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

CBO Estimate for HR 1: Jan 26th, 2009

(UPDATE: For some reason the detailed outlay tables vanished from the PDF linked to here. Leading some to put on their tin foil hats. Fear not, I have uploaded them and they appear under the fold). (UPDATE 2: Larger images at CBO Tables)
Via Prof. K. It turns out the ‘suppressed’ CBO ‘Report’ turned out to be a partial version of the appendix to the full estimate released concurrently with the filing of the bill. Meaning some people can take off their tin-foil hats. And BTW Boehner’s numbers are wrong precisely because the document he used was incomplete. In any event here is the real deal.
Congressional Budget Office Cost Estimate: H.R. 1 American Recovery and Reinvestment Act of 2009 and key grafs:

Assuming enactment in mid-February, CBO estimates that the bill would increase outlays by $93 billion during the remaining several months of fiscal year 2009, by $225 billion in fiscal year 2010 (which begins on October 1), by $159 billion in 2011, and by a total of $604 billion over the 2009-2019 period. That spending includes outlays from discretionary appropriations in Division A of the bill and direct spending resulting from Division B.

In addition, CBO and the Joint Committee on Taxation (JCT) estimate that enacting the provisions in Division B would reduce revenues by $76 billion in fiscal year 2009, by $131 billion in fiscal year 2010, and by a net of $212 billion over the 2009-2019 period.

Combining the spending and revenue effects of H.R. 1, CBO estimates that enacting the bill would increase federal budget deficits by $170 billion over the remaining months of fiscal year 2009, by $356 billion in 2010, by $174 billion in 2011, and by $816 billion over the 2009-2019 period.

52.6% of projected spending by the end of the first nineteen months (end FY 2010). It helps to use complete numbers.
As noted above the outlay tables can be found under the fold.




Tags: , Comments (0) | |

Op-Ed: Misplaced Handwringing on the Stimulus

Tom Bozzo

has observed EconomistMom Diane Lim Rogers run multiple items pertaining to claims that it’s inappropriate to use deficit spending for longer-run public investments. I opine that such claims do not make a hell of a lot of sense. As Rogers is following basically Republican sources (the Washington Post op-ed page, Bruce Bartlett, the Wall Street Journal), at least the strong implication is that deficit-financing households’ consumption — or at least transferring debts from the private to the public sector — is OK (for that’s what individual tax cuts are; do read Bob Herbert for the latest installment of the ‘Party of Ideas’ Watch*).

I incorporate by reference Bruce’s post below on the actual front-loading of the draft House stimulus package, and reassert the important fact that New GFY 2010 is just 7-1/2 calendar months from the likely date of enactment. More to the point, if in 7-1/2 months we’re all sitting around agreeing, “Gee, we didn’t need so much stimulus after all,” the occasion will be one for Champagne-cork popping, raising taxes on the rich, and preparing kleptocrats’ show-trials; having spent a little more than “necessary” on the likes of schools, roads, transit, and the electricity grid shouldn’t keep anyone up at night.

Investments and consumption of durable goods are the exact sorts of expenditures for which “deficit spending” generally can be justified, and IOKIYPS** in that nobody in their right mind would says that businesses or households should avoid borrowing money (within reason, natch) for those purposes. I suggest as a matter of principle that the public sector should not needlessly be subject to regulations that would be stupid to apply to the public sector — i.e., that expenditures must be pay-as-you-go. This is not, of course, to say that we should throw long-term fiscal discipline out the window (in fact, I think Republicans were foolish when they in fact defenestrated that part of the Rubin-Summers program).

Now a good Republican should object that business investment is subject to market discipline including affirmative planning to generate sufficient expected income to repay the debt and provide returns to shareholders, whereas political processes can be waylaid in various ways. As a good technocrat, my response is that I have no objection to competently-performed cost-benefit analysis among other controls on public investments. As a good liberal, I’d note that the stimulus durable spending is concentrated in areas (roads, transit, schools, R&D) that in theory are under-provided by the private sector — and, moreover, are underprovided in practice, unless you happen to think that our roads, rails, schools, and intertubes are too good. And, it is not a bad time to borrow long if you happen to be the U.S. federal government.

