Tag Archives: Economics

General Electric and Taxes

Megan McArdle looks into the claim by the New York Times that General Electric paid no taxes in 2010 and finds it wanting:

…I was rather skeptical of the factoid about GE’s freedom from taxes.  First of all, the definition is as muddy as the article:  what are “US taxes”?  US federal income taxes?  Because I’m quite sure that GE paid some payroll tax, various fuel taxes, etc.  And no matter how good their tax department, I’m pretty sure it didn’t work GE’s personal liability below zero.

This Is Gonna Hurt Like Hell

One of the most memorable commercials aired during the Superbowl was the one by Chrysler featuring Eminem.  For the hell of it, I here it is if you haven’t seen it yet:

It was hard for this Michigan kid to not be somewhat emotional when watching this ad.  It had images of Southeastern Michigan that I am very familiar with, and having come of age during the 70s and 80s in Michigan I’m aware of the hard times my home state has faced.

When my partner Daniel looked at the commercial, he came away with a very different reaction.  He thought it was good as well, but he reminded me that one the reasons that Detroit and the rest of Michigan is in the crapper is because the domestic auto industry refused to change and become competative.

It’s just like him to rain on my parade.

But the thing is, he was right.  In fact, I will go a step farther in saying that my emotionalism is part of why Michigan hasn’t changed, hasn’t diversified.  We didn’t want to face the fact that things were changing and would never, ever be the same.

I hear all the news surrounding Wisconsin, I have to think that this is yet another sign that the United States if not the world, is going through massive change.  The old ways of doing things don’t work anymore.  Things can’t be the same.  And the change wil hurt like hell.

Walter Russell Mead has another insightful essay today about how Democrats in incredibly blue states are also dealing with unions.  Governors like Andrew Cuomo in New York understand that the salad days are over and that the lean years are about to begin. As he notes, public sector unions are heading down the same road that private sector unions did 30 years ago:

The real news here is that the public sector labor movement is inexorably headed down the path the private sector labor movement started down thirty years ago.  At its peak in 1953, the private sector labor movement included 35.7 percent of all private sector workers in the US.  Now fewer than 7 percent belong to unions.

Labor activists would like to blame this on union-busting efforts by corporations, and it is certainly true that corporate resistance to unions has stiffened over the last thirty years.  But what really drove this process was the market.  With offshore competition and onshore automation cutting demand for unionized labor in the US even as immigration and a surge of women into the labor force increased supply, unions could not repeal the law of supply and demand. Over and over again, unions had to accept pay cuts, rollbacks, layoffs and arrangements that allowed companies to hire younger workers at lower wages and with less expensive benefit packages.  The alternative to givebacks was closure: unions were negotiating at the point of a gun.

The massive restructuring of the American auto industry was painful for Michigan.  My hometown of Flint, Michigan once claimed 80,000 people working for General Motors.  You could not travel very far in town without hitting yet another auto plant.  AC had a plant on the east side of town where my Mom worked.  Dad and my Uncle Pablo worked at Buick City near downtown.  My Aunt Nora worked in the cafeteria at the old Fisher Body plant on the southside.  All of those plants are now gone, torn down.  Today, there are about 8,000 people working for GM in the Flint area.

And yet, Michigan has lived in a kind of denial.  We kept on wanting to believe it was someone else’s fault, the Japanese, those Republicans in Washington instead of understanding that we were facing a changed world.  We wanted the good times to roll and wanted whatever politician to make all the change stop.

But change will happen.  It will happen in Michigan, in Wisconsin and in Washington, DC.  It’s gonna hurt.

That doesn’t mean that the restructuring should just hit the weakest in society.  As David Brooks notes, we have to find ways to invest in the young at the expense of the old, which will hurt.

I wonder what would have happened had the state of Michigan 30 years ago decided to diversify the economy.  What if government and industry found ways to encourage new businesses and maybe to start the next Intel or Apple?  What if Michigan had accepted that things were changing and learned to ride the wave of change instead of live in denial?

