Posted: May 24, 2014 Filed under: Gun Control, income inequality, morning reads, racism, The Bonus Class, U.S. Economy, U.S. Politics | Tags: Chris Giles, Donald Sterling, economic theory, Financial Times., guns, inequality, Kevin Drum, LA Clippers, mass murder, mass shootings, NBA, offshore tax havens, open carry laws, Paul Krugman, Reinhart and Rogoff, Shelly Sterling, Ta-Nehisi Coates, The Case for Reparations, The Economist, Thomas Picketty, wealth distribution, wealth vs. income
Have a Stupendous Saturday!
It’s too bad Dakinikat is so busy today, because there’s an economics food fight brewing. Perhaps she’ll still find time to comment on the controversy later the evening after she returns home with her newly adopted canine family member, Temple. Meanwhile, I’ll do my best to describe the dispute over Thomas Picketty’s conclusions about wealth inequality, published in his book Capital in the Twenty-first Century.
At the Financial Times, Economics Editor Chris Giles has claims to have found problems with Picketty’s work: Piketty findings undercut by errors.
Thomas Piketty’s book, ‘Capital in the Twenty-First Century’, has been the publishing sensation of the year. Its thesis of rising inequality tapped into the zeitgeist and electrified the post-financial crisis public policy debate.
But, according to a Financial Times investigation, the rock-star French economist appears to have got his sums wrong.
The data underpinning Professor Piketty’s 577-page tome, which has dominated best-seller lists in recent weeks, contain a series of errors that skew his findings. The FT found mistakes and unexplained entries in his spreadsheets, similar to those which last year undermined the work on public debt and growth of Carmen Reinhart and Kenneth Rogoff.
The central theme of Prof Piketty’s work is that wealth inequalities are heading back up to levels last seen before the first world war. The investigation undercuts this claim, indicating there is little evidence in Prof Piketty’s original sources to bear out the thesis that an increasing share of total wealth is held by the richest few.
Prof Piketty, 43, provides detailed sourcing for his estimates of wealth inequality in Europe and the US over the past 200 years. In his spreadsheets, however, there are transcription errors from the original sources and incorrect formulas. It also appears that some of the data are cherry-picked or constructed without an original source.
John Maynard Keynes
In one specific example, Giles says the corrected data do not show significant growth in Europe since 1970. In a second article, Giles goes into more detail. In addition, he argues that the U.S. data doesn’t support the conclusion that a greater proportion of the wealth is controlled by top 1% than in recent decades. He does admit to the top 10% controlling a greater share of wealth than previously.
An investigation by the Financial Times, however, has revealed many unexplained data entries and errors in the figures underlying some of the book’s key charts.
These are sufficiently serious to undermine Prof Piketty’s claim that the share of wealth owned by the richest in society has been rising and “the reason why wealth today is not as unequally distributed as in the past is simply that not enough time has passed since 1945”.
After referring back to the original data sources, the investigation found numerous mistakes in Prof Piketty’s work: simple fat-finger errors of transcription; suboptimal averaging techniques; multiple unexplained adjustments to the numbers; data entries with no sourcing, unexplained use of different time periods and inconsistent uses of source data….
A second class of problems relates to unexplained alterations of the original source data. Prof Piketty adjusts his own French data on wealth inequality at death to obtain inequality among the living. However, he used a larger adjustment scale for 1910 than for all the other years, without explaining why.
In the UK data, instead of using his source for the wealth of the top 10 per cent population during the 19th century, Prof Piketty inexplicably adds 26 percentage points to the wealth share of the top 1 per cent for 1870 and 28 percentage points for 1810.
A third problem is that when averaging different countries to estimate wealth in Europe, Prof Piketty gives the same weight to Sweden as to France and the UK – even though it only has one-seventh of the population.
Get even more detail and charts here: Data problems with Capital in the 21st Century.
The Pushback So Far:
Paul Krugman: Is Piketty All Wrong?
Great buzz in the blogosphere over Chris Giles’s attack on Thomas Piketty’s Capital in the 21st Century. Giles finds a few clear errors, although they don’t seem to matter much; more important, he questions some of the assumptions and imputations Piketty uses to deal with gaps in the data and the way he switches sources. Neil Irwin and Justin Wolfers have good discussions of the complaints; Piketty will have to answer these questions in detail, and we’ll see how well he does it.
Krugman suggests that Giles may be doing something wrong.
I don’t know the European evidence too well, but the notion of stable wealth concentration in the United States is at odds with many sources of evidence. Take, for example, the landmark CBO study on the distribution of income; it shows the distribution of income by type, and capital income has become much more concentrated over time:
It’s just not plausible that this increase in the concentration of income from capital doesn’t reflect a more or less comparable increase in the concentration of capital itself….
And there’s also the economic story. In the United States, income inequality has soared since 1980 by any measure you use. Unless the affluent starting saving less than the working class, this rise in income disparity must have led to a rise in wealth disparity over time.
