Monday, December 20, 2010
Too Busy To Blog
I am steamed up over that wicked tax compromise bill.
Consider this - at least 4 million people will lose unemployment benefits next year entirely. They may be able to find part-time work, but it won't pay very well. In short, they will be poor.
And in comparison to the MWP, the payroll tax cut returns most to the highest earners. Thus, a person earning 15K next year will get less than the MWP ($300) in tax cuts. A person earning 10K will get $200 back. A person earning 100K will get $2,000 back, whereas under the MWP they got nothing.
So I am truly pissed and discouraged about this. SuperDoc is demanding I write a book because I showed him some graphs, directly from Bureau of Labor Statistics:
Labor Force. Note the increase of, oh, about 11 million since 2000 and over 13 million since 1999.
Here we see those of working age who are not working and did not actively seek employment in the last month.
And here we see the number of those who did not actively seek employment during the last month but want a job. Gee, quite a step function there correlated with the downturn. I wonder if it could have anything to do with not being able to find a job?
Here we see Core Employment (persons over 20 who are working).
This number has risen only by a few million since 2000.
And here we see persons employed full-time (defined as usually working 35 hours or more a week).
And guess what, this number is below the 2000 number.
THERE ARE NO BLEEPING JOBS.
WE DO NOT HAVE A LAZINESS PROBLEM. WE HAVE A STRUCTURAL UNEMPLOYMENT PROBLEM.
All of our problems are related to the lack of jobs, and most especially the lack of full-time employment. The low spending and the credit defaults are a result of people not being able to earn money. Likewise, the number of uninsured people is related to the lack of full-time employment. The "disinflation" problem is caused by people not able to earn money to spend. The states' fiscal problems are related to the retirement benefits situation and low spending and poor people needing public benefits who cannot find jobs.
Further, we are still shedding jobs. Not adding, dropping. And the reason it is not showing up as rising initial claims numbers is because most of the people being laid off don't qualify for unemployment, so they don't file claims. Temporary employment or casual employment or short-term employment doesn't qualify you for unemployment benefits.
Education is not the answer, either. The unemployment level for the college-educated is shooting up rapidly.
Since the Great Depression, WE HAVE NEVER SEEN ANYTHING LIKE THIS. So talking about some imputed relationship that held true in a different economic circumstance is an exercise in fantasy.
Spending nearly 900 billion isn't going to help much because of the way it is being spent. People who are high wage earners are mostly older, and will either pay down debt or invest for retirement. Since the US environment is bad for investment, much of the invested money will go overseas.
Now, 400 billion would create a huge public jobs program, which could be extended for years, and most of the money spent would feed back directly into the US economy.
We are crazy. We are literally insane. Public policy just goes from bad to worse.
Addendum: Some doubt we are crazy. Here's why this is crazy.
First, we have the 2010 GAO audit of the public debt available in pdf. This graph is from page 16.
Haha! Makes me want to build the Parthenon! Might as well be scenically bankrupt. It would be a good public works project.
This graph shows the maturities of our debt held by the public (the stuff we have to pay interest on).
If you are wondering, debt held by the public was 9.3 trillion yesterday. Exactly four years ago, it was 4.9 trillion.
In 2006, the average interest rate on the instruments was in the 4.9% range. This year it is 2.36% (November). It is now traveling upwards.
Annualized nominal and seasonally adjusted GDP for Q3 2010 was 14.75 trillion. Passing this tax bill means that we will add about 3 trillion to the public debt in two years, which will bring us to 12.8, 12.9 trillion. Assuming that the economy grows six percent over the two years, nominal GDP will be about 15.64 trillion. At that point our debt held by the public will be about 78% of GDP.
But we will also be facing huge additional yearly draws relating to the new public entitlement program for medical insurance, Medicare/Medicaid (Medicaid rolls are to expand immensely), Social Security, and the state and local debt. Note that a bunch of localities are due to default over the next two years. And even if the Feds don't bail them out, additional costs will be incurred by the Feds and states.
And we'll be facing huge rate increases on our debt. At that point, we cannot continue to roll over our debt short term, because in just a few years the cost would double. I.E., we would be Greece. So we will have to start writing larger bills, but the going rate for those bills will be increasing, as it is now. Risk premium. So there is a double interest whammy impending.
By 2014 or 2015 we will cut Social Security. By 2015 or 2016, we will cut Medicare. Is this a good deal for the people who are doing so well now and will get back $2,000 on the payroll tax cut? No, because they are the ones with assets who will be faced with extraordinarily high tax bills later, and will likely take the brunt in the Social Security cuts later when they wish to retire.
