Americans View Taxes as Immoral, Experts Say

Although Americans are not taxed nearly as much as people in other Western countries, particularly Canadians and the British, there is nothing that vexes U.S. citizens more than more taxes. Experts say this is because middle-class Americans view taxes as more of a moral issue than other cultures, and one that is always tinged with a hint of exploitation. A recent survey showed that the middle class feels it is stuck paying for handouts to a lazy welfare class while the class above them manipulates tax laws in their favor. In the end, Americans view taxes as a matter of right and wrong, and the current tax structure appears immoral. For more on this continue reading the following article from Economist’s View.

This reinforces points I (and others) have made about why people oppose taxes:

 Why are some people morally against tax?, EurekAlert: ...Americans are famously hostile to taxes even though they are not heavily taxed in comparison to Canadians and the British. ...Dr Jeff Kidder and Dr Isaac Martin, from Northern Illinois University and the University of California-San Diego, explore how middle class feelings of exploitation lie behind this hostility.

"Everyday tax talk among the middle class is not simply part of a wider ideological view about economics or free markets," said Kidder. "Tax talk is morally charged and resonates with how Americans see themselves and their place in society."

The researchers conducted 24 semi-structured, open-ended interviews with taxpayers in the Southern states who owned or managed small businesses to discover how they talk about taxes in everyday life. Entrepreneurs are a demographic group which is typically strongly anti-tax, while the Southern States provide many supporters for the radical Tea Party.

Respondents saw themselves as morally deserving and hard-working people, sandwiched between an economically more powerful group that manipulates the rules for its own benefit and a subordinate group that benefits from government spending but escapes taxation.

"We found that people associate income tax with a violation of the moral principle that hard work should be rewarded," said Kidder. "Our research shows that when Americans lash out at 'takeovers,' 'massive taxes' and 'bailouts,' they are looking at these issues from the perspective of a hard-working middle class besieged on all sides. Tax talk is about dollars, but it is also about a moral sense of what is right."

It is typically believed that those who are anti-tax will also be hostile to government aid for the poor and minorities. However, rich recipients of bailouts were also disparaged as people who did not deserve money because they did not work for it.

"A lot of the tax talk you will hear from politicians this election season makes no sense as arithmetic," Martin said. "But it makes sense as an appeal to the moral sensibilities of small business."

"Our research shows that tax talk is not actually about individual self-interest, but about our respondents' sense of the proper relations among groups," concluded Kidder.

Here's how I put it a bit over a year ago:

...People believe they paid for programs such as Social Security and Medicare. They put in contributions each month, the government saves that money somewhere, somehow, and when they use these programs they aren't consuming from "government," they are consuming their own contributions. ...

So it's true that people want the budget cut, but only the parts where people are forced to pay for "underserving" recipients of these government services. The feeling is that they get up every day and do what's needed to support themselves and their families. They go each day to jobs they hate, hate, hate, hate with a passion because that's how life is, and they don't appreciate seeing their hard-earned money taken away and given to people who don't even try, people who could work if they wanted to, but rely on the system instead.

Now, I happen to think that is a very wrong view of the circumstances of the typical aid recipient, but true or not I do think it is the source of the opposition to many social programs. People don't object to Social Security and Medicare because they believe they paid for these programs in full, or close to it. Same for disability, food stamps, and other programs. They paid into these programs for years, just like medical insurance, and now it's their turn to consume some of the funds they put in... It's the people who consume without contributing that raise their ire and cause objections to these programs. It's the "handouts" that are the problem. ...

And as noted above, the same applies to handouts to the wealthy. (Which reminds me of my mom criticizing my uncle as I was growing up -- a very well off and very Republican farmer -- for complaining about welfare recipients while taking crop subsidy payments himself. She used to tell me he was on welfare too, except he didn't need it. I'll just add that financial executives in too big to fail banks didn't need it either.)

This blog post was republished with permission from Economist's View.

Are Higher Tax Rates Really That Bad?

The Laffer Curve is an economic theory that pinpoints a revenue-maximizing percentage for taxation; in other words, it prescribes a certain tax percentage beyond which tax revenues actually start to decrease due to tax avoidance, evasion and nonpayment. Economists Peter Diamond and Emmanuel Saez believe the percentage for those in the top 1% of U.S. earners hovers somewhere between 50%-70%, meaning the government could raise their tax rate up to at least 50% before seeing a drop in revenue. The wealthy heartily disagree, but there is no way to tell other than to look at historical data, which indicates the hike would not change behavior. For more on this continue reading the following article from Economist’s View. 

Peter Diamond and Emmanuel Saez:

High Tax Rates Won't Slow Growth, by Peter Diamond and Emmanuel Saez, Commentary, WSJ: The share of pre-tax income accruing to the top 1% of earners in the U.S. has more than doubled to about 20% in 2010 from less than 10% in the 1970s. At the same time, the average federal income tax rate on top earners has declined significantly. Given the large current and projected deficits, should the top 1% be taxed more? ...

But will taxable incomes of the top 1% respond to a tax increase by declining so much that revenue rises very little or even drops? In other words, are we already near or beyond the peak of the famous Laffer Curve, the revenue-maximizing tax rate? ...

According to our analysis..., the revenue-maximizing top federal marginal income tax rate would be in or near the range of 50%-70%... Thus we conclude that raising the top tax rate is very likely to result in revenue increases at least until we reach the 50% rate that held during the first Reagan administration, and possibly until the 70% rate of the 1970s. ...

But will raising top tax rates significantly lower economic growth? In the postwar U.S., higher top tax rates tend to go with higher economic growth—not lower. ... Neither does international evidence support a case for lower growth from higher top taxes. ...

By itself, a suitable increase in the taxation of top earners will not solve our unsustainable long-term fiscal trajectory. But that is no reason not to use this tool to contribute to addressing this problem.

With the "taxes harm growth" and Laffer curve arguments undercut by research such as this, Republicans have fallen back on the argument that it's unfair to take income away from those who earn it. But that presumes that the system allocates income fairly, a claim that is hard to swallow given how much financial executives are paid relative to their contribution to the productive process (to name just one example). There's nothing unfair about using taxes to "clawback" misdirected income, and it won't harm growth to send income where it should have gone in the first place.

This article was republished with permission from Economist's View.

Election Year Spurs Small Business Giveaways

The struggling U.S. economy during an election year means many politicians are crafting policy aimed at small businesses in the hopes of scoring points with voters; however, statistics from the Joint Committee on Taxation and the Tax Policy Center reveal these measures really don’t help. The estimated cost to government for the Small Business Tax Cut proposal is $46 billion, and experts say most benefits will go to those earning $1 million or more and will not help create any jobs. Economist Bruce Bartlett argues that money would be better spent on infrastructure, and politicians can spin it by saying infrastructure helps small businesses, too. For more on this continue reading the following article from Economist’s View.

Bruce Bartlett:

Do Small Businesses Create Jobs?, by Bruce Bartlett, Commentary, NY Times: ... Congress is, of course, always keen to find ways of aiding small businesses, which are akin to mom and apple pie in its eyes. Just recently, it approved the JOBS Act, which is intended to ease access to credit by “emerging growth” companies. Congressional Republicans are anxious to enact a new tax cut for small businesses, as well. The Small Business Tax Cut Act, which was reported out by the House Ways and Means Committee on April 10, would give a one-year, 20 percent tax cut to every business with 500 or fewer employees.

The Joint Committee on Taxation estimates that it will reduce federal revenues by $46 billion. The committee report offered virtually no rationale for the legislation other than that small businesses are good and deserve a tax cut, period. The linkage between a small business’s tax burden and job creation, however, is tenuous at best. ...

The Tax Policy Center estimates that the benefits would accrue overwhelming to the wealthy, with 49 percent of the total tax cut going to those making more than $1 million.

There may be policies that would increase the number of business start-ups and aid employment this way. But an across-the-board tax cut for every small business, defined only in terms of employment, is nothing but an election-year giveaway unlikely to create any jobs whatsoever.