At Mother Jones, Kevin Drum notes that
Giles’ objections are mostly to the data regarding increases in wealth inequality over the past few decades, and the funny thing is that even Piketty never claims that this has changed dramatically. The end result of Giles’ re-analysis of Piketty’s data is [below] with Piketty in blue and Giles in red. As you can see, Piketty estimates a very small increase since 1970.
R.A. at The Economist: A Piketty problem?
Mr Giles’s analysis is impressive, and one certainly hopes that further work by Mr Giles, Mr Piketty or others will clarify whether mistakes have been made, how they came to be introduced and what their effects are. Based on the information Mr Giles has provided so far, however, the analysis does not seem to support many of the allegations made by the FT, or the conclusion that the book’s argument is wrong.
There are four important questions raised by the FT‘s work. First, which data are wrong? Second, how did errors in the work, if they are errors, come to be introduced? Third, how do the errors affect the specific points made in the relevant chapters? And fourth, how do the errors affect the fundamental conclusions of the book?
Mr Giles focuses on wealth inequality, to which Mr Piketty turns in Chapter 10 of his book. Mr Piketty has not published nearly as much research on the question of wealth inequality, and it seems that much of the analysis in Chapter 10 was done specifically for the book, based on others’ research. Mr Piketty’s wealth-inequality analysis certainly matters as a component of the book’s argument, but it is not accurate to say, as Mr Giles does, that the results in Chapter 10 constitute the “central theme” of the book.
Are the data wrong? Mr Giles identifies discrepancies between source material cited by Mr Piketty and the figures that appear in the book. He identifies cases in which Mr Piketty appears to have chosen to use data from one source when another would have made more sense. Further, the calculations in Mr Piketty’s spreadsheets (which have been available online since the book’s publication) seem to include adjustments in the data that are not adequately explained, and some figures for which Mr Giles cannot find a documented source. Finally, Mr Piketty has made choices concerning weighting of data used in averages, and assigning of data from one year (1935, for example) to another (1930) when such assignments seem unnecessary or inadvisable.
The author concludes that, unfortunately, ideology will determine how many people respond to the Giles critique. Much more extensive analysis at the link.
Here is Picketty’s–presumably preliminary–response to Giles in a letter to the Financial Times:
Let me also say that I certainly agree that available data sources on wealth are much less systematic than for income. In fact, one of the main reasons why I am in favor of wealth taxation and automatic exchange of bank information is that this would be a way to develop more financial transparency and more reliable sources of information on wealth dynamics (even if the tax was charged at very low rates, which you might agree with).
For the time being, we have to do with what we have, that is, a very diverse and heterogeneous set of data sources on wealth: historical inheritance declarations and estate tax statistics, scarce property and wealth tax data, and household surveys with self-reported data on wealth (with typically a lot of under-reporting at the top). As I make clear in the book, in the on-line appendix, and in the many technical papers I have published on this topic, one needs to make a number of adjustments to the raw data sources so as to make them more homogenous over time and across countries. I have tried in the context of this book to make the most justified choices and arbitrages about data sources and adjustments. I have no doubt that my historical data series can be improved and will be improved in the future (this is why I put everything on line). In fact, the “World Top Incomes Database” (WTID) is set to become a “World Wealth and Income Database” in the coming years, and we will put on-line updated estimates covering more countries. But I would be very surprised if any of the substantive conclusion about the long run evolution of wealth distributions was much affected by these improvements.
I thought this was important:
…my estimates on wealth concentration do not fully take into account offshore wealth, and are likely to err on the low side. I am certainly not trying to make the picture look darker than it it. As I make clear in chapter 12 of my book (see in particular table 12.1-12.2), top wealth holders have apparently been rising a lot faster average wealth in recent decades, at least according to the wealth rankings published in magazines such as Forbes. This is true not only in the US, but also in Britain and at the global level (see attached table). This is not well taken into account by wealth surveys and official statistics, including the recent statistics that were published for Britain. Of course, as I make clear in my book, wealth rankings published by magazines are far from being a perfectly reliable data source. But for the time being, this is what we have, and what we have suggests that the concentration of wealth at the top is rising pretty much everywhere.
In Other News:
There has been a mass shooting in Southern California–this time perpetrated from behind the wheel of a car. From the LA Times, 7 dead in drive-by shooting near UC Santa Barbara.
The shootings began about 9:30 p.m., a sheriff’s spokeswoman told KEYT-TV. It wasn’t clear what the attacker’s motivation might have been.
An 18-year-old Newport Beach man who was visiting Santa Barbara described a confusing scene as the shots rang out.
Nikolaus Becker was eating outside The Habit, 888 Embarcadero Del Norte, near the scene when the first set of shots was fired about 9:30 p.m. At first he thought it was firecrackers. A group of three to five police officers who were nearby started to casually walk toward the sounds, said Becker, but ran when a second round of shots broke out.
