The Fundamental Reason Politics Will Become Kinder to the Poor

One reason that rich may be more willing to support the poor is because they are more able. I think this will change politics.

Between 2009 and 2017 the ratio of households making more than $200k a year to those making less than $10k a year rose from .54 to .94. Put differently, in 2009 each rich family would have to adopt nearly 2 poor families (1.85) whereas by 2017 they would only have to adopt 1 (1.06). (And by 2018 that was probably less than 1.0.)

In San Diego - and likely most big cities - the ratio is even better. In 2009, each poor family could get 1.18 rich families to help. By 2017, the ratio was 1.94 to one, meaning that each poor family could get 2 sponsors. It's obviously easier for two rich families to help one poor family than it is for one rich family to help two poor families. 

What does this mean? Not only are programs to help the poor more financially viable than ever, they're probably more politically viable. 

"We will loan you our trillion dollar tax cut," investors tell government

Here is an interesting pair of numbers.

In the first quarter of 2018, US companies announced $242 billion in stock buybacks. At that pace it will hit nearly one trillion dollars for the year. 

https://www.reuters.com/article/us-apple-results-buybacks/apple-plows-u-s-tax-cuts-into-record-share-buybacks-idUSKBN1I300U

In the first half of the year, the federal government will run a deficit of $600 billion. At that pace it will borrow roughly 1.2 trillion dollars for the year.

http://thehill.com/policy/finance/382033-deficit-nears-600-billion-in-first-half-of-2018

Put differently, corporations have a trillion more than they can spend this year and the federal government needs a trillion more than it has. 

It sounds like an onion headline: "We will loan you our tax cut," investors tell government.

The Libertarian Philosophy - A Truth (often ignored) and a Misconception (largely embraced)

Libertarians advocate one thing that seems to me obviously right (but is often resisted) and another obviously wrong (but nonetheless wins the approval of most Americans).

A general trust in markets seems to me the most important thing they get right. Market solutions don't require consensus or bringing along committees and citizen action groups or the popular vote. An entrepreneur can just try something and assuming they can convince the right mix of investors and employees to go along, they have a chance to change how we live. That's pretty cool and the libertarians' trust in individuals seems to me repeatedly justified by the on-going success of entrepreneurs whose success may never have been predicted by any majority opinion.

The problem with market-driven progress is that it blows in on gales of creative destruction. Solar power can close down coal mines; digital photography can close down picture development kiosks. The status quo has a lot of wealth and power and part of what libertarians get right is that because of this power, government tends towards crony capitalism that protects existing industries in order to protect those investors and employees rather than forcing them to respond to the market. Government can become an obstacle to progress. Look at the coal miners in West Virginia, an industry that began in 1740. If we protect the 44 year old miner today, how much longer do we need to save his job? For two more generations? Two more years? What is society's obligation to protect him? Some politicians will say that for as many generations as he'll vote for you to go to DC to protect him and as long as the coal mining investors will fund your political campaign. Industries that would have a rough time getting thousands from a venture capitalist are sometimes successful at getting billions from governments.

Libertarians' belief that we should let markets disrupt and create new wealth and jobs even while eradicating old jobs and wealth is something I think is right. Still, it seems easy to find programs that protect industries (think of our enormous subsidies to farming and oil). This feel likes a truth often ignored.

So what do I think they get obviously wrong? This notion that government should then be small. I believe that successful markets depend on robust government programs in at least two ways. People always want protection and security. If you are not going to protect their jobs and industries, you need to offer them some personal protection. This, to me, means healthy unemployment insurance, jobs retraining and really hefty subsidies to kindergarten through grad school education, among other things. I also believe that we can hardly spend too much on research at places like the Center for Disease Control or National Health Institute or the National Science Foundation.

I have worked with hundreds of product development firms within companies, from startups funding only one project to Fortune 50 firms with thousands of projects. They develop new products. They need a product that can launch soon. The pharmaceutical companies have the longest development window - about a decade - but most target product launches within about 2 to 4 years. You've heard of R&D, research and development? This is D, the development. It's important. It's crucial. As cliche as it sounds, it can change the lives of investors and consumers. The iPhone is an example of development. The rightful focus of private companies is the D in R&D.

Research is hugely uncertain, though. It will probably result in nothing. If it does result in something cool it may happen a decade or three later than you expected. Not every cool thing becomes profitable. Because of this, corporations rarely finance research and it needs to be heavily funded by government, by groups like DARPA (the Defense Advanced Research Projects Agency) or the University of California. This research - the R - is crucial to corporations' later development - the D. "The parts of the smart phone that make it smart—GPS, touch screens, the Internet—were advanced by the Defense Department," as Mariana Mazzucato points out in her book The Entrepreneurial State: Debunking Public vs. Private Sector Myths. Corporations try to find a way to translate R that has taken one to two decades into D that takes two to four years. It's a pretty cool system.

The libertarian fantasy that communities work well with lean governments is wrong on two counts: a community that learns to sail the gales of creative destruction makes its people feel secure with change rather than resistant to it (which requires a strong welfare state) and getting the research to the point that companies can make it profitable takes considerable public sector leadership.