You can't save any money on SS by cutting the benefits of the lower income people - they just move to public assistance. You have to cut those who are getting higher benefits.
If our net interest rate were to go to around 5% on our public debt by 2012 (very close to the 2006 rate), here's what it would cost each year:
A) 1% on 1 trillion is 10 billion. 5% is 50 billion. (A trillion has 12 zeroes. A billion has nine zeroes. Subtract 2 zeroes to get 10 zeroes.)
B) On 12 trillion at 5%, you pay 600 billion a year just in interest. We will be borrowing money to pay that interest, so each year thereafter even if we were running a primary surplus, we will be paying more interest.
C) The alternative is to remain in the shorter maturities and to buy a few more years. Greece did that.
D) If we do that, then in 2015 or 2016 Congress will basically confiscate 401Ks to get money to put in treasuries, so they can pay their hapless victims 2 or 3 percent. Safe as houses, they will assure us. This is why I do not have any money in a 401K or any sort of retirement account. They're going to take it.
Look to Europe. Watch the skies. This is a suicide pact of a bill; it only confirms that the US is planning to default on its debt. Along with the rest of this, mortgage rates and corporate financing rates will be rapidly driven up in competition with public debt, so growth will be strangled in the future.
Politicians think only to the next election, and that is two years away. The cost of that shortsightedness is immense.
The problem was evident with the uncompetitiveness of the US auto industry in the 70's. But denial and delusion are powerful forces, if it can make us blind for 35 years, there no reason we can't delude ourselves for another 20 or 30 years. I expect things to get worse than the 1970's and that was an awful decade.
My economic conservatism stems from being a teenager in the 70's and seeing absolutely nothing change structurally inside society as a whole since then, except for lots and lots of borrowing.
What a downer, I had been pretty happy about the tax compromise, on the whole. I still think it's the best that we could hope for in the present environment, and a lot better than what I feared. The left is screaming about what they gave up, the right is screaming about what they gave up, and I'm pretty happy at what they both had to give up.
Where did these 4 million people come from? I thought the unemployment benefits got extended?
I also thought the reduction in payroll tax would be a great thing for low-income households. After all, a 2% reduction in taxes on somebody living paycheck-to-paycheck makes a bigger difference than it does for someone with money to burn. Put another way, reducing FICA by 2 points increased the progressivity of the overall Federal tax.
Rates didn't go up on cap gains and dividends, which is necessary for jobs. Maybe not as good as reducing regulation, but what chance is there that Harry Reid will allow anything like that to hit the floor of the Senate? Also, the high public support for this extension shows a willingness to walk away from envy-based economic policy.
As to the jobs program, 400 billion wouldn't buy diddly-squat--see "Stimulus v1.0". Maybe in a rational world where the government simply hands folks a shovel and a check, but not in the world of Messrs. Davis and Bacon. Not in our world of sclerotic special interest groups. Sadly, there remains a lot of tearing-down to do before anything new can be built.
I guess I'm just a glass-half-full kind of guy, but I think the vector is good here, even if the present co-ordinates are sub-optimal. I'll take that.
And that is one reason why this isn't going to work well.
In practice, those getting most of the money back will invest it, probably 50% out of the country, or pay down debt.
The ones at the bottom of the tier just won't have as much money to spend. In a lot of ways, our problem is circulation of money. That's what this failed to address.
There are some middle-ranking households which will get a good bonus out of it, and I think some of them will spend it, but many of them will save it or pay down debt as well.
And you are right that this problem goes way back.
But we are spending gobs of money (federal deficit as a result of this will probably be over 3 trillion over the next two years) and not addressing our long term problems at all.
"My economic conservatism stems from being a teenager in the 70's and seeing absolutely nothing change structurally inside society as a whole since then, except for lots and lots of borrowing."
I completely concur. The only thing we have done on net is build homes and retail space. Those graphs show the result.
I also don't see why it would be an improvement to raise taxes on capital right now. Yes, our economy is inefficient at recycling investment, it has been for decades now. So does that mean this is the right time to penalize investment further? Besides, the new instant-depreciation rules might do a lot of good for capital-intensive industries. That's a huge incentive for fixed plant right there.
I agree that this doesn't do tremendous long-term good. But it refrains from killing the economy in the short term, and that's more than I expected. There is just no way this lame duck was going to reduce regulation. There's probably no chance of doing so in the next two years, at least. I'll take what I can get.
