Finance and insurance are 8.4% of our GDP

Why financial crises are correlated with an increasingly clueless plutocracy...

"There are two sustainable ways to make money in finance: find people with risks that need to be carried and match them with people with unused risk-bearing capacity, or find people with such risks and match them with people who are clueless but who have money." - J. Bradford DeLong

http://www.project-syndicate.org/commentary/delong121/English

Have you listened to Ford, lately?

"There is one rule for the industrialist and that is: Make the best quality of goods possible at the lowest cost possible, paying the highest wages possible." - Henry Ford.

Ford knew the best defense against socialism and government interference in the free market is good-paying jobs.  Supporting a growing middle class and an expanding the economy makes the capitalist richer in the long run.

Industrial serfdom can only lead to the decline of capitalism.

We could use a few more long-sighted capitalists and fewer short-sighted plutocrats if we want to keep a (relatively) free market economy.

learning something new

An important rehashing "If I were a poor black kid"  from a real poor black kid who is now an economist...

http://modeledbehavior.com/2011/12/14/if-i-were-a-poor-black-kid/

Echo of the day

Next time, let's take the cheap route and just buy the bank.  At the beginning of the crash we could have bought Morgan Stanley for about $25 billion.  Instead we lent them about $75 billion.  At the peak of the bailout, we lent the 775% of the value of their assets.

Who is choosing the winners and losers?

The GOP is fond of saying the government shouldn't be choosing winners and losers in the economy.

I agree with the theory - but not the actual practice.

A dollar of income should be a dollar of income - whether you spend 8 hours on a roof nailing shingles under the hot sun, or walking around the golf course as your daddy's money works for you. 

But that's not the way it works.  If you're walking around the golf course earning capital gains on your investments, you get taxed at a lower rate than someone behind a desk, on a tractor, or building a business.

The GOP has chosen the winners.

Those that have inherited money are the big winners in the GOP scheme.  Those that manage to build their own fortune come in a close second.  For example, Bill Gates had to pay a lot of income tax to get to the point where he doesn't pay much, whereas the Koch brothers are riding on daddy Koch's coat tails.

So if you weren't born into the right family or you with the right smarts and entrepreneurial skills - then you are the loser and get to pay higher tax rates.

So let's get government out of choosing the winners and losers...
 

Tax capital gains and dividends as ordinary income.

========

Watch for hype

A new global warming study is out in Science.  I haven't had a chance to read anything but the abstract; however, already I can make a prediction: there will much hype over this article as "proof" that global warming has been a scam, despite the fact that the abstract clearly supports 77% of the previous median estimate of global warming temperature change.  

Here's my interpretation of the abstract:  Global warming has been previously predicted in a range of 2 - 4.5C with a median estimate of 3C.  The new study comes up with a range of 1.7 - 2.6C and a median estimate of 2.3C.

That is, the new median temperature change estimate is 0.7C less than the previous estimate, and the uncertainty range has been reduced from 2.5C to 0.9C.  This is the way that science progresses - new models (if others can validate by replicating) provide reduced uncertainty and (hopefully) better estimates.  Note that nothing in the abstract says that global warming is not occurring or is not caused by CO2 rise.  Indeed, I expect to find the article is based entirely on the mechanisms by which CO2 perturbs the climate.

The article, once again, supports the science showing that rising CO2 levels lead to global climate change and an increase in the average global temperature.

Here's what I expect to see widely quoted:

"...these results imply lower probability of imminent extreme climatic change than previously thought." 

What will be eliminated from the quote is the initial modifying phrase...

"Assuming paleoclimatic constraints apply to the future as predicted by our model,..."

When scientists begin a sentence with "Assuming...", well, you should assume they are outlining a thought problem for future study rather than discussing something proven[1].  This common approach to scientific writing has caused much angst and misunderstanding in the global warming debate[2]. 

I'm interested if the authors have a good argument as to why paleoclimate constraints are still reliable under conditions where an external CO2 source (fossil fuel burning) is steadily forcing the system rather than part of a climate feedback cycle.  I expect that what I'll find is a paper that supports the direction and general magnitude of existing global warming models, but application to the future remains speculative until the difference climates with and without human fossil-fuel burning are further analyzed.