Ostensibly moderate technocrats who like fiscal discipline should be wary of being played by people who seem to be on their side but who more fundamentally just don’t like public spending. I think that eating our public capital is so ingrained that it looks like radicalism to do otherwise.

* Regarding which saying we must conclude that Daniel Patrick Moynihan was offering a backhanded compliment or was nuts.

** It’s OK If You’re Private Sector.

Tags: Comments (0) | |

Boehner is still wrong (even though the CBO ‘Report’ maybe kind of exists)

by Bruce Webb
(IMPORTANT UPDATE: REAL CBO REPORT RELEASED h/t Prof. K
CONGRESSIONAL BUDGET OFFICE COST ESTIMATE
January 26, 2009 H.R. 1 American Recovery and Reinvestment Act of 2009
(oops link fixed)

Reader m.jed points us to this PDF
ESTIMATED COST OF AMERICAN RECOVERY AND REINVESTMENT ACT OF 2009 AS PROVIDED ON THE APPROPRIATION COMMITTEE WEBSITE ON JANUARY 15, 2009
which does give a breakdown of Authorization and Spending by year and cites CBO as a source. Now the title is a little odd, it seems too self-referential with ‘as provided on the’ ‘website’ ‘on Jan 15th’. In the normal course of events the provision, its placement, and its date would be evident: you are on the website, clearly you are reading something provided by the webmaster, and typically it would have a date. Now certainly there was a package of material released on Jan 15th under the signature of the Chairman:
http://appropriations.house.gov/pdf/PressSummary01-15-09.pdf
http://appropriations.house.gov/pdf/RecoveryReport01-15-09.pdf
http://appropriations.house.gov/pdf/EconomicAnalysis01-15-09.pdf
But I simply could not find the original of the above link.

And the host is a little odd in that when I went to the parent http://big.assets.huffingtonpost.com/ I got an ‘Access denied’ message. Now a little Googling shows some obviously authentic material, that is we have the Stimulus Bill’s full text up as:
http://big.assets.huffingtonpost.com/HR1.pdf to go with m.jed’s
http://big.assets.huffingtonpost.com/stimsummary.pdf
Oddly enough I couldn’t get to either through Huff Post’s main page or search engine.

So something is out of whack. That being said there seems to be no reason to doubt the numbers themselves, they seem perfectly reasonable in themselves, and moreover at first glance supports Boehner’s claim that the stimulus package spends less than half of the money in the first two years.

Vindication for ‘Boner’? Nope not at all. Instead he is cherry picking numbers in a pretty dishonest way. Something that comes clear once we examine the numbers ourselves.

First thing to notice is that every category of spending is reported in two ways, first as ‘Budget Authority’ and second as ‘Estimated outlays’, both by date. Now you would think that in terms of stimulus the important date would be the actual spending. And generally you would be right. But then again not everything can be built out in a year, we could have contracts ready and full engineering and environmental assessment completed tomorrow and we would still be more than two years out from a clean grid. Same for most transportation and water projects, even with the best will in the world Rome just doesn’t get built in a day. So lets take a look at the numbers and consider the implications.

We can take Budget Authority as being the time that the money is committed and so the time that the receiving governments and contractors can begin the hiring process. How much of the total package is committed in the first two fiscal years? Most of it.
FY 2009: $274 bn, 2010 $66.5 bn, 2011 $4.1 bn, 2012 $3.5 bn, 2013-2019 $9.8 bn.
Well that is pretty front loaded, particularly when the projected enactment date of the bill is almost five months into the Fiscal Year. Given the pace of FY2009 at an average of $39 bn per month authorized, we can expect almost all of this money to be officially committed by the end of Calender Year 2009. In effect almost all the checks will be in the mail by Christmas .

So how do outlays look?
FY 2009: $26 bn, 2010 $110 bn, 2011 $103 bn, 2012 $53 bn, 2013-2019 $62 bn.
So when Boehner claims less than half of the spending goes out in the first two years he is technically right, if that is you use Fiscal Years. We are looking at $136 billion by FY 2010 end (Sept 2010) vs $228 in the nine years after. But if you figure this by calender years (as most people naturally do) and figure that almost half of FY 2011 will be over by Feb 2011 we end up with a two year figure of about $180 billion vs nine years at $184 billion. If we return to Fiscal Years and look at the third year number we get to $239 billion vs $115 billion. The claims that most of this money won’t get spent until it is too late to matter is in a technical term, hooey.