“That’s when they yelled at us to get inside and take cover,” Becker said.
The BMW took a sharp turn in front of The Habit, Becker said, and moments later a third round of shots was heard. Becker and his friends moved toward the restaurant’s kitchen but were told to wait in the seating area by employees.
He estimates there were at least 13 to 15 shots total at three locations. The locations were about 100 yards from one another.
The shooter, whose motivation is unknown, was found dead in his BMW. It’s not yet clear if he shot himself or was killed by sheriff’s deputies.
In another gun-related story, TPM reports that some gun nuts are reconsidering their campaign of carrying long guns into public places: Scaring The Crap Out of People Oddly Not Winning Fans.
Earlier this week we reported how Chipotle felt obliged to ask its customers not to bring guns to chipotle restaurants. Seems like a reasonably enough request to most of us. And it’s been preceded by similar requests by various other chains like Starbucks and others.
Now the top pro-gun group in Texas pushing the demand for “open carry” firearm rights and trying to get people to show up at various restaurant chains with long guns is deciding it may not be such a hot idea after all.
Open Carry Texas and a group of other aggressive gun rights groups have issued a joint statement telling their members, Dudes, let’s stop taking our guns to restaurants. It’s freaking people out and making them hate us.
Read the full statement at TPM.
Soon-to-be former LA Clippers owner Donald Sterling has signed over the team to his wife and wants her to negotiate the sale.
Shelly Sterling, who previously shared ownership of the beleaguered NBA franchise with her estranged husband, is now in talks with the NBA over selling the team, the source said.
The NBA banned Donald Sterling for life from all league events after an audio tape became public that caught him on tape uttering racist comments to his assistant V. Stiviano. He told her not to post photos of herself with black people on Instagram — such as Magic Johnson — or bring them to his basketball games.
But the NBA isn’t buying it. From ESPN: Why the NBA won’t allow Shelly Sterling to control the Clippers.
At first glance, Donald Sterling’s gesture may seem like serendipitous news for the NBA. Taking him at his word, Donald Sterling has agreed to leave the league without a fight and has signed off on the sale of his team. Digging deeper, however, reveals possible ulterior motives on Sterling’s part to delay and potentially block the sale of the team. Do not forget a crucial point: capital gain taxes. As first reported by SI.com, the Sterlings have significant incentives under capital gain tax law to avoid the sale of the team and keep it in the Sterling family. Doing so, would save them hundreds of millions of dollars. Also, contrary to some reports, the Sterlings are unlikely to benefit from the “involuntary conversion” tax avoidance provision of the Internal Revenue Code. The bottom line is if the Sterlings have to sell the Clippers, they will probably pay hundreds of millions in state and federal taxes.
Along those lines, Donald Sterling’s proposed maneuver does not accomplish the NBA’s goal of ousting the entire Sterling family on June 3. As explained in a previous SI.com article, the NBA interprets its constitution to mean that ousting Donald Sterling on June 3 would also automatically oust Shelly Sterling as co-owner, with the Clippers then falling under the control of commissioner Adam Silver. Donald Sterling’s proposed maneuver risks the prospect of Shelly Sterling undertaking a slow-moving effort to sell the team. A sale process that takes months or years would clearly aggravate the NBA, which wants to erase the Sterling family name from the league as quickly as possible. A protracted sale of the Clippers by Shelly Sterling might also constitute a potential rationale for players to boycott NBA games.
Even of greater risk to the NBA, what is to stop Shelly Sterling from deciding to keep the Clippers? She could plausibly reason, on various grounds, that now is not the right time to sell the team. Also, her instruction from her husband to sell the team would not be legally binding; it would be a mere suggestion the moment she takes over the team.
Read much more at the link.
I’ll end with a long article that I haven’t gotten to yet, but I’m hearing it’s a must read: The Case for Reparations, by Ta-Nehisi Coates at The Atlantic. Here’s the tagline:
“Two hundred fifty years of slavery. Ninety years of Jim Crow. Sixty years of separate but equal. Thirty-five years of racist housing policy. Until we reckon with our compounding moral debts, America will never be whole.”
The Guardian: The ‘Case for Reparations’ is solid, and it’s long past time to make them.
Slate: An Ingenious and Powerful Case for Reparations.
The Wire: You Should Read “The Case for Reparations.”
NPR: How To Tell Who Hasn’t Read The New ‘Atlantic’ Cover Story.
WaPo: Culture change and Ta-Nehisi Coates’s ‘The Case For Reparations’.
What else is happening? As always, please post your links in the comment thread.
