A few years ago there was a lot of celebrating the WW II generation that was reaching the end of their time. It was a whole generation who went to war as a country, instead of hiring people who need the money, to defeat facism. The people who stayed home endured rationing, the nation took on an enormous debt, and millions of soldiers died.
Then after the war was won that generation came home, had lots of babies, and dominated the country from 1945 until 1980. They supported candidates who voted to impose heavy tax burdens, particularly on the wealthy, to pay down the war debt. They believed in our democratic Government because they had seen how government had saved the world from greedy, power hungry fascists, and many were old enough to remember how big business had blown up the world economy in the 1920's.
Then their kids grew up. As the 1980's dawned the kids began to dominate politics, just by sheer weight of numbers. They elected people to Congress who cut taxes, but somehow forgot to cut expenses to match the lost revenue so the country began sinking into debt again. They bought into the notion that business is good and government is bad. Then they cut taxes again, and again, still ignoring the fact the National debt continued to rise.
Here are some statistical facts from an Economist article (*) that sparked this blog.
In 1981 the federal tax rate for a median income American household was 18%. Today it is 11%. The drop in tax rate correlates with a rise in Federal debt. Boomers also supported politicians who granted an expensive prescription drug benefit without bothering to figure out how to pay for it. One economist calculates the average baby boomer can expect 2.2 million dollars in net transfers from the Federal Government (SSN, Medicare etc) over their lifetime. Those aged 65 in 2010 may receive 333 billion more than they pay in taxes, 17 times more than what someone who was 25 in 2010 is likely to receive.
The debt involves more than just money. Annual spending on infrastructure (roads, bridges etc) dropped form more than 3% of GDP in the early 1960's to less than 1% today. We have a big infrastructure debt.
There is no quick fix. By 2030 the over-65 voting age population in the US will rise from the current 17% of total voters to 26%. Older voters won't like inflation. so the Fed will have limited powers to inflate the national debt away.
We boomers have painted ours kids into a corner.
* Economist, September 29, 2012, p.75 "Sponging Boomers"
Sunday, October 21, 2012
Thursday, October 18, 2012
Taxing Corporations and Dividends is Not Double Taxation
Mitt Romney argues that the 14% tax rate he pays is fair, even though most of the rest of the citizens of this country pay a much higher percentage of our income. Mitt says that his 14% is fair because his income is dividend income, and the Corporation has already paid Corporate taxes, so he is in effect being taxed twice.
Leaving aside the fact the Corporate Income Tax is so chock full of loopholes many Corporations pay little or no tax, Mr. Romney's argument is even more fundamentally false.
Corporations are not real. They are a fiction created by the law in order to encourage people to make big, risky investments. A Corporation allows the owners to make big investments, if they do well they get the profits, if it really goes bad, they get to dump calamitous losses on society, instead of absorbing it themselves.
Examples?
Think of the financial collapse we went through a few years ago. The Bankers and Brokers that made tons of money on the stupid business ideas that caused the crash are all still sitting on most of the money, because they operated within Corporations. Their corporations may now be bankrupt, or defunct, but the people who owned and ran the Corporation still have all the money they made. Who bore the risk of loss? The homeowners who lost their homes. The investors that lost much of their wealth. The workers out of a job.
Think of the thousands of plots of land all over this country that are so contaminated with hazardous chemicals they have to be fenced off from public access until someone spends millions to clean up the mess. Generally the mess was made by Corporations that made people very wealthy. The Corporations may be gone, the owners are probably still very wealthy, but it is often government who ends up cleaning up the mess.
That is why Corporations pay Corporate taxes. To compensate society for the risk society is taking that other people will end up paying the price for Corporate folly. Corporate taxes are not a substitute for every citizens obligation to pay their fair share of taxes for running government, they are a cost of doing business as a Corporation.
It is very easy for anyone to avoid Corporate taxes, you just dump the corporation and do business as a partnership. But rich folks don't do that, because if they do, they might actually have to pay for the messes they create.
