Sunday, October 26, 2014

(Flood of Dem Voting Paramount To Middle-Class Survival) Kill the Economics Jester? (David F. Brooks:  They're Coming for You Ha Ha!) Delaware Court Allows Companies to Write By-Laws that Make Shareholders Pay Company's Legal Cost If They Lose Case Filed Against Company (Net Positive of QE)

It seems rather obvious at this time in U.S. history that if there's not a flood of Democrats elected (especially in the Senate) during this next election (North Carolina being one of the GOP-Koch-ad-imperiled), that the downward-trajectory spiral being endured by the middle class will be heading into Depression territory.

Vote like your life depends on it.

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A living wage, retirement security and a life free of debt are now only accessible to the country's wealthiest

From our bestest Beat the Press (we wish) source (Dean Baker):

David Brooks' Great Adventures in Fantasy Land

Friday, 24 October 2014

David Brooks has a tough job. He is supposed to present an intellectually respectable case for a political party that denies human caused global warming and has questions about evolution and the shape of the earth. This is why he must depart from the truth in laying out the path forward for the economy in his column this morning.

He gives us four items to move the economy forward, but we don't have to get beyond the first one to realize that he is not serious. Brooks tells us:

"If you get outside the partisan boxes, there’s a completely obvious agenda to create more middle-class, satisfying jobs. The federal government should borrow money at current interest rates to build infrastructure, including better bus networks so workers can get to distant jobs. The fact that the federal government has not passed major infrastructure legislation is mind-boggling, considering how much support there is from both parties."

Really? There is bipartisan support for having the federal government borrow money (i.e. run larger deficits) to build up the infrastructure? Is Paul Ryan calling for this? Ted Cruz? Marco Rubio? John Boehner? Who are the Republicans who are there demanding that the government run larger deficits to build up the infrastructure?
Brooks could do the country an enormous public service here by naming names.
The reality is that President Obama has been unable to get any notable Republican support for even nickel and dime infrastructure projects. It probably wouldn't even matter if he agreed to restrict the spending to Republican congressional districts.
Then we get Brooks telling us:
"The government should reduce its generosity to people who are not working but increase its support for people who are. That means reducing health benefits for the affluent elderly."
There are two questions that come up here. First what is the definition of "affluent" and second what counts as "generosity."  When we were debating tax brackets in 2012 the Republicans insisted that you wouldn't be wealthy enough to pay higher taxes unless your income was above $400,000 a year. By contrast, President Obama put the cutoff at $250,000.
If we accept either of these definitions and think that the excessive generosity takes the form of Social Security and Medicare benefits, then we can stop right here. The money involved is too trivial to make any difference in the lives of working people. In order to have anything worth the trouble we would have (to) redefine affluent to something like an income of $40,000 a year.

Of course if we include payments of interest on government bonds to affluent people as part of the government's generosity, it would be a different story.
Wealthy people who are not working get a huge amount of interest on government bonds.

