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

Competing GOP Tax proposals Graphic

An organization that is called: American Institute of Certified Tax Coaches has put up a summary graphic of the various tax proposals ofthe GOP candidates. It not only notes the major points of their plans, but what their plans would cost.

It is presented in a sort of game board race layout. The Institute introduces it thusly:

The US tax code is so complexeven those who write the law don’t understand all of it. Infact, few members of Congress prepare their annual tax returnsaccording to a survey by the congressional newspaper, “The Hill.” Politicians cite the complexity of the tax code as the primary reasonleading them to turn to professionals for help. Even theCommissioner of the IRS can’t prepare his own tax returns!

Ask most taxpayers and theyagree our current system is too complicated and unfair. So there’sno easier way for a politician to gain approval than to say thecurrent system should be eliminated.

It’s no surprise theRepublican presidential candidates have come out with somewide-ranging tax proposals. Even deciphering the content ofthese plans can be a challenge, so we took it upon ourselves toidentify how the GOP hopefuls’ differ and just what is in them.

Click on the AICTC link to see their take. The image is too big to post here. (Thanks C & L)

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Speculation About Oil

Last Spring, some Democrats and liberals (Ed Schultz and Bernie Sanders spring readily to mind) who have somehow resisted the enlightenment of unfettered free markets suggested that high oil prices are due to speculation.

Noah Smith took this subject on, asking the question: “Do speculators cause oil and/or gas prices to rise above their “natural” or fundamental level?” Noah’s take is that speculation is innocent, and he cites some corroborating experimental evidence. I’m a big fan, but this time I think Noah missed the point. First, I’ll state right up front that futures markets play a vital role in allowing the producers and first-line purchasers of various commodities to be able to stabilize their cash flows and construct realistic business plans. So – yes, futures markets are a good thing.

On the other hand, when quizzed by Senator Cantwell on why big, trans-national oil companies should continue to receive multiple billions of dollars in tax breaks, Exxon CEO Rex Tillerson admitted that a good estimate of a supply-demand determined price (considering the price of the next marginal barrel) for crude is in the range of $60 to $70 per barrel.

For reference, here is a chart and data table for Brent crude, going back to 1987.

At the depth of the global recession, on Boxing Day 2008, when the world was coming to an end, the price dipped below $34. Be that as it may, with recent prices back over $100, we’re looking at premiums over a rational value estimate of from 60 to 85%. Let’s just call it 75% for convenience.

Now, back to the point that Noah misses, and that Senator Cantwell suggested. What is the effect of unregulated speculation on the price of oil? The Senator estimates 30% activity by concerned stake-holders, and 70% by profit-seeking (in my view rent-seeking) speculators who are playing the market for a profit. The graph on Pg 5 of this study (18 Pg. pdf) suggests a ratio closer to 45% commercial and 55% non-commercial interest. Also it looks like open interest, which had been relatively flat for years, increased by a factor of 6 or 7. This financial tail chasing, aided and abetted by deregulation, is a direct manifestation of the asset misallocation that, in my view, is the real cause of The Great Stagnation.

A look at the oil price chart shows 10 to 15 years of more-or-less flat line in the range of $20, followed by a classic bubble and post-bubble bounce. As an aside, this is typical Elliott wave behavior. I can easily trace a five wave rise to the peak, and what looks like the recent end of a counter-current B-wave since the Dec. ’08 bottom. If this is anywhere near correct, the price of crude a decade from now will be eye-poppingly low, and fundamentals be damned.

As an example of a classic bubble peak, consider the Dow Jones Industrial Average during and after the 1929 crash.

But let’s look at fundamentals, anyway. Global GDP growth since 1980 has been in the range of 2 to 5%. Let’s generously call it 4%. The price of crude in 1990 varied from about $15 to $41. Let’s generously call it $30, on average.

If we compound $30 at 4% for 21 years we get (are you ready for this) $68.36. And this is based on generous numbers.

Not a rock-solid price algorithm, for sure, but it ought to be in the ball park. Maybe it’s just a coincidence that this number corroborates Rex Tillerson’s off-hand estimate.

