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Saturday, August 21, 2010

Interesting Things

The rather long conversation in the comments on the last post is very interesting, at least to me. Whether we like it or not, we have to negotiate a feasible compromise on raising as much revenue as we can while preserving decent growth rates in the economy. It is always interesting to see how people think about this.

I have bursitis of the left arm and shoulder in three joints. It's due to an infection, and this is causing me extreme pain, which is why I haven't posted much and haven't responded to most the comments. The hunt-peck-gasp-and-sweat method of communicating by keyboard is very frustrating.

But I believe I am getting better, because A) I managed to get dressed today although it was a sweaty and painful endeavor, and B) I had enough interest in life to take this BBC sex differences test.

My overall score was 0 (totally neutral) but when I go through the individual tests it looks to me that's because of fliers. For example I got a perfect score on the spatial rotation test, but I also was way better than either sex norm on the verbal test. IMO I am far more on the female side, and sure enough, I find masculine faces attractive. I did not need this test to tell me that. I had noticed. I'm 49. You figure these things out in your teens.

So I'm figuring that there is a scaling problem here - if you are a person who is good at most things, the test is not sensitive enough to pick up the sex-related differences.

And speaking of scaling differences, my suggestion to Mark is that the Gini coefficient (map explanation) is not really sensitive enough to pick up some very important economic essentials. One of those essentials is persistence. In other words, if lower income/asset members of the population are likely to gain more income and assets over the course of their lifetime in an economy, the situation is very different than an economy in which the Gini coefficient may be lower but the ability to change positions in the income hierarchy is very limited.

It is also more important in societies with relatively high standards of living to look at the bottom 20% compared to the middle third.

And, even if all other things are equal, a society with a high standard of living that accepts a lot of immigrants without screening for wealth or assets will wind up with a higher Gini coefficient. The new arrivals are generally from poorer countries; they arrive poor and with limited language skills, and if enough of them come they literally drive down earning potential for the jobs for which they are qualified. The exception to that is in an industrial country with a lot of laboring positions, but still, if enough come they will drive down wages.

Look at the map and look at Canada and Australia - both light green. Both countries have generally had extremely selective immigration criteria. Canada has been far more lenient lately, but note the comments in this 2006 Toronto Star article:
An endless stream of newcomers arrives in the big cities with few options but to work in poorly paid jobs such as cleaning houses and driving taxis. Wages of these jobs are thus kept low and the occupants of them have little chance to get ahead.

Previously, poverty levels among immigrants were about the same as those of the Canadian-born. Now they are much worse. According to a report by the Canadian Council on Social Development, whereas the poverty level of those who arrived before 1986 was 19.7 per cent, or slightly lower than that of the Canadian-born, the poverty level of those who came after 1991 was an alarming 52.1 per cent, while that of people born in Canada remained unchanged at around 20 per cent.

If this trend is not reversed, Toronto and Vancouver will by 2020 be home to an entrenched underclass living in slums. Because of gentrification and rising property values in the central cities, these slums will be located in the suburbs, requiring long commutes for those fortunate enough to have employment.

Fan Yang, a reader of the Toronto Star, shrewdly analyzed the impact of federal immigration policy in a letter to the newspaper in 2003. He accused the federal government of "dumping more cheaply acquired labour into the domestic labour pool, regardless of whether there is a healthy demand. Businesses welcome that enthusiastically as they bear no direct cost of unemployed immigrants and only garner the rewards of lower labour costs."
Then read this November 2009 article focusing on the recent changes involving the bad economy and the growing number of illegal workers. Canada has historically generally had a labor shortage, but they are walking a fine line here and it is exacerbated by the population concentrations. Compared to the US, they don't have a problem, but the Canadian ethos is quite egalitarian and it troubles them more. Note that the changes in immigration were quite recent. In the US, we have pretty much followed an unrestricted southern immigration policy for over 20 years. It has sharply driven down labor prices.

China is almost unique because a lot of its industrial workers are basically illegal immigrants within their own country. They don't have residence permits to be in the areas in which they work, and thus they are not eligible for the most part for free schooling for their children or social benefits such as unemployment.


William Pesek (a favorite of mine) mentioned the Gini index just last week in a story about China.

