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European Daily Catch: Know Your Consumers

by Rebecca Wilder

European Daily Catch: Know Your Consumers Today’s European Daily Catch compares the aggregate implications of the reported January 1-point rise in French household confidence to the reported January stabilization of Italian consumer confidence. Specifically, French consumers could be ‘happier’ but that doesn’t necessarily mean they’re spending more, while Italian household confidence translates rather directly to aggregate spending patterns.

Domestic demand is a large contributor to GDP growth in both Italy and France. Therefore, inferring patterns of aggregate consumption from higher frequency leading indicators, such as confidence, is important. Confidence measures lead real retail sales numbers, and real retail sales lead the quarterly real consumption patterns. Annual real retail sales growth has a reasonably high correlation with aggregate consumption (the ‘C’ of Y=C+I+G+NX) in both Italy and France, 69%; so gauging real retail sales from consumer confidence could potentially be useful.

Consumer confidence could be a useful tool for predicting consumption, hence GDP, in France and Italy…

…but it’s not in France. See, with a correlation of just 38%, household confidence is a terrible coincident indicator of real retail sales and adds practically no predictive value for aggregate consumption or GDP forecasting. French consumers could be just miserable and still post relatively healthy retail sales and aggregate consumption numbers.

…and it is in Italy. When Italians are depressed (not confident), they spend less. And boy are Italians depressed. The same series, consumer confidence and annual real retail sales growth, has a very high correlation in Italy, 76%. The implication is, that with confidence running 12.5 points below its 2000-2012 average I do not expect real retail sales to rise above the current 4.9% annual decline in November (CPI-adjusted).
Given the recent downtrend in Italian consumer confidence, the likelihood of a December decline in real retail sales is high. But even if it did stabilize at current levels, Q4 real retail sales are running 2.5% below Q3 sales. Therefore, household consumption is likely to decline in Q4, and quicker than its 0.2% drop in Q3.

So the moral of today’s European Daily Catch is when it comes to confidence indicators, know your consumers. Unhappy Italian consumers make poor spenders, while unhappy French households may very well hit the shops. Domestic demand in Italy is shaping up poorly.

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SOCIAL SECURITY… How They Lie To Us

by Dale Coberly

SOCIAL SECURITY
How They Lie To Us

The Wall Street Journal in the article Newtitlement State is unhappy with Newt Gingrich’s plan to privatize Social Security. Not only does it know that “privatization” failed when Bush offered it to the country, but they understand that most elected Republicans have distanced themselves from private-account carveouts as well.  Rather than embracing them, Florida Sen. Marco Rubio, whose election was one of the Tea Party’s biggest victories in 2010, said during his campaign.

“Privatization of the accounts has come and gone. There are other alternatives, such as [raising] the retirement age, how you adjust payments in the future, ‘need’ measures, et cetera.

What this means is that “privatization” was never more than a political strategy to kill Social Security. It failed, and now we have a better plan to kill Social Security that won’t cost so much.

Here’s what the Journal said about Gingrich’s plan

The irony of Social Security is that its slow-motion solvency crisis is relatively easy to resolve—and the political system is moving toward consensus, if haltingly…. Personal Social Security accounts are desirable, but that doesn’t mean it makes sense to reject compromises that reduce future liabilities. Yet Mr. Gingrich proposes no such changes in his plan, perhaps because they are politically unpopular. But such an abdication opens him up to charges that he’s not serious about reform and that he has no plan to pay for the transition costs of going to personal accounts (that is, when younger workers put their money in their own accounts, rather than funding current retirees).

This is so subtle and so dishonest that I thought it would be worth the time to deconstruct it.

“Its slow-motion solvency crisis” … note that this assumes there is a solvency crisis. In fact there is not one. Social Security is not insolvent and can never be insolvent. With no changes whatsoever it can pay future benefits that are adequate by today’s standards, benefits which will be in fact greater in real value than today’s benefits.


One danger here is that even the defenders of Social Security have got into the habit of pointing to the 2036 DEATH OF THE TRUST FUND as “not a crisis… it’s 25 years away.”

Well 25 years is coming soon enough that folks are starting to notice that it will happen before or during their own retirement. The defenders of SS need to learn that 2036 is not a crisis, not because it is so far away, but because it never meant anything in the first place.

At about that time the Trust Fund will have done its job: helped pay for the boomer retirement, and will run out of money just the way your Christmas Fund runs out of money on or about December 25. After that Social Security goes back to regular old pay as you go financing, the way it was designed to work.