Posted: November 21, 2012 Filed under: U.S. Politics | Tags: Dave Wiegel, federal income taxes, Jennifer Rubin, Kevin Drum, marginal tax rates, media hacks, Megan McArdle, stupid rick people, whiny rich people
Washington Post hack blogger Jennifer Rubin
It all started on November 18, when The New York Times published an article by Nathaniel Popper and Nelson D. Schwarz headlined, Investors Rush to Beat Threat of Higher Taxes. Much of the discussion was about tax increases that would take place in 2013 if the fiscal
cliff curb is not averted, but the article quoted a woman in McLean, VA who is deeply concerned about what will become of her business if President Obama’s tax proposal is enacted.
Kristina Collins, a chiropractor in McLean, Va., said she and her husband planned to closely monitor the business income from their joint practice to avoid crossing the income threshold for higher taxes outlined by President Obama on earnings above $200,000 for individuals and $250,000 for couples.
Ms. Collins said she felt torn by being near the cutoff line and disappointed that federal tax policy was providing a disincentive to keep expanding a business she founded in 1998.
“If we’re really close and it’s near the end-year, maybe we’ll just close down for a while and go on vacation,” she said.
Either Popper and Schwartz do not understand Obama’s proposal or they simply chose not to call Ms. Collins’ attention to her error–or perhaps they’re just media hacks. A number of bloggers responded with derision. Here’s Dave Wiegel:
How do you get to be as rich as the people in this New York Times story without ever figuring out how taxes work? [….]
You see these idiots every time a tax hike becomes possible again. They have no apparent idea how marginal rates work. Right now, if her and her husband make $250,000, they pay at most a 33% tax on some of that income. If they made $251,000, they would have to pay the same rates for everything except that last $1000 — that, they’d be taxed at 35%. If the rates increase across the board that top rate becomes 39.6%.
Derek Thompson argues that the NYT journalists should have at least gently explained to Collins that she was confused about the way tax rates work.
Kevin Drum provided a handy dandy tax table to help the “innumerate rich people” who are confused about marginal rates.
Megan McArdle, Newsweek hack
Yesterday, conservative media hack Megan McArdle complained that Wiegel and Drum were only talking about ordinary income.
Their analysis is basically sound, except for the fact that it is not quite true. They have forgotten to look at deduction phaseouts, surtaxes, and the AMT, which are not taxes on marginal income.*
No matter what you have heard on the internet, there are in fact a lot of sizeable marginal inflection points for high earners. There are the Pease deduction phaseouts, temporarily abated by the Bush tax cuts but scheduled to go back into effect in 2013, which can eliminate up to 80% of deductions for couples who make more than about $175,000 (the number is indexed for inflation, so it changes every year): your deductions are reduced by 3% of the amount by which your income exceeds the threshhold. The student loan interest deduction phases out at $150,000 ($75,000 for singles). And a lot of tax-free savings opportunities disappear: educational savings accounts and IRAs have income limits, so your ability to use them starts phasing out in the low-six-figure income range. So do various educational and child tax credits. These things obviously aren’t a huge deal for people who make $1,000,000 a year but they can be a huge tax hit for couples in the $150,000 to $300,000 range. Come 2013, they will be an even bigger hit.
And we haven’t even discussed the AMT, which virtually eliminates deductions for couples who make the mistake of doing things like buying a house, having children, or living in a high tax state.
McArdle provided this chart:
I have to be honest, I’m not going to spend a lot of time worrying about people as wealthy as the ones McArdle is freaked out about. But in any case, Kevin Drum took note of the issue McArdle raised in a follow-up to his earlier post. He agreed that there are complex issues for people in the upper income brackets.
None of this really affects our discussion of people with incomes over $250,000, but it does illustrate the fact that moving across a phaseout line can sometimes have a significant effect on your taxes:
For example, a married couple filing jointly in 2013 with two kids at home and one in college who go from making $100,000 to $125,000 loses a $2,000 child tax credit and $1800 worth of HOPE credit, an increase of almost 4% in their effective—not marginal—tax rate. The marginal tax rate on their extra earnings is 15.2% just from deduction losses; that comes on top of the 28% they’ll be paying the federal government in income taxes, and whatever state income tax they owe.
I don’t have any real point to make here. I just wanted to acknowledge that my income tax chart only showed one piece of the picture. It’s the most important piece for most people who earn under $1 million (above that, investment taxes tend to become more important), but there are still plenty of little gotchas in the tax code that can have funny effects as they phase in and out.
Finally today, the media hack of all media hacks Jennifer Rubin weighed with this: Obama’s class war against his supporters.
Democrat and former Michael Dukakis campaign manager Susan Estrich is very upset that the presidential candidate whom she supported actually is intent on raising taxes on the rich — which, lo and behold, includes her. She complains: “I did not vote for Obama because I think I am paying too little in taxes. Like many people I know, I am ‘rich’ by Obama’s standards. I pay more taxes, percentage wise, than Mitt Romney and Warren Buffett, because I earn virtually every penny of my income. I work. And yes, all those deductions that allow the truly rich to not work, or at least to not work all the jobs I do, make me angry.”