This is particularly true when we examine where 2012’s $53 bn and 2013-2019’s $62 billion actually get spent.
Title V: Energy and water 2012 $9.5 bn, 2013-2019 $18.6 bn
Title VI: Federal buildings 2012 $1.6 bn, 2013-2019 $3.2 bn
Title VIII: Clean water 2012 $1.7 bn, 2013-2019 $1.6 bn
Title XII: Highway 2012 $4.2 bn, 2013-2019 $17.4 bn
Title XII: Other transportation 2012 $1.8 bn, 2013-2019 $6.4 bn

Almost all of this spending is in categories heavily weighted towards large scale and so long term infrastructure projects. If we total FY 2012 spending we end up with a total of $18 billion or 34% of the total $53 bn. For 2013-2019 we have $47.2 bn or 75% of $62 bn in total outlays. True enough not every penny in these totals is necessarily for infrastructure build out. On the other hand the other Titles all have their own share of infrastructure, it is just that most of it is front loaded on fast track projects.
Title IX: School construction $10.6 bn by FY 2011 year end out of $14 bn total authorized
Title X: Military construction and veterans $4.8 bn out of $7 bn authorized
Title XII: Housing $4.9 bn out of $8 bn authorized

So if the premise is that the bill is simply laden up with spending on condoms and that too little is targeted at spending that will provide real stimulus, well that just doesn’t survive encounter with the numbers. Near as I can see the spending is projected to be converted into infrastructure and hence jobs in about as fast as practicality allows. Where they can spend quick (schools, military bases, housing) the spend quick, where the nature of the project requires extended build out (clean energy, water projects, clean water, highways, mass transit) they project that it will be spent as fast as reasonably possible

Tags: Comments (0) | |

Senate Stimulus Package: Tax Cuts, Social Security & SSI

A reader in comments asked why the Bears had not posted on Obama’s stimulus plan.

Well, speaking for myself, that was mostly because we didn’t have a plan and still don’t. What we have is the shifting outline of a plan subject to negotiation between the Admin and the Congress, leaving no solid starting point for analysis. But the two Houses have now produced fairly detailed individual plans that do provide such a starting point. In this post I want to examine the Senate’s proposed individual tax cuts. First outlining the plans and then posing a series of questions.

The tax cuts come in two forms. For workers we have a proposal for a $500 tax cut per worker, $1000 per couple for 2 years, to be delivered via a payroll tax holiday on the first $8100 for each worker. This represents the employee share of the tax (6.2% x $8100 = $496), so it would seem that the employer still pays his full share. Unemployed workers would get this in the form of a refundable tax cut delivered via the IRS. The total cost of this plan is $142 billion or $71 bn per year with probably 90% of that delivered via SSA and the remainder via IRS. But it also seems to assume a two-earner household.

Then the Senate added a one time $300 bonus for seniors, the disabled, and people receiving SSI. The AP article I am using doesn’t score this out but given that just under 50 million people were receiving Social Security retirement of disability in 2007 this should work out to $15 billion on the OASDI side plus some more for the SSI people.

Seems simple enough? Well not from where I am sitting, I see all kinds of red flags. Details below the fold.

Update: (rdan… Barkley Rosser notes Jamie Galbaith’s interview on entitlements at Econospeak and also see Whitehouse.gov)

Currently payroll taxes got to pay for Social Security and Medicare Part A with any cash surpluses credited to the Trust Funds where in turn they draw interest against the time when the Trust Funds need to start being tapped. Which under Intermediate Cost assumptions is 2017. In 2008 the cash surplus for Social Security was right around $80 billion. Given current unemployment numbers we can expect 2009 to come in below that, perhaps $20-30 billion less. If that is right this proposal would more than wipe out the first year surplus ($57 bn plus $15 bn) and likely wipe out the 2010 as well ($57 bn). Unless the Trust Funds are somehow made whole you have blown a big hole in Social Security, because not only will it have lost the cash surplus, it also will lose out on all accrued interest on that, which with compounding adds up to a pretty big total hit to a program whose ‘crisis’ is marked by a gap between projected revenue and projected costs after 2017.