Because IN THE MEANWHILE life expectancy has been increasing, the disappearance of the Trust Fund will not cause, but will unmask, the need to increase the tax rate to pay for that increased life expectancy IF the workers of that time want to keep a replacement rate that reflects the INCREASE in their standard of living since the last time the tax rate was set. If they decide they will want to do this, the easiest and fairest way to accomplish it would be to start this year with a raise of forty cents per week, and to increase the tax another forty cents per week each year… while their wages will be increasing about eight dollars per week each year.

“is relatively easy to resolve.” Yes, of course it is. A tiny increase in the tax rate would do it. An increase so small no one would even notice it. But that’s not what the Journal means. They mean it would be relatively easy to cut benefits, or raise the retirement age, or “means test”. All of these would destroy Social Security and cause misery to hundreds of millions of people over time, but they would be “relatively easy” to enact.

“the political system is moving toward consensus,” With a billion dollars of Peterson money behind the “consensus” the political system is indeed moving. But this does not mean that “consensus” means either that honest people are realizing this is the best way, or that the people… as opposed to the politicians… are in favor of this. But, as the Journal knows, slip in the word “consensus” and readers will feel, if not think, that “everyone knows…and so it must be so.”

“Personal Social Security accounts are desirable,” This is almost “subliminally” slipped in. You won’t remember where you heard it, but “personal accounts are desirable” will stick in your brain unexamined. ARE personal (not private, of course, personal) accounts desirable? Well no. But you aren’t going to get to see an honest debate about that. You will just “believe “ it when the time comes. Personal accounts are not INSURANCE, which is what Social Security is. A personal account is exactly what the people had before the great depression taught them a lesson that no one alive now remembers very well. The depression taught people that some kind of retirement insurance was necessary to prevent very widespread poverty among people too old to work, or too old to be hired. With a personal account you might get a little richer than you will from the same money put into Social Security, or you might get a lot poorer. There is no reason you can’t have a personal account in addition to your Social Security insurance… but they don’t want you to think that.

“that doesn’t mean it makes sense to reject compromises that reduce future liabilities.” But “future liabilities” means “future benefits.” And just what is being compromised? You are saving yourself a forty cent tax increase for the “compromise” of getting benefits cut about 200 dollars a month at a time in your life when that will really hurt, or having two years added to the time you HAVE to work for the boss, even though you paid, or could have paid, for your own retirement. Note that no one is stopping you from working extra years if you want to. SS is insurance. It’s there in case you can’t work longer. Or don’t want to work longer…. remember, you paid for it.

“ Yet Mr. Gingrich proposes no such changes in his plan, “ Note that “compromises” has become “changes.” Benefit cuts. means testing. work, if you can find work, until you drop.

“ perhaps because they are politically unpopular.”. Yes, it would be a shame if the people were to be allowed to have their opinion heard. Much less be informed about what their choices are. You see, the only way we can save the country is to lie to the people and take away their right to save for their own retirement.

“such an abdication opens him up to charges that he’s not serious about reform and that he has no plan to pay for the transition costs of going to personal accounts “ Ah, there’s the rub. After the failure of he Bush “personal accounts” plan, the enemies realized they could could kill Social Security without incurring the “costs of transition.” Simply cut benefits, raise the retirement age, impose means testing… so that the program will no longer work as insurance sufficient to allow people to retire. This would force them to try to beat inflation and the markets on their own… without “the government” incurring any transition cost. A win win… for the people who hate Social Security.

“that is, when younger workers put their money in their own accounts, rather than funding current retirees.” And here is the father of lies. With Social Security workers already “put their money in their own accounts.” It happens that “pay as you go” DIRECTLY funds “current retirees.” But that doesn’t mean the workers are paying for someone else’s greedy granny. They are paying for their own retirement. Workers who “invest” in stocks and bonds are “funding current retirees”… who live off stock and bond returns. The only difference is that with Social Security the workers are guaranteed that their own retirement will be paid for when they need it.

 The United States of America has more assets than any stock or bond can claim to have. In the case of Social Security the “asset” is an infinite supply of new workers who need to save for their own retirement in the only plan that protects their savings from inflation and market losses, and certain kinds of personal misfortune. They no more..or less… “pay for” current retirees than an unending supply of new customers “pay for” the retirements of those who own the stocks and bonds issued by a corporatioin.

But you need to think. With SS you pay your insurance premium and a record of that payment is recorded in your name. When you come to retirement, the total of your contributions is automatically adjusted to equal the average growth in the economy, which includes both inflation and real growth in wages. Your benefit is calculated based on your adjusted contribution. It is “paid for” (directly) by the contributions of those still working… who will get the same good deal you are getting. But while they are “funding” the system, they are not “paying for” current retirees. The current retirees already paid for themselves. Current workers are paying for themselves.