If we took that away from them, then we would have lots of money to help working people. Some folks may object that the rich paid for these bonds, but of course the "affluent" elderly also paid for their Social Security and Medicare. So we need clear guidance from Brooks on where he wants to go on this one.
Next we have Brooks endorsing a tax plan from two Republican senators:
"But at least we could have the sort of tax reform that Senators Marco Rubio and Mike Lee have suggested, which would simplify the code while subsidizing middle-class families. The fact that Washington hasn’t even made a run at serious tax reform is another sign of utter political malpractice."
I searched the web and the two senators' web sites. The only evidence I could find of Senators Rubio and Lee's tax plan is this oped in the Wall Street Journal. This piece tells us that they want to add $2,500 to the child tax credit. Their credit would be refundable and even go to rich people who are not working (so much for Brooks' complaint in the prior paragraph). This means it would cost around $180 billion a year. That's roughly 1.0 percent of GDP or 5.0 percent of the budget, or 220 percent of the food stamp budget.
Their proposal also calls for lowering corporate income taxes and individual tax rates. However, if you thought that Rubio and Lee have a way to pay for these tax cuts you would be imagining things. This is the Wall Street Journal and a David Brooks column, not places where numbers are expected to add up. (I'm fine with larger budget deficits, but I know these folks aren't.)
The Rubio and Lee column includes the annoyingly inaccurate comment:
"They [parents] of course pay payroll taxes, like everyone else. But unlike adults without children, they also shoulder the financial burden of raising the next generation of taxpayers, who will grow up to fund the Social Security and Medicare benefits of all future seniors."
Actually, adults without children pay taxes that educate children. Perhaps those taxes should be higher, but their assertion here is simply not true. Also, we do not need anyone in the United States to have children to "fund the Social Security and Medicare benefits of all future seniors." It is almost inconceivable to imagine a scenario in which the country could not produce enough supply (remember we are suffering now from too much supply) to meet the needs of people on Social Security and Medicare. Furthermore, if there ever is a problem with a labor shortage in the United States, there is no shortage of foreigners who would be happy to come here and work.
In short, it's great that people are having kids and we should have a country where they can be raised properly without impoverishing their parents. However, people having kids are not doing a public service.
Then we have Brooks' call on immigration:
"Third, the immigration system should turn into a talent recruiting system, a relentless effort to get the world’s most gifted and driven people to move to our shores."
Hmmm, our doctors are paid twice as much as their counterparts in other wealthy countries. If we use immigration to get their wages in line, it would lead to large gains to the economy and a substantial reduction in inequality. (Almost all doctors are in the top 2.0 percent.) Somehow I don't think immigration of doctors and other highly paid professionals is on Brooks' agenda. (We can use the taxes from doctor immigrants from developing countries to reimburse them for their education so that they can train 2-3 doctors for everyone that comes here.)

Finally, we get silliness about college education.
"Fourth, there has to be a doubling-down on human capital, from early-education programs to community colleges and beyond. Today, too many people are focused on the top 1 percent. But, as economist David Autor has shown, if you took all the wealth gains the top 1 percent made between 1979 and 2012 and spread it to the bottom 99 percent, each household would get a payment of only $7,000. But if you take a two-earner, high-school-educated couple and get them college degrees, their income goes up by $58,000 per year. Inequality is mostly a human capital problem."
It's hard to know where to start on that one. First, why take the wealth of the top 1 percent rather than redirect the annual income flows? The shift over the last 30 years comes to about $1.2 trillion annually. That comes to $12,000 a year for an average family of the bottom 80 percent. On the education side, there are already many people, especially men, who do not benefit from a college education. This number would vastly increase if we massively expanded college enrollment. It is probably a good idea to have more people go to college, but it is an illusion to imagine that this is a solution to inequality.

min/max Comments (17)Add Comment
written by djb, October 24, 2014
so the real figures are 1.2 trillion annually wealth transfer to the 1 percent

but brooks says is it 7000 per household implying that is TOTAL for the entire 35 year period 79 to 2012

that would be about 1 trillion, vs the real figure of maybe 35 trillion

how can you have a serious discussion with a guy like that
written by Mike Martin, October 24, 2014
Brooks is without doubt the worse paid op ed columnist ever, and there is stiff competition (I'm talking about you Taxi Tommy). I could not see any connection between his thesis (meritocracy) and the rest of the essay. We are defined by what we do, therefore we all need to be MBAs?
written by JDM, October 24, 2014
In the non-Brooksian world, even $7,000 is a very sizeable increase in wealth (more than 10% increase for the median family). 12 grand a year is of course even better.
written by PeonInChief, October 24, 2014
First, while better public transit is a good idea, it would make far more sense to build affordable housing near job centers, so that the proletariat wouldn't have to travel long distances to work. But then people like David Brooks would have to live next door to restaurant servers, baristas and janitors, and that would bring down property values.

Second, the people who will be collecting Social Security have already paid for it. I'm sorry that the rich don't want to pay the money back, but that's what happens when you borrow money. Oops, I forgot that the people who don't want to pay it back are rich people. Sorry.
written by urban legend, October 24, 2014
Attacking Social Security and Medicare is a genuflection people like Brooks simply must make. Logic or analysis has absolutely nothing to do with it.
written by Noni Mausa, October 25, 2014
"...Brooks says "Third, the immigration system should turn into a talent recruiting system, a relentless effort to get the world’s most gifted and driven people to move to our shores." ..."