James Watt, employee at University
of  Glasgow, the same university that
employed professor Adam Smith

The contest between the public and private sector is not zero sum. A strong public sector can make the private sector healthier, and vice versa. (And obviously by strong I don't mean power over, the power of corporate lobbyists to choke government or for governments agencies to choke corporations. Instead, I mean power to, the way that advances in one lead to advances in the other, each enabling the other.)

When a libertarian talks about how markets are more innovative than government programs and how individuals should be given freedom to pursue what they think will make them happy, nod knowingly and agree with him. (Libertarians are twice as likely to be men, so this is probably a "him" you're talking to.)  Say something like, "Yeah. The pursuit of happiness. It's literally in our founding documents."  

When he tells you that this means governments should be much smaller, laugh at his naivete. (Libertarian men love when you do that because then they chuckle with you and say, "Well, you can't blame me for wanting lower taxes.") 

The formula that has seemed to work for progress is to let entrepreneurs and companies rapidly change our world while funding the cost of their creativity with research and education and then funding the cost of their disruption with welfare, unemployment insurance, universal healthcare and - yep - more education and jobs training. Who pays for those government programs? Everyone, but the ones who pay the most are the ones who succeed the most: those successful entrepreneurs and companies who so benefit from being part of a system that knows how to create and then harness the gales of creative destruction.

Why Tax Policy Is Largely Incidental to Economic Development

Two quick things about taxes.

Studies suggest that if you try to increase government revenue by raising tax rates, the rich leave. The result? Your higher tax rates result in about the same tax revenue. So, if your route to making your government more vibrant and healthy is raising tax rates, you'll fail.

Studies also suggest that tax breaks for job formation are really expensive. It looks like you have to pay about $100,000 per job by taking the tax incentive route. So, if your route to making your business sector more vibrant and healthy is lowering tax rates, you'll fail. The rest of the community is unlikely to get $100,000 back in taxes and additional business for each new job created in the area.

Tax policy - whether to raise tax rates for your government or cut tax rates for your businesses - is an admission that you don't have any good ideas for development. 

Economic development is a slow game and has a few elements. 

1. Create an alliance between city leaders, education, and industry to facilitate the creation of wealth and jobs through the creation of new businesses and technologies. Fred Terman at Stanford worked to bring in venture capitalists onto campus to collaborate with his professors and students; his early students included Hewlett and Packard.

2. Welcome and attract the best and brightest from any and everywhere. Do this by hosting conferences on important topics, by developing university programs for emerging technologies, nurturing startups with mentors and financing, and promoting a culture of entrepreneurship starting as early as high school. Alphabet (nee Google) has 70-some thousand employees and - like half of the tech companies in Silicon Valley - was co-founded by an immigrant.

3. Make your city a great place to live. This gets overlooked but ultimately you want to attract employees and entrepreneurs and world-class researchers who can afford to live anywhere and will choose to spend a good portion of their wealth and income to live in an area that they love and is stimulating. This means public works projects like art and museums and it means taking advantage of and incorporating into your city, natural beauty and / or good weather. California has relatively great weather and Seattle - a place that has created an abundance of wealth in the last 30 to 40 years - is surrounded by natural beauty. Edinburgh has developed a vibrant startup scene in part because it is such a great city that Scotland's best and brightest are happy to live there, making it easier for companies to attract talent. Creating a great community also means including a lot of voices in the definition and pursuit of quality of life. 

Bookstore door in Seattle, close to Pike Market

4. Welcome diversity. West Virginia's population has dropped in the last 50 years. California's population has gone up 4X. West Virginia is 92.3% white. California is 37.7%. From the early Silk Road that facilitated trade between folks who live in what is now Europe, Iran, India, and China to Silicon Valley, regions that have brought together people from a variety of cultures and perspectives are the regions that are more creative and prosperous. And diversity doesn't just mean skin color or cultural background. Places like California's Bay Area and Seattle have not just created billions in wealth; anyone who has spent time there will tell you that these areas are also hotbeds of radical ideas. It almost seems like it is the same magnet for diversity that will attract people from other countries, communists, and venture capitalists and if you're unwilling for one or two (or, given it is is diversity, twenty or thirty) of these categories of people and thinkers, you're unlikely to get any of them.

Each of the above points deserve their own blog post - their own set of books, really - but taxes are tools towards these goals, not something that will magically create a better community. You shouldn't invest in Business A instead of Business B simply because Business A said they need less capital. Nor should you be impressed that Business B needs more capital so is obviously building a more impressive business. Capital is necessary to a business just as tax revenue is necessary for a community but the fact of it being higher or lower is largely incidental to whether that business or community will prosper. 

Magic Math in Trump's Budget: How an Imaginary $2 Trillion Gets Spent Twice

Trump's new budget plan forecast $2 trillion in additional revenues because of economic growth and then simultaneously applied that $2 trillion to a tax cut and to a deficit reduction. This faster economic growth will both increase revenues in the form of higher taxes and fund a tax cut in the form of lower taxes. Wrap your mind around that.  It is as if Trump's Budget Direct Mick Mulvaney (people say he's Irish but it seems clear that he's a goblin) said, "The amount we get in extra taxes will pay down the deficit AND will let us cut taxes by that same amount." It's like someone has won $100,000 in the lottery and excitedly announces their plan to pay down their $100,000 in debt and spend $100,000 on new cars and travel. It's double counting.

