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

Must be time for more tax cuts

CNN/Money has a special feature up, Jobless in America. I’ll have comments after I have time to read it (the day job is getting in the way), but in the meantime, here’s some titles of the stories in the feature:

For now, I’ll point out that the 6% number does not count discouraged workers–the unemployment rate is the number of active job searchers divided by (# active job searchers + # of employed people).

More importantly, I’ll also point out that tax cuts really do not benefit the unemployed. Sure, they may be stimulative and someday create growth and thus more jobs, but over the next few weeks and even the next few years, that effect is trivial. The long run benefits of tax cuts must be weighed against the costs of higher deficits and the concomitant expectations of future inflation. While any possible trickle down benefits of a tax cut accrue at some unknown point in the future, the recessionary effects of expectations of future deficits occur now.

AB

X-Posted at It’s the Economy

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More Liberal Media

The NYT managed to put out a 26 paragraph story on the rise and fall of Ashleigh Banfield without ever mentioning noted jackass, Michael Weiner (a.k.a. Michael Savage), and his asinine “mind-slut” comments. The NYT did attribute the fall to a number of factors other than her saying “It [War on Iraq coverage] wasn’t journalism [because] getting access does not mean you’re getting the story. It just means you’re getting one more arm or leg of the story.” I think Savage is relevant to the Banfield story because it demonstrates the regard Banfield was held in by top management–long before she made statements critical of the network.

AB

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McKinsey on Dividend Taxes

McKinsey is one of the top, many say the best, management consulting firms–hardly a left-wing industry. Among their various activities, they distribute a newsletter, The McKinsey Quarterly. In the latest issue, they have a short piece entitled Eliminating the double taxation of dividends is more notable for what it won’t do than for what it will (free registration required). This is an exressly non-political piece that speculates about the implications of eliminating the dividend tax from the management perspective. In my series on dividend taxes (see top left of the sidebar), I argued that eliminating dividend taxes would increase the pressure on managers to distribute funds to shareholders and this would be a good thing because the alternative to paying dividends is often money wasting mergers and acquisitions. Making reference to this theory, the McKinsey newsletter says

We doubt all this. The proposed tax cut, when viewed with an understanding of the shareholder makeup and share price movements of US companies, seems unlikely to have a significant or lasting effect on US share prices. Moreover, history and practice suggest that if the proposal becomes law, most US companies will not—and should not —change their dividend policies significantly.

What? Was Angry Bear wrong? No, not really, a little later in the story they explain why:

…But the proposed tax cut isn’t likely to have a major lasting effect on US share prices, primarily because the key investors who drive them are already exempt from taxes. [emphasis mine]

and

…tax-paying US individual shareholders own a minority of all US shares—28 percent in 2002, whereas tax-exempt US institutions and individuals who hold shares in tax-exempt accounts owned 61 percent. (The remainder was in foreign hands.) For the most part, tax-paying individual shareholders don’t drive share prices, whereas nontax-paying institutional investors do: the trading activity of a company’s top 40 to 100 investors—again, usually big institutional investors—accounts for 70 percent of its stock price movement.

The point: don’t believe that the dividend tax cut will fix your 401k or other retirement savings. Those funds are already tax exempt so there is no direct benefit. And if you thought that eliminating the dividend tax would lead to a stock market boom and reverse the losses you suffered from 2000-present, think again. And in this case, it’s not (just) me saying it, it’s a top management consulting firm. One more line from the newsletter report: “In the end, the proposed tax cut will not have a significant impact on the wealth of investors or the behavior of managers.”

AB

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Precursor to The Next House Un-American Activities Commission Disloyal Activites Commission?

Matt Yglesias found it first, at least among bloggers I read. I’ll just echo his sentiment: “Holy Shit!”. For the most part the wording is innocuous–though I am tempted to Fisk it–but the title alone is scary enough.

AB

P.S. This looks like a job for Dave Neiwert (Orcinus).

UPDATE: Who knew? Loyalty Day has been around since the 1930s, and became a national holiday in 1958. Still, it seems rather Un-American. Americans are loyal and patriotic because they want to be, because we appreciate the freedoms, protections, and opportunities available in America, not because our government tells us to be. For the government to endorse “Loyalty” as official policy is a bit too close to “we’re the government, don’t question us, we know what’s best” for me. It should be a bit scary to Libertarians and anti-big government Republicans too.

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The Washington Post on Tax Cuts

Jonathan Weisman has an article entitled “President Says $550 Billion Reduction Would Create More Jobs“. Here’s a nice bit of reasoning by the president:

“Some members of Congress support tax relief but say my proposal is too big,” Bush said in his Saturday radio address. “Since they already agree that tax relief creates jobs, it doesn’t make sense to provide less tax relief and, therefore, create fewer jobs.”

If you have the sniffles, an ounce of Nyquil will make you feel somewhat better. The only logical conclusion is to drink the whole bottle. The article continues directly:

But few economists would argue that tax policy is so straightforward. Taken to its extreme, Joel Slemrod, a tax economist at the University of Michigan, said that Bush’s argument would support eliminating taxes altogether for the sake of job creation.

“Logically, the statement that more tax cuts are better is certainly wrong,” Slemrod said.