This doesn’t bode well for the financial summit next month. Because it would seem that the initial response to ‘crisis’ is to choke off revenue which in turn brings Trust Fund shortfall closer and deeper. Which would seem to grease the slide for a benefit cut based ‘solution’. Was Social Security a ‘Phony Crisis’ as Dean Baker insisted in 1999? Well in certainly was and that was still mostly true in 2008. But it looks like someone is trying to make it real through the back door.

Now it is possible that the proposal does aim to make Social Security whole. But this raises some issues of its own. Social Security as currently configured has no way to hold cash, so a direct transfer from the Treasury is out of the question. The program could be changed in a way that allowed the Treasury to use cash to purchase outside assets and so credit those to the Trust Funds but this would require opening up Social Security itself to all kinds of malicious tinkering, and so probably should be avoided. Which leaves the standard option of Treasury simply crediting the TF with Special Treasuries in the amount of the diverted payroll tax. On paper this would make the TFs whole and avoid the loss of those years of interest. While less than ideal this would be for me an acceptable resolution to the problem created by the dollar diversion to stimulus. I just wish we were not going down this path at all.

Because we have gone from a situation where we had two big pools of revenue and cost that were legally separate. Under current law if Social Security ends up being overfunded going forward its choice would be between sweetening benefits or cutting taxes. If it turns out to be underfunded compared to the schedule it is legally on its own, under IC projections that means considering some package of tax increases/benefit cuts starting in around 2030. And from the perspective of workers that is a pretty reasonable bargain, Social Security not drawing on capital (except in the form of collecting interest on money lent to the General Fund) and so not owing anything to capital. Under this proposal that breaks down. Instead we have lower income workers having much to most of their federal tax burden eliminated for at least a two year period. Which is good for them in that sense, but ends up validating the Right talking point that poor people don’t pay taxes. In reality poor people pay all kinds of taxes directly and indirectly from sales taxes to property taxes funded via their rent payments. And until this proposal came along in the form of FICA payroll taxes to fund a combined insurance/pension plan. Now it looks like that dignity of largely paying for your own retirement is at least temporarily stripped away. I doubt many minimum wage workers would care, under current circumstances they are likely to need that $500 or $1000. And I for one wouldn’t expect them to resist the whole plan on principle. But generally speaking when I hear the words ‘payroll tax holiday’ I am tempted to reach for my pistol. Because history shows that more often than not proposals that use that mechanism have a not-so-hidden agenda of undermining traditional Social Security simply for the sake of doing so.

But this isn’t the only issue. Who counts as unemployed under this proposal? What happens with one earner households? What if one earner in a two-earner household makes less than $8100? If every adult not currently in the work force is included than most of the administrative difficulties go away. On the other hand you have also given out free cash to every rich college student and to every poor drug addict and for that matter every rich college student Amsterdam hash and coke addict. But if you start drawing eligibility lines you could end up with an administrative and/or enforcement nightmare. For example what do you do with the stay-at-home spouse? The proposal suggests that each couple should get $1000 so clearly the intent is to include them in. Which suggests two possible solutions. One you could exempt FICA on the first $16,200 of income for the earner. Which would mean that employers were tasked with tracking employment status for all employee spouses so they would know when to start and stop the exemption. Oops. HR and accounting are not going to like that, you have added substantial compliance costs. Or you could just handle this on a mixed basis, with the earner’s $500 coming from FICA exemptions and the non-earner’s from a refundable credit. Which shifts the compliance costs over to the IRS.

I understand the attraction of payroll tax holidays. They directly reward work. Which is good. And they seem simple and easy to administer. Well everything is simple if you ignore the complexities. I want to hear more detail about how this works operationally before I buy in. Color me skeptical.

Tags: , Comments (0) | |

PWA & WPA: Make work? Or war winning infrastructure?