Mitt should know this. The self proclaimed great businessman who understands how business works has undoubtedly had lots of discussions in his life about whether a business should incorporate or operate as a partnership. But I guess he calculates a lot of regular folk don't, so he can make the argument and get some votes.
Leaving aside the fact the Corporate Income Tax is so chock full of loopholes many Corporations pay little or no tax, Mr. Romney's argument is even more fundamentally false.
Corporations are not real. They are a fiction created by the law in order to encourage people to make big, risky investments. A Corporation allows the owners to make big investments, if they do well they get the profits, if it really goes bad, they get to dump calamitous losses on society, instead of absorbing it themselves.
Examples?
Think of the financial collapse we went through a few years ago. The Bankers and Brokers that made tons of money on the stupid business ideas that caused the crash are all still sitting on most of the money, because they operated within Corporations. Their corporations may now be bankrupt, or defunct, but the people who owned and ran the Corporation still have all the money they made. Who bore the risk of loss? The homeowners who lost their homes. The investors that lost much of their wealth. The workers out of a job.
Think of the thousands of plots of land all over this country that are so contaminated with hazardous chemicals they have to be fenced off from public access until someone spends millions to clean up the mess. Generally the mess was made by Corporations that made people very wealthy. The Corporations may be gone, the owners are probably still very wealthy, but it is often government who ends up cleaning up the mess.
That is why Corporations pay Corporate taxes. To compensate society for the risk society is taking that other people will end up paying the price for Corporate folly. Corporate taxes are not a substitute for every citizens obligation to pay their fair share of taxes for running government, they are a cost of doing business as a Corporation.
It is very easy for anyone to avoid Corporate taxes, you just dump the corporation and do business as a partnership. But rich folks don't do that, because if they do, they might actually have to pay for the messes they create.
Mitt should know this. The self proclaimed great businessman who understands how business works has undoubtedly had lots of discussions in his life about whether a business should incorporate or operate as a partnership. But I guess he calculates a lot of regular folk don't, so he can make the argument and get some votes.
Wednesday, October 17, 2012
The Spooky October Stock Market
Weird things are happening in the Stock Market. Normally stocks go down in the summer and up in the winter.
This last summer, starting about July, stocks started broadly increasing in price despite the fact not many people were trading. The increase has continued into the fall.
What raises this fact to the level of being weird is that each month for the last few months has seen headlines in the financial press about the billions of dollars being pulled out of stock mutual funds by retail investors.
So stock prices keep trending up even though huge chunks of retail investors are abandoning the stock market.
What is going on?
Is it that the money being pulled out by retail investors is being replaced by Corporations - flush with cash but afraid to invest - buying back their own shares? This would have a multiple short term benefit for corporate management, it keeps remaining investors happy that the stock price is up, it qualifies management for bigger bonuses to the extent the bonus is dependant on stock price, and it also boosts up the value of stock management already holds.
But how long can Corporations prop up stock prices when retail investors are bailing? The retail bail-out is not unexpected, people traditionally move out of stocks as they near retirement for the safety of bonds, and big chunks of the baby boomer generation are at or near retirement. What happens to the Corporations when they can no longer prop up their stock price and their market value plummets?
Is the bail out of stocks going to be like a dam breaking instead of a trickle over the top of the dam? Are we about to see an October market freak out like October of 1929, or October of 1987?
This last summer, starting about July, stocks started broadly increasing in price despite the fact not many people were trading. The increase has continued into the fall.
What raises this fact to the level of being weird is that each month for the last few months has seen headlines in the financial press about the billions of dollars being pulled out of stock mutual funds by retail investors.
So stock prices keep trending up even though huge chunks of retail investors are abandoning the stock market.
What is going on?
Is it that the money being pulled out by retail investors is being replaced by Corporations - flush with cash but afraid to invest - buying back their own shares? This would have a multiple short term benefit for corporate management, it keeps remaining investors happy that the stock price is up, it qualifies management for bigger bonuses to the extent the bonus is dependant on stock price, and it also boosts up the value of stock management already holds.