It might be that the Trump administration is that sloppy. Or it might be that they trust that they have so undermined the credibility of the press by continually calling it fake news that they will be able to ignore or brush off any reporting that points this out. They are operating in a fact free zone.

If that's not enough, there is more. Where does this extra $2 trillion over 10 years come from? It's existence comes from an assumption that the economy will grow by 3% a year for a decade. How likely is that?

Well, since 1948, the longest stretch during which GDP growth exceeded 3% was 6 years. (From 1961 to 1966, when Johnson's New Deal was increasing government spending, defense spending for Vietnam was just ramping up, and the baby boomers were starting school and driving their parents to buy more housing, clothes, and cars.) It has been eleven years since GDP growth has been as high as 3% (exactly 3% in 2005, and 3.1% the year before that.) In this century - since 2000 - GDP growth has not even averaged 2%, much less 3%.

So is there reason to believe that economic growth will bump up 50%? (3% is 50% more than 2%.)

Curiously, per capita GDP growth has been incredibly stable since after the Civil War. Here it is by decade. (Source data here.)

Note that in only one decade has per capita GDP growth been more than 3%; in the 1940s, when the US was spending a huge amount of money first fighting Nazis and then rebuilding Europe and Japan, per person GDP growth was nearly 4%. World War 2 was the catalyst. Pull out that decade and you can see that per capita GDP growth has never averaged 3% for a decade. 

And here is a phenomenal statistic. Pull out the 1940s and the average per capita GDP growth since the 1870s has been 1.88%. The average GDP growth in this century? 1.88%.

GDP growth bounces over 3% in healthy and normal decades but it does not stay much above 2% for any length of time without a growth in the workforce. A growth in the workforce depends on immigration and birth rate.

So, will GDP bounce up to 3% for a decade? Only if Donald decides to encourage immigration. (Insert laughter here.) Millennials will cause a growth in the workforce during this next decade to offset baby boomer retirements but it won't be enough to cause a noticeable surge. 

Trump's budget plan doesn't just use the same $2 trillion to simultaneously pay down debt and cut taxes. It forecasts this additional $2 trillion by assuming GDP growth we've only experienced in one out of the last fourteen decades. It's not just that he and Mulvaney are spending this money twice; it's imaginary money.

83% of what Trump says ranges from half-true to pants on fire. Only 17% of what he says is mostly true or simply true. It's little wonder that with such disregard for facts he would put out a plan that shows such utter disregard for simple arithmetic or reasonable assumptions. He continues to show his contempt for Americans' ability to reason. So far, assuming that we're all stupid has worked out well for him. It doesn't seem like it'll work out as well for the rest of us.

We're Uncertain Just How Much Economic Uncertainty Trump Has Added

"There are known unknowns and unknown unknowns," Rumsfeld famously said. With the incoming Trump administration we might now say, "There are certain uncertainties and uncertain uncertainties."

The stock market has rallied since Trump's election. Presumably, the reasons for this include expectations of tax cuts, stimulus spending, and deregulation. All of these add to uncertainty, though.

If Trump gets a stimulus package in the form of infrastructure spending, it will boost GDP more than if the stimulus comes in the form of tax cuts. (The tax cuts will overwhelmingly go to the rich. A guy making $500,000 a year is less likely to change his spending in response to a tax cut that puts $1,000 more in his pocket than will a guy who makes only $5,000 a year.) 

Will the stimulus - the assumed rise in deficit spending - boost the economy by 1% or by something negligible? It's uncertain because we don't really know what form the stimulus will come in.

Further complicating this, Trump has appointed Mick Mulvaney to head his Office of Management and Budget (OMB). He'll be responsible for crafting the budgets proposed to Congress. Mulvaney is a fiscal hawk who has voted against raising the debt ceiling and seems committed enough to a balanced budget that he'd shut down government for this. By contrast, Trump has promised tax cuts and boosts to defense spending and infrastructure, which will drive a big increase in the deficit.

Paul Ryan and Mick Mulvaney's desire for balanced budgets will be at odds with Donald Trump's "deficit be damned" policies. Will Trump's proposed budget deficit shrink or even become a budget surplus? It's uncertain.

Deregulation adds the most uncertainty of all. Before the Great Recession, banks were leveraged about 30 to 1. For every dollar they had in deposits, they had loaned out about $30. That gives you great returns but it makes you vulnerable to a credit crunch. Since Dodd Frank,that ratio has dropped to about 10 to 1, which makes for a much safer banking system. Now, the expectation is that a Trump administration will lower regulatory requirements and allow banks to raise that ratio again. Will the ratio go up to just, say, 12 or 15 to 1? That ratio might still be reasonably safe but raise profits nicely. Or will the ratio be allowed to rise all the way to 20 to 1 or even 30 to 1 again? That ratio will greatly raise profits .... and risk. Financial stocks could look really healthy even as the financial system gets sick. 