Maybe it’s another coincidence that oil prices took off after Phil Graham pushed through legislation (signed by Billy-Bob Clinton at tail end of his battered second term) that exempted some speculative trading from certain regulations dating back to the Commodities Exchange Act of 1936. One of these exemptions was removing this requirement: “Either way, both the buyer and the seller of a futures contract are obligated to fulfill the contract requirements at the end of the contract term” from oil and other energy products. In case this is not crystal clear, it means that back in the bad old days of regulation, a contract had to be closed by executing the opposite transaction from the original prior to expiration, to avoid either supplying or receiving the physical amount of the contract. But after deregulation this requirement was not in force for oil.

Maybe it’s another coincidence that Morgan Stanley became the largest oil company in America. Plus, another point that Noah explicitly missed is that big, speculative finance entities did, in fact engage in physical hoarding. Here is a 20 month old news flash.

Oil traders are taking advantage of a market condition known as contango, in which the price for future delivery is greater than the price for spot (immediate) delivery. If the difference between the two prices is more than the cost of chartering an oil tanker, traders stand to profit. The difference between the price of crude oil for June delivery and the price of crude oil for July delivery is more than $2.00 a barrel; that’s enough to defray the cost of chartering a very large crude carrier (VLCC), which holds about 2 million barrels of oil and, as of April 23, cost $43,876 per day, according to the Baltic Exchange.

How much of an incentive to keep prices artificially high do you suppose is provided by a cost of $43,876 per day? That’s $1.31 million per month.

And that’s why I think Ed Schultz, Bernie Sanders, and Maria Cantwell might actually be on to something.
An earlier (and to be honest, inferior) version of article was posted on Retirement Blues back in May.

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Menzie Chinn Explains it All for You: Demand Inflation Now!

Whether it’s Market Monetarist NGDP targeting (a.k.a. Damn The Inflation Rate; We Need Growth!) or Menzie’s recommendation of Conditional Inflation Targeting with a notably higher target, everything tells us that somewhat higher inflation is the current path to greater and more widespread long-term prosperity.

Raising the expected inflation rate will lower real interest rates and spur investment and consumption. It will also make it difficult for the de facto dollar peggers, such as China, to sustain their policies. The resulting real depreciation of the dollar would stimulate production of U.S. exports and domestic goods that compete with imports, boosting American production. The United States would get faster growth, an accelerated process of deleveraging, a quicker recovery, and a firmer foundation upon which to address long-term fiscal problems.

Like the market monetarist approach, Chinn’s proposal is basically for an automatic stabilizer based on unemployment levels, that anchors expectations (emphasis mine, both above and below):

a policy that would keep the Fed funds rate near zero and supplemented with other quantitative measures as long as unemployment remained above 7 percent or inflation stayed below 3 percent. Making the unemployment target explicit would also serve to constrain inflationary expectations: As the unemployment rate fell, the inflation target would fall with it.

As I said a while back:

Automatic stabilizers are the key to effective 1) policy and 2) expectation-setting. Because 1) They happen, and 2) People know they’re gonna happen. Could be fiscal or monetary, largely a question of where you inject the money.

In other words:
Full disclosure: as a wealth-holder/creditor, the policy proposed here is directly contrary to my own short-term best interests. I would much prefer to see a crash in financial asset prices resulting from deleveraging and slow-growth expectations, so I could buy those assets cheap with all the cash I’m sitting on. But for whatever crazy reasons, I’d rather that my (and your) children and grandchildren spend their lives in a thriving and widely prosperous country.
Cross-posted at

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‘Jazzbumpa’ to write for Angry Bear

Jazzbumpa has been writing about various topics that involve economics for several years now. He maintains several blogs, one of which is Retirement Blues. He is data driven with a sense of humor and will add such to Angry Bear.

Jazzbumpa is retired from a product development career in the auto industry. His education is in chemistry, but he did very little actual chemistry in the real world. The MBA is not worth mentioning. His professional strengths were in trouble-shooting, problem solving and looking askance at management.

So you’re unlikely to get anything from him on IS-LM curves, utility theory, or the hyper-neutrality of money. He also intends to avoid any mention of Social Security and/or FICA. We’ll see how that works out. Ricardian Equivalence and Rational Expectations strike him as the silliest ideas to be believed in by very serious people since chemists gave up on phlogiston. In the early chemists’ defense, though, at that time, they didn’t know any better; and there wasn’t any contrary data.

…With no reason to adhere to any particular brand of economic dogma, he can look at empirical data, and attempt to draw the conclusions that the data actually suggests. He also brings curiosity, skepticism, a smart-ass attitude, and the ability to do simple math.

