precipitous nominal FX depreciation by now. In contrast, the Netherlands or Germany would have seen significant appreciation. However, the single currency union prevents nominal depreciation, so the focus has been on real depreciation. The debtor countries are forced into a policy of internal devaluation (fiscal austerity, they call it) to shift relative prices and real exchange rates. This could work if global growth was going gangbusters, but it’s not.

These imbalances are no longer sustainable.

I’ll leave you with a link as to the direction we’ll be headed here on The Wilder View. Last month Thomas Mayer released a report titled Euroland’s hidden balance-of-payments crisis, which describes imbalances building in the EA financial flows. Next post we’ll look into the balance of payments flows within the EA.

originally published at The Wilder View…Economonitors

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Judge Brett Kavanaugh’s Strange Political Prediction—And Other Recent ACA-Litigation Events

by Beverly Mann

Judge Brett Kavanaugh’s Strange Political Prediction—And Other Recent ACA-Litigation Events

Well, as you all probably know by now, there have been two major developments in the courts within the last two weeks on the litigation challenging the constitutionality of the Patient Protection and Affordable Care Act (the ACA, a.k.a., “Obamacare). On November 8, a three-judge panel of the federal appeals court for Washington, D.C. issued its ruling in a case challenging the constitutionality of the so-called individual mandate requiring everyone who can afford healthcare insurance to purchase it, upon penalty of payment of a regulatory fee. That, of course, is the issue that has gotten almost all of the news media attention, thanks to loud Tea Party/Republican-pol/rightwing-talk-show-personalities cries that the mandate unconstitutionally violates individual liberty and therefore is beyond Congress’s authority under the Constitution’s Commerce Clause.

The Commerce Clause gives Congress the power to regulate interstate commerce and, under Supreme Court precedent, pretty much anything that affects interstate commerce. It is the “enumerated power” under which the ACA was enacted. As opposed to, say, the taxing “enumerated” power.

In several earlier AB posts, including one about the oral argument in late September in the appeal that was decided by last week’s ruling, I said that the right-wing’s conflation of the limits of Congress’s authority under the Commerce Clause and the separate issue of the Constitution’s various limitations on government power to infringe upon individual liberty, including in the Fifth Amendment’s Due Process Clause limiting the federal government’s powers to infringe upon individuals’ rights, is a sophism, as a matter of law and as a matter of logic. I also said that the Due Process argument is fatuous; the federal government clearly has the authority under the taxing power to compel the purchase of medical insurance or retirement savings, and does so for Medicare and Social Security, and a mandate under the Commerce power infringes no more on individual liberty than a mandate under the taxing power.

I made these points originally in an AB post in late June, a few days before Sixth Circuit Court of Appeals Judge Jeffrey Sutton, a highly-regarded conservative Reagan appointee prominent Federalist Society member who early in his career served for a year as a law clerk to Justice Scalia, eloquently deconstructed that conflation in his 2-1 majority opinion upholding the constitutionality of individual mandate. I reiterated the points in an AB post about the Sutton opinion (which I sillily titled “Judge Sutton Channels … Me??”). And I summarized them in a post in early October in which I discussed the oral argument in the appeal that was decided on November 8.

The Sixth Circuit opinion was the first appellate ruling on an ACA case. The dissenter in that opinion is not an appellate judge but instead a trial-level judge sitting on that appellate panel “by designation ” of that court’s chief judge via a statute that allows this, and whose dissenting opinion was breathtakingly lightweight.

In August, an Eleventh Circuit panel consisting of a Clinton appointee to the Court of Appeals who had been appointed as a trial-level judge by Reagan, another Clinton appointee, and a George H. W. Bush appointee, issued a 2-1 opinion ruling the individual-mandate provision unconstitutional but upholding the remainder of the ACA, saying that the remainder was “severable” from the individual-mandate provision—that is, that the remainder of the Act could stand on its own and that therefore the loss of the mandate provision did not dissolve the remainder of the statute. The opinion was written by the Reagan appointee, Joel Dubina and joined by Clinton appointee Frank Hull. Neither judge is considered a star legal analyst, and the opinion didn’t disappoint. It was a rote adoption of the the-individual-mandate-unconstitutionally-infringes-on-liberty-because-it-penalizes-inaction-and-therefore-Congress-exceded-its-Commerce-Clause-authority. The opinion doesn’t explain how a supposed unconstitutional infringement of liberty amounts to a per se exceeding of Congress’s Commerce power, the opinion doesn’t explain. Alchemy? The dissent by Judge Stanley Marcus is scathing. (More about this case below.)