State, local and federal governments will change over time.  They have to.  Public sector unions will be weakened.  But I don’t think that means that we have to head down the dystopian future that some on the Left are fearing.  The challenge for governments in the coming decades is how to be effective and yet frugal.

I think the change will happen and it will hurt.  But I also think if we use our heads and not get trapped in emotionalism, we might find out way out of this.

How’s the Middle Class Doing?

Professor James Hanley has a great post from a few weeks back comparing the middle class circa 1950s vs. the middle class of today.  It has touched off a quite a debate at the League of Ordinary Gentlemen after Jason Kusnicki picked up on it a few days ago. Here’s part of what Hanley said in that January 5 post:

it seems to me that part of the problem is that as the country becomes wealthier, it doesn’t seem to become easier to live a middle class life. And it seems to me that this is because the material standard of living that defines the middle class today is higher than that which defined the middle class in past generations. For example, in the 1950s, a middle class lifestyle meant a window air conditioner and some fans to move the air around; today it means central air conditioning. Back then a single car family was middle class; today most middle class families are two car families. A single television set was sufficient to be middle class back then; today–even though televisions are much cheaper–most middle class families have multiple televisions, many pay extra for a television that’s much larger than what their (grand)parents had, and most pay extra–sometimes a lot extra–for cable or satellite (i.e., once upon a time three free channels was middle class; now 100 pay channels is middle class). They didn’t pay for microwaves and computers (and internet access) in the 1950s, while we do now. We also eat out a lot more today than they did back then. One of the biggest changes is the size of American homes. In the 1950s, the average home size was just under 1,000 square feet; today it’s over 2,300 square feet. As importantly, a house back then most often had a single bathroom; now homes regularly have 2 1/2 baths or more.

All this extra material wealth is a good sign, from a strictly economic point of view,* because this means our middle class can afford more than our grandparents’ middle class. Our middle class has a higher standard of living, is better off, than our grandparents middle class. But as commenter E.C. Gach’s question, “Will we (human race) ever have competed enough in the rat races to have a future where our children can have their needs met while only working part time at the “low end” job?”

Like I said, it’s created a lot of debate. As of today, there are 353 comments. This is what E.D. Kain, once a heterodox conservative and now newly-minted progressive, had this to say:

Jason,

I’m well aware that leisure items and material goods are in many ways more fun and more advanced than in the past. But this says absolutely nothing about retirement security or healthcare – two far, far more important issues. Furthermore, it doesn’t speak to the preferred changes libertarians and many conservatives would like to make which would, on sum, make retirement security even less reliable. And frankly, if left to just libertarian and conservative ideas on healthcare – without the pressure liberals place on the issue – I don’t think you’d ever see anything like healthcare security for the poor and working classes. Just look at the efforts to cut people off the Medicaid rolls across the country.

Furthermore, while this does a fine job at explaining how things have improved in society (and I don’t think most people are arguing that we should return to the 1950’s or the 1800’s – the idea of progress is well-rooted in the collective psyche) it says nothing at all about how things should have improved. Would we trade our high-tech middle-class existence for the low-tech middle-class existence of the 1950’s – maybe some die-hard nostalgiaits would, but most people would not, even if they believed that there was a crisis in the middle class. Asking to pick the present over the past and then using that as an example of how things must have improved is pretty paper-thin as far as arguments go. Nor does it say why things have gotten materially better. Perhaps some of these much-loathed government programs are to blame; and perhaps, too, the liberalization of markets and the lowering of tax rates have helped as well. Perhaps it is a very mixed bag with no simple explanation, just as the gains made across the board don’t tell the whole story either. But I suspect that the usefulness of libertarian economics has reached its peak. Civil liberty issues are the next frontier for libertarians who want to improve the lives of Americans – not attempts to privatize public libraries or fight for more tax cuts.