Beware $1 Trillion Lying Under Chinese Mattress: William Pesek

Last week, we learned China’s households hide as much as 9.3 trillion yuan ($1.4 trillion) of income not reported in official figures -- 80 percent of it by the nation’s wealthiest. This massive pile of stashed cash is equal to about 30 percent of gross domestic product.

There may be both good and bad news in the above study conducted for Credit Suisse Group AG. The good: it lends credence to the domestic-demand story for Chinese growth. It turns out, the average urban disposable household income is 32,154 yuan, or 90 percent more than official figures. The bad: China’s rich-poor gap may be much bigger than we realize.

I've always thought that all it takes to ruin a perfectly good economic model is just one missing/hidden variable.

I get the sense that we're missing all kinds of variables about China.
Mark, 3500 years of Chinese history suggests your last sentence is a profound understatement.

China Bank Property Stress Test Finds Risk: Report

A 50-percent drop in China's property prices will lead to a surge in bad real estate loans for Chinese lenders...

Shocking results! Shocking I tell you!
I wouldn't be shocked if a certain group of someones lost the Mandate of Heaven before Philly Fed sees the end of Kondratiev winter. The reason why the Chinese government did such a huge stimulus is that they have a keen understanding of what happens in China during hard times.
I have always wondered about Mandates. GWB got one and the next thing you know he's holding hands with a Saudi prince in the Rose Garden.
If there are as many empty housing units being hoarded in China due to a combination of greed and negative real interest rates as I suspect there are, then I would have to agree that the Chinese leadership's Mandate of Heaven will be seriously "stress tested" someday.

First things first though. I'm too busy stress testing Jeremy Siegel. He did attack my TIPS "safer haven" by comparing it to the tech bubble after all.

In other news, even motivational speaker Tony Robbins is warning of us the risks these days. I saw videos in the comments over at calculated risk. He wasn't telling people to sell stocks though. He was simply laying out the reasons we might want to consider it. Many, many reasons. D'oh!

I've been a believer since 2004. Not worth the risk to me. Still isn't.
if lower income/asset members of the population are likely to gain more income and assets...the situation is very different than an economy in which the Gini coefficient may be lower but the ability to change positions in the income hierarchy is very limited.

Just so. A large portion of the capital gains tax is paid by otherwise moderate-income people who are having a once-or-twice-in-a-lifetime equity event. The capital gains tax is therefore regressive, benefiting the truly wealthy who can arrange to avoid such events.

We could diddle with it around the edges by using a five-year average of income to calculate tax brackets, but the wealthy would just game that system, too.

Simpler is better.

"The capital gains tax is therefore regressive, benefiting the truly wealthy who can arrange to avoid such events."

The capital gains tax is regressive? I strongly disagree.

I paid ZERO capital gains tax until I was no longer poor. My parents never paid a capital gains tax in their entire lives to the best of my knowledge. They never owned stocks. They never owned their own business. At best, it would have been in real estate. I doubt it though. My mom's house is worth about $150k. It would be completely excluded.

Capital Gains Taxation

"Capital gains are more highly concentrated among high-income households than other forms of income, and therefore it is argued that capital gains rate cuts would be regressive."
Capital gains are more highly concentrated among high-income households...

Well, income is more highly concentrated among high-income households.

Concentration is not the point. When it is applied to moderate-income households, the capital gains tax hurts them far, far worse than it hurts the wealthy. Its real effect is to assist the already-wealthy in maintaining their societal status, by preventing other folks from getting ahead. Which, of course, is why the super-rich all campaign in favor of increasing the cap-gain tax rates.

My hypothesis is that the punitive tax on capital gains increases income inequality by grossly penalizing middle-class folks whenever they get a chance to improve their finances. By pulling out all the stops to "soak the rich", we actually secure their position vis-a-vis the rest of society.

My dad was a bank manager. My mom was a bank teller. We lived in an average middle class house. We were typical middle class.

My parents never paid capital gains. Not one penny to the best of my knowledge. Like many middle class Americans, most of their savings was in home equity which was not subject to capital gains tax.

Those who tuck away money in IRAs won't be paying capital gains tax on their distributions either. It is treated as ordinary income.

Capital gains tax mainly targets the higher income individuals in our society.

I've paid a small fortune in capital gains in many different years. I retired at 35 though. My investments treated me extremely well.

You can argue that getting rid of the capital gains tax is good for the country and good for job creation if you like, but you will not convince me that it is a progressive thing to do. It isn't.