She means she earns mostly ordinary income as opposed to capital gains, but you see her point — who the heck is Obama to tell a hardworking upper-middle class gal she’s not paying enough in taxes?!
I have no idea how much Susan Estrich earns, but if it’s all ordinary income, then she’d pay the same amount as before on the first $250,000, right? And she’d pay a few percentage points more on anything she earns over that amount. Big f&cking deal!
More from Rubin:
If you live in New York or Los Angeles and have an income of $250,000, two kids and a house in a nice but not ostentatious neighborhood, you are not living a lavish lifestyle and you already pay gobs and gobs in taxes. You didn’t inherit wealth and you worked hard in college and in your profession, only to find yourself living paycheck to paycheck. And now, you’re going to get socked with a tax hike.
Not if it’s all ordinary income (i.e., “paycheck to paycheck.”) And if a family with an income of $250,000 is living “paycheck to paycheck,” they need to work on a budget. I didn’t inherit wealth and I worked my ass off in college too. So did millions of other Americans. Big f&cking deal! If you need more, get a second job.
For years Republicans have been warning that the Obama-size of government will require much more than taxing the “rich.” That means not only the $250,000 earners (say, a white-collar professional with a mortgage, college tuition bills and a mother in long-term care) but the $80,000 earners (say a teacher in Massachusetts with a cramped condo, an old car and kids) also are going to be told they have to pay even more of their income to the federal government.
Newsflash for Rubin–you can do better than a cramped condo on $80,000 in Massachusetts–and that would be on the high end for a public school teacher. But Obama’s plan wouldn’t increase taxes on someone making $80,000 as salary income anyway.
To these whiny rich people and concern troll media hacks, I say tough shit! The average income in this country is a little over $50,000. Plenty of those people have parents in long term care–or are caring for them at home. And plenty of poor people have the same problems.
Obviously the White House needs to get busy educating the public as well as the lazy corporate media about how the tax system works and exactly what Obama’s tax proposals are. And hacks like Jennifer Rubin especially should be fired. As long as the Washington Post keeps this hack among hacks on staff, it cannot be considered a serious newspaper.
Feel free to use this as an open thread. I know most people are gearing up for Thanksgiving. I’m another one of those people who don’t really like the holidays.
Posted: July 3, 2011 Filed under: The Media SUCKS, We are so F'd | Tags: crony capitalism, crony journalism, Kevin Drum, plutocracy
Occasionally one of the villagers gets it right (h/t to Digby). Today’s Awake Villager Award goes to Kevin Drum of MoJo who expresses utter contempt for the current Republican strategy of destroying the country at any cost to take down a Democratic President while mentioning that said Democratic President and his crony congress cadre have basically given said right wingers absolutely everything they’ve wanted for over a decade without a fight. I bestow this prize because the piece also recognizes the complicity of “journalists” in this charade.
People who are making policies and people giving air time to policy makers these days exist in a state of complicity in lies. The continuation of more and more of the same damned policies are basically getting the same damned result yet real analysis of the results and the connection to the policy never occurs in the public forum. The polices of the last 12 years induced a financial crisis and are inducing another one. They created high unemployment and falling wages and they continue to perpetuate joblessness and income inequality. No one holds the policy makers or the narrators of the results accountable to hard, cold reality. How is it that this game continues to grow exponentially without riots in the streets by the 99% of the country that’s been hurt and continues to be hurt by this insanity? Are we so doped up with sports and “reality” shows that we don’t have time to take stock of what these people are doing to us?
But then, for about the thousandth time, my mind wanders over the past ten years. Republicans got the tax cuts they wanted. They got the financial deregulation they wanted. They got the wars they wanted. They got the unfunded spending increases they wanted. And the results were completely, unrelentingly disastrous. A decade of sluggish growth and near-zero wage increases. A massive housing bubble. Trillions of dollars in war spending and thousands of American lives lost. A financial collapse. A soaring long-term deficit. Sky-high unemployment. All on their watch and all due to policies they eagerly supported. And worse: ever since the predictable results of their recklessness came crashing down, they’ve rabidly and nearly unanimously opposed every single attempt to dig ourselves out of the hole they created for us.
But despite the fact that this is all recent history, it’s treated like some kind of dreamscape. No one talks about it. Republicans pretend it never happened. Fox News insists that what we need is an even bigger dose of the medicine we got in the aughts, and this is, inexplicably, treated seriously by the rest of the press corps instead of being laughed at. As a result, guys like Marco Rubio have a free hand to insist that Obama — Obama! The guy who rescued the banking system, bailed out GM, and whose worst crime against the rich is a desire to increase their income tax rate 4.6 percentage points! — is a “left-wing strong man” engaged in brutal class warfare against the wealthy. And Rubio does it without blinking. Hell, he probably even believes it.