Will Trump deregulation give finance a little nudge or a dangerous shove? That's uncertain.

Add to this the uncertainty inherent in Trump's trade policies. Will he actually put 35% and 45% tariffs in place against Mexico and China? If he does, WTO will probably slap on retaliatory fines and this could set off a trade war. That path would cost us millions of jobs. If he only talks about trade wars but doesn't actually impose tariffs, it could "just" result in a slowdown in trade. It's uncertain.

And then there is the policy with undocumented workers. Will he actually deport 11 million people? If so, that will crush growth in aggregate demand here in the US and crash house prices. It's uncertain.

Economics is always uncertain but the Trump Administration has added more uncertainty to that than any that I can remember. And perhaps inherent in that uncertainty is an uncertainty about what Trump's victory will mean for the future identity of the Republican Party.

Kansas' Brownback About To Lose His Job As Governor Because He's Bad at Algebra

Governor Sam Brownback of Kansas enacted a sweeping tax cut for the state. He slashed taxes for everyone, reducing middle class tax rates from 6.25% to 4.9%. To his shock and dismay, the $700 million surplus he inherited is now projected to fall to a $238 million deficit. This has caused some backlash and apparently he's now trailing in polls.

Governor Sam Brownback

Arthur Laffer

Kansas paid Arthur Laffer, of Laffer curve fame, $75,000 to come into the state and sell the tax cut. Laffer believes that people who have to pay tax on money have less incentive to make money. In his mind, the good people of Kansas would all go make considerably more money if only they didn't have to give so much of it back in taxes. Why bother to make an extra $1,000 if you just have to pay the state $62.50 of it?

Laffer's curve is laughable for a number of reasons but the most obvious is the simple algebra it depends on.

Assume Kansas has GDP of $100 billion. (And that's not far off. The state's GDP is about $117 billion according to Google.) With a tax rate of 6.25%, that gives the state income tax revenue of $6.25 billion.

Now, cut the tax rate to 4.9%. In order to maintain tax revenues at $6.25 billion, total GDP would have to raise to $127.5 billion. In other words, it would have to grow by 27% to offset this tax cut. To put that in perspective, the US economy will probably grow about 2.5 to 4% this year. China's economy will grow about 7 to 8%,  Europe's closer to 0%. 27% would be an absolutely stunning, unprecedented rate of growth. Even during a full, four-year term. And all triggered by the magic of dropping marginal tax rates from 6.25% to 4.9%, a tax cut that (Laffer would argue) would finally give people the incentive to get rich.

If Brownback knew algebra, he could have quickly calculated the growth rate he'd need to balance the budget with his new tax rate. Sadly for the state, that level of math competency was apparently not needed to qualify for the governor's job.


----------
I suspect that Brownback will win re-election but a couple of interesting articles suggesting he might not can be found here.
Mother Jones, Patrick Caldwell, "What's the Matter With Sam Brownback?"
The New Republic, John B. Judis, "This is What's the Matter With Kansas"

Taxes Don't Determine Rates of Entrepreneurship, So Let's Determine What Does

The Kauffman Foundation just released a report on Entrepreneurship that, among other things, gives the rate at which people in each state have started businesses. I was tickled to see that Montana topped the list of states; not only that, but even among the metropolitan regions, only the Bay Area (San Francisco, et al) had a higher rate of entrepreneurship than Montana. (It's a good year for Montana. This year they bumped Colorado from number one on the list of fittest states, as measured by average body fat percentage.)

The top 5 states for entrepreneurship are:
1. Montana
2. Alaska
3. South Dakota
4. California
5. Colorado

The bottom 5 are:
51. Iowa
50. Rhode Island
49. Indiana
48. Minnesota
47. Washington

Of course the sum of Republicans' argument is that the less that government interferes with business, the lower governments keep tax rates, the more business formation and job creation there will be. And it's true that Alaska and South Dakota - number 2 and 3 on the list - have no state income tax, which would seem to buttress the Republican argument. Further, the worst state - Iowa - has a pretty hefty tax rate of nearly 9%. So points go the GOP for that.

But then the simplicity of this argument wanes in the face of facts as we look at the rest of the list. California has the highest tax rate of any state and is ranked 4th. Additionally, Washington state  has a zero rate and is still 5th from the bottom.

So what does the relationship between state income tax rates and rates of entrepreneurship look like? If Republicans' are right, we see should at least a rough correlation between a state's tax rate and its rate of business formation. Here's a graph that shows the relationship between the two variables:

The line that Exel fits to this data does slop downwards - suggesting that as tax rates go up, the rate of business formation falls. The Republicans are right. If everything else were equal, entrepreneurs would choose to start a business in a state with lower taxes.

