It's Still The Economy, Stupid

Saturday, May 10, 2003  

More on the Distribution of Benefits

From my home blog, this chart, which shows the average benefit for the bottom 80%, the median benefit for the bottom 80%, and the benefit for the top 1%, under Bush's plan and under Grassley's plan (for more on Grassley's plan, see this post). As you can see, Grassley's plan isn't progressive, per se, but compared to Bush's proposal, it's a plan Eugene Debs could endorse.

Note how I had to add the labels indicating the savings for the median tax payer in the bottom 80%--without the labels, you can't even see it.


NOTE: I should clarify that the $2.50 median figure is a best guess that is much more likely to be zero. All other numbers are real--derived from the Waxman report, the CNN report on Grassley, and some algebra. How did I get $2.50? For the first time ever, in 2001 the number of stock holders exceeded the number of non-stock holders. So a bit more than half of the U.S. population now owns stocks, meaning that 40-something percent do not own stocks and therefore do not receive dividend income at all and thus have a (direct) benefit of zero from a dividend tax cut. The median of the 0% to 80% range is the 40th percentile of the overall income distribution. If stock ownership increased one-to-one with income, then the median benefit would be zero. But then I figured that some (but a distinct minority) of the 40th percentile (income of $33,314) might hold a few shares of the biggies, ATT, Coke, GE, and the like, so I guessed that dividend income would average out to about $2.50 (averaging a bunch of zeroes, and a few numbers in the hundreds of dollars and then multiplying by the 20% tax rate for that bracket).

posted by Angry Bear | 6:08 PM |

Around the Econoblogosphere

Dwight Meredith of PLA joins the discussion on Warren Buffet's dislike of Bush's tax cut plan: Is this what W means by "faith-based initiative?"

Max Sawicky at MaxSpeaks is talking healthcare costs around the world and the private sector. Guess where the US stands?

James R. MacLean of The Watch on how real economist's celebrate Mother's Day.

And I've been talking unemployment a lot over at Wampum. Jobless claims decreased this week, but the number of people eligible for unemployment insurance has dropped significantly over the past year. More on that this weekend over here at ISTE.

posted by MB | 12:45 AM |

Friday, May 09, 2003  

Tax policy and redistribution

Matthew Yglesias has something to say that I think makes a lot of sense.

So I've seen a chart displayed on a couple of blogs. The chart is done by Henry Waxman and it's supposed to be a visual representation of the effects of a dividend tax cut. It shows that the mean benefit to the top 1% of taxpayers will be $11,483.00 whereas the mean benefit to the bottom 80% will be only $29.50 -- even more frighteningly, the median benefit to the bottom 80% will be a paltry $2.50. Most of the bloggers I've seen mentioning the chart think that this will be a powerful piece of propaganda that can be used to good effect in the tax cut wars.

I'm afraid they're wrong. I can't remember the precise numbers, but I strongly recall having seen polling to the effect that almost 20% of the population thinks it's in the top 1% and that an even larger number of people believe that they someday will be in the top 1%. Clearly, the vast majority of these people are misinformed, but that's the political reality.

The takeaway lesson should be, I think, that the Democrats need to stop talking in terms of percents and start talking in terms of actual dollar figures. People probably are far better informed about their own income than they are about how much money other people make (I know, for example, how much TAP is going to pay me, but I have no idea what decile that places me in). Fortunately, the Angry Bear has the magic number and it's $374,000 per year. That's the number liberals need to be using.

posted by Matthew | 7:58 PM |

More on the Dividend Tax Cut

The picture first appeared in Henry Waxman's study of Bush's proposed dividend tax cut, then appeared on gorilla-a-gogo, which Off the Cuff then linked and copied, which CalPundit then also posted ,with attribution; then I put it up on Angry Bear. If you still haven't seen it, here it is (for those unclear on the regressive concept, I've identified which bar applies to you, unless you make over $374k per year):

This graph is a great example of why (at Angry Bear) I was able to state with confidence that "[Grassley's] proposal is not Bush's plan; it's just the best Bush can get without Snowe, Voinovich, Collins, and Chafee (Zell Miller can only sell out once). Were Bush's plan implemented, I assure you it would be regressive."