------------------------------

[1] You shouldn't assume that what follows "assuming" is either true or necessarily discussed in the paper.  In many cases, the scientists are merely presenting a thought problem illustrating the possible importance of their paper.   If they actually had a good argument, they wouldn't begin the sentence with "assuming." In this case, if they were able to show evidence that paleoclimate constraints developed without human intervention should apply to a climate affected by humans, they would have written something like "It is shown that arthropogeneic paleoclimate constraints apply to the anthropogenically-affected future, so predictions of our model imply a lower probablility..." 

[2] As an example, the entire "hockey stick" controversy revolved around an analysis methodology that written up using an "assuming" form of discussion, which was then taken out of context by people with an agenda.  The authors were quite careful in their discussion - the readers not so much.  However, debunking the readers out-of-context hype is not the same as proving the science to be ill-founded.

Alien slave hunting

Had a strange dream last night.  Aliens from a planet around Deneb were looking for slaves.  They had three requirements for potential slaves: 

1.  They need something in common that is easily identifiable to aliens,
2.  There's got to be enough of them to make a good work force.
3.  They shouldn't be missed by their neighbors.

They took everyone with Confederate flags on their cars, trucks, and clothing.

A free lunch!

Newt Gingrich has a free lunch for you...

"Growth and innovation means securing and strengthening Social Security by empowering Americans with the option to invest in personal savings accounts... This gives Americans ownership over their retirement and the opportunity to unleash the power of the market to enjoy prosperous retirements."

Anyone out there with a 401(k) want to talk about the "prosperous retirement" that the market secured and strengthened?  Or are you retirees to busy working at Walmart because of the market crash?

Did someone forget the way the market works?  Higher reward comes with higher risk - unless you're in the well-connected 1%.  There's not a lot of risk when there's a sucker on the other end of the bet.

Personal savings accounts are just a way of increasing the number of suckers with tax incentives to play the Three-card Monte designed by financiers.

Follow the Newt and we will all be prosperous and above average.  There are no losers in the free market - every retiree will win!  And everyone gets a pony too!

UPDATE:  Responding to criticism that privatizing social security might mean some people would go broke, Newt said that the government would step in to guarantee their retirement if their investments don't pan out.  I'm looking forward to putting my privatized social security money in some really risky investments - if they pay off I'll retire a multimillionaire.  If they don't the government will bail me out.  I'm sure this is a great fiscal policy that will completely eliminated any problems with social security.  I can't wait for my pony!

The rural-urban divide

Matthew Yglesias is picking on Kentucky, ...

Yglesias:

"Forty-three percent of San Franciscans have bachelor’s degrees to just 20 percent of Kentuckians. Not surprisingly, San Francisco’s workers ...[earn] a median household income of $74,000 to Kentucky’s $40,000."

The unstated corollary:  Medicare, medicaid, social security, and income taxes are higher on someone with an income of $74k than $40k.

Yglesias again:

"Kentucky is full of doctors and hospital administrators who think of themselves as hard working, highly educated professionals working in the private sector. But they’re living in a dreamland where their customers can afford their services thanks to taxes paid in San Francisco. Absent Medicare and Medicaid, health care professionals in Kentucky would see their incomes plummet..." 

I've thought about this for the rural-urban divide in Texas (Socialism Texas Style), but I really hadn't considered what it means for even non-rural professionals in a low-income state.

Yglesias' points are interesting - whether you like it or not this is the way the U.S. economy works, and if the European Union wants a common currency it needs a similar redistribution philosophy

Of course, my point is less intellectual.  I'm tired of the people who have a net inflow of Federal and state money into their rural and small towns complaining about socialism.

Most things don't matter

The nominal interest rate in the US is near zero.  Your banked money is losing value as the interest earned is less than inflation's erosion. Borrowing money (if you're big enough) is almost free, since you get to pay back in dollars and interest worth less than you borrowed.

Sounds like another deal that's bad for the general public and good for corporations and the uber-wealthy.

But really, why should we care?

The answer, I fear, 
is blowing in the blogo-sphere.  

I'm hearing an echo of economist Karl Smith at Modeled Behavior:

"... most things don’t really matter, but some things do. That is to say, when dealing with a robust evolutionary-designed equilibrium systems like a capitalist economy, or the human body, or the human social network, most of the things you do to it are not going to make a difference precisely because it has evolved many layers of feedback and buffering.

