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A look at tax havens by the Fortune 500

by Kenneth Thomas

A look at tax havens by the Fortune 500

According to a new report today from Citizens for Tax Justice, the 285 members of the Fortune 500 that have parked money overseas would owe an estimated $433 billion in taxes if and when it is repatriated. No wonder these companies are working so hard to get a “repatriation holiday” even though the one given in 2004 did not yield any significant new investment, but lots of dividends and stock buybacks.

The new report list 10 companies with $209 billion parked overseas that report the taxes they would owe on these profits (only 47 do so). These companies all report that they would owe 32-35% on their money, which indicates they have not paid any taxes abroad on it; in other words, the money is in tax havens.

Note that some estimates place these figures even higher; in March, I reported that Apple’s overseas stash was estimated at $64 billion.

Based on the entire 47 companies that report their estimated tax bill, CTJ came up with an average tax rate of just over 27%.

Multiplied by the $1.584 trillion in overseas cash held by the 285 corporations (up from about $1 trillion estimated in March) yields the figure of $433 billion in taxes that would be due if the income were repatriated or the deferral provision for overseas income ended.

What does it all mean? As U.S. companies continue to enjoy record profits, they are declaring them to be foreign profits at a high rate, as we can see in the increase from the March to October estimates. Numerous tech and financial companies have stashed literally tens of billions of dollars, each, in offshore tax havens, which drain billions a year from tax coffers that must be made up with higher taxes on the middle class, larger budget deficits, or cuts in programs. And as we have seen from the two tax returns Mitt Romney has released, there is one tax system for the 1% and another one for the rest of us.

crossposted with Middle Class Political Economist

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New Model Legislation Would be Great First Step Toward Subsidy Reform

 by Kenneth Thomas

New Model Legislation Would be Great First Step Toward Subsidy Reform

Yesterday, Good Jobs First released new model legislation to increase the transparency, accountability, and effectiveness of state and local subsidies, which I estimate to total $70 billion per year. If states were to adopt these laws, subsidy administration would improve dramatically, and if all states adopted them, it would put an end to job piracy as well.

The model legislation revolves around four principles. First, company-specific, web-based reporting of subsidies received and compliance with job quality and other performance requirements. This would be supplemented by reporting by property tax districts of all tax abatements, tax increment financing deals, and other tax reductions affecting school districts and other recipients of property tax revenues.

Second, there would be standards for job creation and job quality (wages, percent full time, benefits, etc.) set that would be specific to the locality. Noteworthy among the provisions is that the model legislation would require at least one new job to be created for every $35,000 in subsidies, and that a company could not count a job towards its job creation commitments if it relocated the job from elsewhere in the United States (not just the state giving the subsidy). This latter provision would prevent states from subsidizing relocations, as happens, for example, at the New York/New Jersey and Missouri/Kansas borders, and even within metropolitan areas like Cincinnati and Cleveland.

Third, states would be required to claw back subsidies if companies did not reach and maintain their job creation and job quality commitments. The legislation gives specific language on how much should be recaptured under various scenarios (a bigger percentage for three years of failure than one year, for example). Moreover, the model legislation provides for private parties to have standing in the courts to enforce the rules if state agencies do not.

Fourth, under the Good Jobs First proposals, states would create Unified Economic Development Budgets, which would track both tax expenditures and on-budget subsidies in every state agency that provided them. This would make it easier for citizens to hold legislators responsible for overall economic development policy, and it would certainly make life easier for researchers like me who currently have to create national estimates based on incomplete data and a relatively small number of states.

These provisions would dramatically improve the transparency and administration of state and local subsidies, but at the same time they show the limits of state-by-state reform. For example, no automobile assembly plant has been built with a subsidy as small as $35,000 per job since the 1980s. No state will commit to that level, because they simply would never receive another auto assembly plant when plenty of states that are good locations for such facilities will give $100-150,000 per job, and at least one (Tennessee) over $200,000 per job. Similarly, I would doubt that many states would commit to stop their job piracy, at least if they were victimized by it to any appreciable extent.

