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

Trump Claims Obstruction of Justice is an Official Duty of the White House

Trump Claims Obstruction of Justice is an Official Duty of the White House

Tierney Sneed reports on Trump’s latest obstruction of justice:

The Justice Department on Monday issued a legal opinion claiming that Congress could not compel former White House Counsel Don McGahn to testify about special counsel Robert Mueller’s report. The opinion was released not long after reports that the White House was planning to instruct McGahn to not comply with a House subpoena that he testify at a Judiciary Committee hearing Tuesday.

The legal opinion can be found here and states in part:

Congress may not constitutionally compel the President’s senior advisors to testify about their official duties … This testimonial immunity is rooted in the constitutional separation of powers and derives from the President’s independence from Congress.

What an incredibly arrogant canard! McGahn is being asked to testify to Congress about what is clearly obstruction of justice – a crime. How is that an official duty of the White House? Oh wait – the Trump White House is nothing but a den of organized crime so maybe he sees committing crimes as one of his official duties!

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Panetta and Trump: Who are You Calling Chumps?

Panetta and Trump: Who are You Calling Chumps?

Leon Panetta:

Trump treats Americans like we’re chumps

Check out the entire interview as it was excellent. But I had to look up this old fashion word:

a person who is easily tricked : a stupid or foolish person

OK – Trump supporters are easily tricked. But Trump wants to pretend he is a young vigorous man! Chris Matthews did talk about young people who are more likely to check out Urban Dictionary than the old fashion Merriam-Webster dictionary:

Someone who does not understand the basics of life on earth. Confused easily.

Actually this is the perfect description for Trump supporters. There are more definitions at Urban Dictionary that I would submit also apply!

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USMCA, the International Trade Commission, and Kevin Hassett

USMCA, the International Trade Commission, and Kevin Hassett

Tracey Samuelson of Market Place writes:

USMCA would slightly boost U.S. economy, says ITC report – On Thursday, the International Trade Commission released its assessment of the projected economic impact of USMCA, President Trump’s proposed replacement for NAFTA. The report shows the new deal is projected to boost the U.S. economy by .35% when fully implemented.

I will to read this report after I get over laughing at the latest from Menzie Chinn who quotes Kevin Hassett:

Two-thirds of U.S. CFO’s expect a recession by summer of next year, but White House Council of Economic Advisers Chair Kevin Hassett believes the economy shows no signs of slowing down. “There’s so much momentum right now,” he told FOX Business Stuart Varney on Friday. “It just seems almost impossible that there would be a recession by the summer of next year.”

You should watch what turned out to be a really stupid interview on Fox Business covering not only on the alleged impossibility of a recession and how Hassett fluffed off Trump pressuring the FED to lower interest rates. Hey Kevin – if it is impossible for there to be a recession, why lower interest rates? Never mind that for now and listen to how Hassett declared USMCA to be the best trade deal and how it would increase GDP by $100 billion in the first year. Did the ITC really say that? Update: The report can be found here. It does say on page 37:

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Is Stephen Moore a Gold Bug?

Is Stephen Moore a Gold Bug?

A lot of the criticisms of putting the twin village idiots known as Herman Cain and Stephen Moore on the FED assert that they are gold bugs. Kate Riga watched CNN when Erin Burnett interviewed Stephen Moore on this allegation:

Stephen Moore tries to flip-flop on the gold standard — but Erin Burnett is prepared and armed with a montage of his past statements

Watch and enjoy! Now Moore did say he would prefer targeting an index of commodity prices, which led me to FRED and its Global Price Index of All Commodities. Moore has not be all that specific how his commodity price target would work but let’s speculate his index would be a lot like this one. Suppose the FED targeted commodity prices to be where they were in 2005 since this index is based where it would equal 100 in 2005. Just imagine how a Moore monetary policy would have worked say during the booming 1990’s. Commodity prices were low so his policy prescription would have been massively expansionary during a booming economy. For much of the period from 2007 to 2014, we would have had a contractionary monetary policy even as U.S. aggregate demand was often incredibly weak. In other words, his commodity price based monetary policy would be about as destabilizing as was monetary policy under the gold standard.