Finally, here are the president’s numbers:

Advisers calculated in February that the president’s full, $726 billion package would create 1.4 million jobs through 2004. The House’s trimmed down, $550 billion package would create just over a million jobs, by the White House’s calculation. A $350 billion package would create 425,000 fewer jobs, White House spokesman Ari Fleischer told reporters last week.

Doing a little math, these numbers translate into per-job-created costs of $518,000, $550,000, and $609,000 for the smallest tax cut. Note how the numbers assume increasing returns (i.e., lower cost-per-job) to tax cuts? Most things in economics are subject to diminishing returns (it’s such a common phenomenon that we call it The Law of Diminishing Returns).

I posted more on this story at It’s Still the Economy.

AB

UPDATE: CalPundit has more here, in a post that draws upon some excellent sleuthing by Max Sawicky, whose post is here.

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CEO Pay

For those who like to get outraged over CEO pay, take a look at this CNN/Money story. I actually have no problem with high CEO pay, as long as it is tightly linked to the performance of the company. I should probably also add, as long as the compensation committee is independent and not beholden to the CEO. Jack Welch, Lou Gerstner, and Stanley Gault all made huge contributions to their companies (the latter two saved their respective companies, IBM and Goodyear, from ruin), to their employees, and to the economy. When the pay is not linked to performance, as is the case with severance packages and to some degree stock options, then the pay levels are in fact pretty outrageous.

Why do companies offer generous severance packages? One theory is that the compensation committee is controlled by the CEO. Another is that it allows them to give lower pay during the CEO’s tenure by reducing the risk the CEO faces. Of course reducing the risk the CEO faces in this fashion reduces the link between CEO pay and company performance, to some extent invalidating the theory behind high pay in the first place.

AB

P.S. I talked about this issue in an earlier post on dividend taxes.

P.P.S. This post, and others by other bloggers (Wampum and To The Point, so far) available at http://www.itstheeconomy.blogspot.com/.

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PBS on Blogs

Josh Marshall posted yesterday that PBS’s Newshour would run a piece on blogs last night. Not reading TPM yesterday, I missed the show, but the transcript is up now. Who got the big plugs? Instapundit, Sully, Marshall (also quoted extensively), Salam Pax, John Irons (of ArgMax, but they don’t mention the name of his blog). The piece was actually filmed several months ago, possibly explaining why angrybear.blogspot.com didn’t make the cut. The story did cite an estimate that there are 5 million blog readers, which means there are approximately 4,999,800 blog readers not yet reading Angry Bear.

I did find one statement that I disagree strongly with, by Joan Connel, Exec. Producer, MSNBC.com:

One of the values that we place on our own weblogs is that we edit our webloggers. Out there in the blogosphere, often it goes from the mind of the blogger to the mind of the reader, and there’s no backup. And I would submit that that editing function really is the factor that makes it journalism. Are you making a mistake here? Do you really want to say that? Do you really want to use that word? Is that libelous? All of those basic journalism questions that we always ask.

And I thought MSNBC’s real value-add was not implementing permalinks. Seriously, Bloggers don’t need editors. The readers and other bloggers are the editors; when they find mistakes or omitted details, that’s what “UPDATE:” is for.

AB

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Economics, Straight Up, Please

Prefer your economics straight up, without political ramblings and me complaining about spam and such? Check out It’s Still the Economy. ISTE is a work in progress set up by M.B. of Wampum that is apparently developing into a team blog of left and center-left economic/political (but more economic I think) news. It’s a work in progress, but there are already good posts up and surely more on the way. Matt Stoller of To The Point is already contributing and I may also add some thoughts to the blog in the near future. If it’s me, MB, and Matt, I suspect I’ll occupy the enviable position of the “Righty” in the project.

AB

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Rumsfeld on Military History

I caught a clip on CNN of Rumsfeld saying something to the effect that the march to Baghdad was the fastest in history. That didn’t sound true, so with the help of Google I found the exact quote (near the end): “Baghdad was liberated in less than a month, possibly the fastest march on a capital in modern military history.” [emphasis mine]

I guess it all depends on the meaning of “modern” and “possibly”:

  • In Grenada, Marines were in the capital on the first day (the medical school that was evacuated was in St. George, the capital of Grenada).
  • In Panama, the US invaded on December 20, 1989 and Noriega surrendered on January 3, 1990–two weeks, start to finish.
  • In Poland, Germany invaded on September 1, 1939 and had Warsaw surrounded on September 17th–slightly more than two weeks (the Poles completely surrendered on September 28th, though heroic partisan activity continued throughout WWII).

So yes, it is “possibly” the fastest in history, but it’s “factually” not. This is something of a minor point, but the invasion went smoothly enough that it doesn’t need to be exaggerated (and I suppose we could reasonably hold Secretary of Defense to a high standard on the subject of military history). Similarly, the extent of the looting after the takeover of the capital should not be minimized (in case you missed it, Rumsfeld recently said “The images you are seeing on television, you are seeing over and over and over. It’s the same picture of some person walking out of some building with a vase and you see it twenty times. And you think, my goodness, were there that many vases? …[pause for laughter]…Is it possible that there were that many vases in the whole country?” Given 5,000 years, I hypothesize that a nation the size of California can in fact accumulate many, many, vases.

AB

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