So, having outsourced manufacturing and finance to other countries, we should now outsource the raising and training of new citizens too? News flash -- North America is doing that already. The US and Canada would have no population growth if it weren't for immigration.

But, another news flash -- the best and brightest foreigners look askance at the US with its crazy health system, xenophobic culture, and suspicion of intelligence and expertise. They may visit, might take work contracts, but are shy of diving right into the melting pot.


Please, please, please click on the Comments link above (as I really enjoy and want to share how those commenting laugh almost as loudly (just kidding!) as Dean does at Brooks' ignorant (purposely?) rant).

More Dean below:

In Case You Wondered Why CEOs in the United States Make So Much Money

Sunday, 26 October 2014

Okay, there are a few hundred people who believe that the tens and hundreds of millions of dollars pocketed by CEOs reflect their worth in the market. (And most of those people write for newspapers or teach in business schools.) The rest understand that CEOs get incredibly rich by being able to rip off the companies that they supposedly work for. This is because the rules are rigged to give them effective control over the company.

Gretchen Morgenson has a good piece explaining one way in which CEOs and other top management rig the deck. Her column today talks about a Delaware court ruling that allows companies to write by-laws that make shareholders pay the company's legal cost if they lose a case filed against the company. For example, this could mean that if shareholders sued a company because it rewrote the strike price on options given to an incompetent CEO, and then lost the case, then the shareholders would have to pay the company's legal expenses.(Most U.S. companies are chartered in Delaware, so this ruling makes a big difference.)

Since companies that overpay incompetent CEOs tend to have hugely overpaid lawyers, this is likely to be a very serious expense. This would be a major disincentive to shareholder suits, making it easier for CEOs to rip off the companies for which they work.

It is worth noting that courts always had the authority to require losers to pay the winners' legal fees in frivolous cases. The Delaware ruling means that losers would always be required to pay the company's legal fees, even if the loss was due to a technical issue, such as a missed filing deadline.

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Krugman on Quantitative Easing and Inequality

Saturday, 25 October 2014

Paul Krugman is on the mark in his comments on quantitative easing and inequality. The policy has helped boost the economy and create jobs, it is almost certainly a net gainer from the standpoint of distribution. I would make three additional points, all going in the same direction.

First, when comparing the real value of the stock market to prior levels, we should expect an upward trend. The economy grows through time, as do profits, just assuming that profit share remains constant. The profit share has, of course, grown in recent years. This means that if the price to earnings ratio remains constant, then the value of the market should grow at roughly the same rate as the economy.

If we assume a 2.4 percent trend growth rate between 2007 and the present, the market should be roughly 17 percent higher in real terms today than in 2007, assuming no increase in trend profit shares. In other words, the market is pretty much in line with where we would expect it to be if there were no extraordinary monetary policy in place and the economy had followed it trend path. Crediting or blaming the Fed for the market's bounceback from the 2008-2009 lows is just silly.

The second point is that the impoverished masses with large interest incomes (that's a joke) also would benefit from the increase in asset prices, if they held any longer term bonds. When the interest rates on 10-year and 30-year bonds plummeted, the price of these bonds soared. This would have increased the wealth of middle income people who held these bonds. It's possible that they don't want to sell the bonds (after all, they can't get a high interest rate if they re-invest the money elsewhere), but this the same story for rich people who hold lots of stock. The high stock price doesn't do them any good unless they sell some stock.

Anyhow, the point is that in order for our middle-income people to be hurt on net by the fall in interest rates, not only would it be necessary that all their money was in interest bearing assets (as opposed to stock), but it would have to be in short-term assets like savings accounts or certificates of deposits. This is a very small group of people. (I know everyone has an aunt who has $50k in a savings account - sorry, someone is lying in that story.)

Finally, normal middle-income people tend to be big net payers of interest because of something called a "mortgage." They may also have student loan debt. Lower interest rates have allowed tens of millions of people to have substantially lower mortgage and student loan payments. This is a huge plus on the distributional side. That doesn't mean that mortgage and student loan payments are not a major burden in many cases, but they would be a much bigger burden if the interest payments were 1-2 percentage points higher.

In short, the distributional effects of QE were almost certainly a net positive, in spite of the fact that everyone's aunt got hurt.

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