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

The 1912 Bread and Roses Strike

The 1912 Bread and Roses Strike

Elizabeth Warren made an impressive speech just now in the freezing cold of Lawrence, Massachusetts:

Sen. Elizabeth Warren officially launched her 2020 presidential campaign Saturday at a rally in Lawrence, Massachusetts, using the backdrop of Everett Mills — the site of a historic 1912 labor strike led by women and immigrants — to issue a call to action against wealthy power brokers who “have been waging class warfare against hardworking people for decades.” Over 44 minutes in sub-freezing temperatures, Warren described a political elite “bought off” and “bullied” by corporate giants, and a middle class squeezed so tight it “can barely breathe.” “The man in the White House is not the cause of what is broken, he is just the latest and most extreme symptom of what’s gone wrong in America,” Warren said of President Donald Trump. “A product of a rigged system that props up the rich and powerful and kicks dirt on everyone else. So once he’s gone, we can’t pretend that none of this ever happened.”

Warren has staked herself as the true progressive in terms of those who have already announced. I’m sure many others will comment on the specifics of her speech so let me note this 1912 strike:

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Value of the Chrysler Building and California Property Taxes

Value of the Chrysler Building and California Property Taxes

The big news in New York City is that the Chrysler Building is for sale:

New York City’s iconic Chrysler Building has appeared in dozens of movies and remained an Art Deco jewel of the Manhattan skyline for decades. Now, the 89-year-old skyscraper can be yours. Located on 42nd Street just east of Grand Central Terminal, sale price estimates for the famed Chrysler Building vary, but its majority owners, the Abu Dhabi Investment Council, hope to recoup the $800 million it paid for their stake of the building back in 2008.

They hope but some think the building might go for as little as $650 million and that does not cover the value of the land:

the land beneath the building is owned by New York’s Cooper Union School and the lease last year came to $32.5 million.

If we assume a 5% discount rate, the present value of annual lease payments like these might be another $650 million if one wants to know the value of the land and the building. But is it reasonable to assume a 5% discount rate? Let’s return to this after noting some grumpiness from John Cochrane towards something Paul Krugman wrote:

I try very hard not to get in to the business of rebutting Paul Krugman’s various outrages. The article “The Economics of Soaking the Rich” merits an exception. I will ignore the snark, the… distoritions, the … untruths, the attack by inventing evil motive, the demonization of anything starting with the letter R, and focus on the central economic points … Diamond and Saez made a big splash precisely because their estimates were so novel and so much higher than the prevailing consensus. For example, Greg Mankiw, also a previous CEA chair, and not a fraud, writing the excellent “Optimal Taxation in Theory and Practice” in the Journal of Economic Perspectives … Krugman and company are proposing a 70% top federal rate on top of all the others, which is … a bit deceptive relative to the 70% total marginal tax rate even in his cherry-picked sources.

OK – I cherry picked much of this rant so read the entire long winded thing for yourself. Optimal taxation is indeed a controversial topic and I applaud the notion that we should go beyond Federal taxation. Can someone tell Mankiw that before his next oped on how progressive the Federal tax system is? Cochrane followed this by some claim that we should include property taxes in the calculus of calculating the marginal tax on income:

How much is the property tax? In Calfornia, we pay 1% per year. That doesn’t seem bad, except that property values are very high. You can’t get a tear-down in Palo Alto for under $2 million. If you buy a house that costs 5 times your income — say someone earning $200,000 per year buying a $1 million house — then that is equivalent to 5 percentage points additional income tax. On top of 42% federal, 13.2% state, 9% sales, and other taxes, it’s part of my view that we’re past 70% top marginal rate now.

Maybe it is because so many of us in New York City choose to pay rents but adding the tax on property to the tax on income strikes me as odd. I’ll leave to others to weigh on this debate but I would be amiss if I did not note Peter Dorman’s latest post:

In the world of urban politics, there is probably no more potent populist rallying cry than the demand to halt gentrification. Activists have fought it on multiple fronts: zoning, development subsidies, permitting, rent control—every lever housing policies afford. But what if they’re mistaking cause for effect, hacking away at the visible manifestations of the problem while leaving the problem itself intact? Pivot to an important article in today’s New York Times, reporting on recent research David Autor of MIT presented at the economics meetings in Atlanta earlier this month.