But how long can Corporations prop up stock prices when retail investors are bailing? The retail bail-out is not unexpected, people traditionally move out of stocks as they near retirement for the safety of bonds, and big chunks of the baby boomer generation are at or near retirement. What happens to the Corporations when they can no longer prop up their stock price and their market value plummets?
Is the bail out of stocks going to be like a dam breaking instead of a trickle over the top of the dam? Are we about to see an October market freak out like October of 1929, or October of 1987?
Tuesday, October 16, 2012
Stocks do better when Democrats run the show
(Comments sparked by Economist Article of Oct. 6, 2012, p.84 discussing a study by Barclay's capital)
Many would probably assume that periods when we have a Republican President would be good for the Stock Market. But, interestingly, since 1929 the average price change on stocks, adjusted for inflation, during the 40 years we have had Republican President's is....slightly less than zero per year. The 44 years where we have had Democratic Presidents, on the other hand, average about 7% increase.
Even if you look only at the years where a Repubilican President's party controlled both houses of Congress, the real average return on stocks is negative.
Predictably, given that bonds do well when investor's retreat from equities when the economy is weak, bond prices when we had Republican President's averaged a gain in bond values of 1.9% while Democrats saw a loss of just under 1%.
The inflation rate has been slightly higher under Democratic Presidents than Republican Presidents (3.5% to 3%), but far from enough to explain away the Republicans poor record.
The advantage to Democratic Presidents goes beyond prices to income. The article cites calculations * that the top 20% of earners, between 1952 and 2004, did better under Democratic President's than Republican Presidents (1.37% to 0.92%). So did the poor (bottom 20%) who gained 1.56% a year under Democrats, and lost 0.32% under Republicans.
A big part of the Republicans problem is that somehow they just seem to be running the show when calamitous collapses in stock prices occur. In 1929 Herbert Hoover was President, in 1973-74 it was Richard Nixon, in 1987 Ronald Reagan and in 2001 and again in 2008 it was George Bush. Democratic Presidents seldom see stock market crashes, Roosevelt in 1935-36 is the only one even beginning to rise to the level of the classic Republican collapses. But that still hardly explains the underlying huge gap over the years.
So why are the facts so hard on Republicans? The simple answer suggested by the facts is that Republicans are incompetent at managing the economy. Business Republicans love money, so they try too hard to cultivate it. Perhaps Republicans are like one of those people we all know who love plants but kill everything they try to grow because they over water and overfeed.
* "Unequal Democracy: The Political Economy of the New Gilded Age" (Larry Bartel's)
Many would probably assume that periods when we have a Republican President would be good for the Stock Market. But, interestingly, since 1929 the average price change on stocks, adjusted for inflation, during the 40 years we have had Republican President's is....slightly less than zero per year. The 44 years where we have had Democratic Presidents, on the other hand, average about 7% increase.
Even if you look only at the years where a Repubilican President's party controlled both houses of Congress, the real average return on stocks is negative.
Predictably, given that bonds do well when investor's retreat from equities when the economy is weak, bond prices when we had Republican President's averaged a gain in bond values of 1.9% while Democrats saw a loss of just under 1%.
The inflation rate has been slightly higher under Democratic Presidents than Republican Presidents (3.5% to 3%), but far from enough to explain away the Republicans poor record.
The advantage to Democratic Presidents goes beyond prices to income. The article cites calculations * that the top 20% of earners, between 1952 and 2004, did better under Democratic President's than Republican Presidents (1.37% to 0.92%). So did the poor (bottom 20%) who gained 1.56% a year under Democrats, and lost 0.32% under Republicans.
A big part of the Republicans problem is that somehow they just seem to be running the show when calamitous collapses in stock prices occur. In 1929 Herbert Hoover was President, in 1973-74 it was Richard Nixon, in 1987 Ronald Reagan and in 2001 and again in 2008 it was George Bush. Democratic Presidents seldom see stock market crashes, Roosevelt in 1935-36 is the only one even beginning to rise to the level of the classic Republican collapses. But that still hardly explains the underlying huge gap over the years.