Anyways, this argument also says nothing about how things will be in the future if we maintain the current course. I don’t trust that the nation as a whole will be very good with its 401k investments, or that the investment bankers who just thrashed the economy will be very wise stewards of our money. Pointing out that the middle class can afford more leisure and better toys than it used to, and that we live in more material comfort, ignores the chaos in the system, the rapidly shifting industries, the rough and tumble ride that middle class workers face, and how very important things like health insurance are for people who have none, or who lose it when they lose their jobs.

The argument that is going on about the middle class could be summed up in another comment:

Being middle class isn’t just the ability to buy stuff… it’s security: knowing that if you get sick you’ll get health care, when you retire you will be comfortable; etc.

One of the main defenses of the globalization of labor is that this decreases the cost of consumer goods. Well, we have that now.
Maybe it’s time to focus on the other side of the equation… finding ways to drive up the costs of labor so that the middle class can have both cheap TVs and a decent retirement.

The debate boils down to what the middle class can do: are they able to buy certain consumer items or are they able to afford retirement and health care.

Since, I tend to lean to the right, I tend to resonate with Hanley’s argument.  But I don’t know if some the anxieties that the middle class feels is just due to higher living standards.

What do you all think?

Look Who’s Not Spending

Tyler Craft notes there is one group that doesn’t spend its tax cuts- the middle class:

Conventional wisdom (something I do generally adhere to) goes like this… if a person makes $20K a year and you give them $100, they will spend all $100 to fulfill basic needs. If you give the same $100 to a person making $80K per year, they will likely save some percent of it. The percent of income saved increases as income increases. This is a very logical argument that is generally accurate.

What happens when a twist is thrown into the premise of the argument? What if a third group is introduced in the middle? The third group, by the original logic, would simply save more than the $20K group but less than the $80K group. However, what if the original two groups have less leveraged balance sheets than this new group? This is the case with the current recession.

Middle class homeowners are leveraged to a breaking point. The rich continue to be rich, and the poor continue to fall just outside of the regular economy. As figures 8 and 9 in the aforementioned research show, stimulus dollars led to increased total spending at a rate of about $.77 per $1.00 by the high group in the study (incomes > about $75K) and at a rate of about $1.28 per $1.00 by the low group (incomes below $32K). The baseline group only increased spending by about 58%. Figure 9 goes on to illustrate the effect of mortgage responsibilities on stimulus spending (this continues in the narrative of figure 8).

Does this mean the middle class should not receive tax cuts because the rich and poor are more effective groups to target? Of course not. In addition to providing some stimulus (the middle class is still spending nearly $.60 per $1.00) from the middle class, tax breaks for this group allow them to deleverage their personal balance sheets so they will emerge from the recession in better financial health than when the recession began.

Does Raising Taxes Make You Liberal?

Shay Riley takes exception with my column on conservatives and taxes:

The Brits aren’t cutting spending, but rather merely decreasing the annual rate of spending growth. That ain’t a true spending cut.

And yes, a true fiscal conservative does not favor higher taxes. For one, it reduces revenues due to capital flight. But more importantly, it’s government thinking it can spend people’s money better than the people themselves.

Fundamentally, the question in USA should be: Is [name the program] a federal power or responsibility, per Article I, Section VIII of the U.S. Constitution? If not (and 75% of the federal budget falls in this category), it ought to be slashed and returned to the states where it belongs per the 10th Amendment.

Okay, so I guess I’m not a true conservative in Shay’s eyes for thinking we might need to raise taxes at some point.  But I do have a few questions: if raising taxes is a conservative no-no then, why really have a federal government at all?  Why do we need to pay for a military or social security?  Why have the feds pay for roads?  And if we are going to be so strict in turning the Constitution into rigid test of what the feds can or can’t do or can or can’t pay for, then shouldn’t we go back to the old Articles of Confederation which is how the United States was set up before the Constitution? If you read the Articles, what you find is a lot of what Shay (and many conservatives these days) is advocating for.