For this reason, I have long argued that federal controls are necessary to rein in these out-of-control subsidies. However, even though governors and economic development officials realize they’re in a bad bargaining position, they are not willing to give up their “tools,” as we saw when it looked like the courts might rule that state subsidies violate the Commerce Clause (p. 90). For the time being, then, state-level subsidy reform is the only game in town, and the Good Jobs First model legislation is the best cookbook out there.

cross posted with Middles Class Political Economist

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Romney Tax Plan as Budget Busting as Ever

by Kenneth Thomas

Romney Tax Plan as Budget Busting as Ever

Seriously, I could just re-post my February 27th post word for word tonight and it would be just as true as it was then. The Romney tax plan blows a $5 trillion hole in the budget via tax reductions and he still hasn’t told us anything about the tax breaks he would get rid of to pay for it, which he has to do because he calls it revenue neutral, as he did again in tonight’s debate.
 
Amazingly, Romney kept denying that his tax reductions reduce revenue by $5 trillion over 10 years when considered by themselves, even accusing the President of lying about it! He kept insisting that his plan was revenue neutral and that he would not adopt a plan that would reduce the share of taxes paid by the rich. Trust him. We have his word on it.* (Apparently, that is how CNN does fact-checking.).

Given his insistence on his proposal’s revenue neutrality, let me repeat my 5-step plan, “How to Read a Republican Tax Proposal.”
 
Step 1: Assume revenue neutrality.

Step 2: Look at what income is no longer taxed.


In the Romney plan, according to conservative economist Josh Barro, there is a $1 trillion reduction in corporate income tax, $3 trillion from the 20% reduction in tax rates (again, not 20 percentage points: the top rate falls from 35% to 28%), and $1 trillion from miscellaneous tax reductions, notably abolishing the Alternative Minimum Tax.
 
Step 3: Determine how much of that income you have.
 
Step 4: Ask what taxes have to be raised to get to revenue neutrality.
 
Step 5: Look in the mirror to see who pays them.
 
That would be the end of the story, except that the Romney budget is also raising military spending by $2 trillion, as the President pointed out in the debate. So that has to be offset, too.
 
Again, the bottom line is that if we cut taxes for the wealthy and corporations, it will impact the budget elsewhere, in some combination of tax increases on the middle class, program cuts, and deficit increases. Regardless of the spin surrounding it, if a proposal reduces some taxes but doesn’t reduce your taxes, you will lose out via these three methods of compensating for the lost revenue.
 
* If you aren’t old enough to remember, this is a reference to a great series of Isuzu car and truck ads featuring “Joe Isuzu,” whose signature line was “You have my word on it.”

cross posted with Middle Class Political Economist

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Conservative roots of Obamacare

by Kenneth Thomas
 
Conservative roots of Obamacare

The pile-on continues. As I discussed in February, Stuart Butler of the Heritage Foundation wrote a breath-taking op-ed in USA Today (via Don Taylor) denying that he fathered the individual mandate. In fact, his revised 140-page research paper was published January 2, 1989, before President George HW Bush came into office, let alone President Clinton, whose proposals Butler says his research was directed against. Two conservatives, Avik Roy of Forbes and James Taranto of the Wall Street Journal, played strong roles in locking down the point that Butler was the first to propose the mandate.
 
Today, J.D. Kleinke of the American Enterprise Institute goes straight to that 1989 report in a New York Times opinion piece to once again lay the mandate at the feet of Heritage. And why not? According to him, the Affordable Care Act is a conservative’s dream.

The rationalization and extension of the current market is financed by the other linchpin of the law: the mandate that we all carry health insurance, an idea forged not by liberal social engineers at the Brookings Institution but by conservative economists at the Heritage Foundation. The individual mandate recognizes that millions of Americans who could buy health insurance choose not to, because it requires trading away today’s wants for tomorrow’s needs. The mandate is about personal responsibility — a hallmark of conservative thought.