There has been a great deal of recent discussion insisting that the various New Deal programs did not get this country out of the Depression, only World War II did that. And no one that I know of argues that the level of unemployment right through the 30’s was not unacceptably high. But I want to turn the question around, could we have won the war without the infrastructure built by the PWA (Public Works Administration) and the WPA (Works Progress Administration) in the previous decade? Or was this what allowed us to be landing troops in Morocco by Nov. of 1942 (Operation Torch) and winning the Battle of Midway in June of 1942? As I get some time I will update this post with some of the major projects produced by both. But for now here is a little overview:

Public Works Administration

More than any other New Deal program, the PWA epitomized the Rooseveltian notion of “priming the pump” to encourage economic growth. Between July 1933 and March 1939, the PWA funded the construction of more than 34,000 projects, including airports, electricity-generating dams, and aircraft carriers; and seventy percent of the new schools and one third of the hospitals built during that time. It also electrified the Pennsylvania Railroad between New York and Washington, D.C. Its one big failure was in quality, affordable housing, building only 25,000 units in four and a half years.

The PWA spent over $6 billion, but did not succeed in returning the level of industrial activity to pre-depression levels. Nor did it significantly reduce the unemployment level or help jump-start a widespread creation of small businesses

Clearly not a panacea, on the other hand both of those carriers (the Enterprise and the Yorktown) fought in and helped win the Battle of Midway, which many would concede was the turning point of the Pacific War.

Works Progress Administration

About 75 percent of employment and 75 percent of WPA expenditures went to public facilities such as highways, streets, public buildings, airports, utilities, small dams, sewers, parks, libraries, and recreational fields. The WPA built 650,000 miles of roads, 78,000 bridges, 125,000 buildings, and 700 miles of airport runways. Seven percent of the budget was allocated to arts projects, presenting 225,000 concerts 🙂 to audiences totaling 150 million, and producing almost 475,000 artworks.

Could we have ramped up production after 1939 in the way we did without the transportation infrastructure represented here?

The proposed stimulus package may not work miracles. But it will produce lots of paychecks and public goods. Goods that will continue to provide utility long after the economy recovers. The beginning of a list of PWA and WPA projects starts under the fold, feel free to add more in comments.
WPA
Camp David
Federal One
Federal Writers’ Project
Historical Records Survey
Federal Theatre Project
Federal Art Project
Federal Music Project
Mathematical Tables Project
Houston City Hall
Lapham Peak
Mendocino Woodlands State Park
Timberline Lodge, Mount Hood, Oregon
Lake Afton Kansas
Dealey Plaza Dallas, Texas
National Guard Armory of Columbia, Missouri

PWA
The Yorktown
The Enterprise
Bonneville Dam
completion of Hoover Dam
Triborough Bridge
Lake Shore Drive Chicago
various TVA projects

Tags: , , Comments (2) | |

Galbraith: Unemployment Statistics Of The New Deal Era

by Bruce Webb
A little antidote to Amity Shlaes and the other New Deal Deniers. From TPM Cafe J.K. Galbraith introduces Marshall Auerback

The view that the New Deal was too small and accomplished little, that only WWII ended the Depression, is very widely held. But it is not correct. It is based on a mis-reading of reconstructed unemployment statistics from that time, which treat the workers actually employed by the New Deal as though they were unemployed. Which they were not.

In fact, the New Deal accomplished a huge amount, both in specific construction projects and in providing employment to the American people.

I am going to turn over my microphone, not for the first time, to Marshall Auerback, and quote at great length from his paper entitled “A New New Deal.” Those wishing to get the whole paper should contact Marshall at mauer1959@aol.com

While Galbraith has permission to cite this paper at length I don’t know that I do. But I do know the topic is of extreme importance in light of the Republicans’ clear plan to sabotage the stimulus package in favor of tried (I mean tired) and true tax cuts on capital.
Link to extract from Auerbach Unemployment Statistics Of The New Deal Era I thought the following was particularly interesting

Even pro-Roosevelt historians such as William Leuchtenburg and Doris Kearns Goodwin have meekly accepted that the millions of people in the New Deal workfare programs were unemployed, while comparable millions of Germans and Japanese, and eventually French and British, who were dragooned into the armed forces and defense production industries in the mid-and late 1930s, were considered to be employed.

