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.

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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.

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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