Kleinke argues that Romney’s incoherence on health care stems precisely from rejecting his accomplishment in Massachusetts. Romney can’t offer anything better than the ACA because it is the only conservative way to overcome the problems of the health care market while remaining based on the market and individual responsibility. With no single payer and no public option, it is not surprising that, as he puts it, “the health insurance industry has been quietly supporting the plan all along.”
 
Aside from his odd notion that single payer represents a “government takeover of health care” (Canada’s Medicare is not the United Kingdom’s National Health Service), Kleinke’s column is on the money: historically, the mandate was developed by Heritage economists, the ACA more broadly relies on conservative rather than liberal principles, and many liberals have been unenthusiastic for just that reason.

Heck, I’m unenthusiastic (single payer!). But it’s a big improvement over the status quo that is already providing benefits to millions of people, whether for young adults, the millions of consumers getting rebates due to the medical loss ratio rule, or for seniors getting rid of the donut hole and gaining free preventive care.

crossposted with Middle Class Political Economist

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Mitt Romney’s Unintentionally Hilarious Tax Return FAQ

by Kenneth Thomas

Mitt Romney’s Unintentionally Hilarious Tax Return FAQ

Unless you’ve been in a coma, you have certainly heard about Mitt Romney’s release of his 2011 tax returns last Friday. You no doubt know that he and his wife did not claim all the charitable tax deductions they were due, so their tax rate would not go below 13% of adjusted gross income. If you read Bloomberg or a newspaper that picked up the Bloomberg story, you know that Rafalca, the Romneys’ dressage horse, has disappeared from their 2011 tax deductions. This, of course, raises the question of whether it was a legitimate deduction in 2010 (or earlier?). After all, being in the Olympics probably raised the mare’s value, making the profit motive necessary for an allowable business deduction more plausible. So why would Rafalca not be eligible to deduct in 2011 if she were eligible in 2010 and probably gained value?

But have you read the Frequently Asked Questions page the Romney campaign put up about the 2011 returns and the PricewaterhouseCoopers (PwC) summary of the Romneys’ 1990-2009 taxes? You should, for the humor value, if nothing else.

In question 9, we learn how PwC calculated the average effective tax rate: they added the tax rate for each year, then divided by 20. This tells us almost nothing, as many observers (here’s one, h/t Think Progress) have pointed out: $50 million taxed at 10% (though the campaign claims it was never less than 13.7%) and $5 million taxed at 30% would yield an average tax rate of 20%, using the PwC method, when the true tax rate would be 11.8% ($6.5/$55) in this example.

In the very next question, however, we learn that for the total of federal taxes, state taxes, and charitable contributions (38.49%), PwC used the proper averaging methodology! In other words, adding up all the payment dollars and dividing by the total adjusted gross income (though we don’t know what tricks he used before adjusted gross income). Why didn’t they do that for tax alone?

In 2011, the Romneys’ charitable contributions came to just over twice their federal income tax ($4 million vs. $1.9 million). If that ratio applied for the entire 1990-2009 period, that would make the federal tax portion less than 13% (even lower because I have ignored state taxes). Of course, we have no way of knowing the real rate for federal or state taxes, or charitable deductions, without seeing the actual tax returns.
But wait, there’s more! Don’t forget all the offshore accounts! To do this question and answer justice, I’ll have to quote it in full:

12. There are some investments that seem to be established in offshore accounts, like the Cayman Islands and Bermuda. Are these investments evading taxes?
Note the misdirection in the question, “evading” rather than “avoiding” taxes, which describe illegal and legal maneuvers respectively. Few people think Romney has broken the law, though Nicholas Shaxson considers it to be a possibility.

No, the investments by the blind trusts in funds established in the Cayman Islands or other jurisdictions are taxed in the very same way they would be if the shares were held in the US rather than through a Cayman fund. No taxes are evaded or reduced. These funds are all registered with the IRS and report all income to investors and the IRS, just like domestic funds. Whether in Bermuda or Boston or elsewhere, there is no difference in how they are taxed.