Forced by Hitler to build tanks and bombs? Gainfully employed. Asked by Roosevelt to build parks and schools? Makework slacker who is certainly not ’employed’. Now THAT is a perverse use of statistics.

Tags: , , , Comments (0) | |

Hey, Big Spender!

by Tom Bozzo

Look who’s into big government now, via TrafficWorld:

“We need to spend an enormous, massive amount of money in rebuilding America’s infrastructure, not only in the short term, but in the long term to underpin the economy once it’s up and growing again,” said R. Bruce Josten, the [U.S. Chamber of Commerce]’s top lobbyist.

Lawmakers are also considering funding other forms of infrastructure projects, an idea that has the support of the Chamber.

The total amount of the stimulus package is still being hammered out, but Josten said a group of economists brought in at Pelosi’s request estimated between $300 billion and $500 billion.

“There is a very strong possibility that even if there is a stimulus in the lame duck [session] it would be followed very quickly in the 111th Congress, under President Obama, with a second stimulus package,” Josten told reporters Thursday.

Funny that this is the same U.S. Chamber of Commerce that intervened heavily in the Minnesota U.S. Senate race to help save the country from the likes of Al Franken.

Officials at the U.S. Chamber of Commerce, fearful of a union-friendly Democratic Senate, have dubbed the race “ground zero” in the effort to stop a 60-seat majority. The chamber and its affiliates have spent more than $3 million on ads designed to scare voters about Franken and Democrats, according to sources on both sides.

While the Chamber was especially keen on keeping enough Republicans in the Senate to forestall passage of the Employee Free Choice Act by filibuster, they also advocated ‘affordable, quality health care’ a la Norm Coleman (stop laughing) and attacked Franken for allegedly wanting to raise taxes to pay for, we can only guess, things like affordable, quality health care and 12-figure infrastructure projects.

I can only imagine that future of the K Street Project will involve a demonstration of lobbyists’ eagerness to kiss ass across the political spectrum.

Tags: Comments (0) | |

Always Tax Cuts for the Rich?

by Tom Bozzo

The ‘McCain Resurgence Plan’ surges on (h/t Creative Destruction):

Current rules mandate that investors must begin to sell off their IRAs and 401Ks when they reach age 70 and one half years old. Those rules should be suspended to spare senior citizens from being forced to sell their stock just as the market is hurting the most. Under the emergency measure I propose, we will also cut the tax rate for withdrawals from tax-preferred retirement accounts to ten percent…

Fine, but this affects a small slice of the public and not necessarily those who are going to be hurt by the recession.

“Small slice of the public” may be an understatement for the retirement plan changes. Last time I checked, there was a 10 percent regular income tax bracket, and for 2008 a married couple has to have $16,050 in taxable income to clear it. The top of the 15% bracket is $65,100. So lower-income seniors get nothing except the right to defer tax-deferred plan withdrawals that they arguably cannot afford not to take, and most seniors get no more than 5 percent of their withdrawals. The main beneficiaries are owners of tax-deferred retirement accounts that are so large that they can replace an income in roughly the top 25% (or better).

McCain goes on

It is essential that we avoid an exodus of capital from the market. Senator Obama yesterday offered up a proposal that would have the effect of encouraging early withdrawal of funds from 401(k) accounts, by suspending penalties through 2009. This is an invitation to capital flight, and therefore to continued instability in the market, at a moment when exactly the opposite is needed. Any family that takes part in this will not see the benefits of the market recovery that smart policy can help bring about. In my administration, we will instead revive the market by attracting new investment. I will cut in half the capital gains tax on stocks purchased and held for more than a year — from a rate of 15 to 7.5 percent.

These provisions do not make exactly make Team McCain look in-touch.

First, people are raiding their 401(k)’s because defined contribution plan balances are often the only significant “savings” they have. “Joe Sixpack,” as a certain vice-presidential candidate likes to say, doesn’t have appreciable amounts of money in assets that are potentially subject to capital gains tax. (See, e.g., the Survey of Consumer Finances. In 2004, the median holdings for working families owning stocks and investment funds were $10,000 and $25,000, respectively. But only 15 percent of all families owned stocks directly and 40 percent owned mutual funds, so majorities had nada.) Eating one’s retirement capital is already a desperation measure, and Obama’s plan arguably relieves an injury following insults that are done deals. Plus, Obama would keep in place the loss-of-income-tax-deferral disincentive and limit penalty-free withdrawals, so we aren’t talking carte blanche here.