Instead, let's use the $46 billion this would cost (and mostly waste in terms of job creation) to build infrastructure. If it helps to sell it, make it infrastructure that would be useful to small businesses -- it can probably be argued that most infrastructure projects would help small businesses in one way or the other. This way, even apart from the better prospects for job creation from infrastructure spending, at least we'll have something to show for the money when all is said and done.

This blog post was republished with permission from Economist's View.

Economist Recommends Tax Increases

Economist Paul Krugman writes in The New York Times that it’s a good thing the Congressional “supercommittee” has failed to agree on federal budget cuts. A more helpful approach, he says, is to raise taxes on the rich and to start taxing financial transactions. He takes on naysayers who argue taxing the rich will not help the bigger picture by pointing out that the combined income for the top 0.1% of earners is more than $1 trillion, and claims the vast increase in financial transactions over the years could result in a significant source of tax revenue. For more on this continue reading the following article from Economist’s View.

Increased in revenue from taxes on very high incomes and taxes on financial transactions should be part of the long-term deficit reduction plan:

Things to Tax, by Paul Krugman, Commentary, NY Times: The supercommittee was a superdud — and we should be glad. Nonetheless, at some point we’ll have to rein in budget deficits. And when we do, here’s a thought: How about making increased revenue an important part of the deal?

And I don’t just mean a return to Clinton-era tax rates. ... The long-run budget outlook has darkened, which means that some hard choices must be made. Why should those choices only involve spending cuts? Why not also push some taxes above their levels in the 1990s?

Let me suggest two areas in which it would make a lot of sense to raise taxes in earnest...: taxes on very high incomes and taxes on financial transactions.

About those high incomes: In my last column I suggested that the very rich ... should pay more in taxes. I got many responses from readers ... that even confiscatory taxes on the wealthy couldn’t possibly raise enough money to matter.

Folks, you’re living in the past. ... The IRS reports that in 2007 ... the top 0.1 percent of taxpayers — roughly speaking, people with annual incomes over $2 million — had a combined income of more than a trillion dollars. That’s a lot of money, and ... taxes ... would raise a significant amount of revenue...

For example,... before 1980 very-high-income individuals fell into tax brackets well above the 35 percent top rate that applies today. ... I’ve extrapolated ... using Congressional Budget Office projections, and what I get for the next decade is that high-income taxation could shave more than $1 trillion off the deficit. ...

So raising taxes on the very rich could make a serious contribution to deficit reduction. Don’t believe anyone who claims otherwise.

And then there’s the idea of taxing financial transactions... Because there are so many transactions, such a fee could yield several hundred billion dollars in revenue over the next decade. Again, this compares favorably with the savings from many of the harsh spending cuts being proposed in the name of fiscal responsibility.

But wouldn’t such a tax hurt economic growth? As I said, the evidence suggests not — if anything,... to the extent that taxing financial transactions reduces the volume of wheeling and dealing, that would be a good thing. ...

Now, the tax ideas I’ve just mentioned wouldn’t be enough, by themselves, to fix our deficit. But the same is true of proposals for spending cuts. The point I’m making here isn’t that taxes are all we need; it is that they could and should be a significant part of the solution.

This blog post was republished with permission from Economist’s View.

Americans Would Have To Double Income Tax To Close 2010 Deficit

According to the Tax Foundation, the government would have to more than double income taxes to close the 2010 budget deficit. While an extreme tax hike is very unlikely, these claims show the severe imbalance of government revenue and liabilities. See the following post from The Capital Spectator for more on this.

Supply side economics guru Arthur Laffer co-authored a book recently whose title is anything but subtle: The End of Prosperity: How Higher Taxes Will Doom the Economy--If We Let It Happen. This provocative title came to mind after perusing some freshly minted numbers from the Tax Foundation, which estimates what it would take to close the U.S. government’s fiscal 2010 budget deficit by adjusting federal income tax rates for individuals. That's not going to happen, of course. Not even close. But it's an interesting way to consider what we owe and what it would take to pay off the debt solely on the backs of individual tax payers--in one year. In this make-believe world, the adjustment, of course, would be an increase in tax rates, and by more than a trifling amount. So it goes when liabilities exceed revenue by something approaching biblical proportions.

One can debate the Tax Foundation’s assumptions, of course. And in the real world there are other means of closing the budget deficit. In fact, there’s no legal pressure to close it this year, or any time soon, for that matter. Economic reality imposes its own restrictions and limits, but that’s another matter. Meantime, here’s how the Tax Foundation summarizes its theoretical experiment:

Assuming deductions, exemptions and credits were kept the same as they are now, Congress would have to raise each personal income tax rate by a factor of almost two and a half to erase the 2010 deficit. Even in later years when the President's Budget predicts that the deficit will be "only" in the $700-to-$800 billion range, the rates necessary to close the deficit are untenable.

The CBO projects a budget deficit for fiscal 2010 of $1.3 trillion. According to the Tax Foundation, blotting out that red ink by way of higher personal income taxes—all in one year—would require more than doubling the current tax rates. For the upper income levels, a near tripling of the tax burden would be required, as the table below shows.



The chances of Congress raising tax rates to close the deficit in one year, much less having the President sign off on the idea, is about as likely as waking up on Saturn tomorrow morning. The Beltway boys and girls don’t usually favor politically self-destructive legislation. If anything, they’re partial to the opposite spectrum of legislative activity, which is part of what got us into this deficit trouble in the first place.

Yes, higher tax rates are coming, and may already be bubbling before they're formally announced, as we discussed last week. But higher rates are likely to come quietly in the night, as opposed to dropping out of the blue on Monday morning with a formal press conference announcing the change on the front steps of the Capitol. No doubt there'll be other changes, too, including cutting back on certain spending projects that lack a large and influential constituency, i.e., something other than Medicare, Social Security, etc.

In any case, the Tax Foundation’s quantitative “what if” review is a reminder of just how deep a hole that’s been dug and what it would take to climb out. Assuming we even try. History suggests that printing money is the political path of least resistance. And for good reason: it works, at least until the next election. And even then, there are limits, which is to say that it works until it doesn’t.

For the moment, the bond market has a high level of tolerance for fiscal impropriety. That’s largely a function of the political cover that flows from the deflation/disinflation blowback generated by the Great Recession. But tomorrow, as Scarlett once said, is another day. So too is what passes for tolerance.

This post has been republished from James Picerno's blog, The Capital Spectator.

Taxes And Economic Growth

An examination of presidential policy over the last 30 years indicates that tax cuts may not be the most effective means of stimulating economic growth in the United States. The data suggests that the tax increases signed by President Reagan and President Clinton did more to promote economic growth and recovery than any of the tax cuts signed since 1980. See the following post from Economist's View.

Do tax cuts spur economic growth?

Tax Cuts and Recoveries, by David Leonhardt, Economix: One big question about the 1983-84 economic boom (a boom I mention in my Wednesday column) is: Was it the tax cut?

Ronald Reagan signed a large tax cut in the summer of 1981, while the economy was in recession. Within a year and a half, the economy was booming. Conservatives, understandably, like to argue that the tax cut helped cause the boom.

I’m open to that argument. ... What’s unclear is how big an effect tax rates have.

In 1982, with the economy in the second part of its double-dip recession, Reagan signed a tax increase, meant to reduce the deficit. Here’s Bruce Bartlett, writing at Forbes.com:

According to a recent Treasury Department study, Ronald Reagan proposed the largest peacetime tax increase in American history as part of a budget deal to get the federal deficit under control. The Tax Equity and Fiscal Responsibility Act (TEFRA) ... took effect on Jan. 1, 1983.

During debate on TEFRA, many conservatives predicted economic disaster. They argued that raising taxes in the midst of a severe recession was exactly the wrong thing to do. ... Said Rep. Newt Gingrich, “I think it will make the economy sicker.” The Chamber of Commerce ... said it had “no doubt that it will curb the economic recovery everyone wants.”

Looking at the data, however, it is very hard to see any evidence that TEFRA had a negative effect on growth. Indeed, one could easily make a case that its enactment stimulated growth.