If this were true, why would the funds need to be organized in the Cayman Islands? Boston would be a lot more convenient. No, as Richard Murphy of Tax Research UK told me, these funds are set up to allow round tripping by U.S. investors to avoid U.S. taxes, though some foreigners may also take advantage of them. Moreover, if foreigners are exempt from U.S. taxes like the Unrelated Business Income Tax, what need do they have to invest through the Caymans except to avoid taxes at home? Finally, we know from the Gawker revelations that at least two Cayman funds the Romneys invested in created five blocker corporations, which are set up precisely to allow round-tripping by Americans. How can these funds be established in the Cayman Islands, etc., for any reason other than tax avoidance?

In addition, it is important to note that there are no offshore accounts. These are investments in funds that are organized outside the US.

A fund organized in a secrecy jurisdiction like the Caymans, Bermuda, or Luxembourg is offshore by definition.

Further, it is important to note that Governor Romney did not make these investments. Governor and Mrs. Romney’s assets are managed on a blind basis. They do not control the investment of these assets. The assets are under the control and overall management of an independent trustee.

We’ve known since 1994 what Romney thinks of blind trusts, calling Senator Ted Kennedy’s “a ruse.”

Finally, the trustee did not choose where the investments were located any more than a stockholder in a Fortune 500 company chooses where that company is organized. Only the sponsor of the fund decides where it is organized. That responsibility is totally outside the control of a passive investor like Gov. Romney or the trustee of his blind trust.

And a stockholder can sell his shares. Has trustee Brad Malt never heard of “divestment”? I was one of thousands of people active in the late 1970s to get our universities to sell stock in companies doing business in South Africa, the “divestment movement.” While we weren’t very successful at Princeton, students and faculty at many other universities were, and some major local government funds divested from such firms, too, leading companies like Citicorp to end their South African operations. Malt could sell if he wanted to.
The bottom line is the “same as it ever was,” one tax system for the 1% and another one for the rest of us.

cross posted with Middle Class Political Economist

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Every State’s State/Local Tax System Taxes the Poor More than the Wealthy–And All Exceed Federal Taxes

by Kenneth Thomas

Every State’s State/Local Tax System Taxes the Poor More than the Wealthy–And All Exceed Federal Taxes

A new report from the Institute on Taxation and Economic Policy (ITEP) shows that in every state in the country, the bottom 20% of households pay more of their income in state and local taxes than does the top 1%. Washington state was the worst, where the bottom 20% pay a whopping 17.3% of their income in state and local taxes. This was followed by Florida at 13.5% and Illinois at 13.0%. Though the report hints at an exception, a reading of their appendix shows that the only one is the District of Columbia.
 
As the report points out, such high taxation increases the burden of poverty on the people who, by definition, can least afford it. Moreover, this runs counter to the federal tax system, which in its overall effect (see table below) is progressive. On average, the top 1% pay federal taxes equal to 30% of their income, compared to 1.1% for the lowest 20%.
 
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Source: Tax Policy Center

Between these two reports, we can see that the bottom 20% of taxpayers pays a much higher portion of their income in state and local taxes than they do in federal taxes. ITEP therefore recommends four major policies to make state and local taxation less regressive.

1) Enact a refundable earned income tax credit for state income tax;
2) Enact property tax circuit-breaker caps for all low-income taxpayers, including renters;
3) Enact other refundable income tax credits for childless households below the poverty level;
4) Enact or increase child tax credits, and make them refundable.

Of course, it should go without needing to be said, but to make federal tax more progressive (think of Mitt Romney and his tax rate below the average 15.1% paid by those in the third income quintile), we should tax capital gains and carried interest the same as ordinary income.

cross posted with Middle Class Political Economist

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More New Books Highlight Plight of Middle Class

by Kenneth Thomas

More New Books Highlight Plight of Middle Class

The situation of the middle class is a hot topic these days, and rightly so. In addition to James Carville and Stan Greenberg’s recent book, It’s the Middle Class, Stupid, new books are out by Donald Barlett & James Steele, Jeff Faux, and Mike Lofgren.Together, they advance our understanding of middle class issues significantly.