Meanwhile, there is a fairness issue here, in that the “rich” — i.e. those with substantial financial asset holdings outside of retirement accounts — can dump their assets at will and McCain will if anything make the terms of such transactions more favorable. It’s just us chumps with defined contribution plans who are tasked with riding out the crisis in McCain world.

Second, it’s not at all obvious what McCain could substantively mean by “capital flight.” This, I suppose, is part of what has Brad DeLong scratching his head. Asset sales have to have two parties — the upshot is that someone exchanges money for an asset. These transactions aren’t counted as savings in the NIPAs since all that happens is a change in ownership, and the macro statistics don’t care exactly who holds what. Capital can’t be “fleeing” the market since someone has to buy in to complete the transaction, and desperate 401(k) raiders likely are not trying to invest their proceeds in foreign assets. (That would be the rich dumping assets to stuff cash in tax havens.)

Third, if the stated policy aim is to keep people from selling assets, how on earth will reductions in taxes on asset sales — note that another part of the McCain plan is to increase capital losses that can be counted against income — do that? The naive incentives of the plan make it a bit easier to sell, unless McCain is offering something other than the long-term capital gains rate cut that he seems to be selling. Rich people who are sitting on long-term gains see their tax rate go, as Maynard of Creative Destruction puts it, from minuscule to infinitesimal. So maybe that gun is set to run out of ammo anyway. But when the case is made for capital gains tax cuts raising, or at least not losing, much revenue, the argument always seems to involve an element of capital gains realization timing: people time their asset sales to take advantage of the more favorable tax terms.

In any event, it is maybe not so surprising that a campaign of millionaires and lobbyists can’t put together a plan that isn’t a giveaway to themselves. So the clown show at a train wreck goes on…

Tags: , Comments (0) | |

Class War; Appropriateness of the Wealthy’s strategy

A research review by: Divorced one like Bush

Introduction: This review was initiated after reading the report linked at the 25 indicators post. A review of the data regarding accepted economic performance indicators for business cycle peaks of year 2000 and 2008 is presented along with a discussion of the relevance to the strategy of the Wealthy in winning the War of Class. In short, the Wealthy are irrational in their strategy in fighting the War of Class and are in fact losing the war for everyone.

The data:

The growth rate in median family income, however, was slower between the business-cycle peaks of 2000 and 2007 (0.1 percent per year) than it had been between the two earlier peaks in 1989 and 2000 (0.9 percent per year).
Labor productivity, meanwhile, grew more rapidly in the 2000s business cycle (2.5 percent) than it did in the preceding cycle (2.0 percent).
Economic growth was faster over the 1990s business-cycle (3.1 percent per year) than it was over the 2000s cycle (2.3 percent).
…but the 1990s cycle still produced a higher personal savings rate (5.6 percent of disposable personal income) than the 2000s cycle (1.8 percent of disposable personal income).

Another way to view the data is to align each point with the year of origin.
Early years: 2% productivity growth with 0.9% income growth, 5.6 savings, 3.5%economic growth
Versus Bush years: 2.5% productivity growth, .01% income growth, 1.8% savings, 2.3% economic growth.

Analysis: Going forward I will refer to two groups fighting in the Class War. The subject of this study will be called the Wealthy. The Wealthy survive by making money from money. That is the accepted opinion. Though this report suggests that even the top 1% were earning more from wages each year until it reverses in 2000. Quote:

The lower end of this group is not seeing an increase of income from wages. But look at the change in the top 1% and the top 0.1%. They have the greatest increase of their income coming from wages. The entire top 5% sees this, but it is the very top that is seeing a doubling (32 to 63% for the top 1%) and tripling (18.1 to 58.2 for the top 0.1%) of the percentage from wages. (see chart)

The group the Wealthy are fighting will be called the Enemy. The Enemy survive by making money from selling their labor which is tied to productivity.