Finally, this: Ronald Reagan was credited for slashing income taxes, which was a good thing in my book.  But he also raised taxes during his eight years as well.  Does that make him not a real conservative?

Going through the “Pledge to America”

This was originally posted at tylercraft1.wordpress.com.

Reading the GOP House members’ “Pledge to America” last week felt like watching Disney’s National Treasure; the language was both antiquated and inspiringly hollow. Lines like, “whenever the agenda of government becomes destructive of these ends, it is the right of the people to institute a new governing agenda and set a different course,” might has well come directly from the Declaration of Independence – a wonderful document, but a bit irrelevant to current issues.

I thought that perhaps the preamble to the document was an attempt to inspire the reader to drudge through a wonkish set of policy proposals aimed at shrinking the scope of the federal government… something in the style of Paul Ryan’s “Roadmap for America’s Future,” I was mistaken. In fact, thanks to a Washington Post graphic, I now know that the word “policy” was only used nine times in the entire 7,000+ word document. There were, however, lots of pictures (14 of the documents 48 pages were pictures – that is just over 29%). If you remove pages that were pictures, graphs, or title pages the document is only 20 pages, or 41.67% of its current size.

So what is left? Honestly, not much.

Here are some of the highlights of their proposal:

1.) Cut Taxes – This one is not really that surprising. The GOP is the low tax party. Most of the actual proposals, which can be found on page 16 of the document, are reasonable to an extent. Keeping taxes low as we emerge from a recession is generally a good idea – although if a balanced budget is a priority for the GOP (and, as the document says later, it is) tax increases may become a matter of fact in the future. Lumped in with cutting taxes is eliminating the requirement of small businesses to report all purchases over $600. This is going to happen no matter who controls the house.

2.) Stop Spending – This section of proposals alludes to the goal of balancing the budget. There is one very important caveat in the spending cuts; “With common-sense exceptions for seniors, veterans, and our troops, we will roll back government spending to pre-stimulus, pre-bailout levels.” The chart below shows fiscal year 2010 spending in defense, social security, medicare, and Veterans Affairs.

Data provided by the Office of Management and Budget and the Department of Veterans Affairs

Assuming that the budget was returned to total non-defense, non-senior citizen, non-veteran outlay levels in the year 2007 (i.e. pre-stimulus, pre-bailout), there would be a reduction of $460 billion, or just over 12%, to the budget. A picture of this new budget is below.

Data provided by the Office of Management and Budget and the Department of Veterans Affairs

The change in non-defense, non-senior citizen, non-veteran spending is a reduction of 19% from 2010 levels. That means that, while there is little difference in the overall level of outlays, things like education and medicaid experience a disproportionate amount of the spending cuts. This is not to say budget cuts are inherently a bad idea, but exempted the three biggest expenditures is not responsible governance.

3.) End the Toxic Asset Relief Program (TARP) – If you watched Wall Street Money Never Sleeps last weekend, as I did, TARP looks like the biggest insider deal in the history of the country. While the movie was good, I do not think this is a fair depiction of the legislation. The program helped quell a systemic problem. By capitalizing banks, TARP was able to prevent the failure of major financial institutions and maintain some level of stability in the financial markets. In fact the return on TARP funds has, thus far, been successful.

4.) Replace the Healthcare Bill – To encourage stability for business, the “Pledge” aims to recall one of the biggest bills in the history of Congress. This seems just a little irrational and over-the-top. This section has some of the best ideas in the document, but it is all overshadowed by this sweeping measure. Things like tort reform and HSA expansion are amiable to an environment of reduced healthcare costs. Furthermore, some of the ideas presented in the healthcare part of the “Pledge” are already in the current healthcare bill (i.e. granting access to insurance for people with preexisting conditions). It seems counterproductive to completely start over on a bill that apparently is not completely off-base.

5.) Restoring Trust in Government – This section should have been left out. You cannot tell people to trust you and have them trust you immediately. Trust is earned.