Barlett and Steele have been sounding the alarm about middle class decline since they wrote the first newspaper articles forming the core of 1992’s America: What Went Wrong?  In The Betrayal of the American Dream, they tell the stories of everyday Americans, many of whom they kept up with after interviewing them for previous books. They date the beginning of the decline of the middle class to the 1970s, which I think is correct since that is when real wages for production and non-supervisory workers began their forty year decline. They emphasize the central role of Congressional and Presidential decision-making that has given us tax rules favoring the 1%, laws allowing private equity and other corporate raiders to raid pension funds and break contracts with unions and retirees, trade agreements, industry deregulation (which they see as highly destabilizing for the middle class), the destruction of retirement via the assault on pensions and their replacement with 401(k)’s, and the devastation of offshoring.

Their proposed solutions include raising taxes on the rich, and to consider instituting a financial transactions tax (also known as a Tobin tax, after its first proponent) or a gross receipts tax, which would be harder to dodge than the corporate income tax. Barlett and Steele argue further that we need to rebuild manufacturing and reduce the trade deficit, with high tariffs if necessary. They propose massive investments in infrastructure and education, including job training. Finally, they argue that the financial fraudsters who caused the 2008 financial crisis need to be prosecuted. Surprisingly, they say little about getting money out of politics, though they do mention it in their prologue as well as the well-funded corporate propaganda machine.

Jeff Faux, founder of the Economic Policy Institute, was fighting trade agreements long before mainstream economists were willing to admit that maybe free trade isn’t always good for everybody, especially workers in the United States. His book, The Servant Economy, is a dystopian vision of the future of the middle class if present trends are not reversed. His basic argument is what he calls an “end-of-empire story,” that the U.S. can no longer sustain subsidized capitalism, global military dominance, and middle class prosperity. He argues that the country’s former economic and military dominance gave it a “cushion” that was able to sustain the middle class, but that the pressures of international trade and global competition have eroded that cushion along with the nation’s ability to achieve all three of the goals mentioned above.

For Faux, much of the problem stems from the increasing U.S. trade deficit, which figures in prominently throughout the book. The rise of finance relative to manufacturing is a key problem as well, one which has made the Democratic Party more dependent on Wall Street Money, which led to Clinton ending Glass-Steagall and Obama treating bankers with kid gloves after he came into office. Worse, as we saw in the 2011 debt negotiations and other instances, the President has made it clear that he thinks there needs to be cuts to Social Security.

“Hope is not a strategy,” according to Faux, and he devotes an entire chapter to what he calls “the shaky case for optimism.” He foresees a “politics of austerity” that will mean cuts to middle class programs, the continuing loss of good jobs to the trade deficit, and slowly declining living standards and economic security for the vast majority of Americans for decades to come.. He calls cuts to Social Security and Medicare “a done deal.” To me, perhaps the single most depressing statistic in the book relates to the much hyped “onshoring” phenomenon: GE has moved some production from China to Louisville, but the workers there make $13/hour compared to the $22/hour they formerly made.

What, then, is to be done? In a talk Faux gave at the Economic Policy Institute August 15th, he explained that he didn’t see the need to give a laundry list of policy proposals because, first, he had done so in previous books, and second, there was no point in it unless we change government decision-making. Thus, it is essentially a one-point program, a constitutional amendment that ends corporate “personhood” permanently. This would also have the effect of overturning Citizens United. Without that, he argues, there is no hope.