We are well and truly down the rabbit hole. The party of class warfare for the past 30 years is fighting a war against an empty field and the result has been a rout. I wonder what would happen if the rest of us ever actually started fighting back?
There are so many little gems in this assessment it’s hard to point to them all. The Republican denial of how their policies have and continue to trash the nation’s economy is the obvious one. The next is the obvious enabling by the press that exists in some strange struggle to seem fair or be some Orwellian version of “fair and balanced” that ignores facts and data and experts in fields. The press puts party operatives and politicians on TV to lie their frigging hearts out without fact checking their statements. Some how, fair and balanced means repeatedly letting people put out “opinions” like the sky is green and dirt is blue. An opinion isn’t misstating facts last time I checked my notes on the scientific method and the rules of public debate.
This is what drives me craziest. The press treats “seriously” people that get on TV to present alternate reality under the guise of looking at all sides. Misstatement of facts are not opinions. They are damned lies.
Most journalists these days peddle in access to lies and not much more. There is lots and lots of irrefutable, scientific evidence on evolution, climate change, and the results of “voodoo” economic policy. One does not get an “opinion” on appendicitis except on TV news shows. In life, a certified and trained doctor diagnoses the condition. Fair and balanced reporting should not mean getting a panel of grade school educated yokels on TV who insist that people can’t get appendicitis because the appendix doesn’t exist. It also doesn’t mean that some congressman that sits on a committee looking at health issues should be freed of the burden of proving his point that the appendix doesn’t exist because god and Ayn Rand wrote it down somewhere. There are tons of freaks these days that are funded by rich idiots–many that own said corporate media outlets–that set up “think tanks” to put out false research that basically states that the sky is green. These freaks show up on TV news constantly. Study after study shows that people that view Fox news–as an example–don’t just hold opinions. They hold completely false information. This is a huge problem because an effective democracy relies on an informed electorate. We are getting systematically fed falsehoods that are killing our country and our livelihoods. This particulary bothers me because as an economics and finance professor, I have to confront the economic and finance fairy tales daily. I hear the economic version of “the appendix doesn’t exist” from people who think they are just expressing an opinion instead of repeating a complete falsehood.
I guess what really struck me the most about Drum’s rant was that same sense of frustration and near-depression throughout that basically haunts me too. I have absolutely no idea how to stop what he’s described. What brought about the huge changes during the Great Depression was the vision of a leader and the people who surrounded him and the fear of the elite that US citizens might actually take to the streets. They feared it was the New Deal or a Communist-style revolution in which they would lose everything. The political and economically powerful no longer fear us and we no longer have leaders with vision beyond their own re-elections. Something is going to give eventually and I’m just hoping its not the 200+ year experience that’s called the United States of America. Over the last thirty years, all three branches of government and the press have been successfully infiltrated to represent only the most rich and powerful. What are we going to do about it?
Oh. The answer to the question at the top is that every one hears the Rubio Down the Rabbit Hole. That’s because we’re not only victims of crony capitalism, we’re victims of crony journalism.
Posted: December 13, 2010 Filed under: jobs, The Great Recession, the villagers, U.S. Economy | Tags: Kevin Drum, Mother Jones, voodoo economics
So, now there’s a bunch of polls showing that the public basically approves of most of the tax cuts. yhe village chattering class (e.g Kevin Drum of Mother Jones)sees this as a sign of potential support for Obama and the Democrats.
To me, that’s about like polling on the question: Would you look a gift horse in the mouth? Of course, every one likes some change in their pockets. But at what cost? The polls aren’t asking that question. The one part of the tax deal that came out with a disapproval was the cut in payroll taxes. But, that’s the big Obama win, right? So, the villagers have to explain why EVERY one should just love that.
The explanation given by Drum is that every one is really dumb and thinks this will bankrupt social security because no one will pay into to it for a few years. He’s thinking people don’t see the promised government IOU. He’s got a list of how dumb he thinks we are about this and you’ll see it at the bottom of the post. So, now we do economic policy on polls? Can I get a witness that just because people like something doesn’t mean it’s good or wise policy? It doesn’t even mean that if they see the hamburger today, they’ll be willing to pay for its cost on Tuesday either. My guess is when the tab comes, there will be some unhappy polls then.
The major economic argument for this package is basically that you don’t raise taxes in a weak economy. That is basic Keynesian thought and it’s odd to see the entire Republican party joining hands and singing “We’re all Keynesians now”. A secondary argument is that any thing bartered away at this point is worth it because we extend long term unemployment benefits.
What you don’t see is a larger discussion of this all in terms of the economic situation and what is called for in these circumstances except in economist circles. This really worries me. Did you notice this ABC poll doesn’t ask people how they feel about giving cash subsidies to corn growers or the deal on equipment write offs? Those are also components of this tax giveaway. The poll also doesn’t ask people about what they think this will do to the deficit in the future and the cost of government borrowing. (Even Moody’s is threatening to downgrade our debt on the merits of this plan.) This poll basically asks, “Would you like more money in your pocket or not?” I can only image the naysayers like me either know their economics or they’re like me and not getting anything from this tax bill but the bill.