Or they were until the enemies of Social Security came up with the truly brilliant plan of killing Social Security simply by giving the workers their savings back to fritter away. They promise to make up for your lost savings by borrowing the money and taxing the rich… turning Social Security into welfare as we knew it. Welfare is something they already know how to kill in the dark.

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Does Government Debt Impose a Burden on Future Generations/Periods/People? #12,143

I think (after a lot of effort) that I’ve internalized Nick Rowe’s modeling of this question (follow links from here) pretty well conceptually. His answer is Yes.

There have been thousands of posts and comments across the blogosphere since Nick took Krugman to task on the issue a couple of weeks ago, and Nick has been remarkably generous with his time in helping people understand his thinking. (A kudos also to Bob Murphy.) And it’s worth pointing out that Krugman hasn’t really responded to the core argument head-on. Feel free to follow the threads.

Here’s Nick’s model in brief, in my words:

Government borrowing/bond issuance today — considering only its costs, not the potential up/downsides of the associated spending — propagates incentives into the future, like waves are propagated when you throw a rock in a pool. Those incentives cause the old people in every period to consume more than the young people. In each future period, parents will eat some of their kids’ lunch.

Each generation consumes the same amount as they would have otherwise (because first you’re young, then you’re old, first you’re a child, then you’re a parent). But if government eventually has to tax to pay back the debt, the young people in that period are forced to consume less over their lifetimes, because they don’t get to eat their kids’ lunch.

(Nick acknowledges the point that Jamie Galbraith and others have been making for years: if the future GDP growth rate is higher than the interest rate, on average, the taxation never needs to happen, so the burden is never imposed.)

Here’s why I haven’t updated my priors much based on this thinking:

1. The wave model of propagated old/young bond-buying/spending patterns, extending to eternity, doesn’t seem plausible to me intuitively. It seems like the rock-in-the-pool ripples would probably flatten as they spread through time — maybe (?), as discussed in various posts and comment threads, because over the generations a certain percentage of parents bequeath their bonds to their children. That leaves us with “we’ll have to tax to pay for it eventually, so somebody will have to consume less,” which is pretty much where we started.

2. I wonder whether a real agent-based dynamic simulation modeling of Nick’s scenario, with continuous time and using differential equations, would give the same results. I’m not enough of a mathie to even guess, but I wouldn’t be surprised to see very different patterns and/or results.

3. The huge majority of government bonds are bought and traded not by people but by institutions (many of which — this seems significant — are licensed to create credit money and associated debt ex nihilo, and use government bonds as debt collateral in that process). Those institutions don’t have generations — birth/death, parents/children — and they don’t consume real goods (much). Again, my intuition tells me that these facts would bring complex dynamic interaction effects into play. While it might suffice to simplify by modeling things “as if” children were buying bonds from their parents, I don’t feel confident that that’s true.

4. The question Krugman was really asking, underlying his “is debt a future burden” locution, was: A. should we be taxing more or less? and B. should we be spending more or less? (Hence, should we be borrowing more or less?) Since I’d expect to see complex interaction effects from any of the four sources/uses choice combinations, isolating the question in this way seems like a questionable analytical technique. It’s kind of (not wanting to offend, can’t resist the word) petifogging. I’m not at all sure it provides useful information when divorced from the relevant context.

5. Semantics: assuming the model’s right, that we’re forcing a future generation of people to pay for their parents’ (our?) extra consumption — but not changing the amount that all future people will consume in toto — should we call that “a burden on future generations”? I’ll leave that to the philosophers.

I may (still) be displaying an inadequate understanding of the model in some points here, but I think there’s enough of merit above to discourage certainty — to question the ultimate utility of the model.

In short, if I was running a business of any size (yes: I have done so), with any decent amount of money on the line, I would 1. not give a huge amount of weight to the results of this model, and/or 2. be asking for a much more sophisticated analysis.

Which (#2) leaves us again where we were, wrestling with many/most of the big questions of growth macro.

So when Nick says “I thought we all had this debt burden stuff sorted out 30 years ago,” I agree. The answer was “maybe.” (Especially given the long-term historical reality of the Galbraithian scenario described above.) And in my mind it still is — with a little more weight on the “burden” side.