So why are the facts so hard on Republicans? The simple answer suggested by the facts is that Republicans are incompetent at managing the economy. Business Republicans love money, so they try too hard to cultivate it. Perhaps Republicans are like one of those people we all know who love plants but kill everything they try to grow because they over water and overfeed.
* "Unequal Democracy: The Political Economy of the New Gilded Age" (Larry Bartel's)
Wednesday, October 10, 2012
Income Inequality - Good or Bad?
Is income inequality good or bad?
The answer seems to depend on what goal you are seeking to achieve.
If your goal is to maximize the economic strength and vitality of the United States, history shows pretty clearly it is bad. In the last 100 years the two periods where income inequality rose rapidly ended in the two most crippling economic collapses, the great depression and the great recession. The long period from the late -1930's to early 1980's where income inequality was falling or stable at lower levels was marked by a very long period of pretty stable and strong growth.
The average American should be against income inequality. A survey from about a year ago found the average American, if they had an income of $70,000 a year, felt comfortable and secure and was willing to commit more time to enjoying life. Because for average Americans wealth is not about competition or power, its about creating a life for themselves and their family. So their goal should be a strong and vital economy for the United States.
On the other hand, if your pre-eminent goals are personal maybe income inequality is good (if you are on the up side of inequality). Psychological studies found some years ago that most rich people care more about relative wealth than absolute wealth. What motivates them is to be much wealthier than everyone else, rather than to achieve any particular amount of wealth or security. There is no magic number at which they are ready to enjoy life and family, because what motivates them is the competition to garner personal wealth and the power to goes with wealth. They don't really care what is good for the country, if it gets in the way of their personal ambitions.
It is sort of like they just want to be a big fish, and if the pond has to shrink for them to be a big fish, so be it. So, unfortunately for the rest of us, our pond has been shrinking because the folks who like income inequality have dominated the public discourse the last few years.
Sunday, October 7, 2012
Businessmen as Presidents
History suggests businessmen don't make very good Presidents. In the last 100 years we have had, by my reckoning, 5 Presidents whose primary qualification according to the way they characterized themselves was their success as business people.
The first three were Republicans.
First wealthy newspaperman Warren G. Harding from 1921 to 1923. He died in office in 1923 as his administration was engulfed by the Teapot Dome corruption scandal. He was replaced by Calvin Coolidge. Silent Cal was a career Republican politician and seems to have been a pretty smart guy. He managed to defuse and deflect the scandal from the Harding administration and, since the economy was doing reasonably well get re-elected in 1925. His term in office was marked by a hands off, business knows best attitude, during which stock market and housing bubbles began to really inflate. Coolidge choose not to run in 1929.
With Coolidge bowing out Republican Herbert Hoover, a successful mining engineer who had moved into politics and served in both the Harding and Coolidge administrations rode the still bubbling euphoria of the roaring twenties into office. Within a year the bubbles began collapsing and the nation began sinking into what came to be the Great Depression. Hoover tried to use business friendly free market economic policies to stop the slide, they only made it worse. He reduced income tax rates, and, believing in limited government, vetoed a series of efforts attempting to develop a coordinated national response to the deepening crisis. By the 1932 election thousands of banks had failed, the unemployment rate was nearing 25%, businesses were failing across the country and the nations deficit was skyrocketing. Coolidge lost to Roosevelt and we did not have another Republican President until Ike 20 years later.
The next businessman President was a Democrat, Jimmy Carter, the Peanut Farmer. Although Carter wasn't truly a big business candidate, and didn't necessarily ascribe to the notion the free market is self correcting and government is bad, his administration began in a period of economic stagnation and he managed to do little to turn the tide.