The panel in the Washington, D.C. case, the one decided on November 8, like the panel in the Sixth Circuit case, was comprised of two conservative Republican appointees and a Democratic appointee. Both Republican appointees, Lawrence Silberman and Brett Kavanaugh, the latter a former law clerk for Judge Kennedy, are high-profile stalwart conservatives and both are intellectual leaders of the “movement” right, albeit from slightly different conservative-legal-movement eras. Silberman is a Reagan appointee, Kavanaugh a George W. Bush appointee. In any event, they are not just rightwing but also considered intelligent, if not necessarily by me.

In my post last month about the oral argument in that case, I wrote:

Sutton’s analysis exposes the constitutional challenges to the individual mandate for what they are: a series of ideological clichés masquerading as legal argument.  As I wrote in AB shortly after the Sutton opinion was released, his analysis is so fine, so precise, that ultimately the Supreme Court’s opinion will echo it.  So I was not among those who were surprised that the administration is pushing for a Supreme Court ruling on the constitutionality or the statute before the 2012 election.  But all the judges thus far who have voted to invalidate the individual-mandate provision as unconstitutional are, in my opinion, intellectual lightweights, and so I’d wondered whether the Sutton analysis itself could be persuasively deconstructed by a judge or justice who is not.

The answer appears to be no.  Last week, a panel of yet federal appellate court, this one the one for Washington, D.C., heard arguments in yet another case challenging the constitutionality of the mandate as beyond Congress’s Commerce-regulation authority because it infringes upon the liberty of individuals to remain self-insured, it requires the purchase of a “product” from a private party, and, well, um, the scope of the statute is really sweeping.  I mean, what’s next, asked one of the two stalwart rightwing-intellectual-heavyweight members of the panel?  Congress mandating the purchase of GM cars by the wealthy in order to prevent the collapse of that company during the next economic downturn, upon pain of payment of a penalty for failure to do so?  (I hope so. Then, when David Koch has a heart attack in his Maserati and the ambulance attendants verify through the Secretary of State’s offices in his various home states that there is no GM car registered in his name, the attendants dump his gasping-for-breath body in the road, where he’s run over by a Cadillac SUV

I followed those paragraphs with this one:

A sigh of relief was in order—although I had to wait until I stopped smiling like a Cheshire cat.  That judge, Brett Kavanaugh (a former law clerk to Justice Kennedy, circa 1993), reportedly commented earlier to the plaintiffs’ lawyer that maybe the courts shouldn’t interfere with what could be the beginning of the mass privatization of the social safety net.  More likely, I think, it will prompt, finally, a single-payer healthcare-insurance system—Medicare for all—in order to cut out the spiraling costs of a private, multi-carrier, for-profit system whose premiums reflect, in part the investment losses of those private companies.  But don’t tell Judge Kavanaugh until after that appeal is over.

Um, oops. Actually, it was Silberman, not Kavanaugh, who suggested that if the individual mandate in the ACA is constitutional, then a mandate requiring the purchase of a GM car might be, too. It was, however, Kavanaugh who predicted, mouth watering, that if the ACA’s mandate is upheld, it might usher in a mass privatization of the social safety net.

When the panel decided the case, it was Silberman who wrote the opinion—for himself and the Democratic appointee, liberal Clinton appointee Harry Edwards, upholding the individual mandate and echoing the basics of Judge Sutton’s opinion: that the Commerce Clause gives Congress the authority to regulate that which affects an interstate market, as the healthcare market clearly is; that the decision to not purchase healthcare insurance is not inactivity but instead clearly market activity because (unlike the proverbial decisions whether to purchase broccoli, or a GM vehicle) virtually everyone will need healthcare at some point, and will receive it whether or not the person is insured or can afford to pay the medical bills out-of-pocket; that the infringement-of-individual-liberty objection is not a Commerce Clause issue but instead a Due Process issue; and that the individual-mandate provision does not unconstitutionally infringe upon individual liberty.

Silberman’s opinion adopts Sutton’s reasoning in all respects. Most interesting, I think—partly, I guess, because by now I feel like I have a proprietary interest in it—is his conclusion that:

Appellants’ view that an individual cannot be subject to Commerce Clause regulation absent voluntary, affirmative acts that enter him or her into, or affect, the interstate market expresses a concern for individual liberty that seems more redolent of Due Process Clause arguments. But it has no foundation in the Commerce Clause.

Kavanaugh dissented. But not on “liberty” grounds. And not even on Commerce Clause grounds. Instead, he said a court ruling now is premature, for two reasons., one (he said) compelled by statute, the other (he said) in deference to “the bedrock principle of judicial restraint that courts avoid prematurely or unnecessarily deciding constitutional questions.”