His main relevant interests are in time-series data of various econ-related phenomena, inquiries into how and why things happened in the ways that they did, and what implications one might expect going forward.

JzB’s publication history includes a chapter in a Materials Handbook and a book review in an obscure and long-defunct science fiction magazine. His non-publication history includes a large stack of rejection letters. His real name was once mentioned on the acknowledgments page of a real novel by a real author.

When not involved in this nonsense, he’s an active (occasionally hyper-active) amateur musician/composer/arranger, occasional poet, loving husband, and devoted fan of 11 smart, beautiful, and talented grandchildren.

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Big Changes at Capital Gains and Games

I go away for a week and the world collapses. While most of you probably noticed that Russell Brand is available again, the other Major Separation was at Capital Gains and Games, which is now exclusively Stan Collender’s as “principal writer and managing editor.”

It is also rebranded “Stan Collender’s Capital Gains and Games.” (The URL remains unchanged.)

Stan has been driving the posting at CG&G for a while now, and this seems, on balance, a good move for everyone, most especially the readers.

In related news, Andrew Samwick has gone back to being a solo artist.* I suspect there are more details in the CG&G posts over the past week, but I’m still catching up.

*If Samwick is the blogsphere equivalent of Sammy Hagar,** then Vox Baby was “I Can’t Drive 55,” while the new one will be…uh, someone help me out here. He’s already got a Brad DeLong link, which may be a better equivalent than the post-VH solo Hagar did.

**Comments game for Nils Lofgren-solo fans: Who are “the Supreme Court of” Economics Bloggers?

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Mike Mandel on productivity and Tyler Cowen on stagnation

Last week Mike Mandel published a very interesting chart as his nominee for the chart of the year.

He is using the net investment data to argue that capital spending is much smaller than generally assumed.

Standard thinking is that since the early 1980s capital spending has been booming and despite cyclical swings real business fixed investment has moved up to record levels as this chart of real business fixed investment as a share of GDP shows..

Maybe, if you look at this chart that divides real business fixed investment into two categories:
information tech ( IT) and all other, or more traditional capital goods it demonstrates that IT has accounted for virtually all the growth in real investment since 1980 and that it share of total capital spending has been steadily increasing — it now accounts for 45% of the total.

But IT equipment has a very different life span than more traditional capital equipment. Business computers have a life span of only about 2 years and communication equipment has a similar life span. In contrast, traditional capital equipment has a much longer life span. An office building, a ware house or something like a blast furnace can be expected to have a useful life of decades.
Even more rapidly depreciating equipment like trucks now last some 10 to 20 years.

If you are depreciating your equipment over only a couple of years it means that you have to run ever faster and faster to keep even. For example if in year one you buy one computer and in year two you buy two computers and year three it is three computers, etc,.etc., you net addition to your capital stock is much less than your gross purchases of computers. In year three, one of the three computers you buy goes to replace the computer you bought in the first year and in year five, three of the five new computers only replace the three you bought in year three, etc., etc… So you net purchases is three, not five. This is the primary reason Mandel is making a very important point with his analysis of net capital spending.

For some time Mandel has been arguing strongly that the official productivity data significantly over states productivity growth. Economist debate what drives productivity growth, but no one denies that growth in the capital stock is an important way new technology becomes embedded and is an important determinate of productivity growth and real standards of living. Mandel is correct that the growth in the net private capital stock has slowed sharply since the early 1980s.

Moreover, if you look at the growth in real net capital stock per employee it shows a clear break in trend in the late 1970s. From 1945 to 1985 the trend growth rate for this series was 1.6%. But since 1974 the trend growth rate has fallen to about 1.0%, a much slower growth rate. This appears to provide solid support to Mandel’s argument that productivity growth is slower and Tyler Cowen’s great stagnation thesis.

I suspect that these two economists are on to something, but I am not quite ready to fully accept their arguments. I would like to see some other analysis independently support their arguments.
I always look for independent conformation of economic trends. One reason I question their argument is that a dominant determinate of corporate profits is the spread between unit labor cost and business prices. If productivity growth were significantly slower, the tight relationship between profits growth and the growth of the spread between unit labor cost and prices should be breaking down. But as the chart below shows, if anything, the relationship appears tighter in recent years than it was in an earlier era. So while I am not quite ready to fully accept either Mandel’s weaker productivity thesis or Tyler Cowen’s great stagnation thesis, but I am not ready to reject them either.