The next business man President was George Bush Jr. (Although his Dad had considerable business experience, he did not market himself as a businessman). Mr. Bush, as we all know, took over a country with a balanced budget and a strong economy and walked out the door eight years later with the housing market in a shambles, Lehman Brothers having just collapsed, over 4 million people having lost their jobs in the months before he left and the deficit skyrocketing.
The first three were Republicans.
First wealthy newspaperman Warren G. Harding from 1921 to 1923. He died in office in 1923 as his administration was engulfed by the Teapot Dome corruption scandal. He was replaced by Calvin Coolidge. Silent Cal was a career Republican politician and seems to have been a pretty smart guy. He managed to defuse and deflect the scandal from the Harding administration and, since the economy was doing reasonably well get re-elected in 1925. His term in office was marked by a hands off, business knows best attitude, during which stock market and housing bubbles began to really inflate. Coolidge choose not to run in 1929.
With Coolidge bowing out Republican Herbert Hoover, a successful mining engineer who had moved into politics and served in both the Harding and Coolidge administrations rode the still bubbling euphoria of the roaring twenties into office. Within a year the bubbles began collapsing and the nation began sinking into what came to be the Great Depression. Hoover tried to use business friendly free market economic policies to stop the slide, they only made it worse. He reduced income tax rates, and, believing in limited government, vetoed a series of efforts attempting to develop a coordinated national response to the deepening crisis. By the 1932 election thousands of banks had failed, the unemployment rate was nearing 25%, businesses were failing across the country and the nations deficit was skyrocketing. Coolidge lost to Roosevelt and we did not have another Republican President until Ike 20 years later.
The next businessman President was a Democrat, Jimmy Carter, the Peanut Farmer. Although Carter wasn't truly a big business candidate, and didn't necessarily ascribe to the notion the free market is self correcting and government is bad, his administration began in a period of economic stagnation and he managed to do little to turn the tide.
The next business man President was George Bush Jr. (Although his Dad had considerable business experience, he did not market himself as a businessman). Mr. Bush, as we all know, took over a country with a balanced budget and a strong economy and walked out the door eight years later with the housing market in a shambles, Lehman Brothers having just collapsed, over 4 million people having lost their jobs in the months before he left and the deficit skyrocketing.
Friday, October 5, 2012
Romneys Health Care Fairy Tale
The Republican party has staked out such a fantasy based position on Health Care that it has allowed Obama to occupy the middle of the road where one can make decisions based on facts and data rather than having to cater to ideology.
This is a bit of a problem for Romney, who is a pragmatic guy, as far as I can see. He really wants Obama's job but has to be very careful about what he says to avoid irritating either his base who believe a fairy tale view of how good healthcare works, or the middle of the road voters who pay at least some attention to facts and data.
So the formula he has hit on is to avoid direct discussion of the realities of Health Care in favor calling Obama the "government" health care guy, and himself the "private sector" health care guy, and then piling up platitudes about how wonderful the private sector is at health care, and how bad government is at health care.
If this turns out to be politically the best thing Romney can do, it will be because voters are to busy to realize how wrong this approach is, and it will limit Romney's ability to actually move the countries creaking health care system to a better place. The historical evidence shows pretty clearly the private sector is pretty bad at doing Health Care. At the end of WW II, when many Western industrialized countries were moving toward Government health care, Congress pushed the US into a system based on employers providing private insurance for their employee's. Ever since we have maintained one of the most privatized health care systems in the industrialized world.
60 years down the road our health care system is a mess. For decades, the cost of healthcare has inflated far more rapidly that inflation in general, to the point we now pay twice as much for healthcare per person as do citizens of any other country in the world ($15,000 a year in the US as against about $7,000 per year in the next most expensive countries). Yet there are 30 or 40 countries where people live longer, another 30 or 40 where they have lower infant mortality rates. And employers, the backbone around which our system was designed, are scrambling to get out from under the constantly inflating health insurance premiums.