6.) Securing America – This “Pledge to America” ends by going to Republican’s historical bread and butter, defense. Oddly enough the highlight of this section, in my opinion, is not really defense related, but is instead procedure related. The GOP proposes ending coupling defense bills with completely unrelated issues (i.e. no more omnibus defense bills). This is generally a good idea. Issues should be debated in an open forum; however, the practicality of determining what is relevant and what is not is a cause for concern. Beyond that, this section is a regurgitation of typical national defense/security issues. In a strange coincidence this section included a quote from Dwight Eisenhower. He apparently once said, “History does not long entrust the care of freedom to the weak or the timid.” What is interesting about a quote from the former president being in this section is that he also gave this speech.

Overall the “Pledge to America” was lacking in any substance. There were few concrete policy proposals, and most of the document was covered in pictures, quotes, and nearly blank pages. There were some good ideas presented, but this is a long-shot from the good governance David Brooks described yesterday, more about that later.

Bush's Legacy Debt Nightmare will be doubled by Obama within 5 years.

Someone has a plan to pay for all of this, right?

President Obama inherited a national debt of about $11.4 trillion dollars. That debt had accumulated since President Reagan grew the national debt from a mere $930 million to $2.6 trillion (he had promised in 1980 to 100% pay it off by 1983), Clinton accumulated another $1.6 trillion in debt over 8 years, and Bush 43 gave us $6.4 trillion of our national debt.

We were staggering under the national debt before President Obama. There should be no doubt however that the most prolific accumulators of national debt have had an ‘R’ after their name … until now.

The outlook now is that President Obama will break all records and double the national debt within just five years, hard to believe but PolitFact has looked at the numbers and found them credible.

Our annual GDP is $14.4 trillion dollars (2009). We will soon owe more than our country is even capable of producing.

From the Washington Post, on Sunday April 4, 2010:

“A study we conducted at the Tax Policy Center found that Washington would have to raise taxes by almost 40 percent to reduce — not eliminate, just reduce — the deficit to 3 percent of our GDP, the 2015 goal the Obama administration set in its 2011 budget. That tax boost would mean the lowest income tax rate would jump from 10 to nearly 14 percent, and the top rate from 35 to 48 percent.”

“What if we raised taxes only on families with couples making more than $250,000 a year and on individuals making more than $200,000? The top two income tax rates would have to more than double, with the top rate hitting almost 77 percent, to get the deficit down to 3 percent of GDP. Such dramatic tax increases are politically untenable and still wouldn’t come close to eliminating the deficit.”

 

President Obama has no hope of paying for the problems he inherited, much less pay for new programs. His numbers and calculations are deeply flawed. The economy will collapse of its own weight and we will be at 8-9% or greater unemployment through 2013-2016.

I deeply believe that our economy will continue to improve through early summer 2010 and then take a dramatic downward plunge — perhaps before November or just after … our economy cannot sustain more debt. The dam will break and make 2008 look like a practice warmup.

And in all fairness to President Obama, I do not believe that the Republicans have a plan either. Actually they do or did have a plan called ‘starve the beast‘ which was to push the government (but not the country) to the brink of bankruptcy. The idea is to let economics do what they were not willing to champion through legislation. Once the beast really did start starving they had no plan … other than do more of the same. The bad news for President Obama is that he may deliver the coup de grace always wanted by starve the beast supporters — and it will happen with a Democrat at the helm.

What We Can Learn from Sen. Jim Bunning

The Honorable Senator from Kentucky has been increasingly irritable, erratic, and downright ornery in recent years.  He has alienated colleagues and nearly lost his seat to a Democrat.  Now he has sealed his “cantankerous old codger” credentials with a stunt that was costing thousands of out of work Americans their unemployment benefits.

Until yesterday, Bunning was using one of those arcane Senatorial prerogatives to halt progress of a funding bill for that includes numerous projects including money for unemployment.  His complaint was that the bill should not move forward until the Senate finds funding to cover its cost.