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Dahlia Lithwick looks at the judiciary system

Dahlia Lithwick writes about the masterful attention Republicans have given to the judicial system in  The Washington Monthly:

For anyone considering the 2012 election’s importance to the future of the American judiciary, one fact stands out: next November, Ruth Bader Ginsburg will be seventy-nine years old. If a Republican wins the presidential election, he or she may have an opportunity to seat Ginsburg’s successor, replacing the Supreme Court’s most reliably liberal jurist with a conservative. That would mean that the Court—currently balanced almost elegantly between four liberals, four conservatives, and the moderate conservative Anthony Kennedy—would finally tilt decisively to the right…Kennedy, who is ranked tenth in that study, will be seventy- six next November.

But it’s not just the Supreme Court that would tilt further right. The high court only hears seventy-some cases each year. The vast majority of disputes are resolved by the federal appellate courts, which are the last stop for almost every federal litigant in the country. And the one legacy of which George W. Bush can be most proud is his fundamental transformation of the lower federal judiciary—a change that happened almost completely undetected by the left

 Beverly Mann responds in an e-mail back to me after I sent her the link:

I love this article. My favorite paragraph is:

Why have the Republicans been so much more effective at dragging the judicial branch rightward than Democrats have been in yanking it back? Focus, mainly. Since the Meese revolution of the mid-1980s, the GOP has been better at constitutional messaging, better at mobilizing the electorate, and better at laying out a judicial vision than liberals, who still seem to believe that unless the Supreme Court overturns Roe v. Wade (or perhaps the Affordable Care Act), judges are not really a voting issue.

It’s dismayed and enraged me for years—at this point, decades—that most of the vocal left (the people who gain media attention) act as if the only legal issue of real importance is abortion rights. Okay, now some of them have added torture and Gitmo as issues important enough to mention, but that’s pretty much it. But actually, it would be hard at this point to even explain how deeply, how profoundly, how thoroughly, these judges and justices have changed the very system of law in this country, largely by simply routinely, categorically denying access to federal court, by erecting ever more unattainable, ridiculous, and complex procedural requirements to have a federal court decide a case “on the merits” rather than on a procedural issue—or by quietly denying meaningful court review if access is granted, by pretending to have granted it but by issuing a formulaic ruling making clear that what happened was that the outcome was never really at issue and that the excuses for it were filled in later.

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More Caution and Skepticism About Federal Mortgage “Investigation”

Yves Smith continues to follow the progress of investigations in  More Caution and Skepticism About Federal Mortgage “Investigation”

While a large number of “liberal” groups, ranging from the official Democratic party outlets (the Center for American Progress) to ones that sometimes cross swords with the Administration (MoveOn, the Working Families Party) praised the Tuesday evening announcement of mortgage “investigations” with Schneiderman co-chairing the effort, others who have been watching the mortgage legal fight closely were far more ambivalent about the creation of a new unit in an initiative …which has done pretty much nothing since its creation in 2009 (boldface mine):


Attorney General Eric Holder, Treasury Secretary Tim Geithner, Housing and Urban Development (HUD) Secretary Shaun Donovan, and Securities and Exchange Commission (SEC) Chairwoman Mary Schapiro today announced that President Barack Obama has established by Executive Order an interagency Financial Fraud Enforcement Task Force to strengthen efforts to combat financial crime. The Department of Justice will lead the task force and the Department of Treasury, HUD and the SEC will serve on the steering committee. The task force’s leadership, along with representatives from a broad range of federal agencies, regulatory authorities and inspectors general, will work with state and local partners to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, address discrimination in the lending and financial markets and recover proceeds for victims.
 …
 The Times identified the two red flags. First, why are the settlement talks still proceeding? This is ridiculous if the plan is to do investigations. The fact that they have not been halted calls this exercise into question. Second, if this is supposed to be a heavyweight investigation, why hasn’t Obama set up an independent prosecutor, a role much more likely to attract the sort of kick-ass litigator that the Times correctly thinks is necessary for the job?

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Twitter as the platform for elections

I want to point to John Cassidy’s notion in the New Yorker that Twitter could serve as an adequate platform for electioneering candidates…

…What if, rather than presenting a long and tedious speech that would constantly be interrupted by senators and congressmen mugging for the cameras, the President sat in the Oval Office, or anywhere, actually, and tapped out what he had to say in a hundred and forty characters?

Obviously tongue in cheek because twitter doesn’t include pictures and facial expressions…like watching John Boehner’s face behind the President.

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Obama’s State of the Union vs Romney’s Tax Returns

by Linda Beale

Obama’s State of the Union vs Romney’s Tax Returns

Obama took the high ground in his state of the union address, where he pointedly noted the importance of applying fair tax rules to ensure that millionaires pay taxes at rates more similar to those paid by secretaries and firefighters. He wants a 30% rate on those with incomes of a million or more.