Lofgren’s book, The Party Is Over, is a Republican-eye view of what went wrong, beginning with Newt Gingrich’s takeover of the Republican Party. While highly critical of the rightward, anti-science turn of his party, he argues that the Democrats are not much better, and have suffered from extremely bad messaging (he says the stimulus act should have been called the “jobs bill,” for example). Interestingly, his major recommendation is to cut trillions from defense spending and redirect it to infrastructure. Of course, he wants to get the money out of politics, too, but cutting defense is his most distinctive policy proposal.

Taken together, these books are largely complementary, though each has its own distinct emphasis. Faux’s book, in my opinion, is the best of the three, though also the most depressing. His vision of a likely future is far too plausible to take lightly.

cross posted with Middle Class Political Economist

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US wages trail 10 OECD countries, but with higher unemployment than 9 of them

by Kenneth Thomas

US wages trail 10 OECD countries, but with higher unemployment than 9 of them

Contra Eric Cantor, Labor Day celebrates the importance of labor and the labor movement in American history. But the bluster of Cantor, where he celebrates the so-called job creators, does illustrate that organized labor has been in decline in this country for quite some time.

One result of having a weak labor movement is that average wages in the United States have fallen behind those of 10 other industrialized democracies that are members of the Organization for Economic Cooperation and Development (OECD). What is most confounding, for Republicans at least, is that nine of these countries also have lower unemployment, which contradicts their view that high wages (and high minimum wages) harm employment.

The table below below is constructed from data at OECD StatExtracts, showing the average earnings of all wage and salary workers in each country, as well as its most recent unemployment rate (usually July 2012).
Source: OECD StatExtracts.


For average wages, select data by theme, then labour, then earnings, then average annual wages, and use “2011 USD exchange rates and 2011 constant prices” for each country. For unemployment, select data by theme, then labour, then labour force statistics, then short-term statistics, then short-term labour market statistics, then harmonized unemployment rates.
 
This table does not make use of purchasing power parity (PPP) conversions to wages (and the U.S. in fact has the highest wages when adjusted for PPP), for a very important reason. Essentially, the PPP calculation adjusts actual exchange rates for differences in the cost of living between countries. In practice, this means downward adjustments for expensive countries like Norway (where I had a personal pan pizza for $25 on my honeymoon six years ago; the New York Times recently published more examples) and upward adjustments for developing countries and even Eastern European countries. As I note in Investment Incentives and the Global Competition for Capital, gross national income per capita for the Czech Republic in 2006 was $12,680 at actual exchange rates, but $21,470 at PPP (page 99).
 
The reason we should ignore PPP when dealing with wages and jobs is that a company deciding to invest in one place rather than another has to pay the wages using the actual exchange rate and is not affected by PPP. Thus, if there is an effect of wages on employment, that will be a response to what an employer actually has to pay to hire someone, not a hypothetical measure of how well off the worker is in terms of PPP-adjusted dollars. The data here does not show any negative effect of wages on unemployment.
 
Moreover, I would argue that living in a high-wage, high-cost location has distinct advantages over living in a low-wage, low cost location, even if after adjusting for cost of living (via PPP or within a single country) the lower wage location has “higher” pay. One important reason is that having extra cash gives you extra options. You will have a higher retirement benefit and will keep it if you move to a lower-cost area, whereas the reverse is not possible. You will have better quality services on average, particularly health care. It is far easier for you to vacation in a low-cost location than it will be for someone in a low-cost location to vacation to a high-cost location ($25 personal pan pizzas!).

Your high salary will be the benchmark if you take a job in a lower-cost location. If you economize from the standard basket of goods used to measure cost of living, your benefit will be higher in the high-cost area. Of course, a full treatment of this issue requires another post, but the big point is that high wages do not necessarily create unemployment and reducing wages is not the route to middle class prosperity.

cross posted with  Middle Class Political Economist

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"You didn’t build that!"

by Kenneth Thomas

Hilarious twist on “You didn’t build that!” UPDATED

The Atlantic Wire (via @NoBigGovDuh) has a great story on the dishonesty of Mitt Romney’s “You didn’t build that” ads. It turns out that at the Republican convention on Tuesday night, they plan to ramp it up again with a speech by a small business owner from Delaware, Sher Valenzuela, telling everyone how she did build it, not government.