For all the people who are fighting a class war, looking at the means by which both sides make money and thinking that both want to win it for the long haul, it appears that each side has been losing under the Wealthy’s strategy and tactics used for winning the war. For the Wealthy who make money from money, I assume a higher annual average economic growth would be more beneficial as it means more wealth being created over time, but they have produced lower growth. They appear to have won when the Enemy was able to sell their labor for a higher share of productivity. In fact, it appears that the important factor to the Wealthy winning the war is how much of the productivity gains go to the Enemy instead of how much more work the Wealthy can get out of the Enemy. There appears to be an inverse relationship of income and productivity to the success of the Wealthy in the war. As the share of productivity going to income of the Enemy goes down, economic activity declines. That is, as the Wealthy take more of the productivity gains as a means to win the war, they are in actuality hurting their war efforts. A decline of the economic activity is a war losing results for the Wealthy.

Conclusion: The Wealthy are closer to winning what they want when they let the Enemy win. That they have continued the same strategy during declining indicators and have seen similar battle results in the past (the battle known as the Roaring 20’s comes to mind) suggests that they are not being rational. For the Enemy of the Wealthy, well I guess there is some solace in the thought that the Wealthy are ultimately beating themselves in that they are driving down economic growth. I am reminded of the great wisdom of the infamous class warrior Billy Ray Valentine:

“You know, it occurs to me that the best way you hurt rich people is by turning them into poor people.”

Of course unexpected events can change the momentum and ultimately the strength of either side. For example, a banking crisis. (An event for which I can find no research that supports one has ever been caused by the tactics of the armies of the Immigrant or Indigent. ) Such an event changes the emphasis of the theater of the war from the broader, larger operation of the market place which requires an understanding of the rules of economic theory and historical economic data to the limited and smaller theater of the halls of government with the need to understand the rules of political theory and historical political data. For either side, the most successful campaign would take into consideration the results of the market place war front when fighting in the halls of government war front.

There is a paradox to the Wealthy winning any battle in the halls of government theater. That they do not heed the historical record of battles within both theaters leads to poor tactics. The Wealthy institute tactics based on non-rational analysis moving them further from their desired goal. Thus, a possible strategy for the Wealthy’s Enemy could be to focus on the Wealthy’s lack of rational analysis. It might be possible for the Enemy to make the Wealthy aware of their self defeating results. Showing the Wealthy that they were more successful when the Enemy received approximately 50% of the productivity gains could be a basis for a treaty. There is data available to the Enemy that suggests when they received gains equal to the rise of productivity, the growth of economic activity was even greater than the period of this study.

To summarize: The Wealthy are poor Class War strategists. They are self defeating in such a way that they remove all ability for either side to win the Class War. The Wealthy must let the Enemy win the war in order for the Wealthy to win. I would caution that any approach toward a treaty by the Enemy to the Wealthy must be taken with care. It is not certain as to whether the Wealthy have the strength of character to accept that they are failures. By evidence of their tactics in the face of the data, forming a treaty with the Wealthy who act irrationally will be met with great frustration by the Enemy.

Tags: , , , Comments (0) | |

Stimulus Outreach Needed?

While others are looking towards the next economic stimulus package, the Center on Budget and Policy Priorities sends word that some 5 million payments have yet to be claimed. Claiming the payments requires filing an income tax return, but some otherwise eligible individuals — notably seniors and disabled veterans — have total incomes too low to require filing a return under normal circumstances. It’s hard not to think of low-income pensioners as having a high marginal utility of $600. They have until October 15 to file.

Now, 5 million returns might not seem like a lot relative to the 134 million individual income tax returns filed in 2005 (the latest year in the Statistics of Income data). However, according to IRS data graciously provided by the CBPP, it’s 28% of the population of Social Security and VA beneficiaries needing to file. The geographical variations are pretty interesting, too:

Data courtesy of CBPP. Not shown: Alaska and Hawaii (in the top 35-39 rate group).

Somehow I don’t think it’s easier to be on a low fixed income in the Northeast or West Coast states than it is in Iowa or South Dakota. Perhaps it’s harder to reach the target population among the urban poor? More outreach appears to be in order.

Tags: Comments (0) | |