Cochrane had an odd calculation of the present value of property taxes:

A 1% property tax at a 1% interest rate is equivalent to a 100% tax on houses. That $1,000,000 house is really going to cost you $2,000,000!

Wait, wait – I’m assuming a 5% discount rate and he assumes a 1% discount rate? OK, he continues:

What is the right rate? We can have a lot of fun with that one. The current 30 year TIPS (inflation indexed) rate is 1.19%. The 30 year nominal Treasury rate is 2.97%. In California, under Proposition 13, you pay 1% of the actual purchase price per year, but that quantity never increases. (This fact results in the paradox of extremely high property taxes on new purchasers, older people staying in huge old houses, and low property tax revenues.) So you might say that the nominal rate applies.

You might say? If the nominal cash flow is not indexed, then you should use the nominal risk-free rate as your starting point. So I started with a 3% rate and then added 2% more. Why the extra 2% you ask? Well I have read the seminal paper on leasing by Merton Miller and Charles Upton that note we should add a premium for bearing the risk of obsolescence. A lot of research would put that premium at 2% but I guess Cochrane wants to pretend owners of property should discount cash flows at the risk-free rate, which reminds me of that book by James Glassman and Kevin Hassett entitled DOW 36000. Never mind having fun with the appropriate discount rate – who did Cochrane rely on when teaching his students finance – Glassman & Hassett or Merton Miller?

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Real Military Pay

Real Military Pay

Donald Trump lies about everything including military pay:

Trump Brags To Troops About A Fictional Giant Pay Raise He Got Them – The president told military personnel in Iraq that they’ll get a raise of over 10 percent, their first in a decade. But it’s 2.6 percent, and they get a hike every year.

Dave Jamieson even notes that Bill Kristol has called out Trump on this whopper. But to me this is not the story. The real story is that Trump thinks our troops are stupid. As I read this sad account, I thought of a classic paper by Robert Lucas on the role of monetary policy in the New Classical model. Lucas postulated several island economies each with one individual who observes his own wage but not the general price level. Business cycles were generated by unexpected changes in the money supply which drives up everyone’s wages but people have yet to catch on to the fact that the general price index had also increased. I always found this an odd way of explaining persistent changes in output since most people shop at least on a weekly basis. But maybe the soldiers during the Vietnam War did not know their at home spouse and kids were facing higher grocery prices. But with the internet and advance telecommunications, this story is not tenable today even for our soldiers overseas. Dave links to this informative source:

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Taxes Up 30%!

Taxes Up 30%!

A couple of months ago yours truly complained a bit about some fiscal dishonesty coming from Team Trump:

He was basically lying to us hoping the public would be too stupid to realize that when the price level rose by 2.5% during the same period, we are talking about a 2% real decrease in tax revenues.

But if we look at customs duties we do see an increase in a category that represents a very modest part of Federal tax collections. Back in the 3rd quarter of 2017, these collections were a mere $38,428 million but by the 3rd quarter of 2018, they had risen to $51,383 million. A 33.7% nominal increase in a year represents a 31% real increase. Team Trump take a bow! Of course this is not only an inefficient means of collecting taxes but also one likely to hit the average Joe the most. It is also a drop in the bucket and pales to the reduction in real tax revenues from that income tax giveaway to the well to do.

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Rah Rah Economics

Rah Rah Economics

Greg Mankiw read Trumponics by Art Laffer and Stephen Moore so we don’t have to:

When economists write, they can decide among three possible voices to convey their message. The choice is crucial, because it affects how readers receive their work. The first voice might be called the textbook authority. Here, economists act as ambassadors for their profession. They faithfully present the wide range of views professional economists hold, acknowledging the pros and cons of each … The second voice is that of the nuanced advocate. In this case, economists advance a point of view while recognizing the diversity of thought among reasonable people … The third voice is that of the rah-rah partisan. Rah-rah partisans do not build their analysis on the foundation of professional consensus or serious studies from peer-reviewed journals. They deny that people who disagree with them may have some logical points and that there may be weaknesses in their own arguments. In their view, the world is simple, and the opposition is just wrong, wrong, wrong. Rah-rah partisans do not aim to persuade the undecided. They aim to rally the faithful.

