|It's Still The Economy, Stupid
Friday, May 23, 2003
More Wall Street Journal (and the NYT)
As it turns out if you want actual information, non-distorted even, about the likely-to-pass tax cut proposal, you have to go to the Wall Street Journal. All of the following are on Page 1, above the fold:
You wouldn't get all this from, for instance, the NYT. There, if you go to the national section you can at least find one story with this subheading: "A hard look at various elements of the $318 billion tax bill shows a plan that could lose $800 billion in tax revenues over 10 years." But continuing with it's slanted coverage, consider this graphic (click to enlarge):
What's wrong with this? I looked at it and I thought, "Hey, at least this works out ok for middle income families with income around $41,000, particularly if they have kids". Then I thought, "But of course the marriage credits have a two year sunset", and then I thought "Hey, what's this about 'Assumes' and 'capital gains of:' and 'dividend income of:' and then putting in $500 for each."
That's patently absurd. Families making $41,000 per year do not--outside of tax-sheltered retirement accounts--have remotely near this amount of capital gains and dividend income. If the NYT wants to make stuff up (or hire Deloitte and Touche to do so), why not just assume they get all of their income from stocks? How does this fiction affect the numbers? Well there's $1000 of fictional stock-based income that will be taxed at 15% instead of 28%, which means the savings for the $41,000 family are overstated by $130--an 11% over statement of the benefit. Similarly, though I'm less certain on this point, $30,000 per year in stock income for families in the $530,000k and over bracket seems on the low side. So this assumption understates the top-end benefits of this tax plan. One more thing: where's the row for "Annual Household Income of $18,000"?
X-Posted at Angry Bear.
UPDATE: What would it take for the Times' assumption about dividend and capital gains income to be true? Click here.
UPDATE: The NYT assumption may be more biased than I thought. From the NRO: "Lower-bracket taxpayers will pay a 5 percent rate [on capital gains and dividend income] for the 2003-2007 period and zero percent in 2008". This mean that part of the savings come from the fictional $1000 in stock income being taxed at 5% instead of 28%, meaning the fake savings would be $230 (tax on $1000 is $50 instead of $280) instead of $130, if the NYT used the new 5% rate. 5%, or 50%, it doesn't matter what the rate is, since the dividend income for that bracket is way, way, below $1000. Based on a CNN story that I can't find anymore, only 28% of filers indicated some dividend income and 63% of those made more than $100k per year in income.posted by Angry Bear | 1:41 PM |
Who are the real economists?
Thursday, May 22, 2003
Is It Paradise Yet?
Democratic politicians have done a very bad job of explaining why taxes represent services we get, and not just money we pay. Conservatives have therefore been able to get the country nearly convinced that a gun in every home and the abolishment of the IRS would result in a utopian society wherein citizens would provide their own security. Where the market would solve every problem. Libertarians seem to believe that the result would be a spontaneous 'open source' self-governance, wherein the reason of the enlightened citizenry would prevail.
It might not seem like having a gun in every home was much of an economic issue, let alone one that relates to taxation, but *needing* a gun in every home certainly is. The provision of security, relatively invisible until recently in a peaceful country like the US, is a major function of governments large and small. A measure of peace is a vital component of trade. Also, it happens to have a hefty price tag.
For corporations, government policing means diminished costs for physical security mechanisms and private guards, the reasonable expectation that shipped or ordered goods will arrive at their destination, that contracts will be enforced, and an ability to be insured for unusual losses. (If losses become regular, by definition, insurability diminishes sharply.) For individuals, it means the ability of citizens to travel freely to work, decreases the risk of property loss or grievous bodily harm, centralizes the guarding of neighborhoods, and increases their willingness to engage in commercial transactions with parties unknown to them.
But, it turns out that we have a test case for the utopian dreamers: Iraq. The Big Gummint' is gone, no one is paying taxes, and everybody has guns. Must be sweet.
Yet there's the sticky problem of the need to protect hospitals from looters. A high crime rate. Growing resentment over the high crime rate. The rise of unaccountable paramilitary groups. And a dawning recognition that law and order becomes more important than democracy in the face of a need to perform nightly sentry duty outside your own home.
So I'll pay my taxes, thank you kindly. Bravely standing watch over your property with a trusty sidearm at the ready is yet another thing that's only exciting in movies and adventure novels.
x-posted at the watchposted by Natasha | 7:46 PM |
Teasers on the Front Page of [even the conservative] Wall Street Journal
Here's a nice highlight from the A2 story:
"...a rich investor might, for instance, borrow money and deduct interest payments...then use the money to buy shares of stock on which he would earn a tax-free dividend paid from profits that have never been taxed. Bottom line: The profits are never taxed, not even once, and the economy gets no new capital or savings because the investor borrows the money that he used to buy the shares."