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Elizabeth Warren Wants to Collect More in Corporate Profits Taxes

Elizabeth Warren Wants to Collect More in Corporate Profits Taxes

John Harwood reports:

Democratic presidential candidate Elizabeth Warren proposes raising $1 trillion in government revenue from a new tax on profits of the largest corporations. The proposed surtax would prevent Amazon and other companies with profits exceeding $100 million from wiping out their tax liabilities altogether. Instead of taxable corporate income as defined by the IRS, the 7% surtax would apply to profits companies report to their investors.

A lot to like. Look – I hated that 2017 tax scam, which we were told would clean up how corporations are allowed to shield income by all sorts of tricks including transfer pricing manipulation. Alas, its complexity was a boondoggle for shifty tax attorneys rather than simplification and closing loopholes. So proposals to “repeal and replace” this awful tax deform are highly welcomed. But this part of Harwood’s reporting was dreadful:

Warren cited two high-profile examples: Amazon has reported $10 billion in 2018 profits but zero in U.S. corporate taxes; Occidental Petroleum has reported $4.1 billion in profits and also paid zero.

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Does Cochrane Really Understand the Latest on Minimum Wages?

Does Cochrane Really Understand the Latest on Minimum Wages?

John Cochrane thinks we liberals who think higher minimum wages can do some good by offsetting monopsony power fail to grasp labor economics. He is citing some work by Jeffrey Clemens, Lisa B. Kahn, and Jonathan Meer. Alas his blog post screwed up the link to this interesting paper:

Compensation consists of a combination of cash and non-cash attributes, and depends on worker productivity. We also allow for the possibility of a bargaining wedge whereby the firm pays less in total compensation (cash and non-cash benefits) than a worker’s marginal product. When the minimum wage rises above the prevailing wage (cash payment) but below a worker’s marginal product, the firm will shift the mix of compensation towards cash and away from non-cash benefits, but will still find it worthwhile to employ the worker. This distortion can create losses to worker welfare which, if large enough, will push workers to prefer their outside option of nonwork. We also show that, in the presence of a bargaining wedge, the welfare effects of minimum wage increases are non-monotonic. In general, wage gains associated with increases in worker bargaining power will tend to improve welfare, while wage gains that are accommodated through reductions in non-cash benefits can reduce welfare.

In many ways, this dates to a 1980 paper by Walter Wessels (“The effect of minimum wages in the presence of fringe benefits: An expanded model,” Economic Inquiry), which the authors cite. Wessels assumed a perfectly competitive model where government interference lowered worker total compensation. Wessels published later papers, which alas the authors did not cite. In 1994, the Journal of Labor Research presented an extension of Wessels thinking that incorporated monopsony power entitled “Minimum wages and the wessels effect in a monopsony model” by J. Harold McClure:

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The Trump Tax Cut and Big Pharma

The Trump Tax Cut and Big Pharma

CEOs of 7 pharmaceutical multinationals addressed the Senate Finance Committee:

Pharma execs offer Senate ideas to lower drug costs – except actually cutting prices. Executives from seven pharmaceutical companies — AbbVie, AstraZeneca, Bristol-Myers Squibb, Johnson & Johnson, Merck, Pfizer and Sanofi — are testifying before the Senate Finance Committee. The pharma executives have a number of ideas to reduce drug prices for patients, except lowering list prices. High drug prices has become a rare bipartisan issue, with lawmakers on both sides of the aisle demanding change.

One of these questions posed to the CEO of Abbvie was how much of the benefit from the 2017 tax cut did his company pass onto consumers. I guess the Senator was expecting an honest answer being “none”. But the actual answer came out that AbbVie did not get much benefit from this reduction of corporate profit tax rates. How could that be? Well – look at its past 10-K filings and you will see that AbbVie has sourced little to none of its massive profits to the U.S. parent. Why would you benefit from a tax rate cut when one is engaged in massive transfer pricing manipulation?!

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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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