Guess which voice Laffer and Moore used throughout their book. While I appreciate Mankiw’s three categories – one has to wonder how we should place some of the over the top arguments for the 2017 tax cut by Republican economists not in this White House. Mankiw to his credit writes:

 

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Kevin Hassett and Irwin Steltzer Join in on the Fiscal Dishonesty

Kevin Hassett and Irwin Steltzer Join in on the Fiscal Dishonesty

Brad DeLong is annoyed at the latest from Irwin Stelzer:

Hassett and others in the administration point out that despite a hefty reduction in the corporate tax rate from 35 percent to 21 percent, government revenues rose by $3.3 trillion in the fiscal year just ended. In part this is because the economy is growing at around a 4 percent rate in response to the tax cuts and to a revival of animal spirits as entrepreneurs and corporate chieftains wake up in the morning wondering not what the government is going to do to them, but what it might do for them. So Trump may yet be proven right. And if that proof does not emerge by 2020, he an always blame the Fed. The problem, says Trump, is that spending rose even more, by $4.1 trillion.

Hassett is lying but let’s note so are the OMB Director and the Treasury Secretary as well as Speaker Paul Ryan:

He was basically lying to us hoping the public would be too stupid to realize that when the price level rose by 2.5% during the same period, we are talking about a 2% real decrease in tax revenues.

Yes nominal government spending rose by 3.2%, which represents only a 0.7% real increase. Spending and revenues both fell relative to GDP. Brad correctly notes:

his claim that under Trump economic growth is “around… 4%”. It is not. GDP growth under Trump has been and is widely projected to be roughly 2.7% per year, not “around… 4%”. Irwin Stelzer is a liar. Liars are not worth reading.

While true – Trump’s entire economic team has been lying but quoting nominal changes rather than real changes. So maybe Stelzer was talking about the increase in nominal GDP. Yes – that is dishonest but hey – everyone on Team Trump is doing this.

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Fiscal Dishonesty from Paul Ryan (Surprise!)

Fiscal Dishonesty from Paul Ryan (Surprise!)

We earlier noted that when our Treasury Secretary wrote this:

Government receipts totaled $3,329 billion in FY 2018. This was $14 billion higher than in FY 2017, an increase of 0.4 percent…Outlays were $4,108 billion, $127 billion above those in FY 2017, a 3.2 percent increase.

He was basically lying to us hoping the public would be too stupid to realize that when the price level rose by 2.5% during the same period, we are talking about a 2% real decrease in tax revenues. And it seems that some nitwit at CNBC was indeed that stupid. Yesterday I endured an appearance by Paul Ryan on CBS This Morning. No surprise that this dishonest weasel repeated the same lie:

Revenues are up this year. Believe it or not, we cut taxes at the beginning of the year, and we have higher revenues this year. Why do we have higher revenues? Because we have faster economic growth, higher wages, more taxes are coming into the government.

But let’s give credit to John Dickerson for calling Ryan on this intellectual garbage:

Dickerson pushed back, pointing out that when you account for inflation, some of the revenues from the previous tax policy, and the revenue that would increase from population, the revenues are lower than they should be.

I would say Dickerson nailed this liar but how did Ryan respond?

Let me just say it this way. We cut taxes and we have higher revenues coming into the government today still.

Got that? He just repeated his debunked lie. After all Paul Ryan has such total disdain for the public that he simply doubled down on this incredibly stupid dishonesty.

 

 

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Fiscal Dishonesty from CNBC and Our Treasury Secretary

Fiscal Dishonesty from CNBC and Our Treasury Secretary

Is Jacob Pramuk on the White House payroll?