“Unnecessarily” being the interesting part of this.

The statutory reason is his interpretation of a federal court-jurisdiction statute called the Anti-Injunction Act and of the legal nature of the mandate provision. The Anti-Injunction Act removes the “jurisdiction,” i.e., legal authority, of the courts to even consider the challenge to the individual-mandate provision and its penalty for failure to purchase insurance until after the effective date of that provision in 2014 and the penalty is assessed against someone who then sues for reimbursement, contesting the provision’s constitutionality. The issue depends on whether the penalty is a tax, since the Anti-Injunction Act applies only to taxes. In August, a panel of the Fourth Circuit Court of Appeals ruled, 2-1, that the mandate is a tax and that the Act therefore removed the courts’ jurisdiction to consider the constitutionality of the mandate provision until 2015, when the first penalties would be assessed by the I.R.S. Kavanaugh bought the argument; Silberman and Edwards didn’t.

The “unnecessarily” reason has subparts, but the main ones are that Congress may repeal the ACA, or parts of it, before the individual-mandate provision becomes effective, and, more to the point (or at least more to my point), that Congress may instead simply change the wording of the mandate provision slightly so that the penalty is clearly a tax. Which, he says, clearly would be constitutional.

He doesn’t say that it would be clearly within Congress’s taxing power. He says, flatly, that it would be clearly constitutional. He says, in other words, that the infringement on liberty does not itself violate the Constitution—whether the mandate is an exercise of Congress’s power to regulate interstate commerce or instead an exercise of Congress’s power to tax.

That Kavanaugh has an ideological ulterior motive which advertised at oral argument and reiterates with more elaboration in his dissenting opinion— his expectation that if the ACA’s mandate is upheld, it could herald an era of mass privatization of the social safety net, happily marrying tea party types and rightwing interests in having government create a market serving private business interests—does not matter. Nor does it matter that Kavanaugh is delusional—unless, of course, it really is likely that there is, say, a private-food-assistance lobby similar in number to the insurance-industry lobby that, like the insurance-industry lobby did in fighting single-payer healthcare insurance proposals (and even the so-called public option in a version of Obamacare) , will emerge like locusts to have Congress enact a law mandating that everyone who can afford to do so must purchase food stamps each year, redeemable when and if necessary. Or that the AARP will agitate for privatization of Social Security, maybe in order to prevent the government from funding massive otherwise-unfunded wars and massive tax cuts for the wealthy largely by tapping the ostensible Social Security trust fund.

No, what matters is that Kavanaugh said what he said, irrespective of his motive. Kavanaugh got it right. The individual-mandate provision does not violate the Constitution’s limitations on government infringement of individual liberty. And Sutton and Silberman, neither of whom appears to share Kavanaugh’s peculiar delusion and ulterior motive, but also neither of whom voted for Obama or any member of Congress who voted for his “care,” have enunciated so finely why this is so and why, also, the mandate provision is within Congress’s Commerce Clause authority, that a 5-4 Supreme Court ruling to the contrary would be a transparent act of ideology. It’s not, of course, that the majority doesn’t do this, regularly; they do. It’s that this time they would be eating not only Obama and Care, but also Kavanaugh, Sutton and Silberman.

The fat lady hasn’t sung yet on the constitutionality of the individual mandate, but I think it’s over nonetheless. When the Court decides that issue—and despite the out-of-right-field potential inherent in certain sort-of-breathtaking parts of the Court’s order last Monday agreeing to hear the Eleventh Circuit case—I think the Court will decide that issue, eventually, if not in that case.

For the specifics of that order, and a comprehensive discussion of the five parts to it and the possible implications of one of them, see Simon Lazarus and Dahlia Lithwick’s article in Slate, “The Medicaid Ambush: The Supreme Court’s unexpected and astounding reasons for wanting to hear a challenge to Obamacare,” here.

If the Court rules the ACA unconstitutional because the majority thinks the ACA’s expansion-of-Medicaid provision violates the states’, um, constitutional right to the current federal statutory entitlement (Medicaid in its current form) in order to protect the popularity of the states’ legislators who would vote to forego Medicaid in order to avoid the requirements of Obamacare (see the Slate article), then of course the Court will never have to decide the constitutionality of the individual mandate. I don’t think it will buy the states’ hubristic claim; I think the Court simply wants to hear all challenges from all governments that are suing. This is a court with at least a few members who apparently think that any time a state or local government asks it to hear a case, it should hear the case. But it also is a court whose majority, in deciding cases, regularly privileges the states’ interests over the interests of the federal government and of individuals. Their ideology largely rejects the Fourteenth Amendment and the original Constitution’s Supremacy Clause. So, who knows?