However, evolution leaves little holes where certain shocks can make a massive difference. That’s why you can put an animal through all kinds of physical abuse – for some worms, even chop them into pieces – they will heal and you can barely tell the difference. But, the tiniest, microscopic drop of a neuro-inhibitor will kill the whole organism within seconds.

Same thing with an economy. Smack it around. Impose a bunch of taxes. In the case of Japan, literally carpet bomb the whole thing, launch an actual nuclear strike, slaughter millions of people and annihilate the capital stock. What’s the long run effect?

Basically nothing. Within 10 years its growing at a double digit pace. Within 25 years it’s the second largest economy in the world.

However, let nominal interest rates get to zero and the whole thing keels over in a 20+ year paralysis that shows no signs of ending anytime soon.

Most things don’t matter, but some things do."

http://modeledbehavior.com/2011/11/18/notes-on-the-corporate-tax/

Deficit fixing, Austerian style.

In the UK, the Labour government was heading for a deficit of £389 billion, which was simply unacceptable during a recession.  It was obviously time to tighten the government's belt.  So Labour was ousted and the new government promised austerity would solve the problem.

After £40 billion of budget cuts, the deficit is now projected to be...

... £412 billion.

Yes, that math is correct.  Cutting spending by 9% of the deficit during a weak economy resulted in increasing the deficit by 5%. The reduced spending echoed through the economy - consumers had less money to spend - business took in less money -  business expansion was reduced.  Tax revenues didn't keep up with expenses and the deficit increased.

This outcome wasn't a surprise. Keynesian economic models predict a multiplier effect for reducing government spending.  Indeed, this is why Keynesians argue for reducing government spending or increasing taxes during good economic times, when deficit spending can add to "irrational exuberance" of an overheated economy.  Imagine if the Bush administration had cut the subsidization of mortgages in 2004 or increased taxes on capital gains from flipping houses as we came out of the prior recession.  Without a housing bubble, some people on Wall Street (and Main Street) would have made less money, but we wouldn't have had a financial panic and crash that required a bailout.  Everyone likes to forget the flip side of Keynesian ideas when they ridicule deficit spending during a weak economy.

Keynesian economists are held in low regard by the "Austerians" who control most policy these days.  Austerian "common sense" is that households must tighten their belts in a recession and therefore so must the government.  I've to to admit, it does sound like the kind of just and moral world we'd like to live in.  But just because it would be nice for pi to equal 3 doesn't mean that 3r will get you the circumference of a circle.

I can't wait to see how US budget cutting will reduce the deficit.

Arguments without facts show ignorance;

Arguments in spite of facts show stupidity.

=======

This is just another blogosphere echo, inspired by...
http://delong.typepad.com/sdj/2011/11/britain-yes-contractionary-fiscal-policy-is-indeed-contractionary.html
http://www.eschatonblog.com/2011/11/how-about-because-of.html
Driven by the news article at...
http://www.independent.co.uk/news/uk/home-news/pain-but-no-gain-6263358.html

Another one bites the dust

In the name of security, we've already given up the 4th, 6th and 8th amendments to the U.S. Constitution.  With the nationwide crackdown on the Occupy Wall Street protest, it looks like part of the 1st is on its way out.

Let's see how many "strict constructionists" are outraged over violation of "the right of the people to peaceably assemble" in the same absolutist way that they are outraged over violations of "the right of the people to keep and bear arms."

Oh well, we weren't really using those liberties anyway.  Plug me into football and give me another beer.

QotD

"... conservatives are not at all the free market advocates they claim to be.  You’ll be hard pressed to find Adam Smith’s invisible hand anywhere...,  but you’ll see conservatives’ thumbs on policy scales throughout the economy."

Jared Bernstein describing Dean Baker's book The End of Loser Liberalism at http://jaredbernsteinblog.com/loser-liberalism-is-a-winner

QotD

Libertarianism and a pony for everyone

"Just wish that we might all live in a state of perfect liberty, free of taxation and intrusive government, and that we should all be wealthier as well as freer.