In and of itself this is not such an unreasonable demand.  What’s strange and pointlessly spiteful about it is that about a quarter of everything Congress spends right now has no revenue behind it and Bunning has played an enthusiastic role in getting us into this mess.  He could have refused to designate any of his earmarks until Congress found funding for them, but that would have severely impacted Bunning’s campaign contributors.  We don’t want to let idealism get out of hand.

Beyond the realization that one guy with a loose grip on reality can hold up Senate business, there is a cold lesson in this experience if we choose to see it.  Bunning is, accidentally I’m sure, playing out for us in microcosm an ambush we have set for ourselves.  We are facing a scenario in the medium-term future, perhaps as few as eight to ten years out, when world financial markets will “pull a Bunning” on us.  When this happens, it won’t affect one government program, but all of them.  We could potentially lose the ability to deliver basic services for brief periods.  This is an opportunity to learn.

These days we aren’t just borrowing “a lot.”  We are borrowing far more money than we can find lenders for.  Our total debt is now almost as high as a full year’s complete economic output for the entire country.  So how have we avoided a collapse in government funding?  We are covering this frightening scenario by having our own Treasury and Federal Reserve purchase the debt that can’t be auctioned in the marketplace.  Under normal conditions this couldn’t be sustained because it would trigger high levels of inflation.  But (again, simplifying), the scale of the recent economic collapse was so vast that even now deflation remains a greater concern than inflation.

So what happens to debt finance when we have finally worked our way through the effects of the housing bubble and the financial industry collapse?  The honest answer is no one really knows.  But you can be pretty certain that we won’t be able to continue to print money to cover our debt.  If we have not found a way to stop running massive annual deficits we face a terrible dilemma –  either run a risk of hyperinflation or run out of money, perhaps rather suddenly.  At that point, the kind of pain Jim Bunning is causing will look like a joke.  Depending on how unprepared we are for the problem, we may not have an opportunity to prioritize whatever available funding there is.  Bills may not be paid based on which day or month they come due, be they military, medical, educational, etc.

This is a scenario other countries, like Argentina and Malaysia have experienced recently with great human suffering.  But if we let it happen to us the pain will reverberate around the planet.  The collapse of Argentina’s currency didn’t destroy the machinery of the global commodities markets and international finance. The collapse of the dollar would have broad global impacts that are difficult to predict.  That makes it likely the world will work to keep it from happening, but ultimately we are in the drivers’ seat.  That’s why you hear so much talk these days about countries and international entities wanting to find an alternative to the dollar as a reserve currency.

Taming our spending problems will be painful and unpopular.  It remains unclear whether we have the will, even within the GOP, to do it.  Over the previous four Administrations, it was Republican Presidents that more than quadrupled our debt to GDP ratio while Clinton actually produced a surplus.  Crazy ‘Ole Uncle Jim is showing us a vision of our future.  It is a future we can avoid if we choose.

All About Paul Ryan

Wisconsin Congressman Paul Ryan is getting a lot of talk for his deficit reduction plan, a lot of it about how a Republican has finally come up with an idea on deficit deduction (that other Republicans are quickly running away from). Conservative blogger Rick Moran talks about Ryan here and here. E.D. Kain also talks up Ryan here and here. Robert Samuelson shares his opinion as does Ross Douthat.

Finally, Bruce Bartlett thinks Ryan’s plan is ludicrous, and also thinks conservatives including the Tea Party brigade should consider endorsing it.

What do you all think?

Republicans Sneaking Pork Out The Back Door

To hear many Republicans tell it: the Stimulus is actually bad for the economy. They voted against it almost across the board. A party line vote.

Yet a number of groups normally friendly to the GOP are taking Republican lawmakers to task for trying to tap into stimulus funds through the backdoor; groups like the American Taxpayers Union and Citizens for Responsibility and Ethics in Washington. Continue reading