So, rather than listen to the failed lawyers who make up our policy decision=making class and the spoiled, rich little nitwits that write the punditry blogs in the MSM, let’s check out what some economists have to say. We’re going for three of them here. There will be four if you count me.
I linked down page on the morning reads thread to a blogger named Chevelle who was a government economist who now works at an asset management firm. She has a very good short piece up on why these tax cuts are a very “dumb” idea. Her basic analysis actually sounds a lot like Larry Summers’ parting shot in Time Magazine. Another similar voice can be read in the WSJ and comes from Nobel prize winning economist Joseph Stiglitz who calls for a second stimulus package that’s not tax cut loaded. The tax cuts may be politically popular but they don’t really take care of our problems right now. The money used for the tax cuts would be a lot more powerful and useful if it was targeted at the problem in the form of Government Expenditures. That’s what all three of them say in their commentary and that’s what I’m arguing for here. It’s your basic expenditure multipliers stuff from Economics 101.
We’ll start with Larry Summers who answers the question “what is holding the economy back?”. I’m actually beginning to think this parade of economists out of the West Wing door is ominous. This article just gives me more of those willies. Here’s the problems per LaLa.
• When unemployment has been above 9% for 19 straight months,
• When the job vacancy rate is at near record low levels,
• When 8 million houses and countless square feet of office and retail space sit empty,
• When capacity utilization in the nation’s factories and on its railways and highways is nearly as low as it has been in any period since the Second World War,
• There cannot be any question that the constraint on our economy now and for the next several years will be lack of demand.
I am under no illusion that increased demand alone is sufficient to restore America’s economic health, but it is an unquestionably necessary component of a full recovery.
Unfortunately, the approaches we have become used to over the last fifty years for supporting demand in a market economy are not open to us today.
Base interest rates cannot fall below their current level of zero.
And, in the face of excess capacity and excess debt, it is not clear that, even if they were possible, falling interest rates would be effective in convincing consumers and businesses to spend more.
That sounds a lot like what Stiglitz wrote too.
“The first stimulus package had too much emphasis on tax cuts. Those were relatively ineffective and not enough aid for the states,” Stiglitz told reporters on the sidelines of a seminar in Chile’s capital.
A new stimulus package should include a revenue-sharing program to make up for a shortfall in state revenue and should pick up the states’ investments that had to be stalled. Also, there should be a special focus on human capital, in particular on education and training, he said.
“We have to believe that the economy will eventually recover…[W]hat kinds of jobs will we want to have in five years…[W]e need to have people trained for that,” Stiglitz said.
Additionally, Stiglitz argued the U.S. Federal Reserve’s quantitative easing bond-purchasing program is creating an excess of liquidity, which is flowing into emerging-market nations.
Emerging-market economies such as Chile’s are growing at a much faster pace than the U.S. and have comparatively higher interest rates, making them attractive destinations for investors looking for higher returns.
According to Stiglitz, the $600 billion bond-purchasing program has created a large amount of “liquidity looking for relatively safe high returns” that aren’t found in the U.S. but can be found in many emerging-market nations.
As many emerging markets are trying to discourage capital inflows, “the liquidity goes to the places where they haven’t yet put barriers for the inflows,” Stiglitz told reporters.
Okay, now to blogger Chevelle from Models & Agents. She begins by explaining how most people are back on their life time budgets as measured by the PCE or Personal Consumption Expenditure/per employed person. It’s back to the lackadaisical pre financial crisis level. We actually all have a life time expenditures patterm that tends to be consistent over our lifetime. Some times we borrow and over spend a little. Other times we panic and save. Eventually, we get back to the mean. Employed people are at that now. It’s the unemployed that aren’t anywhere near their usual budget. This package does nothing about that.
That the problem with the economy is not that (employed) Americans don’t consume enough; it is that we have too many unemployed people who can’t consume, not even the basics. And this is my first reason why giving a tax gift to employed Americans is a completely dumb policy: Not only is it unfair to the unemployed; it is questionable whether those Americans with jobs and with comfortable cash positions are going to spend this tax gift, if they are already close to reaching their long-term consumption growth. So much for a “targeted”, “efficient” fiscal “stimulus”.
She also argues that we do face a potential government debt problem in the intermediate future and doing more dumb tax cuts is just going to exacerbate the problem down the road. That also has disturbing implications. Then, there’s the payroll tax cut. That’s what Kevin doesn’t grok.
What does the cut in the payroll tax do? If anything, it reduces labor supply. This is because employed workers could work fewer hours and still end up with the same amount of disposable dollars as before the tax cut. So, at the margin, they would reduce the hours they offer to work. (To throw a bit of jargon, the labor supply curve shifts to the left: i.e. less labor is offered for a given wage).