But it also turns out that this relationship seems to explain only 1% of the difference in rates of entrepreneurship. Polls have suggested - as does this data - that taxes aren't very important in the list of consideration for aspiring entrepreneurs.They're more interested in finding a place where they themselves want to live and where they can find good employees. It's true that low taxes that leave more money in their pocket are likely to attract them. It's also true that low taxes that leave a community unable to provide a great education or high quality of life are likely to repel entrepreneurs. On their own, taxes simply aren't much of a determinant of where businesses get started.

Arguing for lower taxes is akin to saying, "We don't have a clue why entrepreneurs choose, or emerge out of, some communities but not others." Or more precisely, "We can explain about 1% of why states differ."

Communities serious about increasing the rate of entrepreneurship - and that should include any community serious about job and wealth creation - should first admit that the problem is more complicated than the simple matter of tax rates and then dive into discovering what does. The longer they waste time debating a dead issue, the longer they'll defer a genuinely profitable discussion.

Tax Rates in Perspective

Just a dose of reality, for those of you still in the mood for such things. In a list of 34 of the most economically developed countries in the world, the US has the fifth lowest tax rate. Three of the four lower are Mexico, Turkey, and Chile - with per capita incomes of about $15,000 or less. Those hardly seem like good models for what Americans aspire to. 

Republicans Raise Taxes

Republican's new balanced budget amendment proposal requires government spending and tax revenues to be equal (hence the balanced) and set to 18% of GDP.

Curiously, this is roughly what taxes have averaged over the last few decades. It is also about 3 percentage points higher than it is now, at roughly 15% of GDP.

So, the Republicans have finally agreed to raise taxes.

The amendment will never pass, and there are so many good reasons it shouldn't. But one overlooked fact in all this is that this amendment is the Republican's first admission that with taxes the lowest they have been in Obama's lifetime, we might have to swallow the bitter pill of tax hikes.

Taxes Fall Outside of Historic Range - But are Still Too High

Like a murder of crows, politicians and talk show hosts endlessly caw about the debt as a consequence of rampant government spending. Usually in the same breath, they decry high taxes. 

It's worth pointing out that - at the federal level at least - taxes have never been so low. Not just the lowest they've been in the lifetime of our president but outside the control charts set since his birth.

Companies use control charts to distinguish between common cause and special cause variation. Simply put, a control chart shows normal variation in a process. It can be applied to a factory floor to track defects, a high school to track dropout rates, or even to tax rates for a country. 

The control chart below shows tax rates as a percentage of GDP since 1961 - the year our president was born. 

Put simply, this suggests that any administration ought to be prepared for tax rates as low as 15.4% or as high as 20.8%. Taxes always varied within in this range. 

And then two things happened. One, the Great Recession lowered taxes. Two, and more importantly, conservatives finally institutionalized tax cuts as an annual rite, like virgins offered to the volcano. Obama, unable to end occupations in Afghanistan and Iraq but able to institute Universal Health Care, continued George W.'s blind adherence to cutting taxes no matter what spending was required. 

Do we have record deficits? Yes. And spending does play a part in this. But the part that every politician and the media seem to blithely ignore is this: taxes have plummeted below their old range. Not just their lowest, but lower than any reasonable prediction would have suggested even four years ago. 

I could opine at length about this. For now, I'll just point out these facts. You consider whether there is a good reason to believe that the lowest federal tax rate in all the developed world should have suddenly fallen to a new,and even lower range. 

The High Cost of Being Glen Beck

Glen Beck is LDS. As a Mormon, he's expected to tithe 10% to his church. As tea party enthusiast, he believes that federal taxes equal to 14% of GDP is too high.

The federal government funds
- retirement
- health care
- war & occupation
- defense of borders
- unemployment
- interstate highways
- NASA
- housing
- environmental protection
- science research
- arts
- etc.
- etc.
- etc.

What does the church fund?
- potlucks
- a church building
- some missions (although from what little I know about it, much of this is actually funded by the family of the young (or old) person going on a mission, not the church).

Now I am sure that the list for what the church funds could be longer - but so could the list of what NASA funds. Seems to me that the federal government is doing much more with its 14% than Glen's church is doing with its 10%. Maybe, if Glen is really that sore about taxes, he should just join a cheaper church.

Just a thought.

The Rate of Inflation of (perceived) Tax Rates

I had an epiphany the other day. People KNOW that taxes are too high but they don't know how high they are.

I think it would be fascinating to sponsor a study asking Americans two questions:

1. What do you think is the average tax rate for the US federal government? (What portion of the GDP is collected by the federal government as taxes?)
2. What do you think the average should be?

Simply judging from conversations with a few friends, they all are convinced that taxes are too high at their current rate of (estimates vary from 33% to 50%). They think that taxes should be closer to 18% to 30%.

Last year, federal tax receipts (for everything, including personal and corporate taxes) were about 14% of GDP. In recent decades, we've been at about 18%, give or take a couple of percentage points.

The right has infected public opinion in a variety of ways, but this matter of inflation in the perceived tax rate might be their greatest success. They've seemingly convinced the average person that taxes are about double what they are.

Oh, and one last thing. If we add in state and local taxes - everything from property taxes to sales and inheritance taxes, etc. - the average tax rate in the US is 27%.