From the WSJ/NBC poll on A4, Bush's overall approval is at 62%; 64% think there are better ways than a tax cut to increase economic growth (7% unsure); by a 55-36 margin, money to help pay for health care beats out tax cuts; and 53% said the 2001 Bush Tax Cut had no real effect on U.S. economic performance, with 15% saying they hurt and 25% saying they helped. Also, Lieberman, Kerry, and Gephart are all 20+% behind Bush in 2004 election polls, though a generic Democrat is only behind 47% to 32%.
From the C1 story:
"I guarantee it produces very, very low [tax] rates", possibly even zero says Ronald Pearlman, a tax-law professor at Georgetown.
As Warren Buffet points out, the government can't create a free lunch. Since spending, including discretionary spending, is increasing under Republican Control of the White House, the House, and the Senate, if someone pays less, then someone else has to pay more. We know who will pay less. Guess who will pay more?
P.S. As these stories make clear, there is another reason that the cost of tax cut will be over $350b. I'm guessing that the costs of cutting the dividend tax to 15% were computed as (35%-15%)*($Dividend Income), while totally ignoring the substitution effect: people with the means to do so will shift money in ways to minimize their tax bills, increasing the cost of the tax cut.
X-Posted at Angry Bearposted by Angry Bear | 12:21 PM |
THEM JOBS, CONT'D. From MaxSpeak's mouth to CNN's ear. Some no-name at the Council of Economic Advisers (fear of MaxSpeak?) accused me of disingenuousness. I recounted the saga here.
Debt Increase Plan of 2001 causes Debt Ceiling Increase in 2003
Wednesday, May 21, 2003
Regressive Tax Cuts
The picture somewhat exaggerates the top-heaviness of the benefits because the bins widen as you move right. Still, it's quite regressive: for example, the $75k-$100k group has roughly double the income that the $40k-$50k group has but their tax savings ($1,597) are 3.6 times larger. This is what happens when you finance dividend tax cuts by shaving cuts for married couples and small businesses.
X-Posted at Angry Bear.posted by Angry Bear | 11:54 AM |
Teddy here again. My introductory post was held up for a few days, so you'll have to scroll down to 5/15 to see it.
Leave it to John Snow to make Paul O'Neill look good. The Treasury Secretary's rather bizarre pronouncements at the G-8 meeting in France sent the U.S. dollar to its lowest level against the Euro since the latter currency's inception. While the White House quickly moved to damage control mode over Snow's comments, the reality is there has never been a "strong dollar" policy. One might as well take credit for the sun coming up in the morning.
The foreign exchange markets trade around $1.5 trillion every day, the majority of this in dollar-based exchanges. Foreign Reserve assets held by the Federal Reserve amount to around $20 billion. The idea that the Fed can even intervene effectively to support the dollar with so few reserves is lunacy. Even when Bill Clinton's legendary Treasury Secretary Robert Rubin ruled the roost, the U.S. could only just pretend that they had control of the level of the U.S. dollar.
The dollar remains strong because it is the world reserve currency and there is no alternative. About 68% of global currency reserves are held in U.S. dollars. If there is any "strong dollar" policy, that policy is governed by countries outside the U.S., which manage their exchange rates to trade in favorable terms with America and recycle their trade surplus by buying U.S. dollar assets.
Big net exporters to the U.S., such as China and Japan must do this for two reasons. First, there is no reserve asset liquid enough to contain the $500 billion annual trade surplus that the rest of the world runs with the U.S. If any of these countries moved to buy gold they would drive the price into the stratosphere. If they moved to buy another currency, that nation would consider it a hostile act, jeopardizing their currency's exchange value with the dollar. Second, if any country challenged the U.S. "dollar hegemony" the U.S. would consider it a hostile act and move to sanction the offending nation.
Foreign nations have no alternative but to underwrite a strong dollar because the U.S. has become the world economy equivalent of "too big to fail". For the dollar hegemony to end, all countries would have to abandon the dollar simultaneously, in order to avoid the wrath of the U.S., as well as avoid the possibility that some countries would take advantage of the situation to seize their share of U.S. exports and assets. If the dollar were abandoned completely, the U.S. economy would evolve like Argentina's currency crisis. Devoid of foreign capital and having little savings of our own, U.S. interest rates would skyrocket and a debt-deflation would cripple the economy until we allowed our currency to collapse and defaulted on our massive global obligations. The rest of the world would have to accept the deflationary effect on their own economies of so many U.S. dollar debts collapsing in value. Needless to say, this outcome is not highly desired, so the rest of the world goes along even though the U.S. economy is siphoning off capital that could in many cases be used to shore up other countries' shaky financial systems.