How would things look under Grassley's plan? The rich would get to exclude $500 of dividend income, which would otherwise be taxed at 38.6% (2003 rate), for a savings of $193; the bottom 80% would get an average saving identical to that in Waxman's graph, $29.50. Even that figure overstates the benefit--the $29.50 stems from a relatively small number of upper middle class (70th-80th%) getting a benefit well above $29.50 and the majority of the middle and lower class getting 0. Seriously, would it be so hard to identify the mean and the median benefit of the various tax programs? In this case, the median benefit to those in the bottom 80% would be the benefit to the person in the 40th percentile, which I suspect would be very close to zero--maybe $2.50 in tax savings.

Whenever the average of X is well above the median of X, you know that the distribution of X is skewed upward. Suppose you and ten friends are in a room and that the average income in the room is $50k, which is also the median (half make more than $50k, half make less). Now take your wealthiest friend and replace him with Bill Gates, who makes $1 billion per year. The average income becomes $104.5 million, but the median remains unchanged at $50 thousand. More to come.


P.S. Why all the emphasis on attribution? See this post.

posted by Angry Bear | 2:24 PM |

Thursday, May 08, 2003  

Why isn't Bush trying to fix the economy?

Matthew Yglesias and Brad DeLong both want to know. Considering that few economists think tax cuts of the type proposed will actually bring us out of recession, it's a good question. Why isn't the President trying to actually fix the economy? He's certainly devoting attention to it, he's just not really trying to end the recession.

My own opinion is that there's a sort of self-delusion on the part of the GOP and that they think that the tax cuts actually will cure what ails the country, but check out the comments section of both blogs for more.

posted by Matthew | 3:35 PM |

Wednesday, May 07, 2003  

And now the smearing of Buffett starts

(X-posted at To the point)

One of the little noticed controversies of the past few days has been spurred by a fight over Bush's tax plan between Warren Buffett, sage of Omaha, and the right-wing media and financial community. It's worth going over, because it's not easy to smear of Warren Buffett and make it stick, so those who do must have a really good reason and a really effective way to do it. I blogged about Buffett's comments here (they are originally from the subscription site Factually, his comments are indisputable.

Buffett said: "We [as in the U.S.A.] are going to spend $2.2 trillion this year; it's just a question of where it comes from. And, frankly, I don't think enough of it comes from people like me and too much comes from people who work in our shoe factories."

Reuters further reported that Buffett also said: Bush "is not changing the amount the American public sends the government, just changing who does it," and unfairly to the benefit of rich people.

This is true. The only way you could dispute this statement is if Bush were actually cutting spending, which he is not doing. Spending is actually increasing quite dramatically. I don't dispute that spending needs to go up for defense and other national priorities, just that you can't have the government expend resources and then pretend they don't come from somewhere. They do, and if you don't collect the resources in tax revenue, you have to collect them elsewhere, usually by crowding out investment from the private sector or by inflating away the value of money. It's simply basic accounting.

Now, you'd think that Warren Buffett has some credibility here, and not just because he's the best investor of all time, but because he's been consistently out in front of important ideas. He has always lambasted stock options as perverse incentive systems for management, and decried inadequate corporate governance. He correctly pointed out the dangers of the bubble economy, and has consistently vilified unearned CEO pay (not excessive pay, but excessive unearned pay - his company sometimes pays managers hundreds of millions of dollars) and the conflicts of interest on Wall Street. He did all of this before any of the recent controversies; indeed, he's been preaching about these issues for fifteen or twenty years.