Now wish that people should, despite that lack of any restraint on their actions such as might be formed by policemen, functioning law courts, the SEC, and so on, not spend all their time screwing each other in predictable ways ranging from ordinary rape, through the selling of fraudulent stocks in non-existent ventures, up to the wholesale dumping of mercury in the public water supplies. (I mean, the general stock of water from which people privately draw.)

Awesome huh? But it gets better. Now wish that everyone had a pony."

From Belle Waring (emphasis in the original) at http://examinedlife.typepad.com/johnbelle/2004/03/if_wishes_were_.html 

QotD

"If the financiers whose over leverage set the stage for the disaster emerge wealthier than ever and even more confident that the government will bail them out, you have created an economic, political, and moral disaster.

The disaster is economic in that you have just given incentives to create bigger episodes of moral hazard and bigger financial crises in the future.

The disaster is political because voters will conclude that you are wholly-owned tools of Wall Street.

The disaster is moral because there is no way an outcome that leaves over leveraged financiers still in the game and as wealthy and ever can be just and fair."

J. Bradford DeLong (with my emphasis added) at  http://delong.typepad.com/sdj/2011/11/felix-salmon-tries-to-puzzle-out-geithnerism-the-government-needs-to-lend-to-banks-freely-but-at-a-penalty-rate-blogging.html

Why the 81% to 99% should be worried

Percent of change in share of national income as a function of income distribution percentile.  From http://krugman.blogs.nytimes.com/2011/11/03/inequality-trends-in-one-picture

Those of us sitting in the upper 81% to 99% haven't been doing too badly.  But you can't get blood from a turnip.  When the bottom 80% have nothing left to give, who's next?  After decades of getting a larger and larger section of the pie, will the 1% leave the upper quintile alone?

As proven by the last financial crash, when the 1% can rig the game, it isn't a game anymore - it's simply a show.   And this show ends like the Roman Empire.   Once wealth and power are concentrated, order will be maintained with bread, circuses, and swords.  But be comforted - the oligarchy is smarter than the rest of us.  After all, the 1% got bailed out when they bet on mortgages, but homeowners in the bottom 80% lost their houses on the same bet. 

It's too bad that we don't use Krugman's dictum, which he put very nicely[1], but I crudely paraphrase as:   

If you got bailed out, your ass is ours.

Every major Wall Street brokerage firm would be broke today without the taxpayer bailout.  We have the right, and indeed the obligation to our children, to shake out this industry to prevent this from happening again.   

Ah well, let's go watch the lions eat somebody and be glad it's not you or me.   

Here we are now, entertain us.  

With the lights out, it's less dangerous.

[1] Krugman quoted at http://delong.typepad.com/sdj/2011/10/quote-of-the-day-october-21-2011.html

Growing up

"If you're responsible, you drop acid in the evening. After midnight it's just lame." 

A twenty-something's complaint about how some friends haven't quit their irresponsible college behaviors.  Overheard at the Zilker Park Hillside Theater. 

Keep Austin Weird!

=======

Are you serious?

The  government deficit is a serious problem, and serious problems require serious solutions from serious people.

I dug through the budget and found that $2 billion in subsidy checks are being sent to oil companies.  We'll call this Government Program A (or GoPA).   It works like this: the oil companies calculate and send in their taxes, then the government runs their financial data through complex calculations and cuts each company a check.  If you're serious about the deficit, is this a program to cut?

With a little more research, I found another $2 billion oil subsidy program, which we'll call Government Program B (or GoPB).  This program is more efficient than GoPA, because it's rather silly for the oil companies send in a tax check and then get a subsidy check back.  In GoPB, the oil companies calculate the subsidy and deduct it from their taxes.   If you're serious about the deficit, is this a program to cut?

Oops, it looks like I made a couple mistakes. GoPA doesn't actually exist and the real GoPB subsidy is $4 billion.

Republicans (or just plain old GOP) refuse to talk about cutting GoPB because that would be "raising taxes."  Apparently,  "spending" only occurs when you send a check to the government and they send one back.  So your Social Security is OK to cut, because you've already sent the check in - but hands off those oil company subsidies.

Are they serious?

=======

The masters of spin

Tax cuts for the wealthy: $1.7 trillion.

Underestimated war costs: $1.3 trillion.