So the recent dollar weakness has largely been based on the needs of individual states. The Euro has been strongest against the dollar because many countries in Europe need to refund their banking and insurance systems after multi-billion dollar losses in U.S. assets as well as the bubble in global telecommunications (recall the hundreds of billions these largely nationalized phone systems were wasting on 3G licenses). In order to raise the funds necessary, ECB chair Wim Deusenberg has refrained from cutting interest rates despite near-zero growth throughout the continent in order to keep European bonds favored by foreign investors. A strong Euro is also a big incentive for foreign investors, as they will make additional profits on their assets as the Euro rises.
Japan and China, on the other hand, are expected to keep their currencies roughly fixed against the dollar. Japan has intervened frequently to keep the Yen above 115 to the dollar, and China has refused so far to revalue the Yuan, which is pegged at about 8.3 to the dollar. Most other East Asian nations, which run similar trade surpluses with the U.S., are fighting to sell their own currencies and buy dollars in order not to lose their trade competitiveness to Japan and China. To them, a smaller trade surplus hurts growth and in countries like Japan, worsens deflationary pressures.
To the developing world, particularly Argentina and Brazil, an appreciation of their currencies to the dollar is badly needed to restore capital inflows that significantly damaged their economies to the point of full-blown currency crises.
But this weakness can only go so far. At some point, even Europe is going to intervene to sell Euros and maintain their terms of trade with the rest of the world. The difficulty is that even in countries with massive amounts of reserves, they cannot compete against the 95% of currency trading that is speculative. If the speculators decide that the dollar is toast, then it will be.
That is because the dollar hegemony is a system doomed to failure. As long as the U.S. can run trade deficits without limit, the rest of the world is in essence agreeing to loan money to the U.S. knowing that the U.S. intends never to pay it back in full. Foreigners holding U.S. assets abroad are trapped in a prisoners dilemma. U.S. assets yield less and less as the Federal Reserve is forced to keep lowering interest rates in order to pay its ballooning obligations and prop up its economy. Yet the dollar can't be abandoned as that would lead to even larger losses as the currency and the U.S. economy would crash.
However, the larger these deficits become, the more capital they drain from abroad that would be better invested in the foreign home country. At some point, maintaining the dollar sytem will become so costly to the rest of the world that the Greenback will be better off abandoned. At that point, the dollar will collapse and the $trillions in dollar-denominated debts will collapse in value with it.
Even the economically-challenged Bush Administration realizes this. The most reasonable strategy is thus a "gradual realignment" as Secretary Snow mentioned on Monday. The only worry is that once we start announcing that the dollar will depreciate, the speculators will pile on the dollar and turn the "gradual realignment" will into a full-blown devaluation raising U.S. inflation and interest rates to catastrophic levels. The adjustment does not fix the broken currency regime, only minimizes the losses from the status quo. If Snow and Co. manage a steady devaluation along with a strong economic recovery, the trade deficit will become less of a drain on the world capital stock but will not disappear. Bush will be able to stay in office through 2008 and Snow will be viewed as more akin to Rubin than O'Neill. Unfortunately, this is almost certainly too much to ask a U.S. economy overburdened by debt and unable to benefit much further from lower interest rates. Significant economic growth will require us to spend and borrow even more, an outcome at odds with a U.S. economy that needs to drain less money from abroad.
A very good recent article on the dollar dilemma is an interview with David Duncan. Historical background on the evolution of the dollar standard since 1945 can be found in Michael Hudson's classic, Super Imperialism. posted by Teddy | 9:22 AM |
Tuesday, May 20, 2003
Bush gets Professional Help (and then I woke up!)
From The Washington Post In regard to stimulus measures to confront the current recession, "The White House is forming a package... (which) will include some reduction of the tax on corporate dividends, an added tax write-off for corporations investing in plants and equipment, and a higher limit on contributions to retirement accounts such as 401(k)'s."
A Mercantilist Economist Responds:
My Dear Mssr. Bush:
It is with great apprehension I broach the matter of your economic stimulus plan, which peradventure was only attributed to your counselors by a most condign device…
Methinks it would but ill boots your grace to take amiss at such well-meant words as I have to proffer. The purpose you undertake is dangerous; the institutions you name, uncertain; the time itself unsorted; and the whole plot too light for the counterpoise of so great an opposition. The tax cut on corporate dividends wouldst serve in another time marvelously well; I would well content me to endorse it when your exchequer is in better sorts, but the flight of treasure from these shores is of great urgency. God wot I hath in past days praised subsidies and immunities from taxes; but only companies bound to the service of the state.