It is one thing that the poor currently do not need to pay and yet someone else does. From a taxation standpoint, it therefore helps the poor relative to the wealthy.
The data is from old but it is pretty much what I would expect.

Who Pays Capital Gains Taxes?

Note that more than half of the taxpayers were $40k or under. Now look to the average tax on capital gains column. That's $2 to $20 per year.

While the capital gains tax might temporarily push someone into a higher tax bracket for one time events (certainly never did for my parents or me before I became reasonably well off), it hits the wealthier continuously.

The problem with your statements is that the capital gains tax created the situation you describe by penalizing the middle class. It comes back to the fact that we don't really know whether lower capital gains taxes will increase income inequality, because people order their lives so thoroughly to avoid taxed capital gains.

Case in point: 401k vehicles have truly awful rates of return, small businesses tend to have pretty good ones if you count the value of the business at the end of the period of ownership. Unfortunately, the situation is reversed because of cap-gains taxes, which boosts the relative performance of the 401k and reduces the value of the small business. But hey--the 401k system funnels all our savings through Wall Street, where the already-wealthy can take the skim, which is why Warren Buffett is so in favor of it.

The point is, just because the wealthy pay a tax doesn't mean they're more harmed by it. In this case we have all formed bad financial habits just to avoid paying the tax.
Sorry, I meant to say 401k's have awful risk-adjusted returns. They're not bad if your timing is good.

The problem with your statements is that the capital gains tax created the situation you describe by penalizing the middle class.

That's an opinion. It is one I do not share.

I find the whole concept of trickle-down economics repulsive.

Trickle-down economics

"Trickle-down economics" and "trickle-down theory" are terms of political rhetoric that refer to the policy of providing across the board tax cuts or benefits to businesses, such as tax breaks, in the belief that this will indirectly benefit the broad population. The term has been attributed to humorist Will Rogers, who said during the Great Depression that "money was all appropriated for the top in hopes that it would trickle down to the needy."

And yet here we are. Much of the trickling down now flows to China. Why? Because it can trickle down slower there. In other words, their middle class doesn't require as much trickling.
I just want to say that I know you are trying to offer ideas that you think will work to help our country.

We just see things very differently on this topic.

Trickle up effect

The trickle up effect argues itself as more effective than the trickle down effect because people who have less tend to buy more.

So now I'm really interested--why the resistance to the idea?

Let's say I'm wrong. We get increased inequality, but everybody is better off individually. Maybe we'd have to go back and fix it later, but the consequences are hardly dire. If I'm right, then the consequences of increasing the cap gains tax are truly dire and we end up not just with income inequality but an entrenched class structure, which is nearly impossible to fix. It seems to me the correlation of risks is clear.

Really, you're not the first person I've run into who really dug their heels in against the idea, and I just don't understand. If you wouldn't mind explaining it to me, I'd like to know.

I don't know why you think trickle up is any worse than trickle down. Maybe you could explain that to me.

If the government handed a rich person $1000 then that person might decide to hire more workers or that person might decide to simply hoard it. (I hoarded my stimulus check. It did nothing except pad my savings.)

If the government handed a poor person $1000 then there is a much higher probability that it will be spent. As it is spent, the rich person might decide to hire more workers to sell that person things.

So why is handing the rich person the money (and/or the tax break) automatically the better choice?

I actually think Who Struck John put it best in a previous thread.

"I dislike the positions of both the Party of Envy (tax capital gains unbearably, whether the gains are real or inflationary) and the Party of Greed (don't tax capital gains at all)."

The compromise would be not to favor trickle down or trickle up, but rather to find a middle ground that makes sense.

Here's the risk I see in you both being right and wrong.

What if the only way to rescue our economy is to lower the capital gains tax to zero. It helps us temporarily chug along a few more years and then find ourselves in the same position.

What then? We've hit zero. There's no way to lower it further.

Maybe there's an underlying problem here that's similar to interest rates. Our country is fine as long as both interest rates and income tax rates can keep falling?

Scary thought? It is for me.

In other words, maybe there's a deeper structural problem and capital gains taxation is actually just a much, much smaller side topic.

In the grand scheme of things, it certainly wasn't capital gains taxation that turned me bearish. Let's just put it that way. Sigh.
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