Are taxes too high? Maybe. Looking around the Western world it seems me me that we're doing pretty well (Sweden is just under 50%; the OECD average is about 36%.) But if we're going to discuss tax rates it seems to me that the discussion should start with the facts, not some intentionally distorted perception of those facts.

Lower Taxes? Why Not NO TAXES?

Fed quietly posts record $46.1-billion profit in 2009.

I find this promises a fascinating alternative to us actually paying taxes. The Fed has enormous influence over interests rates and even exchange rates and, of course, stock and bond markets. It seems to me that with a proper amount of cunning, the Treasury Department could regularly generate profits. I'm waiting for Sarah Palin to take the "no new taxes" pledge to the next level, campaigning with the slogan, "No taxes."

That would, of course, give us years to figure out how to make up for the fact that all this manipulation would leave our investment portfolios stunted like bonzai trees in a redwood forest. But then again, having to work until you die would sting less if you knew that your income wasn't being taxed. I would hope.

Maddie on Socialist Networking Sites and Bernard on Republican Drug Dealers

It had been too long since I'd met my favorite senior citizen siblings for lunch. Maddie was the closest thing I knew to an idiot savant in the social realm: she seemed profoundly insightful about love and tragically misinformed about politics. Bernard, by contrast, was a deep (if sometimes unorthodox) thinker when it came to politics but seemed perpetually baffled by relationships. And yet they were delightfully fond of each other, and I of them.

Maddie shook her head, “And now these socialist networking sites are all over the Internets.”

“What?”

“These sites like myface,” she said. “I heard Glen Beck call them socialist networking sites.”

“Um,” I began, hardly knowing where to begin. “You mean facebook and my space?”

“Whatever,” Maddie said. “I just think it’s awful. They’re indoctrinating all these young kids who spend so much time on the computer.”

Bernard scoffed. “Maddie, you have to stop watching nut jobs like Bleck.”

“You mean Beck,” Maddie corrected him.

“Yes,” Bernard said unrepentantly. “Bleck.”

“So you think that Obama is a socialist,” I asked.

“Don’t,” Bernard rose his hand at me, looking disgusted, “get her started” he finished in a whisper.

Fortunately, Maddie did not say much. She just touched my arm and leaned in to say, “Oh honey. Everybody knows that.”

“If only Joe McCarthy had known is was so easy to spot a socialist," Bernard shook his head. "The new definition of socialist is someone who wants to increase government spending on something other than aircraft carriers. You know what’s really wrong with this country,” he asked.

“Country music station in every town and not a single folk station to be found anywhere,” I asked.

“What does he mean by that,” Maddie asked, turning to Bernard with a look of confusion.

“Nothing Maddie. He’s just talking nonsense.”

I almost protested but realized that until the waiter came with his food, Bernard was going to be cantankerous. His blood sugar was low.

“What’s wrong with this country, Bernard?”

“Politics have been hijacked by the drug dealers.”

“What?”

“Nobody can raise taxes. Not Obama and certainly no Republican will do it.”

“As if Republicans want to raise taxes.”

“You’re too young to remember that under Eisenhower, a Republican president, marginal income tax rates were 91%. Republicans didn’t use to be just about lower taxes. We liked balanced budgets and social responsibility too.”

“We?” I was shocked. “You were a Republican?”

“Well, sure. Any thinking person was. But now Republicans don’t even have an ideology. They just have a mantra. And it’s worked to hypnotize the masses. Nobody even questions the inane premise behind it now.”

“Republicans are not ideological?” This threw me even more than his claim to have been a Republican.

“They don’t have an ideology. They have a chant: lower taxes! Lower taxes!” Bernard pounded the table like a soccer hooligan as he chanted.

“Finally,” Maddie said, “you are on board.”

Without missing a beat, Bernard asked, “So Maddie, what level of taxes would be ideal?”

“Well you just said it, Bernie: lower.”

“And there you have it,” Bernard announced with a flourish. “Chanting ‘lower taxes’ regardless of whether your marginal rate is 91% like it was under Eisenhower or 28% like it was under Reagan – without regard for policy needs or deficits – is not an ideology. It is political Tourette’s – a vocal tic that means nothing.”

“I’m lost, Bernard.” And I really was lost. I was trying to make sense of the jump from drug dealers hijacking politics to the lower taxes mantra. “What does this have to do with drug dealers?”

“Well, who benefits if we underfund government to the point that it can’t be sustained? Where else do we see low taxes and weak government?”

“Well, there is Mexico just over the border.”

“Exactly!” Bernard jumped up. He always seemed so relieved when I caught up to him. “Taxes there are about 18% of GDP – about half of ours. And the government is, like Colombia’s, essentially at the mercy of drug dealers. They own the country. And the government is too weak to fight back.”

“So you think that the guys behind the anti-tax movement are the drug dealers?”

“Yes! With a weak government, the drug dealers are like Machiavellian princes. They live in luxury and without constraints.”

I paused. “That’s a crazy idea, Bernard.” He waited me out. “But I have to admit it makes sense.”

Bernard was looking more calm now, halfway through his turkey and avocado sandwich. “And really, what better example of the ideal of unregulated markets than the drug trade,” he asked.