In theory, that's what I was going to do with the money. In practice, the 2% savings I'll get from FICA is going to go to my town's brand-new public pension tax on property.
Progressive tax systems have always been a joke. The biggest supporters of it are also the biggest supporters of quantitative easing. Any alleged tax advantage the poorer get versus the richer in a progressive tax system is completely undone (and then some) by the inflation caused by the creation of the new money. The envious get to "feel good" about the rich getting taxed at a higher rate, but the rich get all the advantage of the new money and the poor get the biggest reduction in purchasing power of the existing money (the hidden tax). The so-called progressive tax system screws precisely the classes it alleges to be helping.
"WE DO NOT HAVE A LAZINESS PROBLEM. WE HAVE A STRUCTURAL UNEMPLOYMENT PROBLEM."
I was buying some groceries yesterday and the checker knew the guy in front of me.
She asked him how it was going. He said he's been sick but was working anyway. She asked him why he was working if he was sick. He said his hours had been reduced to 17 hours per week and he can't afford to not work.
She asked why it was just 17 hours per week. He said just one word: economy.
It's a perfect word to describe it.
Many of its definitions would apply.
"....over the long term, our structural unemployment has been created by our regulatory environment which is anti-business, anti-energy, anti-manufacturing."
Cannot concur more whole heartedly. This all began with the environmental movement. Nixon established the EPA in 1970 and in 1973 the Endangered Species Act was pssed and signed by Nixon. That was the beginning of the decline due to anti-manufacturing, anti-energy, and anti- business (except "clean business.") legislation that has slowly throttled the engine of our wealth creation.
This will only change when we can elect enough people to Congress that understand the issues and are willing to do battle with the environmental lobby. The Greens are a small, but very vocal and well heeled special interest that want to return to those heady days before the industrial revolution. No one wants a dirty environment, so it is easy to vilify anyone who says no to the demands of the Greens. Yet, what they keep doing is demanding higher and higher standards of purity for water, air, and soil. Standards that are impractical and unnecessary except to further impede growth of business in this country. The AGW scam was a big part of it, but the fact that it takes four to seven years to get a permit for a factory and the work can then be halted at any time for reasons of supposed endangerment of some plant or animal, makes companies loathe to begin projects here. Much easier to just go somewhere else.
Just opening up our offshore areas and the ANWR for oil exploration would be a terrific shot in the arm for the economy. It will not happen as long as Obama is President and the Senate is Democrat.
These next two years are going to be long and hard.
Has been the primary cause of our woes. The
number one problem has been forcing US labor
to compete with third world labor and the third
World's lack of regulation. US workers were
sold out to support big business. Add to that a
Tax code that punishes income from labor and
Discourages employers from hiring and you have
a mess in the making.
There may have been a lot of that, but I can tell you from personal knowledeg that many businesses would rather stay here and pay the higher wages, but the regulation + higher wages were too big an obstacle.
Case in point. A medium sized sawmill (lumber) operation here in the Pacific NW wanted to stay here, but the ESA stopped logging in large areas and reduced the supply of logs. The owner moved his operation to the biggest forests in the world in Russia. Cheap labor, lots of log supply, and few regulations. What's not to like? In his case it was the lack of clear private property laws backed by courts and the difficulty of enforcing contracts. He could produce lots of lumber cheaply and sell it in Japan and the U.S. However, the hassles of paying bribes, challenges to his ownership, and contract prices that weren't worth the paper they were written on drove him to distraction. He stayed for five years and finally gave up. Lost most of his investment, too. He was a small operator. A big outfit like Potlatch or Weyerhauser might have stayed because they could hire Russian lawyers and goons to protect their interests. That sawmill owner's experience explains why Russia, although it is a country rich in natural resources, will never become an economic success until it embraces free markets and private property ownership.
Logging and lumber used to be a big industry here. It is all but dead now. There are still some private forests (Weyerhauser & International Paper) and Washington State owns some timber that they cut each year to help pay for schools, but its about 20% the size it was before the ESA (Spotted Owl) and the Greens went after them. Those were good paying jobs and some families had been in the industry for generations. Like old mining towns in the Rockies and Southwest we have near deserted logging towns here.
That is one industry I am personally acquainted with. I also know we would have more good paying jobs in the oil and gas industry if we didn't have so much regulation. There's a refinery at Anacortes, Washington about 30 miles from my house. It has been trying to expand for the last 20 years, but has never been able to get the permits. It is one of the best paying employers in this immediate area. Regulation killing jobs again.