A little more than a decade later, Mr. Gingrich made the same argument about Bill Clinton’s tax increase. But ... the ... late 1990s expansion was the fastest of any in the past forty years.

Mr. Clinton’s successor, George W. Bush, signed a large tax cut during his first year in office — as Mr. Reagan did. But Mr. Bush never signed a tax increase to reduce the deficit. And growth in the Bush years was slower than in the Reagan years or the Clinton years, even before the financial crisis hit.

The history seems to suggest that tax cuts are not the most reliable strategy for spurring growth, at least in the United States, where top income-tax rates are not sky high.

But maybe readers can offer an analysis that explains this history and still makes the case for tax cuts as the main engine of economic recoveries. ...

Just one quick note - for those anxious about the deficit and eager to do something about it, the Reagan experience shouldn't be used as an excuse to start raising taxes too soon. The time will come when deficit spending is no longer needed to spur the economy and at that point we should reverse course, but we shouldn't make the mistake of 1937-38 when an attempt to balance the budget too soon in the recovery caused the economy to fall back into recession.

This post has been republished from Mark Thoma's blog Economist's View.

Save Thousands By Converting Your IRA To A Roth IRA in 2010

New rules beginning on January 1st, 2010, will allow you to convert your existing IRA into a Roth IRA regardless of your income level. This could potentially save you thousands or even hundreds of thousands in taxes. For more on this see the following article by Dr. Steve Sjuggerud from Daily Wealth.

"Thank God for Obama," my accountant, Hank Hurst, said to me yesterday...

"I know people are out of work. But accountants like me have never been so busy, thanks to all the new and potential tax changes and regulatory changes."

Hank went on about these changes. What interested me the most is a government boondoggle... a program that can save you hundreds of thousands of dollars in your tax money.

For this to make sense for you, you have to answer "yes" to these three questions:

• First question: Do you expect U.S. federal income tax rates in the future will be higher than today?

The answer should be obvious... At the trajectory we're on, with massive government debts (not to mention future health care and Social Security liabilities), higher tax rates are a certainty.

• Next question: Do you believe capital gains tax rates and dividend tax rates in the future will be higher than today?

Obviously, this should have the same answer as the first question.

• Last question: Do you think inflation in the future will be higher than today?

This should be obvious, too... At the rate our government is "printing" money and spending it, future inflation is a foregone conclusion.

If you answered "yes" to these three things, then you should seriously consider getting in on this deal. Here's the story:

The U.S. government needs your money now. So it's willing to do something foolish to get your money today, instead of waiting until you retire. The government has created a loophole that allows us to exploit its desperation for cash.

If the government were smart, it would wait, and take $400,000 from you in the future instead of asking for $40,000 today. But it needs money now, and it'll take what it can get.

So starting on January 1, 2010, ANY American, regardless of income, can convert his IRA to a Roth IRA with no penalties. You have to pay income tax due, but you get a special "grace" period until April 15, 2013 to fully pay it.

When you do this conversion, all your money grows tax-free... It can grow to millions, and the government can't tax it ever again.

If you believe those three questions above should be answered "yes," then you're beating the government at its own game. Let me show you...

Let's say you have a traditional IRA with $100,000 today. That might grow to $1 million in 20 years. At that point, you'd have to pay nearly $400,000 in taxes to get the money out (using a 39.6% income tax rate). But the joke is on you... because a good portion of the "gain" on your investment will probably be from inflation.

If you take this deal and convert your traditional IRA to a Roth IRA, then you have to pay $40,000 in taxes by April 2013. But if you've got the cash elsewhere, you don't have to take it out of your IRA. So in 20 years, $100,000 will turn into $1 million, with no taxes due at the end. The $40,000 today is the cost of not paying $400,000 in taxes in the future.

Now that's a simple example. Most people contribute yearly, and then withdraw yearly when they retire – they're forced to withdraw money annually by law in a traditional IRA. That way, the government can collect its taxes. But in this Roth, you already paid your taxes. You can take your money out any time... no penalties, no taxes.

This deal is not right for everyone. If you're close to retirement age already, or if you expect to be in a low tax bracket when you retire, it probably doesn't make sense for you.

But if you're younger... and you're worried about big government and inflation... it's the best way I know to beat the government at its own game. Instead of getting taxed on inflation, you can use inflation to your advantage. Your money "inflates" tax free in your Roth IRA.

There are a lot of ins and outs here. And the big risk, I'm afraid to say, is if the government changes the rules. Also, I'm not a tax advisor – far from it! So don't take it from me. Do your homework. Talk to your tax man (or talk to mine... you can reach Hank by e-mail at info@hurstcpa.com).

If you believe higher taxes and higher inflation are in your future, then this 2010 Roth deal is worth considering.

Dailywealth.com offers a free daily investment newsletter which focuses on contrarian investment opportunities.

Nice...AIG Is Paying $165 Million To The People That Ruined The Company

What is going on over at AIG? The latest fiasco coming from AIG is the news that $165 million in bonuses are scheduled to be paid out to the financial products unit. Oh, one other thing, that is the unit that basically bankrupted the company. How on earth are these people still even working for the company, let alone getting bonuses? Typically when someone screws up that much they get fired, not rewarded. Meanwhile the American public is left completely baffled at the situation. So far we have given AIG about $170 billion, — which kept the company in business — and now AIG is telling us that we have to allocate $165 million of this tax payer money to give to the people who caused us to have to pony up the $170 billion to begin with? I know they have some contract things in place and all, but as Laura Wilson from Information Security Resources points out in her blog post below, I'm sure there is a way for us to get around that contract considering the situation. Oh yeah, here is a thought too: how about we FIRE some of these people! There are a lot of good financial people looking for jobs right now, and a little shake up over there might not be such a bad thing.

The plaint that credit default swap-promulgating AIG (AIG) is contractually obligated to pay out millions in bonuses to the same pitted brass that led the company, the industry, and the entire economy off a cliff is a bunch of horse hooey.

If you are on the management team of a company that lays off workers, can’t pay its bills, leaves shareholders holding nothing, and has to take public bailouts, it’s your damn job to make a deal to restructure that company, or wind it down responsibly.

Your bonus is getting to keep porking up to the paycheck trough while other workers are losing salary, severance, and health care.

New York Times: The payments to A.I.G.’s financial products unit are in addition to $121 million in previously scheduled bonuses for the company’s senior executives and 6,400 employees across the sprawling corporation. Mr. Geithner last week pressured A.I.G. to cut the $9.6 million going to the top 50 executives in half and tie the rest to performance.

The payment of so much money at a company at the heart of the financial collapse that sent the broader economy into a tailspin almost certainly will fuel a popular backlash against the government’s efforts to prop up Wall Street. Past bonuses already have prompted President Obama and Congress to impose tough rules on corporate executive compensation at firms bailed out with taxpayer money.

A.I.G., nearly 80 percent of which is now owned by the government, defended its bonuses, arguing that they were promised last year before the crisis and cannot be legally canceled. In a letter to Mr. Geithner, Edward M. Liddy, the government-appointed chairman of A.I.G., said at least some bonuses were needed to keep the most skilled executives.

I sure would like to see those AIG contracts - I’ll bet I can poke a hole in the specious supposition that the company really, really wants to do the right thing, but its little hands are tied. Since the public bailout of AIG, we all have an ownership interest in where the money is going, and are entitled to ask probing questions.

New York Times: “We cannot attract and retain the best and the brightest talent to lead and staff the A.I.G. businesses — which are now being operated principally on behalf of American taxpayers — if employees believe their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury,” he wrote Mr. Geithner on Saturday.

Still, Mr. Liddy seemed stung by his talk with Mr. Geithner, calling their conversation last Wednesday “a difficult one for me,” and noting that he receives no bonus himself.

“Needless to say, in the current circumstances,” Mr. Liddy wrote, “I do not like these arrangements and find it distasteful and difficult to recommend to you that we must proceed with them.”