“So you think that the Republican Party has been hijacked by drug dealers?”

“Who better to hypnotize a population past the point of thinking?” Bernard shook his head. “This is not your grandfather’s GOP.”

News Duet with Allen

The blog author seems unable to write this week. Whatever point I start seems too obvious or too obscure to merit posting. I'll offer this commentary on the news, coupled with my buddy Allen Warren's (AW) musings about the week. If this works out, we might get a blog show like Click and Clack.

RD: Our distinguished legislators just seemed to have wasted a week of intense activity pretending that there was some reasonable chance that Sotomayor might not be confirmed. The time suck that was this parade of platitudes effectively stole a month's worth of potential productivity (which, depending on your level of cynicism about the work of Congress, is either a good thing or a bad thing.)

AW: I’m thinking ‘Barnum & Bailey’ must be happier now that the ‘National Circus Show’, aka Supreme Court Confirmation Hearings has gone into hiatus until the next Supreme Court Justice chooses to retire.

AW: It’s been amazing the past week the questions asked of Judge Sotomayor in terms of her rich life experiences as Republican Senators want to insure she follows the letter of the law. I have no doubt our Founding Fathers would be so happy to know this. After all, I’m sure the experiences suffered by those under British Rule probably had no bearing on how our Constitution was written.

RD: Obama remains supremely confident of himself even as the evidence for the efficacy of his stimulus package has yet to come in. (The joy of being an opposition candidate is that there is a freedom in being able to criticize someone else's policies rather than play cheerleader for one's own.) One might think that the unreasonable adulation coupled with the unreasonable criticism might be enough to cancel out, leaving our president's fairly fair minded about their own foibles and strengths. Instead, it seems as though the job brings with it a conviction of one's great ability. The exalted leader seems to make about as much sense as wigs and horse drawn carriages. The man is just a man. But we insist on mixing politics and religion, making him into either deity or demon.

RD: Sean Hannity recently ran a piece on exorcisms. I went to his site the other day and was amazed at the number of ads (or was it mere click throughs to more material?) that warned of the coming apocalypse. There is an element on the right that really does seem convinced that there is no happy ending possible for a country that has embraced happiness and science over sober superstitution.

AW: Einstein noted we can’t “simultaneously prevent and prepare for war.” Maybe we can’t support universal health care and health insurance companies for much the same reason.

AW: The people who have the compassion and courage to donate an organ to save another person’s life should not have to wonder whether they will be punished for it later by health insurers concluding that they have a “pre-existing condition”.

AW: And about healthcare . . . a young Portland couple have been charged with 2nd-degree manslaughter and criminal mistreatment in the death of their 15-month-old daughter because they are members of a religious group that believes in prayer healing vs. modern medicine. I’m thinking it might happen that more and more parents will rely on faith when the cost of health insurance puts any other ideas out of the question.

AW: Our President told Africa, “No business wants to invest in a place where the government skims 20 percent off the top . . .”. Hmmmm . . . looks like Obama will have to consider reducing the federal income tax.

401(k) Accounts: Putting Off Paying Tax to a Higher Tax Rate Era

It’s not enough that baby boomers have just lived through one of the worst years in stock market history. It also seems that they’ve been duped on the tax-deferment scheme of 401(k) accounts.

The idea behind a 401(k) is not that you avoid taxes. It is that you defer them. Many people lose track of this, but if you put money into a 401(k) account today, you pay no taxes on what you invest.

For example, assume that your household income last year was $100,000. You put $10,000 in a 401(k), thereby avoiding $2,500 in taxes (25% marginal tax rate).

But you have to pay taxes on the capital and return of this invested amount when you retire. The general assumption is that your income in retirement will be lower so you will pay taxes at a lower marginal rate. You save by getting in on a lower tax.

Today Bernanke announced that the projected debt to GDP rate is unsustainable. Deficits will have to come down. Given that our last four “conservative” administrations (Nixon, Ford, Bush and Bush) failed so spectacularly to slow the growth of government, it seems inevitable that reducing deficits will ultimately mean raising taxes.

What does this mean for baby boomers? They might just have avoided lower taxes for higher ones.

I find it perfectly plausible that the people who avoided $2,500 of taxes when working will pay $3,500 in taxes when retired.

As the World Spins

The Republicans are expressing outrage at Obama's deficits. This is like the runner up in a fart contest calling the winner gross. If they're truly outraged at big deficits they ought to finally give up their worship of Reagan and defense of Bush2.

Some Catholics attacked Obama and Notre Dame because they didn't think that one of the nation's leading universities should invite the president to speak (because he's pro-choice). Those Catholics should be reminded that the protestants, deists, closet agnostics, and general collection of anti-papists who founded this country reluctantly let them in because they were worried that once safely here, the Catholics would try to subordinate our laws to the whims of the pope.