So you'd think that even if you disagreed with him, you'd have to at least countenance his opinion. So what happened when he came out against the President's plan? Well, first of all, his positions on tax policy were ignored by nearly every media outlet. Then Wall Streeters started chiming in:

Given that the statement came as President Bush stumps the country for more tax cuts while Congress is trying to hammer out a package, you'd think Buffett's comments would have been bigger news for mainstream media outlets. (On Tuesday, Senate Finance Committee Chairman Charles Grassley submitted a modified version of Bush's proposals with a plan that calls for a three-year phase of dividend tax reform, a reduction in income tax rates, increased tax credits for married couples and higher tax credit for children under 17.)

Considering Buffett has supported an effort to preserve the estate tax and provided financial support to Hillary Clinton's Senate campaign, it's pretty clear where his political sympathies lie. As a colleague said in explaining the relatively light coverage this received: "He's known as a Democrat, [so] it stops being an ultrarich-guy-bucks-the-system story [and becomes a] rich-Democrat-criticizes-Republican-idea story."

This is a staggering way of attacking an argument. Rather than listening to Buffett, the most successful investor of all time and one of the most shareholder-friendly managers of any company ever, detractors simply dismiss him as a liberal partisan. It's weird. Critics are willing to coutenance an argument from Buffett until they find out he leans Democratic. What is going on? It's as if critics assume that once you become a Democrat, your ideas are now tainted and corrupted. This is an odd reversal of the situation for someone like Buffett, who supports ideas and then seeks mechanisms to implement them. That is, he supports Democrats because they agree with him, not the other way around.

And that's not all. After Buffett gets dismissed as a partisan, he's then attacked for being self-interested and corrupt:

Most market participants deride Buffett's oft-described homespun wisdom as really just another guy talking his book. "He dismisses derivatives because of his own problems with General Re, he nixes stocks because he would like to be buying at lower prices and he frowns at CEO salaries because the billionaire takes little in cash compensation, while having to compensate more than his fair share of others," as contributor Paul Kedrosky summarized.

Yet the pocketbook of a legendary value investor like Buffett would seemingly be enhanced by dividend tax reform, which he opposes. Same with President Bush's tax proposals in general. How do those who generally believe everyone talks their book explain Buffett's seemingly self-defeating stance on taxes?

Simple: It may not be self-defeating, after all. [ed.]
Skip this next section is you don't care about the intricacies of tax policy[ed.]
In the 1980s, the IRS ruled investors must pay tax on "imputed interest" on zero coupon bonds and Treasury 'strips,'" recalled Bill King, principal and market strategist at M. Ramsey King Securities, a Burr Ridge, Ill.-based securities broker, and author of The King Report, a daily service for institutional clients. "Buffett then realized that the converse must also be true [and Berkshire Hathaway] issued zero coupon bonds and bought high-yielding preferred stocks with the proceeds."

By King's reckoning, Berkshire received the 85% tax exclusion on the dividends the corporation received and simultaneously was able to write off the interest on the zero coupon bonds it issued. "So, Buffett got a monstrous tax break by being short zero coupon bonds -- tax benefit of the imputed interest without paying it -- and got the 85% tax break on the dividends," he concluded, wondering: "Is this the real reason Warren is against the repeal of the double taxation of dividends?"

Ah, so maybe it's about self-interest after all. Whew, I was worried there for a second. [ed.]

Conveniently forgetting than Buffett supports higher taxes on the rich, an inheritance tax, and campaign finance reform, all of which work against his own interest, detractors, rather than just ignoring him, are calling him a grand scale political manipulator. He clearly can't be against a dividend tax cut because he thinks it's a bad idea, oh no, it must be some innate corrupt agenda. The lead-in to such a smear is carefully calculated to coincide with the description of his political affiliation, in particular his donations to Hillary Clinton.

And then the Wurlitzer weighed in, commensurate with the near non-impact of Buffett's statements:

Rush Limbaugh did take notice of the "Oracle of Omaha's" stance on taxes, which the arch-conservative commentator decried as standard-issue liberal claptrap.

It's not the lock-step agreement on ideas that scares me about the Republicans, it's the tacit agreement to not even acknowledge the potential for a Democrat to have something valuable to contribute, unless that value is of the 'even the liberal Democrat XYZD agrees that Republican proposal is a good idea..' type.