I would be willing to bet there are many other industries that can point to regulation as the prime force driving them offshore and the lower pay is just a bonus of the move.
The best thing would be a sales tax applied uniformly to imports and domestic production. The cost of transportation would then act as a counter (imperfect, to be sure) against the lower labor and environmental costs overseas.
I am beginning to think that we should remove the Commerce Clause from the Constitution, with a comment in the repealing ammendment to the effect that regulation of interstate commerce has been found harmful.
As a further pointer to what Jimmy J. and njcommuter said, it's worth noting that it is no coincidence that the states in the worst fiscal shape are those that have most embraced the high-tax, high-regulation, high-spending model, such as California and Illinois.
It hits buildings of all sizes and business owners of all sizes. A few years ago a business owner I know in Valdosta, GA, got a visit from the EPA. He owned an old office building there downtown, across the street from one bank and catty corner on the block from another. Seems the EPA came out and tested his soil and found it had traces of petroleum contamination. Well, the building was also catty-corner from an operating gas station, but it seems the building had been built on the site of an older gas station.
A whole lot a money went down the tubes because of that.
Even if the government grants you a permit to do something, finally, after eight or ten years of applications and permits, then any environmental group can sue you.
In essence, our environmental law is producing the same situation as Jimmy J describes in Russia.
The US had such a great industrial base that it carried us for a few decades, but now we see the fruits of our tree.
First, I added a graph to the bottom of the post. Please look at it.
Second, when a couple making 30K is going to pay $200 more in taxes in 2011 than in 2010, and a couple making 200K is going to pay $4,000 less in federal taxes than in 2010, isn't the regressivity obvious?
The MWP was removed. The payroll tax was substituted. By my calculations, the payroll tax is more like a 107 billion giveback than the 120 I read about, but hey ----.
Regardless, if you are, say, a government worker or a scientist or most engineers you are going to do very well. It is very questionable that much of that money will go back into the economy. Instead, it is inflationary. More will be invested. The stock market will probably go higher as a result. Commodities will ratchet up. Prices will go higher, which is going to be a double slam on the lower brackets.
The significance of so many of the states passing laws or joining lawsuits against it is that it appears that there is a good base for a constitutional amendment.
There is a 4:1 ratio built into the health care reform bill. That means that an older couple living on say 60K could be forced to pay 18K for insurance, which they would not have. So they will have to pay the tax instead.
over-regulated. However when you look at the disaster
BP caused and the mortgage mess you should admit
that some regulation is needed. I do favor higher
taxes on imported energy to be offset by lower taxes
on labor. This should enable more energy production
to be profitable here and at the same time encourage
consumers and businesses to be more efficient. It is
the over taxation of labor to benefit multinational
corporations I resent.
The EPA has more clout than the Department Of Defense. My father worked all his life on nuclear power projects for the DoD; most of these projects were done in concert with energy companies who put up half the money (my father was employed by the University Of Chicago which was the director of the research). After Three Mile Island, the EPA shut down most of the projects over the DoD's protests and all the private money vanished. This is part of the reason the so-called Green Jobs will never happen - the EPA scares away all private companies who had any energy projects with the government in the past; the only companies that will work with the government anymore are newcomers/suckers who don't know the history of getting screwed by a different agency of the government. Brazil, India, and China (if your a Chinese engineer) are all much more amenable to energy research than the US. These are the countries that will have a breakthrough in green jobs, the US simply won't allow it.
You'd think the Obama family, being employed by the same university, would actually TALK to someone in the school about such things but 1) they'd have to leave campus to find them, and 2) probably 90% of those engineers have quit or retired by now.
There's no way the lame-duck Congress could revamp the tax system broadly enough to create a politically viable rate increase for the middle class. The best that could be done was to preserve the current rates on capital and business, which happened, miracle of miracles. And raising the top rate is the same thing as increasing the corporate tax, until the system can be re-vamped to encourage people to change from C-corps to S-corps. We can only increase the top rate after that is fixed.
Also, this compromise has me thinking that there might just be a compromise out there which would do the job, since even lefties in Congress are talking about broadening the tax base and lowering rates. Fear focuses the mind wonderfully.