I know contracts inside and out, at the real-world, down and dirty level, not the black-box, ivory tower, theoretical stratum that gets adjusted as the tectonic plates of business deals crash into each other.

Although I have chosen not to practice law anymore, I am really good at understanding the terms of these agreements, and evaluating when it would appropriate to reward corporate players for their performance.

And, when it is not.

New York Times: Of all the financial institutions that have been propped up by taxpayer dollars, none has received more money than AIG, and none has infuriated lawmakers (and Ben Bernanke per 60 Minutes) more, with practices that policy makers have called “reckless”

The bonuses will be paid to executives at A.I.G.’s financial products division, the unit that wrote trillions of dollars’ worth of credit-default swaps that protected investors from defaults on bonds which were backed in many cases by subprime mortgages.

The bonus plan covers 400 employees, and the bonuses range from as little as $1,000 to as much as $6.5 million. Seven executives at the financial products unit were entitled to receive more than $3 million in bonuses.

Any attorney who advises that these bonuses are appropriate ought to have his or her head checked.

Base salary, maybe, if not outrageous. No bonus. No severance unless everybody else also received proportionate assistance. Don’t care what the contract says - attack it in bankruptcy or wind down - I saw it many times in the Silicon Valley meltdown.

But the official also said the administration will force A.I.G. to eventually repay the cost of the bonuses to the taxpayers as part of the agreement with the firm, which is being restructured.

AIG’s main business is insurance, but the financial products unit sold hundreds of billions of dollars’ worth of derivatives, the notorious credit-default swaps that nearly toppled the entire company last fall. AIG had set up a special bonus pool for the financial products unit early in 2008, before the company’s near collapse, and when problems stemming from the mortgage crisis were just becoming clear.

There were concerns that some of the best-informed derivatives specialists might leave.the company. AIG then locked in $450 million for the financial products unit, and prepared to pay it in a series of installments to encourage people to stay.

This poignant issue is near and dear to me, as I have shut down management bonuses before, even when I would have received some of that money, and even when I really needed it.

I also have been lucky enough to work with one of the premier corporate governance experts in the country and with a bankruptcy and wind down expert whom I hope will end up on the federal bench.

In the past, I have known both of these gentlemen to express support for my assertion that it is appalling for a destitute company to pay out management and deal bonuses to the team that took the company under.

New York Times: A.I.G.’s main business is insurance, but the financial products unit sold hundreds of billions of dollars’ worth of derivatives, the notorious credit-default swaps that nearly toppled the entire company last fall.

Under a deal reached last week, A.I.G. agreed that the top 50 executives would get half of the $9.6 million they were supposed to get by March 15. The second half of their bonuses would be paid out in two installments in July and in September. To get those payments, Treasury officials said, A.I.G. would have to show that it had made progress toward its goal of selling off business units and repaying the government.

Nice. You just keep holding that moral compass you got there, guys.

Laura is a business consultant and an advocate for information security, consumer protection, long-term shareholder value, and better management decisions. Her specialty is finding and fixing risks and threats to sensitive data. Her experience includes international banking, credit card, and mortgage companies, venture capital portfolio companies, and software and technology providers. She practiced law in Silicon Valley during the tech boom and meltdown, handling corporate governance and information protection.

This post can also be viewed on yourmortgageoryourlife.wordpress.com.

Tax Cuts Could Deepen The Recession

There has been non-stop debate between Republicans and Democrats for the past couple weeks regarding how the economic stimulus bill should be structured. Republicans want a majority to go towards tax cuts, and the Democrats want to see high levels of spending. It appears that the Democrats are going to win out in this debate, thinks to their heavy numbers advantage, but according to the New York Fed's Gauti Eggertsson that is a good thing. He wrote a paper theorizing that in today's economic environment tax cuts have the potential to backfire, and possibly even deepen the recession. Economics professor and author of the Economist's View blog, Mark Thoma, looks at this closer in his blog post below.

Justin Wolfers summarizes a paper that suggests government spending would be better than tax cuts at reviving the economy:

Tax Cuts vs. Government Spending, by Justin Wolfers: As the Senate and the House look to reconcile competing stimulus plans, the big debate is whether to emphasize government spending or tax cuts. A new paper by the New York Fed’s Gauti Eggertsson argues that the risk of deflation should tilt the balance to government spending.

Our current problem is deficient aggregate demand. The government can raise total spending either by buying more stuff, or it can lower taxes and hope that consumers take their tax breaks to the mall. ...

But that’s not the whole story. Tax cuts stimulate both aggregate demand and aggregate supply. If taxes are temporarily lower, they make working today more attractive than working tomorrow, and thus increase labor supply. This boost to the nation’s productive capacity means that a tax-cut-based stimulus doesn’t do as much to narrow the gap between output and what we can produce.

Under normal circumstances, this doesn’t present a problem, because the Fed can lower interest rates to close this output gap. But right now, the Fed has set interest rates as low as they can go, and so different principles apply. Eggertsson’s concern is that a big output gap will lead inflation to fall, leading real interest rates to rise in the middle of the recession. These higher real interest rates further dampen economic activity, and with the Fed powerless to offset this, there’s the very real risk of a deflationary spiral. And so a tax-cut-based fiscal stimulus might actually backfire. In fact, Eggertsson reckons there’s a chance that tax cuts could even deepen the recession.

Is Eggertson’s conjecture right? Unfortunately the historical record can’t tell us: there’s never been an episode in which we’ve tried reducing taxes when interest rates were this low. When we’re in uncharted waters, we’ve got nothing but economic theory to guide us. And the theory says it’s safer to stick to a spending-based stimulus plan.

I'd like to be able to rely on this as one more piece of evidence for government spending over taxes, but I have doubts that the aggregate supply (labor supply) effect would be large enough to make much of a difference. The author also suggests caution:

I am bit hesitant to draw the lesson from this paper that it would be ideal to raise payroll taxes to stimulate the US economy today, although this clearly is a direct implication of the analysis

And he also says:

What should we take out of all of this? ...[One] lesson is that policymakers today should view with great deal of skepticisms any empirical evidence on the effect of tax cuts or government spending based on post war US data. The number of these studies is high, and they are frequently cited in the current debate. The model presented here, which has by now become a workhorse model in macroeconomics, predicts that the effect of tax cuts and government spending is fundamentally different at zero nominal interest rates than under normal circumstances.

This post can also be viewed on economistsview.typepad.com.

Is Free-Market Ideology Flawed?

In a controversial article published in the Guardian, Jeffrey Sachs calls out free-market ideology as flawed and applauds the measures being taken by Obama to get the government more involved in business. America is known for its relatively free-market economy, and for years it seemed to work great, but Sachs argues that things have changed. Whether or not one agrees with Sachs it is interesting to hear his perspective on things. Mark Thoma from the Economist's View presents Sach's article in his blog post below.

Jeff Sachs seems to be pleased with the new administrations commitment to "a new age of sustainable development":

Rewriting the rulebook for 21st-century capitalism, by Jeffrey Sachs, CIF, The Guardian: One of President Barack Obama's historic contributions will be a grand act of policy jujitsu - turning the crushing economic crisis into the launch of a new age of sustainable development. ... Obama is already setting a new historic course by reorienting the economy from private consumption to public investments directed at the great challenges of energy, climate, food production, water and biodiversity.

The new president has taken every opportunity to underscore that the economic crisis will not slow, but rather will accelerate, the much-needed economic transformation to sustainability. ... The fiscal stimulus ... will lay down the first steps of a massive generation-long technological overhaul...

Obama has started with the most important first step: a team of scientific and technological advisers of stunning quality... He has also focused on two core truths of sustainable development: that technological overhaul lies at the core of the challenge, and that such an overhaul requires a public-private partnership for success. Taking shape, therefore, is nothing less than a new 21st-century model of capitalism ... committed to the dual objectives of economic development and sustainability...

Consider the challenge of a bankrupt automobile sector... In the Obama strategy, GM will not be closed to punish it... It's worth far too much as a world leader in the electric vehicles of the 21st century. ...