US budget deficit expands to $779 billion in fiscal 2018 as spending surges. The federal budget deficit rose 17 percent in fiscal 2018, according to the Trump administration. Spending jumped, and revenue only increased slightly following the GOP tax cuts. The Trump administration has pushed for dramatic budget cuts at several agencies and supported massive increases in military spending.

And that was just his headlines!

The deficit increased by $70 billion less than anticipated in a report published in July, according to the two officials. Federal revenue rose only slightly, by $14 billion after Republicans chopped tax rates for corporations and most individuals. Outlays climbed by $127 billion, or 3.2 percent.

He is getting his numbers from this report:

Government receipts totaled $3,329 billion in FY 2018. This was $14 billion higher than in FY 2017, an increase of 0.4 percent…Outlays were $4,108 billion, $127 billion above those in FY 2017, a 3.2 percent increase.

I have skipped the chest thumbing about the economy from Mnuchin and Mulvaney to focus on the stupidity ala CNBC. Real government spending barely kept pace with inflation, which is why outlays relative to GDP fell from 20.7% to 20.3%. Real tax revenues clearly fell in absolute terms and as a percent of GDP went from 17.2% to 16.5%. I guess this is what one gets when one lets Lawrence Kudlow become a chief economic adviser. But this kind of dishonesty is well known ever since Kudlow and his ilk tried to pull this intellectual garbage in the 1980’s. Does anyone at CNBC not realize the Trump White House is playing the same games with numbers? Never mind that the Treasury Department has decided to lead the way on some good old fashion rightwing nonsense.

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U.S. Saudi Trade

U.S. Saudi Trade

Donald Trump appears to be reluctant to investigate the murder of Jamal Khashoggibecause of an alleged trade deal?

Donald Trump has said US investigators are looking into how Jamal Khashoggi vanished at the Saudi consulate in Istanbul, but made clear that whatever the outcome, the US would not forgo lucrative arms deals with Riyadh. The president’s announcement raised concerns of a cover-up of evidence implicating Saudi Arabia’s powerful crown prince, Mohammed bin Salman, in plans to silence the dissident journalist…Any sense that the administration might seek to impose serious consequences on Saudi Arabia was dispelled by the president. Asked at an impromptu press conference in the Oval Office whether the US would cut arms sales if the Saudi government was found to be responsible for Khashoggi’s disappearance, the president demurred, saying the US could lose its share of the huge Saudi arms market to Russia or China. In the Oval Office Trump pointed out that the disappearance took place in Turkey and that Khashoggi was not a US citizen.

He may not be a citizen but he did hold a green card and worked for the Washington Post. Credit to the Republicans in Congress for pressing on the appropriate investigation of this matter. My only comment today will be to challenge Trump’s argument that our trade with Saudi Arabia is more important than sanctioning the Saudi government for this murder likely ordered by Mohammed bin Salman. The Census Bureau reports on both our imports from Saudi Arabia and our exports to them. Over the last decade, imports have varied from less than $17 billion per year to over $55 billion. These imports are predominantly been oil of course. Exports have never reached $20 billion per year so we have run persistent and sometimes large deficits with the Saudis. In Trumpian “logic” – aren’t we losing to them? To be fair, we choose to import Saudi oil but then again, the kingdom is not the only supplier of this commodity. But Trump is telling us that we may have yuuuge exports of military goods:

I know they’re [Senators] talking about different kinds of sanctions, but they’re [Saudi Arabia] spending $110 billion on military equipment and on things that create jobs, like jobs and others for this country. I don’t like the concept of stopping an investment of $110 billion into the United States.