As to the payroll tax, there's an efficiency argument to be made that we should keep it as it was, just because it's flat. But the 2-point rate cut takes us from a situation where the top rate of income tax + FICA is (35 + 7)% of 7, 6X the first-dollar tax rate of 7%, to one where the top rate will be (35 + 5)%, 8X the first-dollar rate of 5%. I don't have time to work the tax tables out all the way, but I'm pretty sure that's more progressive than before. There's some loopholes that will need to be closed to really make this true, but in my opinion, shifting the burden from the payroll tax to the income tax will force some of these changes eventually.
Every time there's a recession, Portland is always one of the states really struggling. They wouldn't have struggled as much if they hadn't gutted the timber industry and had instead treated it like the renewal resource that it is. Same short sightedness on my side of the river. And there's no hope at all, given the lock that the Dems have on these two states. We fantasize about moving to Louisiana sometimes.
Yep, that's the way the Dems roll. You taxpayers won't give us all the money we want, we'll make you suffer - we'll cut those government services that everyone sees and actually wants.
They never think about ways to grow the economy that will provide more jobs and more taxes. In their eyes, the pie is just so big and they want their cut no matter what. They never think about making the pie bigger. Oh no, those loggers and refinery workers and fishermen aren't Greens - The Dems want to get rid of them, not realizing that they are shrinking the pie and making things harder for everyone.
End of rant!
The employee share of FICA tax is 6.2%. Employer + employee is 12.4%.
Income tax brackets for 2010 (single) are about 10% up to 8.375K, 15% up to 34K, 25% up to 82K (about), 28% up to 170K about. 33% up to about 374K, and 35% thereafter. But that's AGI, first you deduct standard deduction/personal exemption.
FICA caps out at 106.8K. Thus a worker making 100K pays 28% + 6.2% or 34.2% on the last 15K or so (including standard deduction).
You actually get quite a bonus after that, because if you are pulling down 150K the last 40 or so just incurs 28%.
The top rate of 35% (only charged on AGI above 370K) is really hardly more than the worker making 85K is paying, and the worker earning 200K pays 28% on their last dollar, which is less than the worker earning 100K, who is paying 25% plus 6.2% (31%) on their last dollar.
Medicare is charged on all wages. that is 1.45% (employee share).
No one pays 35% or 33% plus FICA. In the future, maybe. But not now and it sure wasn't going to happen anytime soon.
And let me remind you that the higher rate is in effect only for the amount of AGI that exceeds the prior bracket.
You're right, of course, I got sloppy in my haste. Thanks for taking the time to correct my numbers.
(For 8 years running, I have been given raises to put me above the threshold, only to have Congress raise the threshold so that I am below it again. I've tried asking for a larger raise, telling them it won't cost them as much, but so far they won't listen :)
It's impossible. You can raise the employee cap, and not give the employee any additional SS credit for the additional money he pays in. But even that will shift income for high wage earners to lower taxed forms, such as stocks or options or such.
The math is inexorable:
If you were going to give a 200K wage earner a 5% increase it would amount to 10K. Out of that, under the current scheme, the federal government would get 35.9% (33% income tax plus 1.45% Medicare employer plus 1.45% Medicare employee, for a total of an additional $3,590 in federal revenue. State governments would get from 6-8% on average.
If you raise the wage cap to 300K, in the first year the employer is going to pay an additional 6.2% on about 100K ($6,200), which eats up most of his projected raise budget. So the employer will probably give the employee a 3-5K raise and lower raises in the later years. Because you are losing the 35.9% on each 1K of wages not paid, you get to a negative return very quickly.
Now the employee is facing an additional tax of 6.2% on a 100K of income, so his after-tax compensation drops substantially that year. (He gets a raise of say 5K and pays 6.2K of extra taxes for just SS plus 34.45% of the 5K raise for a net extra tax bill of $7,922.50.) Both employer and employee feel screwed.
At that point, both employer and employee have a huge incentive to shift wage compensation to lower net taxed forms of compensation such as additional vacation time, perks, and financial compensation in the form of stocks, options and bonuses which are not subject to wage taxes.
So after just a few years, the federal government would probably be net negative in revenue. For every 1K in wages not paid because of the additional 6.2% of employer-side tax, the federal government is losing 2.9% of medicare tax plus 33% income tax.
The other option is to substantially raise capital gains tax, but that will be very economically risky and will likely drop net payroll taxes further in the form of lost jobs.
In any case, journalists who want to opine about taxation should be required to demonstrate proficiency in algebra and basic accounting at least once every 5 years. They don't have to be bright, but they should be able to do basic math.
Taxes, regulations and uncertainty come from every level of gov't these days.