Conservatives are aghast. The bail-out of the auto industry was hard enough to swallow. Government investments in infrastructure and research and development are viewed with scorn, compared with the tried and true (if disastrously failed) tax cuts of the Bush era. Rightwing pundits bemoan the evident intention of Obama and team to "tell us what kind of car to drive". Yet that is exactly what they intend to do (at least with regard to the power source under the hood), and rightly so. Free-market ideology is an anachronism in an era of climate change, water stress, food scarcity and energy insecurity. Public-private efforts to steer the economy to a safe technological harbour will be the order of the new era.

There is plenty of room for blunders... Government activism can founder on the shoals of massive budget deficits, tax-cutting populism pushed by the right, politically motivated investments such as corn-based ethanol..., and more. Yet Obama is absolutely correct that we have no choice but to try...

This post can also be viewed on economistsview.typepad.com.

Most Americans Support New Stimulus Proposal

House Democrats released the latest version of a new stimulus package meant to turn our struggling economy around. Most notably, the stimulus package swelled from $775 billion to $825 billion with a proposed $550 billion in spending and aid to states and $275 billion in tax cuts, according to CNNMoney. Despite the large price tag, Americans are generally perceived to be on board with the plan, according to a recent Wall Street Journal/NBC News poll. 43 percent of the people surveyed called the plan a “good idea,” while 27 percent said it was a “bad idea.” The remaining portion had no opinion either way.

The most pressing concern for the people surveyed was unemployment, followed by the federal budget deficit which came in at a distant second. 63 percent of the surveyed individuals felt that government spending should be the biggest priority of the bill, while 33 percent felt that tax cuts should be the main catalyst.

It would be interesting to compare this current poll to how people felt about these priorities prior to the last stimulus package. I have a sneaking suspicion that more people would have been in favor of tax cuts back then. Because those didn’t work as planned, people are turning to a different strategy to fix the problem.

President-elect Obama is enjoying unprecedented support for his plan and his administration as Americans look to him to get us out of this mess, but if Obama’s stimulus plan doesn’t get succeed, it will be interesting to see how quickly that support wanes. President Bush once had the highest approval rating ever (90 percent in September 2001), and now has the second lowest approval rating ever, only bested by Richard Nixon after the Watergate scandal. The American people are ready for results, and Obama may learn, as George W. did, that opinions can change drastically and quickly.

Unemployment Rate Now 7.2 Percent And Rising

The U.S. Labor Department just released the latest jobs report, and—surprise!—it wasn’t pretty. For the first time in the history of the report, there were back-to-back monthly job losses in excess of 500,000—584,000 jobs lost in November, followed by 524,000 jobs in December—bringing the total for 2008 to 2.6 million—the largest yearly drop (by number) since 1945.

"We have a bigger economy now, but even on a proportional basis, the last months have been the worst since [1945]," said Kurt Karl, head of economic research at Swiss Re, according to CNNMoney . "It's just an enormous acceleration of job losses."

It doesn’t end there: In addition to unemployment, there is an increasing number of under-employed workers. The under-employed rate jumped to 13.5 percent, up from 12.6 percent, which is the highest level on record since measurement began back in 1994, according to CNNMoney.

Experts don’t envision things turning around anytime soon either. Tig Gilliam, chief executive of Adecco Group North America, a unit of the world's largest employment firm and Karl both expect about another 1 million jobs to be lost in January and February before the declines begin to shrink to about a 200,000 level in June. Both said stimulus will help, but they doubt that infrastructure jobs will have as quick of a boost as lawmakers hope, according to CNNMoney.

Obama is attempting to enact an economic stimulus plan that will create or save 3 million jobs. In addition to major tax cuts for businesses and consumers, the plan also calls for huge investments in infrastructure. This could help put to work the legions of unemployed construction workers, although experts think that benefits wouldn’t be heeded until the end of the year. Even if that is the case, "Putting money into highways won't by itself end the recession, but it will put a lot of skilled workers back on job," said Ken Simonson, chief economist for The Associated General Contractors of America in a CNNMoney article.

It is difficult not be pessimistic about the employment prospects for Americans, "We're seeing a complete unraveling of the labor market and are on track for getting beyond 10 percent unemployment," said Lawrence Mishel, president of the Economic Policy Institute in a CNNMoney article.

It is hard to envision the government allowing unemployment numbers to surpass 10 percent, but unless they act quickly it is a definite possibility. I think Obama will do everything he can to prevent unemployment from spiraling out of control, but will it ultimately be enough?

A Case Against New Tax Cuts

One major debate among economists and politicians is whether or not tax cuts actually stimulate the economy. Yesterday President-Elect Barack Obama shared details about his new economic stimulus plan where he is calling for around $300 billion in tax cuts. Many people are in support of these cuts, however, there is also an opposition side as well. Jeff Madrick is one such opponent, he believes in higher taxes and bigger government. While you certainly do not have to agree with his views, it is interesting to hear his arguments. Economics professor Mark Thoma takes a closer look at Madrick's article, and adds some thoughts in his blog post below.

Jeff Madrick makes the case for government:

No New Tax Cuts, by Jeff Madrick, Boston Review: ...Even Friedman acknowledged that free markets do not adequately supply some public goods, like primary education and roads. ... And there are other strong theoretical arguments to be made for state intervention in areas of information economics, behavioral economics, agency problems..., and institutional economics and the power of the firm.

However, it is possible to look at the question ... empirically rather than theoretically. ... One argument against government is that public spending is unproductive and crowds out private spending. But, time and again, [Peter H. Lindert, a leading economic historian,] found that studies claiming that high taxes reduce economic growth simply did not hold up. ... No matter how he juggled the data, he found no relationship between the growth of GDP per capita and productivity and the level of taxes or the extent of social spending. There is a dramatic “conflict between intuition and evidence,” he writes. ...

Other economists have ... shown that one of the other anti-tax arguments—that it significantly reduces incentives to invest and work—is highly exaggerated. ... Then there is the argument that government is always inefficient. Sometimes it surely is. But Medicare’s administrative expenses consume only 2 or 3 percent of outlays compared to 15 to 20 percent for private medical insurance. The administrative expenses of Social Security, a marvel of efficiency, are miniscule.

Indeed, the economic history of the United States is one of consistent and vigorous government action... Even when government expenditures were low, government established regulations that seriously affected the nation. Thomas Jefferson was one of the early regulators of land-distribution policies, which were radical by any standard we know today... As a consequence, land was widely distributed at a fair price in the nation early on, and speculators (to the degree possible) kept at bay.

State and local government spent on public improvements aggressively in the early 1800s, building canals and roads. By 1850 the United States had one of the the world’s great free primary education systems. Through land donations—a form of spending—the federal government supported the new agricultural and technical colleges, such as MIT and the University of California, Berkeley, and invested heavily in railroads. In the late 1800s and early 1900s, government built the sanitation, water, and sewer systems that made urban life possible. In the 1900s, government built the new high schools necessary for an advancing economy, along with new roads, dams, bridges, and all manner of public works. Look at your own city. After World War II, the federal government built the national highway system, subsidized college for GIs, supplied the polio vaccine, developed the Internet—and on.

That is where tax dollars go. The reason higher-tax nations do well economically is that government spending can and often does succor economic growth. All rich nations today have robust government. ...

America’s to-do list is now very long..., and many, with an unnecessary fear of budget deficits, believe it cannot do what it must. The first step will be to jettison ideology and return to America’s pragmatic roots. That has not happened yet, but push-back has already started...

[Read other pieces in this special economics feature by Dean Baker and Robert Pollin.]

I have argued that targeted tax cuts need to be a part of the stimulus package for a variety of reasons, e.g. the speed with which tax cuts can be implemented, and as part of a portfolio of policies that recognize we aren't sure whether tax cuts or changes in government expenditures work the best to name just two. So I don't agree with the title's call to not cut taxes, in the short-run we may need to lower taxes as part of a recovery package. To the extent that tax cuts support the goal of economic recovery, and do so better than any other option, they are needed. But if the goal of the tax cuts is simply to use the crisis as leverage to exploit a ratchet effect, or at least an asymmetry where taxes can be lowered much easier than they can be raised and hence squeeze government in the future, then that's another matter entirely. Republicans have a history of using crises to try and ram through their favorite policy, e.g.:

Just two days after 9/11, I learned from Congressional staffers that Republicans on Capitol Hill were already exploiting the atrocity, trying to use it to push through tax cuts for corporations and the wealthy.