Tomorrow Californians will likely vote down provisions to fund their state government. Californians are so angry that even our local public radio station in San Diego has begun to sound like right-wing talk radio. They don't even deny that needy constituents will lose out without more taxes (e.g., the mentally ill), but insist that the only way to get politicians to stop wasting money on (trivial) appointments for each other is to deny the government money. How brilliant. Anyone who looks across the border at Mexico where tax rates are only 18.5% can see that the best way to reduce corruption and abuse in government is to cut taxes, budgets, and the ability of the government to actually govern.

Lest you think that I'm a mindless Obama defender, I'll say that his policy for education suggests a history of paste-eating. He is spending $100 billion to "fix" the 5,000 worst schools in the nation by firing all the adults in those schools and starting over. There is nothing in his (and his Education Secretary Arne Duncan's) policy that suggests that he realizes that the 5,000 worst schools are just as much a product of the educational system as the 5,000 best. To act otherwise is to de-moralize millions of professionals, create chaos, and miss the opportunity to actually make systemic change. If Obama's plan worked, education would have already been "transformed" by the half dozen previous presidents. The only thing unique about his approach is the magnitude of the budget he'll waste.

The World Health Organization (WHO) has been rebuked for calling the swine flu a pandemic. Apparently casual users of the term have something other than three nights in bed with a fever when they think of a pandemic.

Republicans are now claiming that Pelosi knew about torture back in 2003. This would have been remarkable. In 2003, even Bush and Cheney were unaware of torture. Or so they told us. So if Pelosi knew about it, she'd have been unique. This is sort of like the devolution of their protests against climate change.
1. We aren't torturing.
2. I mean, we are torturing but it is not authorized and was just the act of a few mavericks.
3. Okay, we authorized it but it worked.
4. Ha! Nancy Pelosi never once said a word of protest and she knew! We might have done something immoral and ineffectual but Pelosi didn't stop us.

Chait's The Big Con - Lobbyists, Taxes, and Attacks on Character

From Jonathan Chait's The Big Con: The True Story of How Washington Got Hoodwinked and Hijacked by Crackpot Economics, 2007

The Bush administration has routinely - so routinely it no longer makes news - appointed lobbyists to oversee their former employers. Harvey Pitt, Bush's first choice to head the Securities and Exchange Commission, had made his name defending the accounting industry, Ivan Boesky, and anybody else seeking more lenient treatment of financial malfeasance. Pitt took the helm of the SEC and promised a "kinder, gentler" agency where "we aren't going to play gotcha." ... Mark Weinberger, the Bush treasury official charged with regulating tax shelters, is a former lobbyist for purveyors of tax shelters. Soon after taking office he declared, "I want to change the 'us' versus 'them' mentality - the 'us' being government, the 'them' being business.

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Workers in the middle of the income scale pay about 16 percent of their income in federal taxes, whereas those in the top 1 percent pay about 25 percent. But that's offset in part by state and local taxes, which hit the poor and middle class much harder. Taking into account all taxes, the top 1 percent pay a third of their income in taxes, and the middle fifth pay 27.5% of their income. This is a very moderately progressive system.

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The plan to defeat Clinton's policies by weakening his personal image worked perfectly. In 1994, for instance, a Wall Street Journal poll found that every element of the Clinton health plan commanded majority support. Only when it was identified as "the Clinton plan" did respondents turn against it.

The Taxman Cometh

It seems obvous that everyone would be anti-tax. Actually, the anti-tax movement is a strange coalition of the haves and the have-nots. (This leaves out the have-somes, a category into which most of us fall.)

The haves like the anti-tax movement because the only option to taxes is debt. Debt needs to be financed and an investment that pays more than inflation is a great way to protect one’s wealth rather than risk it. (If you are rich enough, returns of 20% or 5% won’t make much difference in your lifestyle: losing 50%, however, might.) The haves love government debt because there are few investments so safe.

The have nots like the anti-tax movement because government spending does not so obviously benefit them. For instance, spending on advanced education might raise incomes but not for those in the little rural communities that lose their best and brightest to far away universities and even farther away companies. The fact that rural areas are heavily subsidized by urban areas in the form of transportation and agricultural subsidies (among others) is invisible to these folks: what is visible is the obvious wasteful spending on things that they can't relate to: things like obscure research, bailout of banks, sex education.

On my way to dinner tonight I found myself in the midst of a sea of anti-tax protesters. I heard one acknowledge another's sign, promoting fairtax.org, and then continued with "What I really want is no-tax.org."

The populist notion is that taxation is a form of extortion. But there is always extortion. Mexico’s tax rate is only 18.5%, but the weak government is no match for drug lords who extort the population at will. Communities always have someone stronger, someone with guns, able to enforce rules and “extort” money. Better to make those parties at least somewhat accountable through elections, laws, and some form of oversight. The resistance to taxation that assumes that a world without a government as one without extortion comes from a mindset that ignores history.

We’ll always have an anti-tax movement in this country. Given that it promotes deficit spending, though, it simply encourages more government spending than we’d otherwise need or want. When we don’t have to pay as we go, we spend too much. The real irony of the anti-tax movement is that it is fueled by the rage of the have-nots and yet it helps to finance the contentment of the haves. Funny how that works. You might think that this would just make the have nots angry, but I guess that their rage is already directed elsewhere.