Medicare giveaway to big pharma: $369 billion.

Bailout for the banks: $700 billion.

Blaming it on the Democrats:

... priceless

=====

Who doesn't pay taxes?

A recent conservative meme is that more than 50% of Americans don't pay any income tax, with the implicit (or explicit) conclusion that most American's aren't contributing their "fair share." This idea becomes a justification for cutting Social Security and Medicare, since the people benefiting clearly aren't paying their fair share.  Naturally, if you just talk about income taxes you miss state and local sales taxes, real estate taxes, Medicare taxes, Social Security taxes and gasoline taxes.  But those can't be significant right?

But let's not muddy things too much - we'll limit our focus to just Federal taxes and ask the question:

Do the data support the idea that most Americans aren't contributing to Federal revenue?  

 The figure below shows the percentage of revenue from the three principal sources (~90% of revenue): individual income taxes, corporate income taxes and Social Security/Medicare taxes.

Looks to me like anyone paying Social Security/Medicare is doing their share, whether or not they pay income taxes. Indeed, the general trend since 1970 is that those paying SS/M are paying an increasing share of the Federal revenue.

I'm not sure what the "fair share" for corporations should be, but it looks to me like they've been treated rather well.

I don't think that number means what you think it means

We all have our foibles - mine is that I take pride in thinking carefully about things and trying to base my opinions on real data rather than knee-jerk emotion.  So when a conservative friend pointed out that the Bush tax cuts resulted in an "unprecedented" increase in tax revenues of $785 billion between 2004 and 2007, I decided that I needed to pause and re-examine my thinking.  Here's what I found.

From the Washington Times, it was reported that

"From 2004 to 2007, federal tax revenues increased by $785 billion, the largest four-year increase in American history."[1]

I decided to see if these numbers were correct.  Indeed, if you go to the IRS website and download tax revenue spreadsheets[2], you can find the tax revenue data.  A graph of revenues between 2003 and 2007 looks like...

If you take the 2007 receipts ($2396 billion) and subtract the 2003 receipts ($1650 billion) the results is $746 billion, which is close to the $785 billion claim.  So now let's see if this is indeed "unprecedented."  If we get the IRS data going back to 1995 - which is readily available online at the same site, we can graph it as...

The increase from 1997-2000 with the Clinton tax increases was $524 billion - a massive 42% increase, so it looks like bravo for Bush!

But do these numbers really mean what conservatives claim?  Do these numbers really show that tax cuts increase tax revenue?  Let's revisit the basic argument that was made to support the Bush tax cuts - when taxes are decreased, the GDP will grow, and a smaller tax rate of a larger number will provide more taxes. That is, the GDP pie grows so much larger that the government can take a thinner slice and actually have more.

Before we proceed, let's ask a question: what constitutes meaningful growth in the GDP?  If inflation is 10% and the GDP grows by 5% has the economy grown?  If the population grows by 10% and the GDP grows by 5% is our society increasing its productivity?

Let's apply two very simple rules - the first I call the Weimar Republic Rule, the second is the Pie Rule. The Weimar Republic Rule is that government doesn't get economic growth credit for devaluing the currency.  You can't compare money numbers from two different years without adjusting for inflation.  Otherwise, you could say that the Weimar Republic collected 100 times more taxes in 1923 than in 1922 - which may be true, but says nothing about real growth of tax revenues.

The Pie Rule is best illustrated by example - let's say your company provides free pie at lunch and your manager tells you: "Great news, our pies will now be 25% bigger." That sounds like a win for the employees - until you find out that  the number of  employees has been increased by 50%.  So the Pie Rule is that government doesn't get economic growth credit for simply increasing the population.

By applying these two rules, we can decide whether or not the raw IRS data for 2004-2007 provides evidence that the tax cuts increased revenue.

First, let's apply the Weimar Republic Rule . Adjusting for inflation using data from [3], the revenue figure in 1995 dollars[4] looks like

During 2004-2007, inflation adjusted tax receipts increased by $394 billion while the Clinton increase from 1997-2000 was $349 billion.  Applying the Weimar Republic Rule the Bush tax cuts still seem to outperform the Clinton tax increase, but by just 12% rather than the 42% we got with the raw data.