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The Susan Collins Excuse

The Susan Collins Excuse

I listened very carefully to Senator Collins as she detailed her excuses for letting Brett Kavanaugh become a Supreme Court Justice. Two aspects of her speech were particularly absurd and kind of appalling. Her claims that Kavanaugh is a moderate akin to Justice Stevens were beyond absurd. The most appalling aspect of her speech was how she dismissed the claims that Kavanaugh sexually abused women in high school and/or college:

Some of the allegations levied against Judge Kavanaugh illustrate why the presumption of innocence is so important. I am thinking in particular not at the allegations raised by professor Ford, but of the allegations that when he was a teenager Judge Kavanaugh drugged multiple girls and used their weakened state to facility gang rape. This outlandish allegation was put forth without any credible supporting evidence and simply parroted public statements of others. That’s such an allegation can find its way into the Supreme Court confirmation process is a stark reminder about why the presumption of innocence is so ingrained in our a American consciousness. Mr. President, I listened carefully to Christine Blasey Ford’s testimony before the Judiciary Committee. I found her testimony to be sincere, painful, and compelling. I believe that she is a survivor of a sexual assault and that this trauma has upended her life.

She believes Dr. Ford but then she went on and on like a defense attorney why she did not believe her when she clearly said it was Kavanaugh. But the real stunner was when she said this:

I do not believe that the claims such as these need to be proved beyond a reasonable doubt. Nevertheless, fairness would dictate that the claims at least should meet a threshold of more likely than not as our standard. The facts presented do not mean that Professor Ford was not sexually assaulted that night or at some other time, but they do lead more to conclude that the allegations fail to meet the more likely than not standard.

I guess “the facts presented” is the key aspect as we know the FBI was not allowed to pursue corroborating evidence, which is why this episode is clearly absurd. But does Senator Collins truly grasp this more likely than not concept? I’m an economist not a lawyer but I have worked with tax attorneys and accountants on the transfer pricing aspects of tax provisions under FIN 48:

Under the Interpretation, absent the existence of a widely understood administrative practice and precedent of the taxing authority, an enterprise cannot recognize a tax benefit in its financial statements unless it concludes that it is more likely than not that the benefit will be sustained on audit by the taxing authority, based solely on the technical merits of the associated tax position. In this evaluation, an enterprise must assume that the position (1) will be examined by a taxing authority that has full knowledge of all relevant information and (2) will be resolved in the court of last resort.

Let’s key in on “full knowledge of all relevant information”. I have seen multinationals trying to convince financial auditors not to impose tax reserves based on some suspect report that key intercompany prices are arm’s length and where material information was not disclosed. In my experience, the financial auditors would refuse to give FIN 48 clearance until this information was disclosed and properly evaluated. It is well known that the latest FBI inquiry literally ran away from material information that may have corroborated Dr. Ford’s testimony. So when Senator Collins raises this More Likely Than Not standard – she should know better given the fact relevant information was not properly explored. Nicole Belle makes a strong case that the Republicans even knew ahead of time that Dr. Ford’s allegations are true:

Don’t Kid Yourself. The GOP KNOWS Kavanaugh Tried To Rape Someone … The FBI notifies the White House of the letter to see if they want follow-up. The White House declines further investigation. But now they know. And now they pass it on to GOP operatives. Early August. So now, Kavanaugh, the FBI, the White House AND GOP operatives all know. BEFORE the hearing even begins. So now the PR campaign goes into overdrive.

Read the entire thing as it explains a lot of the Republican fake anger at Senator Feinstein, which was all a gigantic smoke screen to disguise the fact that the Republican operatives were doing all they could to demean Dr. Ford, pump up Kavanaugh, and evade any real investigation. Senator Collins little More Likely Than Not sort of puts this in the domain of civil litigation rather than criminal charges where the standard is:

preponderance of the evidence – n. the greater weight of the evidence required in a civil (non-criminal) lawsuit for the trier of fact (jury or judge without a jury) to decide in favor of one side or the other. This preponderance is based on the more convincing evidence and its probable truth or accuracy, and not on the amount of evidence. Thus, one clearly knowledgeable witness may provide a preponderance of evidence over a dozen witnesses with hazy testimony, or a signed agreement with definite terms may outweigh opinions or speculation about what the parties intended.

Suppose Dr. Ford chooses to file a civil lawsuit against Brett Kavanaugh and Mark Judge. What then? We would have actual discovery if this lawsuit is allowed. Then again I bet Kavanaugh would hire some slime ball lawyers to squash this lawsuit even if they had to take it to the Supreme Court where Justice Kavanaugh could file the fifth vote in favor of his own motion.

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