The firms who stand to gain so handsomely are procurers of energy, financial services, and entertainment industries like Walt Disney. Such enterprises, while verily of great pith, have no allegiance to your commonweal and are ever wont to regard such graciousness as some gain ill-gotten: to be cozen'd out of the nation, lest it be withdrawn by a future sovereign. When I consider how all of the various items needful for production, such as electric power and natural gas, have done the same when greater profit beckoned, I tremble. And when I further reflect that your adversaries in trade (I mean, God save your grace, the nations of France, Germany, Japan, and a host of other states well-stitch'd together, and well accustomed to cohesive action) are far advanced in securing the diligent loyalty of their beneficiaries in policy, it would be no great leap to conclude you are entitled to no less.
No my lord, I most earnestly beseech your grace to instead resort to an economy of largess, not a surfeit; to bestow that largess not to reward, nor to stimulate, the flow of reserves or bullion from your kingdom, but to risk debts only where great gains from foreign trade lie in sight. In the national income and product accounting system (NIPA) your Excellency will observe the dual accounts of capital and current balance. Capital account should, under the fiat money your nation has chosen, be kept in all cases negative, to render the merchants of other nations in your debt; but woe betide if it becomes available to foreign princes such as the Mikado, who hath sought in every quarter to cultivate novel enterprises. Since you are unable to establish foreign colonies, you should take care to cultivate the slavish loyalties of foreign elites, who well know they suffer utter ruin should they incur your least displeasure. Thus, mighty states with banks under their own mastery are unworthy for American capital.
The current account can, and most assuredly ought, to be kept positive, and large, through loans to importers of American goods, and the steady accumulation of monopoly control of foreign markets. At the same time, the collapse of competition within your own markets bodes ill; for if a resolution could be taken to buy only your native goods, retailers would immediately unite to cheat and exact upon the people in the price, the measure, and the goodness… Such monopolies should be made slaves of your state, else they will make a slave of you.
I remain your most obedient servant,
A Classical Economist Weighs In:
To the Esteemed Mr. President:
In the matter of your proposed economic stimulus package, as cited in The Washington Post, I have undertaken to enlighten your discretion, and elevate your satisfactions, by the following advice.
You say you intend to stimulate investment in your country by a reduction in taxes on dividends. I say, well and good, if you wish to bring about in ensemble the abolition of just-such rent-seeking behavior as would bring your republic into fiscal balance. But be advised that such a course of action, while noble in the endeavor and virtuous in the execution, cannot be looked to as a source of exogenous stimulus. It is a canard to suppose that your state can endlessly reap bounties from deficit spending, when in fact such deficits merely tie up lendable funds.
An increase in the amount of donations allowed to retirement funds is, of course, to be praised from the point of view of individual prudence; but be advised that investment is essentially fixed by the available supply of lendable funds. Your proposal, without explicating how deficits are to be avoided, is only half a plan. I fear that certain canaille have deceived you into supposing that such bribes to the affections and sops to the greed of certain bond underwriters might have led to the notion that the economy can be made to produce more by such arbitrary and intangible events. If so, please allow me to disabuse your Excellency.
Supply creates its own demand. This might be invalid in the realm of the small--the excess inventories of the merchant--but never in the affairs of a nation of two hundred eighty-five millions of persons, with endeavors of trade extending to the furthest reaches of the world. It might, moreover, be masked by the veil that money casts over the radiant visage of that lovely damsel, pure truth, which, thanks to innumerable petty frictions allows temporary misalignments--but only masked. Hence, if your excellency wishes to remove such drags as presently afflict your nation's trade domestic and foreign, I abjure you to withdraw from the hurly burly of commerce, and see that your tax policies do not discriminate or prejudge the boundlessly enlightened judgments of the market.
A Keynesian Economist Responds:
At the risk of blowing a perfectly good opportunity to gloat, Old Boy, I'm going to dispense with the chortling references to how your crew heaped opprobrium on my name for about 24 years, utterly knocked me about like a disgraced maid aunt, and generally used the opportunities created thereby to peddle a bastardized version of the wholly benevolent advice I offered up to you decades ago. Oh, I could prophesy! But tell me, Dear Lad, what in God's name "supply side" is supposed to be the supply side of? Are we perchance talking about my policy recommendations as "demand side," whilst you muck about trying to cut taxes to run deficits? Well, I guess you ought to know I did include that in my general theory but I included constraints as to when one ought and oughtn't to stimulate with tax cuts.