We can either settle for a country where a shrinking number of people do really well, while a growing number of Americans barely get by,” Obama said in his address to a joint session of Congress. “Or we can restore an economy where everyone gets a fair shot, everyone does their fair share and everyone plays by the same set of rules.” STeven Sloan, Obama Says High-Earners Should Pay at least 30% of Income as Tax, Bloomberg.com, Jan 24, 2011.

That would mean that Romney wouldn’t enjoy the exceptionally low rate of tax he had in 2010 after Congress enacted Obama’s suggested reforms. Romney released his tax returns on Tuesday. See this handy link on the New York Times at which the 2010 and 2011 returns and accompanying documents are available, including links showing where Romney earned his $528,871 in speaking fees, etc.. Romney paid only 13.9% on $21.6 million of income, benefitting enormously from the low preferential capital gains rate of 15% that he paid on his returns from his investment of capital. Romney benefitted, too, from investments in the Cayman Islands, a well-known tax haven. And he is still earning “carried interest” from Bain Capital to the tune of multiple millions a year–that’s a share of the profits of a partnership he managed, treated as though it were a return on an investment of capital though it is paid for services. Romney is most definitely one of the 1%–actually in an even more rarefied class cluster of the top 0.006% of multimillionaires with lots of very low taxed income. See Kevin McCoy, Romney tax returns show he’s no average multipmillionaire, USA Today (Jan. 24, 2011) (noting that only 8274 returns out of 140 million filed had income of $10 million or more in 2009); Lori Montgomery et al, Mitt Romney’s Tax Returns shed some light on his investment wealth, Washington Post (Jan. 24, 2012); Nicholas Confessore, Romney’s Tax Returns Show $21.6 Million Income in ’10, New York Times (Jan. 24, 2012).

As the Times story puts it:

What Mr. Romney’s returns illustrated, instead, was the array of perfectly ordinary ways in which the United States tax code confers advantages on the rich, allowing Mr. Romney to amass wealth under rules very different from those faced by most Americans who take home a paycheck.

Obama’s proposals sound reasonable. But I’d extend the basic concepts to the corporate tax. Every corporation that is making book profits of more than some amount ($5 million? $10 million) ought to be held to a similar minimum tax rate on those book profits.

Funny, that is what the original Alternative Minimum Tax (for individuals, and one for corporations) was supposed to achieve–to ensure that everybody paid at least a reasonable rate on their income, even if they could cumulate lots of preferences like mortgage interest deductions, state income taxes, property taxes, and similar deductions. Over time, the AMT has eroded–too many exceptions made, too many taxpayer friendly amendments, and then the Bush tax cut bills that lowered rates so that the AMT rates aren’t really working well as a “broader base but lower rate” tax that ensures that even high-flying income recipients pay a more reasonable tax rate on their income.
http://ataxingmatter.blogs.com/tax/2012/01/obamas-state-of-the-union-vs-romneys-tax-returns.htm

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Japan’s Lopsided Financial Balances

by Rebecca Wilder

Japan’s Lopsided Financial Balances

Tim Duy and Paul Krugman discuss the merits and failures of Japanese policy. The sectoral snapshot of the economic financial balances shows that Japanese policy was indeed a success but also a failure.

First, policy was a success, given the private sector was recuperating from the bursting of a credit and investment bubble.

The chart below illustrates the 3-sector financial balances model – read Scott Fullwiler on New Economic Perspectives for a detailed description of the 3-sector financial balances model. According to this identity, the capital account plus government net saving plus private net saving must equal zero. For a given level of the capital account (Japan’s capital account has been quite stable over the years), when the private sector increases net saving, aggregate demand declines and government net saving declines.

In the early 1990s, all sectors were roughly in balance. However, since then government debt surged in response to a like rise in the private sector desire to save. One could argue that the government deficits and accumulated debts were indeed required, hailing the government’s actions a policy success. However, I contend that this has been a missed policy opportunity rather than overall succes
es.


The second chart illustrates the same financial balances model, but broken down into 4 sectors: the capital account plus government net saving plus household net saving plus corporate net saving must equal zero – household plus corporate net saving equals private net saving in the chart above.
Household net saving has steadily declined with the ageing population. But the corporate saving rate has been positive every year since 1996, offsetting the stimulating effect an ageing population could have on domestic demand. So here’s the policy failure: the government missed the opportunity for structural reform targeted at the corporate saving rate.

Had the government created incentives for a reduction in the corporate saving rate, the returns could have/would have been filtered back into the domestic economy. Now they’re in a state of panic, watching the European debt crisis with an anxious eye. Why else would Noda be pushing so hard for a new tax?