The flaw in Romney's theory of healthcare is simple to spot. A fundemental requirement to make a free market work efficiently is buyers who are not acting under compulsion. When we go out to buy a car, if it is too expensive we just walk away, or go buy a used car, or a bike, or take a bus. When enough of us just walk away the industry has to find a way to lower costs to survive.
We don't have those options with healthcare. If we have a child with cancer, we can't just walk away until the price comes down. In the purchase of medical services (by $ amount - healthy people don't use much health care - sick people use almost all of it) most of the buyers are acting under compulsion - the threat of serious debilitation or death. So a key market force that controls costs is missing in a private medical marketplace.
Contradicting Romneys "Government is bad" position, we have an example of a government run health care system here in the United States that is far more efficient than the private sector medical providers, both in terms of cost per patient, and overall health outcomes. The Veterans Adminstration Hospital system has no private component.
Many of those countries who spend less than half of what we spend per person per year have government run systems that their voters are very happy with, (England, Canada and Sweden come to mind immediately) and their citizens live longer than we do and have lower infant mortality rates.
The Fairy Tale Romney is selling will have serious consequences if he is elected. Even if he is just saying what he needs to say to get elected, he is boxing himself in. The fundemental rule for Doctors is to "first, do no harm." Romney will have a hard time even meeting this standard if he becomes President.
This is a bit of a problem for Romney, who is a pragmatic guy, as far as I can see. He really wants Obama's job but has to be very careful about what he says to avoid irritating either his base who believe a fairy tale view of how good healthcare works, or the middle of the road voters who pay at least some attention to facts and data.
So the formula he has hit on is to avoid direct discussion of the realities of Health Care in favor calling Obama the "government" health care guy, and himself the "private sector" health care guy, and then piling up platitudes about how wonderful the private sector is at health care, and how bad government is at health care.
If this turns out to be politically the best thing Romney can do, it will be because voters are to busy to realize how wrong this approach is, and it will limit Romney's ability to actually move the countries creaking health care system to a better place. The historical evidence shows pretty clearly the private sector is pretty bad at doing Health Care. At the end of WW II, when many Western industrialized countries were moving toward Government health care, Congress pushed the US into a system based on employers providing private insurance for their employee's. Ever since we have maintained one of the most privatized health care systems in the industrialized world.
60 years down the road our health care system is a mess. For decades, the cost of healthcare has inflated far more rapidly that inflation in general, to the point we now pay twice as much for healthcare per person as do citizens of any other country in the world ($15,000 a year in the US as against about $7,000 per year in the next most expensive countries). Yet there are 30 or 40 countries where people live longer, another 30 or 40 where they have lower infant mortality rates. And employers, the backbone around which our system was designed, are scrambling to get out from under the constantly inflating health insurance premiums.
The flaw in Romney's theory of healthcare is simple to spot. A fundemental requirement to make a free market work efficiently is buyers who are not acting under compulsion. When we go out to buy a car, if it is too expensive we just walk away, or go buy a used car, or a bike, or take a bus. When enough of us just walk away the industry has to find a way to lower costs to survive.
We don't have those options with healthcare. If we have a child with cancer, we can't just walk away until the price comes down. In the purchase of medical services (by $ amount - healthy people don't use much health care - sick people use almost all of it) most of the buyers are acting under compulsion - the threat of serious debilitation or death. So a key market force that controls costs is missing in a private medical marketplace.
Contradicting Romneys "Government is bad" position, we have an example of a government run health care system here in the United States that is far more efficient than the private sector medical providers, both in terms of cost per patient, and overall health outcomes. The Veterans Adminstration Hospital system has no private component.
Many of those countries who spend less than half of what we spend per person per year have government run systems that their voters are very happy with, (England, Canada and Sweden come to mind immediately) and their citizens live longer than we do and have lower infant mortality rates.
The Fairy Tale Romney is selling will have serious consequences if he is elected. Even if he is just saying what he needs to say to get elected, he is boxing himself in. The fundemental rule for Doctors is to "first, do no harm." Romney will have a hard time even meeting this standard if he becomes President.
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