Of course, our population increased between 1997 and 2007, so to apply the Pie Rule we can look at the tax revenue per person.  The US population by year can be obtained from the Census Bureau[5], which gives us...

For 2004-2007, the tax revenue per person increased by $933, but in 1997-2000 the revenue per person increased by $1133.  That is, after the Bush tax cuts we saw an increase in tax revenues that was 17% less per person than the increase in revenues after the Clinton tax increase.  The GDP pie may have gotten larger, but the government didn't get its promised bigger piece.

Of course, the big difference is that by 2000, Clinton's tax increases produced a budget surplus.  By 2007, Bush and the GOP turned the surplus into a massive deficit.

At the present tax rates, tax cuts do not produce more revenue.  If the Laffer Curve is really something more than a figment of the supply-side imagination, then we are demonstrably on the uphill side where tax cuts reduce revenue and tax increases provide more revenue.

=======

[1] http://www.washingtontimes.com/news/2010/feb/3/bush-tax-cuts-boosted-federal-revenue

[2] http://www.irs.gov/taxstats/article/0,,id=171960,00.html

[3] http://www.inflationdata.com

[4] For example, the inflation rate of 2.81% in 1995 means that the 1996 raw net taxes is multiplied by 0.9719 to get 1995 dollars.  With an inflation rate of 2.93% in 1996, the 1997 raw net taxes are multiplied by 0.9719 x 0.9707 = 0.9434 to get the 1997 tax in 1995 dollars - that is, you have to decrement each year for all the previous years to get back to 1995 dollars.

[5] http://www.census.gov/popest/eval-estimates/eval-est2010.html
http://www.census.gov/popest/archives/1990s/popclockest.txt

How conservative ideas won

Yesterday I ran into myself at Starbucks.  That is, I almost ran into myself - I was careful not to touch me since I wasn't sure who was matter and who was anti-matter.  Ever since reading Neal Stephenson's Anathem I've been wary of parallel universe cross-over.  Anyway, it looked like I was really depressed, so I asked "Why so glum?" 
     "The conservative ideas have won,"  was the response from me.
     I tried to comfort me by saying, "We hear the same in this world, but I don't agree".
     I got a confused look from me. "How can you not agree?" My voice was incredulous, almost angry. "All the evidence is on their side!  After all, President Reagan cut taxes, deregulated savings and loans, increased military spending and balanced the budget.  Inflation remained below 2% and the economy grew at 5% per year.  George H.W. Bush continued the policies, and by the end of his term we'd paid off the national debt."

     I looked like I was about to cry.  But I choked it back and continued, "We had a chance with Clinton to show how liberalism works, but we blew it.  We re-regulated the savings and loan industry, causing their collapse and a $124 billion bailout.  We kept in place the depression-era laws that separated investment and commercial banks, resulting in the collapse of Bear Stearns and Lehmann Brothers - this time almost annihilating the economy and requiring a $750 billion bailout.  To top it off, under Clinton we raised taxes - which led to 8 years of recession, massive deficits and declining wages for average Americans.  Then George W. Bush came in and fixed all that.  He cut taxes to the lowest in history, and what his father once called 'Voodoo Economics' actually worked!  The wages of average Americans rose, the economy boomed - everyone got richer.  In each year of GWBs presidency, job creation was greater than during any other presidency."

     "Wow", I said.  "Those are really tough facts." I was becoming despondent as well. "It's hard to argue against policies that prove so successful."  
    Parallel me agreed, "Liberal tax policies never balanced the budget and we've run out of excuses.  I think we'll just have to admit the conservatives were right."
    Then I had a thought to cheer me up, "Wait a minute, what about the internet boom?  Didn't your liberals get credit for Al Gore opening the government computer infrastructure for commercial use?  Didn't that ignite a creative renaissance and commercial expansion?"
    There was a pause.  It was as if this idea was too bizarre to be believed, "Gore? Don't be ridiculous, that was Cheney's policy!  Gore said that since the internet was created with government money, it shouldn't compete with industry and should remain solely for the use of the military and scientists.  Gore thought that if the internet was important, private industry would create it."
    It was my turn to be incredulous, "But that sounds like a Republican policy!"