Martin Wolf commented on this one year ago:

Japan’s aim now must be to achieve domestically driven growth. The most important requirement is a big reduction in corporate saving. Mr Smithers argues that this will happen naturally, since savings are largely capital consumption, itself the product of the history of excessive investment. I would add that if ever an economy needed a market in corporate control, to shift cash out of the hands of sleepy managements, Japan is it. Not being beholden to Japan’s corporate establishment, the new government should adopt policies that would change corporate behaviour, at last.

As with all credit cycles, the burden of debt falls on the government as the private sector recoups. However, in Japan’s case the government missed a great opportunity for structural reform before the crash associated with credit cycles in other major developed economies (the USA).

originally published at The Wilder View…Economonitors

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Gingrich’s 2010 Tax Return: what it does (and doesn’t) tell us

by Linda Beale

Gingrich’s 2010 Tax Return: what it does (and doesn’t) tell us

In last Thursday’s debate, Newt Gingrich released his 2010 Gingrich Foundation tax return and the Gingrich Joint Tax return. See Kim Dixon & Marcus Stern, Gingrich tax return out, but much remains unseen, Reuters (Jan. 20, 2012); Paul West, Gingrich tax return details sources of income, alimony payment, L.A. Times (Jan. 19, 2012); Jon Ward, Newt Gingrich Releases His Tax Returns, Huffington Post (Jan. 19, 2012; updated Jan. 20, 2012) (the Gingrich press release, with links to both returns, is also accessible from a link at bottom of this brief article).

The private foundation’s return lists Callista Gingrich (presumably in her role as President) as having custody of the books at the Foundation’s address in Washington. It lists Newt Gingrich as the only manager who contributed more than 2% of the contributions received during the year, and another form (Schedule B) lists Gingrich Holdings as the contributor of $152,609. Callista Gingrich is listed as the president (with zero compensation) and Newt Gingrich as a board member (with no compensation). A treasurer is listed with $1800 of compensation, a secretary with no compensation, and two other uncompensated board memberes.


 The Foundation supported the following organizations with a total of $120,000: Mount Vernon Association, Basilica of the National Shrine, Shiloh Point Elementary in Cumming GA, Amerivan Museum of Natural History in New York, The Washington Opera, The Atlanta Ballet, A Learning Foundation inAtlanta, the Arthritis Foundation, Mount Paran Christian School in Kennesaw GA, the Walker School in Marietta GA, Luther College in Decorah IA, Susan Chambers Dance in Sugar Hill GA, Breast Cancer Research in New York, and Alzheimer’s Association in Washington.
The joint tax return shows income in 2010 of more than $3 million, with about $450,000 in compensation income and about $2.5 million of Schedule E income through his S corporations Gingrich Holdings inc and Lubbers Agency Inc. and partnerships Draper Fisher Jurvetson Fund VIII and FLC XXXII Partnership LP. (He apparently restructured these businesses before entering into the Republican nomination contest, perhaps foreseeing better than Mitt Romney did that voters might react to the very idea of a giant holding company through which one receives one wealth.) The Salaries and Wages report shows that $450,000 in compensation income arising as follows: 252,500 in wages to Newt from Gingrich Holdings, Inc., and to Callista 5918 from National Shrine and 191,827 from Gingrich Productions, Inc. According to the Reuters story, Gingrich’s earlier disclosure said the Gingrich Holding income was mostly a distributive share (the tax term for a pass-through payment from an entity taxed as a partnership) from Gingrich Productions. His Schedule SE shows only 847 of self-employment taxes in connection with the various schedule C, K-1 etc. income, while Callista’s shows 268.

Also revealed on the tax return are the following: $41,625 in speaking and board of director fees (showed as business income on line 12), $6,853 in rental income, $26,655 in taxable interest, $11,892 in ordinary dividends (not eligible for the 15% net capital gain rate), $5,990 in qualified dividends (eligible for the 15% net capital gain rate), $4,184 in net short-term capital gains and $32,133 net long term capital losses and $33,124 of taxable refunds, credits or offsets for state and local income taxes The couple claimed a total itemized deduction of $215,095. They made $81,133 in contributions to various charities and paid $122,844 in state and local income taxes, $11,656 in real property taxes, and $2,422 in personal property taxes, as well as 8505 in tax preparation fees. They also enjoyed $10,754 of tax-exempt interest (not part of their taxable income). The Gingrich couple paid almost a million in taxes, giving them an effective tax rate on the 3.1 million of income of around 31%.