Well, enough of that. You passed a pretty big tax cut last year. You are trying to get the economy out of a recession entirely with tax cuts, while doing nothing about the marginal efficiency of capital. At the same time, as Mssrs Mundell & Flemming warned you, you are holding the interest rates down to some arbitrarily low level. So big surprise, you've got a big balance of payments deficit because what idiot wants to hold dollars when they could hold euros? Your trade deficit is something else again but at least two years ago there was an influx of capital which was closely matched to your current account deficit. So that's why you know that tax cuts, per se, are exhausted.
In the meantime the state governments in 43 states have fiscal crises. To-day, California is slashing everything that moves, and so are other states. If they're cutting their budget by fifty billion nationally over the course of the year, then the IS curve will be pushed further to the right. So much for fiscal stimulus! Look, if you want to carry on insisting that I'm a discredited Communist, I suppose I can't stop you but in that case, why don't you use RBC and Rational Expectations theory? Why even bother with the interest rate cuts? If you want to use the piano, then you must learn to play it.
Look, if you want I can draw you a diagram.
John M. Keynes
RBC (Real Business Cycle Theory): argues that recessions are merely intertemporal substitutions of work for leisure. Rational Expectations is based on the policy ineffectiveness proposition, that neither fiscal policy (i.e., deficit spending) nor monetary policy (i.e., tampering with interest rates). The policy ineffectiveness proposition, IMO, has been as completely discredited as possible with any notions about the economy.posted by James R MacLean | 3:40 PM |
This isn't a tax cut any more than running up your credit cards is making money
When you listen to tax-cut rhetoric, remember that giving one class of taxpayer a "break" requires -- now or down the line -- that an equivalent burden be imposed on other parties. In other words, if I get a break, someone else pays. Government can't deliver a free lunch to the country as a whole. It can, however, determine who pays for lunch. And last week the Senate handed the bill to the wrong party.
I was also chatting with a Mexican bartender I'm friends with, and he pointed out that he's from a country with large persistent deficits, and the rich are much worse off than they are here. Destroying the economy means you destroy the economy for everyone, like a big group hug in reverse. So it you're in favor of the rich getting richer, vote Democratic. If you want more debt, vote Bush.
PS. A la Angry Bear's post: "Streetaccount.com is reporting that 10-year Treasuries are rallying on talk that well-connected Washington consultants Medley Global Advisors is predicting that the Fed will cut interest rates prior to their next scheduled meeting." posted by Matthew | 9:39 AM |
Monday, May 19, 2003
The Economic News Sucks Today
Look for a rate cut if all this stuff keeps happening. Note to Republicans: I mean "look for an interest rate cut", not another "tax rate cut". This on top of already bad news on jobs and bankruptcies.
ABposted by Angry Bear | 9:51 AM |
Sunday, May 18, 2003
Around the econoblogsphere
Republican Presidents = Jobs, right?
Even Carter, who is still maligned under "common wisdom" as being an inept President, saw jobless claims total less than 14 million than his successor, Ronald Reagan, and fewer than both the Bushes. Only Clinton had a better record.
U.S. Democrats urge extended unemployment benefits
I know Democrats like to toss around the 2.7 (or 2.6) million jobs lost number, and strictly speaking, it is true that the economy under Bush has lost that number. But I think it's more accurate to offset that number by any monthly increase in employment. Under that scenario, Bush's record on job lost is just under 2 million (1,971,000 to be more precise.) Fortunately, the BLS also provides historic data on job loss and creation back to 1939, so I was able to re-create a snapshot for the same presidents mentioned above, also to this point in their first terms.
George Bush the Younger has surpassed even his idol, Ronald Reagan in the number of jobs he's seen melt away under his watch. Reagan, however, managed to turn that deficit around to a rather wimpy 2.8 million increase by November 1984, namely by pumping billions into defense spending (and running the federal deficit into the ground at the same time.) Bush the Elder, while seeing a few more months of job loss or sluggish growth, was able to come out with 1.6 new jobs by November 1992, not enough to guarantee him another term. Both Clinton and Carter's economies were job making machines. Unfortunately for Carter, other unforeseen events, namely his mishandling of the Iranian hostage situation, sabotaged his positive job growth numbers. People only seem to care about jobs when they don't have them. Gore faced similar voter complacency in his bid for the Presidency in 2000.