That's not the only example from the past, and in the present we've already heard calls to repeal the capital gains tax as a stimulus measure. I'm sure if the GOP could come up with an estate tax repeal argument that sounded even remotely plausible as a stimulus measure, we'd hear that too. So while I can support targeted tax cuts to some degree, I am worried that we'll avoid the tough political battle in the name of expediency, go too far, and compromise the best economic options in order to satisfy ideological demands. (And that is true not only of the magnitude of the tax cuts versus spending other polices such as infrastructure and aid to state and local governments, but also of the type of tax cuts -- I am not thinking of the trickle down variety when I use the word "targeted".)

This blog post can also be viewed at economistsview.typepad.com.

So Just How Bad Is It In California?

California's budget problems have gone from bad to worse. Democrats and Republicans are at a standstill on how to fix the problems, and while they fight nothing is getting done to address the problem. At the current pace California will run out of money in a couple months, which would be an absolute disaster. California has the largest state economy in the country and their pain will surely be felt in all of the U.S. Tim Iacono from The Mess That Greenspan Made looks closer at the latest developments in his blog post below.

News from Sacramento this morning has the Democrats attempting an end-run around their Republican rivals in the latest effort by the California legislature to stem the flow of red ink.

The Sacramento Bee reports that a vote is planned today on an $18 billion package of tax increases and budget cuts, crafted in such a way as to not require a single Republican vote.

By adroitly stitching together proposals that lower some taxes and raise others, Democratic legislators contend the package is "revenue-neutral" and thus could be passed by a simple majority rather than the constitutionally required two-thirds vote for tax increases.

The plan would raise taxes on gasoline, personal income and sales; cut state spending on schools, state universities and programs for the needy; and lower the state's payroll by $657 million.

Whether the attempt is moot will be decided by Gov. Arnold Schwarzenegger, who could veto the plan.

The first comment on this item neatly summarizes the view of many in the state.

They spent like drunken sailors when the State was flush with money. As a former drunken sailor, I would like to point out that at least drunken sailors stop spending when they run out of money.

Yesterday, state officials cut off funding for some $3.8 billion in infrastructure projects in order to conserve cash that may be needed in the months ahead.

Bloomberg provides the details in this report:

The California Pooled Money Investment Board, made up of the controller, the treasurer and the governor’s finance director, took the step to save money a day after the Legislature failed to approve tax increases for a second time. The impasse may hamper the state’s ability to raise funds by selling bonds, and the officials said it may cost tens of thousands of jobs in a state already reeling from the housing market’s collapse.

“California’s fiscal house is burning down,” Treasurer Bill Lockyer said in a statement. “The people still wait for their elected leaders to pull them out of the fire, stop the blaze and rebuild the house on a solid, lasting foundation. Until that happens, the infrastructure work so vital to getting our economy back on track will lie crippled.”

California, the most-populous U.S. state, will run out of money as soon as February unless lawmakers end an impasse over how to replace revenue lost amid the recession. Governor Arnold Schwarzenegger’s administration has said it may begin paying bills with IOUs should the state run out of cash, a measure used only once since the Great Depression.

The Wall Street Journal reports that things are not much better at the local level.

California may soon have more bankrupt towns on its hands.

The city of Vallejo, Calif., gained national attention earlier this year by filing for Chapter 9 bankruptcy protection. Now, two neighbors are fighting to avoid the same fate, as the state's economic crisis spreads.

Isleton and Rio Vista, small towns roughly 50 miles northeast of San Francisco, say they have begun consulting with bankruptcy lawyers as they draw up plans to deal with their mounting budget crises. The towns' leaders say they hope to avoid bankruptcy, but concede the move may eventually be their only option.

"We're strapped for cash and by the end of March or early April we may not have enough money to pay for payroll," says Hector De La Rosa, Rio Vista's city manager.

Even the state's public retirement system is causing problems lately.

Without its two top executives for the last six months, Calpers (California Public Employees' Retirement System), once admired for their shrewd asset management and stellar investment returns, has nearly run aground as their bad real estate bets get even worse.

The fund is now one of the biggest owners of undeveloped residential land in the country, after placing leveraged bets that, in some cases, have lost over 100 percent of their value. Since July, the giant pension fund has lost nearly 25 percent of its assets with the situation likely to get worse before it gets better.

The fallout is being felt all over the state, particularly in the town of Pacific Grove, as discussed in this story also from the Wall Street Journal.

Pacific Grove, a coastal town south of San Francisco, already faces a budget crisis. Now losses by California's giant pension fund could make the pain worse.

"Calpers could bankrupt us faster than anything else," says Mayor Dan Cort. City officials say other towns face financial stress unless the California Public Employees' Retirement System is able to quickly recover from its investment losses. Says Dan Davis, a former city councilman who has crunched the numbers for Pacific Grove: Other municipalities "are trying to live in denial."

In recent years, Pacific Grove has seen its annual pension costs soar, largely because of increased contributions to make up for losses caused by the last market downturn. Last month, residents voted to consider ditching Calpers as the town's pension provider and look into possible alternatives. But the window of opportunity may have shut. With the market's plunge this fall, the city would have to spend $10 million or more to pay off its widening obligations to vested retirees were it to pull out of Calpers.

The commenter at the Sacramento Bee had it right - worse than drunken sailors.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

New York Proposes New Taxes To Combat Budgetary Shortfalls

Thanks to drastically decreasing tax revenues, states must create new ways to meet their budget obligations. Many states have been able to make ends meet simply by cutting expenses, but this won’t be enough for others. Some states—such as California—have begged the federal government for help, while others—such as New York—are taking matters into their own hands. The governor of New York, David Patterson, is proposing a slew of new taxes that he hopes will help bring the budget in balance.

Considering the state of the economy, most economists would say that the last thing you want to do is raise taxes on consumer goods, but Patterson says he is left with little choice. "This is where we are," Paterson told reporters, according to Alley Insider. "Maybe we should have thought about this when we were depending on what we thought was inexhaustive collections of taxes from Wall Street - and now those taxes have fallen off a cliff."

In total the proposal is for 88 new taxes and fees, including what is being dubbed the “iPod tax,” which is essentially a tax on downloaded entertainment from the internet according to Alley Insider. The goal is to close a budget gap of $15.4 billion.

While these taxes are for the state of New York only, depending on how this proposal works out there could be many states ready to follow in their footsteps. A majority of states are facing budget problems, and with the economy showing little signs of recovering, they need to do something quick. Do they start cutting essential services, or will they raise taxes? That is the question that these states will need to ask themselves.

Removing Sales Tax Is The Best Stimulus Plan

President-elect Obama is intent on stimulating the economy once he takes office, and while he has a couple different plans the big one everyone is talking about is the infrastructure rebuild. Many people have questioned whether this is the best plan of action, but if rebuilding the infrastructure isn't the best course of action, what is? Mark Thoma from the Economist's View looks at an opinion from Susan Woodward and Bob Hall in his blog post below.

Susan Woodward and Bob Hall have expanded their views on the type of stimulus package they believe would be the most effective:

Options for Stimulating the Economy, by Susan Woodward and Robert Hall: In 2009, GDP in the U.S. is expected to be about $900 billion below its normal growth path. The ideal stimulus would have most of its effect in 2009 and would close a reasonable fraction of that gap. We see five general strategies for stimulus:

• Further expansion by the Fed
• Income tax cuts with rebates, as earlier this year
• Tax cuts that reduce the prices of consumer goods temporarily
• Tax cuts that reduce the cost of labor to businesses
• Increase in purchases of goods and services by state and local governments

... Conclusions We foresee a mixture of stimulus policies for the coming year. Monetary policy can only [add] a small further contribution. Income-tax rebates seem to have little support and would probably have relatively small effects within the year, with undesirable continuing effects in later years. We are enthusiastic about removing sales taxes for the year and perhaps somewhat longer, with a phase-out. We are not sure that an employment stimulus from a reduced business payroll tax would raise employment enough to be a contender as a stimulus and to prevent the flowing through of the funds to business owners rather than workers. We believe that some federal subsidies to state and local spending would make sense, but are concerned that too large a program would result in stimulus continuing past the time when it would be needed and that it would create excessive rents for contractors and skilled workers. Thus the sales-tax buyout seems to be the best way to spend the bulk of the stimulus dollars.