    I shook my head in disgust, "You don't understand, the GOP is flexible and pragmatic.  They look for policies that actually produce results; they don't blindly stick to ideology when the facts disagree. They understand that sometimes economic advances have to be built on government investments in infrastructure."

    The conversation reached a standstill.  I decided it was my turn to explain what happened in this world.  At first, I wasn't believed.  It didn't seem possible that things could be so different.  When I concluded, it was clear I needed to sit and think for awhile. Parallel me stirred the dregs of his cappuccino and said,

     "So let me get this straight. After the deficits of Reagan, the balanced budget of Clinton, declining wages under GWB, and financial collapses due to deregulation, your Republicans claim their ideas have won?"

     I gave me a shake of my head and a sheepish look, "Yes, it defies logic, but that's their claim."
     I saw me smile.  A strange smile, starting with small twitch at one corner and then turning into a big grin. "Then there's hope for liberalism in my world after all. Facts don't matter!"
     I saw me skip out of Starbucks and vanish.

     That was when I realized - it's my world that's anti-matter.

6th grade predictions

Back in Mr Eerkes class (6th grade), one of our writing assignments was to predict the future. We wrote one line about each person in the class, then we cut up the paper and traded predictions. Here's the predictions about me that I found in an old envelope:

An all pro on the piano and another Dr. Jeckle. (Bruce)

Is a scientist & still like to wear the hat he wore 26 years ago. (Teresa R)

Is a computer deisioner (Kellie)

Poses nude for mechanics illustrated. (TH)

A mad scientist in Sedro Woolly (Jenny)

A lawyer (Pete)

Five-O cop (Robert)

Scintist of the Air Force and now desinging a new rocket (unsigned)

A genious Professer (unsigned)

Owns a funeral chapel and a run down grave yard (Jeff Baker)

A Olympic Judge (unsigned)

Photographer for playboy. (Cary)

An exellant Naval air base scientist. (unsigned)

Becomes an architec. (unsigned)

Scientist at a newly built rocket base on Whidbey Island. (unsigned)

A proffer in Scince (Saimi)

Playboy and an actor that took Rock Hudsons place. (unsigned)

Bionic Man Doc. (unsigned)

Is a writer of a dictionary (Libbey)

Is on a Coast Guard cutter down in San Francisco. He is a pilot of a chopper on board the cutter (me)

The slow evolution of global warming skepticism

1995 - "You can't prove the earth is warming."

2010 - "OK, it's warming. But you can't prove the sea ice retreat and thawing permafrost is our fault."

2025 - "OK, it's our fault, but you can't prove we can fix it."

Why you pay taxes and Exxon doesn't

If you were treated like Exxon, you wouldn't pay federal income taxes.

This statement isn't hyperbole - it's a provable consequence of the way Exxon is allowed to treat the "taxes" it pays to foreign governments (you've got to get to the bottom of this post to see why "taxes" is in quotes). To be fair, the Foreign Tax Credit sounds pretty innocuous and reasonable - after all, if they pay taxes once why should they pay taxes a second time on the same money? But fair is fair - if the same logic applied to you and I, what would happen to our tax bill?

Let's apply the Exxon tax standard to income taxes for Mr and Mrs. Mythic. They are a dual-income, no-kid household who bring in about twice the median wage ($100K). The Mythics pay $5000 in combined property and state income taxes. They buy $10K worth of products and services subject to state and local sales tax ($800). They use 900 gallons of gasoline with a combined state, local and federal tax of $0.495 per gallon for another $445 turned over to the government. Ms. Mythic works for a company where she earns $60K per year and pays $4590 in social security and medicare taxes. Mr. Mythic is self-employed earning $40K per year, so his social security and medicare taxes are $6120. They also pay state taxes and fees on their cars of about $500.  So they've paid about $17,455 in taxes to various levels of government. 

For simplicity,  let's look at the US Income tax rates to see the maximum possible federal tax liability on $100,000 of income. For married filing jointly, the tax rate on the first $16,750 they earn is 10%, or $1,675. The tax rate on the next $51,520 is 15%, or $7688. The tax rate on last $32,000 of their $100,000 is 25%, or $8000.  Thus, the total taxes would be $17,363. 