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The Peltzman Effect: Why Economic Growth Has Slowed in the US Over Time

by Mike Kimel

(Update: Naked Capitalism notes Mike’s post is the top read of the day in ‘links’)

In recent years, there have been a number of studies showing that generational income mobility is particularly low in the US. To quote this 2006 study by Tom Hertz:

By international standards, the United States has an unusually low level of intergenerational mobility: our parents’ income is highly predictive of our incomes as adults. Intergenerational mobility in the United States is lower than in France, Germany, Sweden, Canada, Finland, Norway and Denmark. Among high-income countries for which comparable estimates are available, only the United Kingdom had a lower rate of mobility than the United States.

Hertz provides this handy chart:

Most of the “big government” countries that compare favorably with the US on intergenerational mobility also do pretty well on measures of entrepreneurship. The following snapshot comes from this paper by Acs and Szerb:

(GEDI = Global Entrepreneurship and Development Index)

While studies are, no doubt, imperfect, I’ve seen similar results before and they seem credible to me.

The studies note, essentially, that the US is not, for many, the land of opportunity it is touted to be, and is now being beaten out by countries like Denmark and Canada. Big government countries, countries where Americans seem to believe people aren’t motivated to get off their duff, are actually quite entrepreneurial and offer offer their citizens a lot of opportunity.

Meanwhile, one other thing to note… growth, real economic growth, has been slowing for decades in the US. George W Bush’s term, even prior to the start of the Great Recession, compares unfavorably with the 1970s. The highly touted Reagan years, for instance, saw much slower growth than, say, the big government LBJ administration or the even bigger government New Deal years.

What is going on here? Is it really the catch-up effect, whereby wealthy countries like the US necessarily grow more slowly than other countries? Or is there a Great Stagnation going on? And if so, why?

I think one explanation for this is the Peltzman effect. Sam Peltzman once noted that, in response to some types of regulation, people can have a tendency to change their behavior in ways that counteracts the intended purpose of the regulation. For instance, some bicycle and motorcycle riders will take greater risks when forced to wear helmets, assuming that the helmets make them safer and more impervious to accidents.

Now, economic advance depends on creative destruction, and creative destruction requires people to take risks. Come up with a great idea for a super duper new widget and it has zero effect on anything if you don’t go out and try to market the thing.

But take two people, both of whom independently came up with the same idea for that super duper new widget. One lives in the US, the other in Denmark. Which one gives up his/her job to start a new company? The American or the Dane? My guess is the Dane will, precisely because the Dane, unlike the American, retains a safety net. The Dane doesn’t give up health insurance for herself or her family, and has more social programs she can rely on if the new business fails. My guess is that isn’t just true for Danes and Canadians, but also for people in a whole host of countries with a stronger safety net than the US. If the US still scores higher than on entrepreneurship than these countries, it is for historical reasons. Attitude is part of the ranking, after all, and Horatio Alger stories are still in our DNA.

If my guess is correct, there are things we should expect to see in US data:

  1. The ratio of American companies, particularly successful American companies which required substantial commitments by their founders, that are founded by foreign born people relative to native born people has been growing. (I.e., native born Americans are becoming more risk averse when it comes to starting companies.)
  2. The ratio of American companies, particularly successful American companies which required substantial commitments by their founders, that are founded by native born people who were born wealthy (and thus have their own built in safety net) relative to those founded by native born people who weren’t born wealthy has been growing. (I.e., non-wealthy Americans are becoming more risk-averse when it comes to starting companies.)

Note that I am trying to distinguish between a “business” and a business that requires some substantial commitments by their founders. There is a big difference between someone leaving their existing employer to start a new business based on an idea they have been toying with for a while and someone who was fired six months earlier deciding that they have no choice but to start something, anything, to put food on the table. I don’t have that data, but I would be surprised if it 1 and 2 weren’t borne out. Unfortunately, I think the direction we are taking, politically, is just going to reduce entrepreneurship in this country more and more. There are only so many wealthy people, and only so many foreigners coming to our shores. The land of opportunity, we will find in the long run, is the one with a safety net.


  1. The first paper cited was put out by the Center for American Progress, which leans left. The second paper was commissioned by the Small Business Administration, but its authors are both at George Mason U, which has a definite libertarian bent. –
  2. Consider this a companion piece to Why Don’t Tax Havens Become Economic Powerhouses? and A Simple Explanation for a Strange Paradox.

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