Only one small problem. Actually, two.

First, Valenzuela’s business, First State Manufacturing, “received more than $2 million in federal loans and more than $15 million in federal contracts over the years,” according to the article. This included Small Business Administration money very early on, as well as federal disaster relief loans after 9/11 and loans from the American Recovery and Reinvestment Act. So, beyond the fact that she obviously didn’t build the roads and bridges and other infrastructure–which the President was actually referring to in his speech Romney has so grossly twisted in his ads–she benefited mightily from more direct government aid. Even a month ago, we knew that lots of companies Romney promoted with this tagline actually had gotten direct government support, too.

Second, a fast-thinking Redditor figured out that Valenzuela had not claimed www.firststatemanufacturing.com  for her website, and constructed his own parody of her there (h/t @NoBigGovDuh and Atlantic Wire). On the landing page we see Valenzuela displayed next to the words:

This refers to the company’s designation by Delaware in 2000 as a Disadvantaged Business Enterprise. As the “About” page concludes,

First State Manufacturing is proud of our heritage, and thankful for the help that government has given us along the way. Not to mention the current help government provides! We believe that to say otherwise would be ungrateful, hypocritical, and unpatriotic.

We’ll see on Tuesday night.

(For the humor-challenged out there, remember, this is not her site and not her words. It’s a parody.)

UPDATE: Here is something from Valenzuela’s own website: “Get federal dollars by being a minority-owned business.” Hypocrisy, anyone?

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Is the Growth of Manufacturing Production a Mirage?

by Kenneth Thomas

Is the Growth of Manufacturing Production a Mirage?

A lot of people lament the decline in manufacturing employment, which has fallen by about 1/3 since 2000. As Upjohn Institute economist Susan Houseman points out in the linked article, we’re talking about 5.5 million lost manufacturing jobs in that time frame. Here’s what it looks like in long perspective

Graph of All Employees: Manufacturing

Instead of recovering as it did in previous recessions, after the 2001 recession manufacturing employment continued to fall, as Houseman points out.


But a number of commentators, including Matthew Yglesias and some more conservative ones cited by Houseman, have argued that what we really ought to be looking at is manufacturing output, which has risen steadily except for small blips during recessions.

Graph of Industrial Production: Manufacturing (NAICS)

What’s wrong with needing fewer people in manufacturing due to greatly increased productivity?
 
Houseman argues that the increased productivity is a mirage, due to a single industry, computers. She writes:

Real value added in the computer industry grew at a staggering rate of 22 percent per year from 1997 to 2007 and 16 percent per year from 2000 to 2010. In contrast, average growth of real value added in the rest of manufacturing was just 1.2 percent per year from 1997 to 2007; real value added in the rest of manufacturing was actually about 6 percent lower in 2010 than at the start of the decade.

With that kind of growth, many multiples of GDP growth, we must be an export powerhouse in computers and electronics, right? (Insert joke here.)*

Of course we aren’t, so where does that gigantic growth rate come from? If you remember the debates over inflation that gave us the Boskin Commission, you will recall that one of its criticisms of Bureau of Labor Statistics Consumer Price Index (CPI) data was it did not adequately account for improvements in quality over time. Houseman argues that the huge increases in computer power and semiconductor processing speed are what are beneath the apparently massive growth in productivity in the industry. In other words, the price deflators used to calculate real growth are the real reason productivity is apparently growing so rapidly in computers.

If Houseman is right, it means that falling manufacturing employment really is a problem; we have not become so productive that we simply need fewer manufacturing workers. And the fact that productivity is growing by leaps and bounds, yet our trade deficit in electronics keeps getting worse, seems to me to be strong evidence that she is on to something.

From the Austin Lounge Lizards song, “The Drugs I Need.”*

cross posted with Middle Class Political Economist

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