  • Re those net short term capital gains: Gingrich bought and sold shares in Campbell Soup in 2010 (losing 74), bought shares in Celgene Corp in 2009 and sold them in 2010 (making 2591), sold in 2010 shares in American Funds Capital bought at various times, for a 346 gain, and similarly sold shares in Nuveen High Yield fo a 1225 gain.
  • Re those net long term capital losses: Gingrich sold shares bought at various times of Martek Bioscience, American Funds capital, Ishares Trust s&P smallcap 600 and Ishares Trust Russell 1000 Value, which combined with the long-term totals from Schedule D-1 of 1.023 million (from sales of various funds and closing out of $600,000 worth of CDs) yielded an aggregate of 1.257 million with a claimed loss of $35,636. Using his capital gain distribution from Schedule D-1 of 1018, that left a net LTCL of 32,541.

There are several things worth noting about Gingrich’s release of the couple’s tax information.
1) this is only a single year’s return–2010. George Romney, Mitt’s father, famously began the more transparent information sharing about presidential candidates by releasing 12 years’ of his own tax returns. Gingrich should follow that example, even if Mitt isn’t sure he will. Multi-year returns are necessary for tax experts to even begin to pierce the veil of tax secrecy by seeing trends and patterns in types of income. One year of returns tells you very little. Gingrich should release returns back to his volatile period in Congress and his scuffle with the ethics inquiry, and should release returns relating to the period when he earned what he calls “consulting” fees based on his being a “historian” for Freddie Mac (see item 3).

2) we don’t have tax returns for Gingrich Holdings or Gingrich Productions, or even the informative financial statements that publicly traded companies are required to provide. Those privately held corporations are therefore able to function as “blockers” to maintain a good deal of secrecy about Gingrich’s own income even with the release of his return. Back before Nixon, corporate tax returns were public information and were not kept secret by the Service. We should go back to that, because corporations, whether publicly traded or held privately, are benefitting from the public trust and the state’s willingness to allow them to form. There seems to be little justification for maintaining any business entity returns as confidential documents, with some redaction allowed to maintain trade secrets. But until we do, we won’t know anything more than what Gingrich tells us (or reporters can get “deep throat” sources to divulge).

3) Gingrich’s return labels him a “consultant” but we know very little about his client list or his activities for his clients. We know he worked for Freddie Mac: he claims he wasn’t a lobbyist but that is a hard one to swallow whole. It is difficult to imagine Freddie Mac paying the consummate politician as though he were a mere historian doing historical research but it is very easy to imagine Freddie Mac paying a well-connected lobbyist, shoes that Gingrich’s role as House Speaker ensures that he would have fit into easily. We know that he worked as a “consultant” during the passage of the Medicare Part D prescription drug provision. Again, that sounds more like lobbying than “consulting”. The problem is that Washington has written weasel rules for lawmakers who “consult” so that they can claim they are not “technically” a lobbyist, as Gingrich is doing. But voters should want to see what kinds of reports he provided on the Medicare and Freddie Mac issues, as Romney is insisting. Otherwise, he is just hiding behind the very thin curtain of the fuzzy line between obvious lobbying and “not required to register-wink/wink lobbying”.

4) Congressmen pay themselves nice little pensions even while the GOP is making an ideology out of its desire to cut private pension benefits for unionized workers (in the name of ‘saving’ business but really in the name of passing along even higher profits to managers and owners) and its intention of “reforming” Social Security (meaning leaving beneficiaries who depend on this system that they’ve paid into all their lives with less money than they should be able to have). Gingrich’s return reports more than $76,000 in 2010 from his Congressional pension.

originally published at ataxingmatter

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Financial Markets Are the Real Barter Economy

As (mis)conceived by most economists, money (which they confute here with currency) emerged as a solution to the time problem of barter economies: my spinach is ready now, but your apples won’t be ripe for months. How can we trade? Answer: you give me money for my spinach, and I give it back to you later for your apples.

That armchair-sourced fairy tale has been resoundingly debunked — that’s not how money (or even currency) emerged, and the Adam Smithian butcher/baker barter-exchange economy has never existed. Credit money — first embodied in tally marks on clay tablets — emerged and was in widespread use a couple of thousand years before coinage was invented (the latter largely to pay soldiers, whose itinerancy makes other methods problematic).
But the notion of barter economies lives on.

The whole system of national accounts (the NIPAs), in fact, was constructed by Simon Kuznets and company in the 30s as if we lived in a barter economy — with money being merely a time-shifting convenience, and with no accounting for financial assets at all. That accounting was only added a decade or so later, with publication of the Fed Flow of Funds accounts.