In the accompanying argument, they explain their lack of enthusiasm for infrastructure spending:

President-elect Obama supports federal funds for state and local construction projects as an element of a stimulus package. ... Government units have backlogs of projects waiting for funding. The questions are how big are the backlogs, how quickly spending can accelerate, and how beneficial are the projects.

State and local construction spending is currently $300 billion per year. The Obama team is hard at work trying to find out how much of a backlog is “shovel-ready”... We are not aware of any easy source for this information.

Timing may be a problem, as it was in the old days when these kinds of projects were called public works. Complicated projects take time to ramp up... Some interstate repairs can be executed in a year, as was the case in rebuilding the collapsed I-35 bridge in Minneapolis last year and in re-opening earthquake-damaged freeways in Los Angeles in 1994, while it took many years to reopen all the damaged roads in San Francisco after the 1989 earthquake.

The president-elect has also mentioned less conventional spending programs, including broadband facilities and online medical records facilities.

All of these proposals for stimulating state and local spending suffer from a common problem–they will end up generating employment for highly specialized businesses and workers, rather than stimulating economic activity more broadly. The consensus of macroeconomists ... is that a spending stimulus raises total spending by between 1.0 and 1.5 times the amount of the direct increase in spending. The follow-on or multiplier effects are between zero and half the direct increase in spending. Thus a program that funnels money to construction firms and their workers mainly raises their incomes and employment levels and has relatively little effect elsewhere. Rebuilding aging interstates and upgrading the energy efficiency of public buildings calls for highly specialized skills. A large-scale infrastructure program will drive up the profits of the limited number of firms capable of doing this type of work and drive up the wages of the skilled workers who know how to do the work.

It’s hard to imagine that a significant fraction of the large stimulus under consideration for 2009 will take the form of state and local construction and other infrastructure spending. We are hoping that discussion of stimulus will not become sidetracked over this part of the program and neglect the opportunities to stimulate consumer spending broadly without complicated, detailed, and time-consuming decisions.

This article has been reposted from the Economist's View. The full post can also be viewed on the Economist's View.

Another $800 Billion Committed: Crisis Tally Tops $8 Trillion

Yesterday on Bloomberg, I saw a disturbing article that disclosed that the government had already committed $7.76 trillion to fix the credit crisis. This number was staggering to me. I write about this stuff every day and yet even I didn’t realize the tally had gotten that high. The $7.76 trillion number includes the over $300 billion committed to Citigroup, but another $800 billion to free up the credit markets was announced this morning. So far this week—which isn’t even two days old yet—the tally has already surpassed a trillion dollars. This is absolutely insane, and you can bet that there will be more where that came from once the new administration takes over.

I don’t know about you, but these numbers are freaking me out. Sure a lot of these commitments have an investment component, but I don’t believe claims that we will make a bunch of money from these deals. I would consider us lucky if we are able to recover the principal. Things have only gotten worse of late, and we seem prepared to throw as much money at the problem as needed, so what will the final tab be? When will this spending spree stop?

Obama is prepared to open up the taxpayer checkbook when he takes office, recently announcing plans to roll out a new stimulus package estimated to cost $500 billion to $700 billion according to CNN. In addition, his selection for Treasury Secretary, Geithner, has had a huge part in the economic decisions made by Treasury Secretary Paulson, and it seems unlikely that he will stray far from the current path. With these combined factors, we could face countless trillions more before all is said and done. Where is this going to leave our children?

The answer to that question of course is that our children will be unfairly burdened by an absolutely enormous debt. Their financial prospects will be dim as they are forced to deal with higher taxes and other restrictive policies. Personally I find this completely unacceptable, and I hope beyond hope that it doesn’t come to that. I’ve mentioned this before in some of my posts, but to knowingly leave a burden such as this on the future generation is immoral to the fullest extent. We need to pay for our own mistakes, and our own excessive lifestyles. Our children have enough to worry about, and paying for the previous generation’s debt shouldn’t be one of them.

Barack Obama And John McCain’s Effect On Your Pocket Book

With the election coming up next week, voters on the fence really need to start looking long and hard at the candidates' positions on key topics. And what topics could be more important than those affecting voters' pocket books? The Wall Street Journal just published a great article that breaks down the views of Barack Obama and John McCain on various issues that affect voters' pocket books, so let’s take a closer look at them:

Short-Term Relief:

Obama wants to stimulate the economy through a tax rebate of $1,000 for families and $500 for individuals. In addition, he is proposing that we allow for penalty free withdrawals from 401(k)s and IRAs, up to 15 percent of the account value or $10,000, whichever is lower.

McCain wants to stimulate the economy by cutting the capital gains tax for stock held more than one year to 7.5 percent. He also wants to increase the amount of stock losses deducible against ordinary income from $3,000 to $15,000. In addition, McCain would tax withdrawals from seniors' retirement accounts no more than 10 percent.

Analysis: If you are wealthy and have a lot of money in stocks McCain is your man. If you don’t, then Obama will likely provide your family with more short-term relief.

Income Taxes:

Obama wants to raise taxes on the wealthy. Families making more than $250,000 and individuals making more than $200,000 will likely see tax increases. The top two marginal tax rates will be increased to 36 percent and 39.6 percent, respectively. Obama also plans for some tax cuts for lower and middle class families.

McCain wants to keep all the Bush tax cuts, and also plans to gradually extend tax credits for dependents from $3,500 to $7,000 over time.

Analysis: Again, if you are wealthy, McCain’s plan will benefit you much more as you will actually see tax cuts as opposed to tax increases. If you have a lot of kids, McCain’s plan might also make sense for you, but that probably depends on your income bracket. For most people not in the wealthy category, Obama’s plan will offer them more benefit. This, of course, is not taking into account the potential for job losses that could stem from these measures as McCain proclaims would happen.

Investments:

Obama wants to raise capital gains tax from 15 percent to 20 percent for the wealthy. At the same time, though, he wants to eliminate capital gains tax on start-up and small businesses.

McCain wants to keep capital gains taxes right where they are, at 15 percent.

Analysis: We don’t get much insight as to the full extent of Obama’s plan for small businesses, so it is difficult to opine on that piece, but the basic trend is the wealthy are going to be taxed more by Obama while McCain wants to stimulate the economy through tax breaks to this class.

The full Wall Street Journal article covers other areas as well, so if you are really on the fence as a voter, make sure to read the full article; I just pulled out the sections most applicable to investors. The theme you will see in pretty much all of these issues is that, in terms of your pocket book, if you are lower to middle class you will probably do better with Obama in office. If you are upper class, McCain definitely favors you. The problem is that nothing is quite as straightforward as that. You also need to take into account the potential impact that these policies could have on the overall economy. It certainly appears that Obama’s policies would add a great deal more to the balance sheet of the U.S. government, but a lot of things could potentially change that. McCain stresses that Obama’s plans would be deadly to small businesses; obviously Obama doesn’t agree with that, and he does offer several measures to aid small business.

The bottom line is a lot of this stuff that the candidates are saying could go either way. We just don’t know how the economy is going to react to the policy changes, or what limits the economy will place upon their plans and their ability to act, and we will never get to see how the losing candidate’s policies would have turned out. At the end of the day, voters are going to have to use their own judgment and decide whether Obama or McCain is the best man for their family and their country. These are difficult times right now, and this is certainly a difficult decision that we all are faced with. Who is the best person to deliver our country out of this mess? You have a week and a day to figure it out…good luck, and remember to vote next Tuesday.