As for what caused Silberman’s change of heart about whether the individual mandate unconstitutionally infringes upon the liberty of individuals to remain uninsured, I have two theories. One is that Kavanaugh read my AB post attributing to him Silberman’s oral argument comment equating the mandate with a theoretical mandate to purchase a GM car, and after explaining to Silberman the difference between the two and insisting that Silberman publicly clarify the distinction or make clear that he, not Kavanaugh, drew the analogy, lest a gasping-for-air David Koch be dumped by an ambulance attendant onto the street and run over by a Cadillac Escalade and that Kavanaugh be blamed, he persuaded Silberman to change his mind about the whole analogy. The other is that Silberman himself gave more thought to whether it would be such a bad thing after all for the government to mandate a GM car in every driveway. After all, that new Chevy Cruze is awfully cute and gets pretty good gas mileage.

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Education with a Twist—An Oliver Twist

by run 75441

In response to Newt Gingrich’s comments on failing schools, work, and rising bootstraps,

Peter Dorman at Econospeak replies in: Education with a Twist—An Oliver Twist”

“why take it out on the janitors? If the school was failing it wasn’t their fault. According to Gingrich, it’s the teachers who can’t make the grade. So why not put the kids to work following lesson plans, going over last year’s standardized tests, etc.? There would be as much pride in this as in cleaning toilets.”

Usually when we focus on schools, the focus is on the failing city school model, teachers, and then the students themselves. One commenter draws the following conclusion:

“I spent weekend pass time as an English conversation resource person at a high school in Taejon. I was able to have a first-hand look at how education was done in what was at that time a very poor country with big ambitions. Most villages at that time were without running water or electricity and people still wore the traditional clothing, both men and women. There was no doubt that we were in a foreign country.
Because there was not enough money to provide free public education to everyone, students had to pass examinations starting with what we would call middle school if they were to be allowed to continue. Same for high school and, of course, post-secondary education.

Those who could not pass the tests were not accepted. But some children of families with enough money were able to continue their education through private schools. The system was exactly opposite what I had seen in America where private schools were generally the place where many of the most accomplished students were sent.”

and another:

“The idea seems to be to give the kids some kind of work other than school work; and to build up a work ethic, which could well be more valuable to them than academics if they are in such a dire situation. I know that a friend of mine who runs a small business says he finds it very hard to hire for low end jobs: too many of his new employees don’t really “get” the whole work concept

I expect anybody who comments here is probably at least middle class. The work ethic is something our parents drilled into us by example and through discipline. That’s unfortunately not true for a lot of the poor, and it is one reason they have so much trouble improving their lot.”

Is it really the student’s fault or have we just taken our own fifties, sixties, and seventies values and applied them to a dysfunctional economy and educational system believing there is still a ray of hope if one works hard enough they can still pull themselves up by their boot straps?

Maybe it is true that Korea has been able to lift the boat of equality for all of it students; but then too when all are at the same level of, efforts to lift the outcome are equally divided and not skewed toward the suburbs over the inner cities. Review the difference in tax revenues for Detroit as compared to Rochester Hills, Farmington Hills, etc. if you wish to see inequality. One way to fix the problem is for Detroit to annex the suburbs to provide a better tax base. It is no longer a society which provides an equal chance to all people and the chance for upward mobility we used to experience in the sixties, seventies and eighties is long gone. Tom Hertz does a nice study defining upward mobility in a short study: “Understanding Upward Mobility in America.”
The days when a good work ethic and a high school diploma being the ticket to the middle class have also disappeared. I am sure you would not solely blame the high unemployment percentage rates on those with just a high school education on a lack of work ethic? And what of college with the high costs of student loans to finance college which has certainly contributed to closing the door on many. I suspect the Korean Vet went to college on the GI Bill the same as I and when it paid for tuition. Loyola of Chicago used to be ~$300 a course in the Masters Program. I am sure it is more now. Dr. Elizabeth Warren reviews what has happened to the chances to enter the middle class; “The Coming Collapse of the Middle Class.”
Why is it we are willing to finance prisons at an average $24,000 per prisoner and keep captive ~1% of the total adult population, heavily skewed towards minorities, with ~50% being nonviolent, and yet we quibble over financing public schools? Is that expenditure for prisoners reaping a better result? Maybe we should teach high school students to be prison guards as it is a growing business both private and public. Another good and not a terribly long read is Dr. James Gillian “Violence: Reflections on A National Epidemic.” A lack of chance in upward mobility with this generation and the previous ones will result in other economic consequences.
“Are there No Prisons??? Are there No Union Workhouses???

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