The utter dismissal of the potential intellectual legitimacy of Democrats, or anyone who voices dissenting opinions, is fairly scary, but it's not surprising. It's a deliberate tactic, and a very effective one. After all, if business leaders are for the dividend tax cut, then it's probably a good thing for business. Listening to the media, though, you'd never know that the best business leader of all time is against it. Or, on the off chance you did hear such a thing, you'd probably be listening to AM radio and inclined to think that Warren Buffett, rather than a native Nebraskan who eats hamburgers and runs a business enterprise with the utmost integrity, is a New York Wall Street corruptoid pushing an agenda to bring him even more money than he already has.

You probably also wouldn't know that the superrich, including Bill Gates Sr, are against many of Bush's programs and tax cuts. But they are. And these aren't 'liberal losers'; these are real business leaders who have helped to build America's global business community. When Warren Buffett is portrayed as someone spewing 'liberal claptrap' in a weird alliance of Rush Limbaugh and Wall Streeters who stole huge amounts of investor money, and Buffett comes off the worse for wear, something in our society is very, very broken.

posted by Matthew | 9:49 AM |

Tuesday, May 06, 2003  

More Buffet

As reported below by Matt Stoller, Warren Buffet recently came out strongly against the Bush tax cuts, going so far as to say "I don't think enough of it [federal revenue] comes from people like me and too much comes from people who work in our shoe factories."

Is Buffet just some rich old guy with outdated opinions? Consider his track record. In the late 1990s tech boom, Buffet took a lot of heat from Berkshire shareholders over his refusal to involve Berkshire Hathaway in the tech boom. From 2000 onward, he had many grateful shareholders. Buffet also has long argued for the expensing of stock options, arguing that burying those expenses allows companies to inflate earnings and that the options are granted disproportionately to top management. While not the same as the fraud at Enron, not expensing options is similar in spirit and in effect to more nefarious methods of inflating earnings. Also, Buffet's salary is only $100,000k per year, though he stands to make substantially (i.e., hundres of millions) more if the company he operates, Berkshire Hathaway, does well--and to lose equally large amounts if his company does poorly. The point: the man knows business, and unlike another recent newsmaker, he practices what he preaches.


X-Posted at Angry Bear

posted by Angry Bear | 2:21 PM |

A few posts of semi-interest

Glen Whitman gives a good primer on why universal health care a la Gephardt is a bad idea. I agree that Gephardt's plan is a bad way to achieve the goal of a 'right to health' for every American, but I don't agree that universal health care itself is a bad idea.

To the point (me) discusses the tendency of pundits to seize on any one data point as evidence of the effects of the President's policies, and why this is, well, bad.

posted by Matthew | 11:26 AM |

Monday, May 05, 2003  

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.


X-Posted at Angry Bear

posted by Angry Bear | 9:40 AM |

James McLean of The Watch on the [sinking] US dollar (links are bloggered):

This posting was inspired by Brad DeLong's site. Some of you, especially those who travel a great deal, might be wondering what is happening to the US dollar. Well, of course it is sliding against currencies like the euro; in 2001 the dollar was worth 1.17 euros, and now it's something like 0.87. The dollar has also slide against the pound, and a little less against the yen. Weighted for trade (that is to say, measuring the exchange rate of the US dollar relative to those with which we conduct the most international trade), the US dollar has actually stayed fairly steady.

The latter point is not terribly reassuring to those who normally watch currency movements. It's something a "calm-down" writer can nearly always pull out of his sleeve: the US conducts a huge share of trade with third world countries whose currencies are always sliding against themselves--currencies like the real (Brazil) or the peso (of practically anywhere). This is not meant to be snide--there are much more important priorities for economic managers in the third world than fighting inflation--and it's not really meant as a gratuitous slam of our own trading patterns, either. It's just that the US dollar looks like it's sliding unless you measure it against the currencies of countries that normally have rather high inflation--or, in short, the US dollar is sliding. [more]

posted by MB | 6:25 AM |