I’d like to suggest that this barter model for the real economy results in a great deal of confusion — including (especially?) among economists — largely because the NIPAs don’t usefully model the distinction between saving wheat (which can be consumed) and “saving” money (which can’t). By “useful” I mean “conceptually tractable, subject to consideration without logical error.”
I’m asserting that the barter model of the real economy results in lots of confusion and logical error. Viz: careful economic thinkers like Nick Rowe, Scott Sumner, and Andy Harless feeling the need/inclination to write lengthy think-pieces on that nature of “S.” Or the widespread misconception that “saving” (by whatever definition) “creates” “loanable funds.”

I’d even go so far as to say that those barter-model-induced logical errors pervade most thinking about economies and economics, both among economists and among the laity.
However: If you want to see a market that does operate as a barter economy, look no further than the market for financial assets. In this market, you trade your checking-account or money-market deposits for shares of Apple stock. Somebody else makes the opposite trade. The transaction is mutual and (effectively) instantaneous and simultaneous. It’s a barter.

In a very real and very counterintuitive sense, there is no money exchange in the financial markets. There are just barter swaps of financial assets.


A proleptic response to inevitable objections, and a definition of terms:
1. By “financial asset” I mean something that has exchange value — somebody will give you something in exchange for it — but that cannot be consumed (directly or through use or time/natural decay/obsolescence), providing actual human value — “utility” — in the process. (Things that can be so consumed, and do provide human utility — and derive their perceived value from that utility — are real goods/assets.)

2. “Money,” then, would be that exchange value as embodied (or metaphorically “stored”) in financial assets. Money cannot, in fact, even exist except as it is so embodied. Financial assets are money’s sines qua non – the things without which it does not exist.
Those financial assets (and the money they embody) can be tallied — represented — on clay tablets or in electronic accounting systems, in mental accounting ledgers (“You owe me”), or in physically exchangeable representations of those ledger tallies, such as dollar bills or stock certificates.
By this definition, a dollar bill or a deposit in a checking account is a financial asset, just as much as a share of stock or a government bond is. Which means that all exchanges of financial assets are swaps. Trades. Barters.

Exchanges for real goods, however, are different. When you buy or sell a real good, money (embodied in a financial asset) moves from one account to another, and — this is key — doesn’t disappear. It keeps getting passed on, exchanged. Real goods move the other way, and do disappear. You’re trading something that only has exchange value for something that can — will – be consumed. Conceptually: Financial assets travel in circles. Real goods travel in one direction only: from birth to death, production to consumption.

A physical metaphor may help: think of the financial system (including physical currency transactions) as a giant wheel, pushing along a conveyor belt of real goods.
But economists try to think about/model these very different situations as identical — as if “money” were being exchanged for bonds (and implicitly, as if those bonds will eventually be “consumed”). Since (mental) models for barter economies must be structured very differently from models for monetary economies,* modeling both of these as the same is problematic, confusing, and productive of logical errors — and perhaps even just plain wrong.

The gist of this thinking is not new — much of it reflects ideas floated long ago by circuitists, chartalists, modern monetary theorists, and other such (g)ists. But I’m hoping the formulation as presented here may be useful to others, as it is to me, in 1. forming mental/conceptual models of how economies work, and 2. evaluating the models bruited by others — notably the inherent validity of their underlying and often unstated assumptions.

I would point out in particular that as with my discussion here, the accounting-based modeling approach of Wynne Godley (and his predecessors, successors, collaborators, and parallel travelers) begins not where Kuznets did — with the interchange of real goods and services — but with the nuts and bolts of financial accounting. This approach imposes logical constraints on economists’ reasoning, constraints that seem sadly lacking in much barter-economy thinking.
As Godley says in the conclusion to his seminal paper:

In contrast to the standard textbook methodology, which starts by making very strong behavioural assumptions based on no empirical evidence at all (for example regarding the shape and role of an aggregate neo-classical production function), [this methodology suggests that] a different paradigm is indicated in which knowledge is gradually built up by empirical study, within the formidable constraints imposed by double entry accounting.

I’m not saying it’s impossible to think logically and coherently using the NIPA/Flow of Funds economic model, with the (confusing) barter and savings models embodied in the NIPAs. I’m saying it’s very difficult — especially since economists aren’t trained in financial accounting — and that as a result logical failures are widespread.

* Nick Rowe quoting Clower: “Hang on. In a Walrasian economy there is one big market where all n goods are exchanged; in a barter economy there are (n-1)n/2 markets where 2 goods are exchanged; and in a monetary economy there are (n-1) markets where 2 goods are exchanged, one of which is money.”
Cross-posted at Asymptosis.

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