Now, this might (temporarily) close part of the labor supply-demand gap—i.e. reduce unemployment. But that’s a reduction for the wrong reason! What we really need is for unemployment to get reduced due to an increase in labor demand (ie policies to shift the labor demand curve to the right!). So, in theory, *if* the government had cash to spare, and *if* companies’ reluctance to hire were driven by a liquidity constraint, the appropriate policy response to raise employment (and thus, consumption, GDP growth and so on) would be to give a temporary cut in the employers’ portion of the payroll tax, not the employees’.
What she’s saying here is that a payroll tax cut is likely to make employed people work less hours, but it is unlikely to cause employers to hire more people. She also continues to explain the impact on long term borrowing for the government of doing this kick-the-can-down-the-road policy.
So, while Kevin Drum is excited about is that warm tingling leg feeling he gets speculating that if people like the policy that might make people like Obama and the Democrats a bit more now. Then, he can feel good about himself again as a Progressive (TM). What he’s really missing is that it’s going to make the situation worse that’s got people peeved at Obama and the Democrats now. It’s not even robbing Peter to pay Paul. It’s borrowing money from both Peter and Paul. It’s giving money to people who will most likely put it into places where it will go stimulate the economies of emerging markets. It’s not going to do much here at all.
What we’ve got going is a long term unemployment problem with all that implies, and as Larry Summers said, a long term consumption problem. The people who get this tax cuts aren’t going to change their spending behavior at all and that’s not going to help the economy. If anything, the money going to the rich will head off overseas quicker than a credit card call center. It’s going to add to the deficit which will create long term debt problems. It does nothing to ensure the long term unemployed will maintain marketable job skills and their ability to eat and stay in their homes. It does nothing to really stimulate buying where it possibly could help. It’s an expensive gesture and that’s about it.
The one thing good that came out of the Reagan years was that we learned that the shot gun approach to tax cutting is just not that effective in doing anything but increasing the deficit. Former Congressman Jack Kemp actually showed that some targeted tax cuts and targeted expenditures could actually make a difference. This is what led to the go-zones we see now in rural and urban places that were difficult to develop in the past. It showed that if you want to kill a big beast, it’s best you get a sharp shooter and the best rifle. The targeted approach is best. So, in this sense, even the Republicans are dooming us all to repeat their past mistakes instead of the few successes they actually delivered. The Democrats have forgotten the past altogether.
I find this very worrisome that we continue to see tax cuts put out by a Democratic administration that play right into that big old VooDoo economics myth. Kevin Drum just seems to miss that point. He thinks you’ll be able to head off the Republican hand wringing in the future. He thinks every one is stupid because this is a good deal for the middle class. The problem is that it isn’t and it just sets us up for worse things in the future. This package will fail worse than the first stimulus for many of the same reasons. Two years down the road, every one will be just as discouraged. Even Larry Summers sees that.
So, here’s the promised list of why Kevin thinks were all dummies who need skooling.
Possible answers: (a) people don’t really understand that cutting payroll taxes means they’ll see an immediate increase in their take home pay, (b) people associate payroll taxes so strongly with Social Security solvency that they don’t want to cut them, (c) people fantastically overestimate how likely they are to have a $5 million estate when they die, (d) lots of people have a strong instinctive view that people should be able to pass on their wealth to their kids no matter how much it is, (e) people are just generally confused about all this stuff and it’s hopeless to try and figure out what’s really going on.
In any case, I’ll say this again to wavering lefties who have suddenly decided that the tax deal is no good because the payroll tax cut will never be undone and Social Security’s finances will be decimated: yes,
Republicans will engage in their usual Democrats are raising your taxes! demagoguery when the tax cut expires next year, but no, it won’t be very effective. There are lots of good reasons for this, and this poll provides evidence for one of them: the public isn’t all that keen on cutting the payroll tax in the first place. They want Social Security fully funded, and that argument, in the end, will carry the day. Never underestimate the power of AARP.
So, Kevin, the deal is this. You’re putting the money into the wrong hands and you’re expanding the deficit in the future and probably making it more expensive for the government to keep putting money back into social security. Afterall, it’s just another government “IOU” to the Social Security Trust Fund. People haven’t liked the idea in the past. They don’t like it when the government ‘borrows’ from the trust fund and they don’t like it now. The Social Security Trust fund is invested in Treasuries. You know, those things Moody’s wants to down grade?
It makes no sense to help out people that don’t need it, borrow a ton of money that won’t really accomplish anything, and still come out with a bad economy two year down the road during the next election season. I really don’t think people are as confused as you are. It’s voodoo economics. It doesn’t make any difference if it’s the Republican or the Democratic brand on it. No one’s going to look a gift horse in the mouth. Still, to think anything good will come of any of this is just plain foolish.