Taking A Bite Out Of Obesity: Alabama’s New Fat Fee For State Workers

In a move that already has some getting their mu-mus in a twist, Alabama state has instituted a new annual fee for obese state-workers to offset lost productivity and high insurance costs. The fee is only $25 dollars for the year, which is half of what some smokers pay per month at companies and in state offices around the country because of their habit. Still, some are calling the new policy oppressive, even “Big Brotherish,” which I think we all can agree is hyperbolic and malapropos, not to mention ironic: By name alone, Big Brother would seem a kindred spirit to the “Big Boned” lot.

To other state workers, however, this sort of kick in the rump is long overdue; Alabama is at critical mass, with over 30 percent of the adult population now obese, second only to Mississippi and eking just ahead of Tennessee in third place. If weight is not curbed soon, this generation and those that follow will be facing astronomically higher incidences of obesity-induced diseases, bringing higher health-care costs to companies and the state, higher mortality rates and less productivity. In areas where the economy is already sagging like an unsightly mudflap, the situation is dire.

The issue at hand only becomes more complex, larger and jigglier as one considers it, for the bathroom scale only tells a portion of how obese individuals’ eating habits impact their lives. Most overweight people are not packing on the pounds by eating leafy greens and fresh fruit, but rather high-fat, low-quality foods. One must remember that this is often not by choice; poorer communities have the least access to fresh, healthy foods and frequently subsist on fast food and pre-packaged snacks which per serving have 1 percent of one’s daily required nutrients, 100 percent of one’s daily fat allowance, and 1000 percent of the trans-fats, pesticides, rat hair and roach droppings that one would ever wish to consume. In other words, obese individuals may ultimately be accountable for their own weight, but the infrastructure and culture that surrounds them makes it all too easy to pack on those costly pounds.

There is a lot of sensitivity surrounding the issue as well, and those who will be affected are already lowing at the gates about the unfairness of the situation. The main complaint among the policy’s detractors is that obesity is caused by health problems and heredity over which obese individuals have no control; therefore, these individuals should not be hit with a sort of “fat tax”, unlike smokers, who choose their unhealthy habit.

This argument is particularly weak, but I can see both sides of the issue. For kicks and giggles, let’s look at a point-counterpoint breakdown of some of the controversy surrounding obesity.

POINT	COUNTERPOINT
Obesity is and always will be voluntary. Generations before were thinner because they ate better and exercised more. It isn’t genetic, it isn’t magic, and there is no disease that makes one gain weight spontaneously, so says the first law of thermodynamics.	Certain individuals are genetically pre-disposed to store that consumed energy which makes them more prone to weight-gain. This, combined with the lethargy inspired by contemporary culture, leads to eventual obesity. To penalize individuals for this is discrimination.
This isn’t penalization; it's recouping losses that, though they may not be entirely in your control, still cost the system a great deal of money—much more than $25 per year, in fact.	To suggest that we pay more into the system also suggests that we are doing something wrong or that we are parasites on that system.
Yea. Pretty much. The truth hurts, huh fatso?	You know, it is derogatory remarks like that which cause a lot of overweight people to become depressed and seek solace in food, thereby exacerbating the problem.
‘Exacerbating the problem’ being code for ‘adding a cup size.’	I’m a man!
Indeed you are, a man whose very presence calls into question the words of John Donne: "No man is an island unto himself."	Screw this. Where are my Ding Dongs?

In the end, the fee is so minimal that no one’s wallet will be hurting for it, though a few feelings may be hurt. As the fee is also only annual, it will soon be forgotten and thus provide little motivation to people to lose weight. Furthermore, the fee is discretionary, and if an individual is putting forth a genuine effort, it can be waived.

The one last worrying aspect of this is that it creates one more precedent of what one might call a lifestyle tax. Though I personally would like to see fees levied against people who overuse the word “synergy” or sound effects in Power Point presentations (the mental anguish caused by these infractions does indeed cause lost productivity), I wouldn’t legislate these things for fear that I might one day be nickel-and-dimed by my own foibles and lifestyle choices. After all, if I want to drink a little paint when I kick back and play Russian Roulette at the local leper colony, I may be putting my health at risk, but that’s my business, thank you very much.

I’d love to hear from huskier readers what they think. Is this sort of policy motivational or degrading? Leave a comment and we’ll chew the fat.

Barack Obama Wants Taxes To Be Fair, But What Is Fair?

On Saturday Barack Obama and John McCain debated, among other things, their tax policies. One of the main points drawn from that debate on the side of Obama was his goal to make taxes fair. He went on to say that wealthy people were not paying their fair share, himself included. He specifically targeted families earning more than $250,000 a year as wealthy. A point brought up by William McGurn in an opinion piece published in the Wall Street Journal, though, begs some thought. “As we come to the end of the Bush administration, the top 1 percent of American taxpayers already pay 40% of all income taxes -- the highest level in 40 years. The top 10 percent of income earners pay 71 percent of the taxes.”

McGurn asked, “What specific rate of individual taxation would it take for the rich to be paying their fair share?”

This is an interesting question to ponder. The rich obviously are in a better position to pay more taxes and still live comfortably, but at what point does it no longer become fair for them to support the poor and middle class masses? In another Wall Street Journal opinion piece, this one by Peter Ferrara, it is pointed out that the bottom 60 percent of income earners pay less than 1 percent of federal income taxes on net. This means that the top 10 percent pays 71 percent of all taxes, the next 30 percent pays around 29 percent of all taxes and the bulk of employees, the remaining 60 percent, only pay 1 percent. Strictly on appearances here, one would think that the wealthy are paying significantly more than their fair share. The top 1.5 percent of earners in the U.S. made more than $250,000, according to the 2005 U.S. Census. It is that 1.5 percent that is specifically being targeted by Obama. Do these taxpayers get more services in exchange for their increased tax payments? The answer is a most definite no. They actually receive much less in return, because their payments go to support all the social programs and so on for which they aren't eligible. Is this fair?

Moreover, according to Ferrara, if Obama is successful in his plan to increase Social Security payments for those making over $250,000 a year from 16 percent to 32 percent, they will receive less than a 0 percent real return from their lifetime payments. So they will actually end up paying for other people’s retirement. Again, this begs the question: is this fair? The answer, of course, will vary from one person to another, depending on their personal beliefs--and perhaps their income level.

Personally, I don’t think the word “fair” is appropriate. In my mind this tax structure is obviously not “fair.” In order to be “fair” people should only have to pay for the services they expect to receive or in some way benefit from. A wealthy person paying for the care of 1,000 poor people doesn’t qualify as “fair” in my book. That being said, I would never want to see 1,000 people dying of starvation so that a wealthy person could buy a new fancy sports car to add to their collection; I understand there has to be some sort of compromise. I think most wealthy people would probably say the same thing, but there is always something about giving money to the government through taxation that just gets on people’s nerves. Maybe it is because we constantly watch how they waste it. Because of this the wealthy always seems to find a sneaky way around these increased taxes.

Obama wants to raise taxes to pay for more social programs, but instead of increasing taxes for the wealthy, why don’t we appeal to their charitable side to accomplish the same social impact. We could get a little creative and try to figure out some ways to increase charitable donations from the wealthy, perhaps through tax incentives, but it could be done any number of ways. In the end, though, charitable organizations (at least good ones) are going to provide much more social impact for the buck than the U.S. government ever will. In addition, wealthy people are going to feel much better about giving more money to charity then they will about giving more money to the government. As a result, they might actually pay it as opposed to finding loopholes in the system. So to me this seems like a no-brainer: more change, happier taxpayers and less for the government to worry about.

It shouldn’t be about being “fair,” rather Obama should focus on accomplishing his goal of social change. He needs the wealthy to contribute more in order to see his goal to fruition, but increasing taxes isn’t the only, or even the best, way. Wealthy people have hearts, too--he should try appealing to those instead of trying to steal money from their pocket books.