Now if the Mythics could get the same treatment as Exxon - getting tax credit for taxes already paid, their total federal tax bill would be $17,363 - $17,455 = -$92. The Mythics end up with a net tax credit - just like Exxon. So they would be entitled to a full refund of any taxes withheld by Ms. Mythic's employer and any quarterly estimated taxes paid by the self-employed Mr. Mythic.

On the other hand, if our system simply gave deductions for all the taxes paid, then the Mythics would be paying taxes on a net income of $82,545, for a total federal tax of $13,000. Of course, we have a much more muddled system with a variety of deductions.  If you go to an online calculator and use some of the above figures, you get an estimated tax of about $12,000.  You can imagine that if Exxon didn't have the foreign tax credit it would similarly have substantial taxes to pay. But, much like the taxes on the Mythics - the amount would be fair and similar to what others are paying.

The key point is that Exxon gets a tax credit rather than a tax deduction.  The inequity is clear - certainly the cost of foreign taxes is a cost of production and as such should be deducted from revenues(1)   - but to give a tax credit for these payments is simply absurd and completely out of line with how the rest of the nation gets treated.

The reward for having read this far is something that should send you through the roof.  Exxon has a sweetheart deal - the per barrel oil royalties paid to the Saudi government are treated as foreign income taxes.  If you or I run an oil company and find oil on private property, we will will pay a royalty per barrel extracted to the property owner, which is then tax deductible as a cost of doing business. That is - we are buying the oil from the property owner and making a profit on the difference between our costs (including royalties) and the oil selling price - which is what we expect to be taxed upon.  But if you're Exxon and the property owner is King Saud, then you get a tax credit for the same royalty payments.  In effect, Exxon is claiming that King Saud gave them the oil for free and then charged an income tax based on the value of the gift. Thus, anything you might want to quibble about in my accounting for the Mythics(2)  is completely washed away by the fact that Exxon gets to treat a business expense as a tax, and then gets a credit rather than a deduction for this faux tax! 

Notes
(1) That is, if you are calculating corporate tax based on the difference between income and expenses, which is a post for another day.

(2) e.g. my implication that real estate taxes should have the same accounting treatment as foreign income taxes.

Socialism Texas Style

The west Texas town of Miles, population 800, taxes its citizens to the tune of $710,000 per year to pay for local schools.  The rest of Texas chips in another $2.5 million(1) to make sure the children of Miles have a decent education. Despite the socialism of this system, the Socialist Party of America doesn't do well in local elections.

This vignette plays out throughout rural and small town America.  There, staunch conservatives live in a bubble - viable only because of socialist taxes on city-based people and corporations. The state and federal money going into rural/small-town America is always greater than their taxes paid(2).  Indeed, the modern infrastructure of rural small town life would not exist but for water projects of the Bureau of Reclamation, the electrical grid subsidized by the Rural Electrification Administration, and the interstate highways of the Transportation Department.  All these socialist policies provide transfer of wealth and services from cities to rural communities. Without socialism, we would be talking about ghost-town rather than small-town America.

What would happen if we dropped the socialist support for small-town schools?  Towns would have to substantially raise local taxes or reduce the quality of education - making them less attractive to new businesses, residents and young families.  In a true free market, the local businesses, farms and ranches would have to pay higher wages to attract workers to live in a higher tax/poor-education town. Rural businesses, farms and ranches paying higher wages couldn't compete in a global marketplace. Many towns simply wouldn't survive. Indeed, the transfer of wealth from cities to rural America is simply an indirect subsidy of rural landholders and businesses, keeping their costs artificially low and their businesses competitive.

Personally, I do not mind the socialist transfer of my wealth for rural America's infrastructure and education. There are good social and economic reasons for maintaining a vibrant rural community. I do, however, resent the attitude among the rural elite who pretend they are more self-sufficient and morally superior to those who are actually picking up a good bit of the tab for their community.

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Notes:

(1) Data from Austin-American Statesman article "Budget cuts menace rural schools and communities" by Kate Alexander, February 13, 2011.

(2) The notable exceptions are rural areas with mineral/oil/gas extraction industries, where upfront royalties are generally greater than ongoing infrastructure costs. However, such royalties rarely cover the long-term environmental clean-up costs (which again are usually covered by taxpayers or corporations in cities).