Does John Cornyn Not Realize that Capital Gains is a Form of Income?

I guess private citizens don’t have the right to express their own views on tax policy without the Republican Party demanding to see their tax return:

Republicans on Capitol Hill have found a new hidden document conspiracy to push to now that President Obama's long-form birth certificate is a matter of public record. Warren Buffett, they demand, show us the tax return!

But what cracks me up is this statement from Senator Cornyn:

I know that Mr. Buffett's not likely to release his tax records but I'll bet what it'll show you is that most of what he earns is from capital gains, which is taxed at a 15 percent tax rate rather than deriving it as income [for] which he'd pay a much higher tax rate," Cornyn said. "If he doesn't derive ordinary income and if all of his, what he puts in his pocket is based on capital gains, I think that would be an important information.

Capital gains allow one to either consume more or enjoy an increase in one’s wealth. So it is income – but income taxed at a much lower rate than other characterizations of income. Which is the point that people that Mr. Buffett are making. If someone does not understand this simple point – then why are they qualified to serve in the Senate?

Dems to SuperCommittee – First Do No Harm (to employment)

Brian Beutler reports on a good idea from 11 Democratic Senators:

The idea here is to require CBO to analyze the Super Committee bill's impact on employment -- not just budget deficits. The goal is for members to know, and for journalists to report, not just that the legislation reduces deficits by some trillions of dollars, but that it might cost a huge number of jobs. If that's the story, then they'll be more amenable to considering direct job creation measures or at the very least finding deficit savings that don't lead directly to furloughs and layoffs.

For many of us – the output gap and the resulting effect on employment prospects should be priority #1 with the need to close the budget gap in the long-run being priority #2. I suspect the folks at CBO would be most happy to report the estimated impact on employment as well as the deficit from any proposed bill. And it should be mandatory for journalists to accurately portray these findings.

Be Careful with Those “Sorry You Lost Your Job” Cards

I suppose it’s nice that Hallmark now has a line of cards you can send someone who’s been laid off.  A word of caution, however: don’t send one to a coworker unless you know for sure they’ve been told.

The Paradox Of Pay Toilets Revisited

I have blogged previously on this obscure and odd topic, but staying in Europe for extended periods as I am doing now (based in Florence, Italy for the semester, but traveling around giving lectures) always reminds me of it. Plus, I have new observations on some of the supposed explanations.

So, the paradox is that in the supposedly more market capitalist US, there simply are no pay toilets, at least not overtly, although there were some a half century ago, usually with slot for coins on the doors of them, not somebody sitting at the entrance taking money for you even to get into one. However, in supposedly more socialist Europe, at least some of its countries, certainly including France, Italy, and Russia, one finds this latter in many public toilets: someone sitting at the entrance taking money before you can enter at all. Why?

One explanation I have heard is that it is an employment preserving device. However, increasingly I see those people being replaced by slots for coins in the newer ones at the entrances.

Another is that it is necessary to pay for their upkeep. Well, I was just in one the other day in Siena that had the woman out front taking money, but it was in terrible shape without even seats on the toilets. Yes, I grant that the newer ones are usually in good shape. But, this does not answer why we do not do this in the US. Indeed, in Virginia in the last few years the rest areas on the interstates were closed for awhile due to funding shortages (since reopened), but not a single solitary soul suggested publicly that maybe the resolution was to make people pay for using them.

In short, I do not see either the employment or paying for their upkeep arguments as holding much water. This remains basically a mystery to me. Somehow in the US we think releaving oneself for free is a divine right, even as audiences laugh and cheer at the idea of people dying who do not pay for health insurance, while in much of Europe it is taken for granted that one must pay to releave oneself, even as they have universal health insurance coverage.

BTW, I do recognize that de facto private toilets are often for pay in that businesses will make them available only to paying customers. But one finds this in about equal proportions in both the US and most of Europe as near as I can tell.

A Simple but Possibly Correct Theory of the Capitalist Financial Process

I rarely bother to read grand theories of economics (or politics or history) that fit into a blog post or even a short essay.  How likely is it that someone has figured out a huge idea that generations of smart, knowledgeable people have all missed?

So you can stop reading here.  In my defense, I recognize that most of the elements of what I’m about to say have been worked over rather thoroughly, but I’m not aware that anyone has put them together in quite this way.

A Little Basic Economics Would Go a Long Way for Paul Kasriel and Joe Nocera

Nocera has a wide-eyed piece in this morning’s New York Times that touts a presentation by Paul Kasriel, an economist with Northern Trust.  Kasriel has convinced Nocera (with “the force of revelation”) that there is a single economic problem hobbling us, unwillingness of banks to supply credit, and a single solution, more (and more and more) bond purchases by the Fed.

It’s painful to say this, but Kasriel seems to not understand that a reduction in lending could be driven either by shortage of demand or shortage of supply (or both).  He simply assumes it comes from the supply side.  With nonfinancial corporations sitting on something like $2 trillion in liquid reserves, could it just possibly be the case that demand is deficient?  An oversight as fundamental as this is not just a random blip; it is the result of not thinking through the economic logic of a supposed argument.

I could burrow down into some of the details (yes, there is a credit constraint on small business, but this represents an intensification of a long-running problem in our dual economy; no, the collapsed ratio of credit creation to monetary base is not due to so much less of the numerator but so much more of the denominator, the old “pushing on a string”), but I’ll save your time and mine.

Social Security v. the Republican Alternative

M.S. writing for The Economist notes:

Up until about 2007, the goal of such attacks was clear: conservatives wanted to replace it with a Chilean-style defined-contribution plan that would be invested in securities. Within its own assumptions, that programme did at least make sense; but since the financial crisis, and with average returns from Wall Street now sharply negative over an entire decade, both the logic and the political support for any such programme have evaporated.

This “goal” would represent two fundamental changes: (a) investing surplus funds in risky securities as opposed to government bonds; and (b) converting a defined benefits program to a defined contribution program. Part (a) was supposed to increase the expected return at the cost of bearing stock market risk – which as M.S. notes has witnessed average returns being well below expected returns of late. The Galveston Plan, however, implemented part (b) but kept surplus funds in a portfolio with lower risk and lower expected return. But not everyone was necessarily better off under this Galveston Plan.

Advocate vs Advocate For

After venting on such peripheral matters as the fate of the global economy and the relationship between power and policy, I think it’s time to get to the really important stuff, like the painful misuse of “advocate for”.

It sounds terrible and it drives me crazy.

Once, long ago, we didn’t have this problem.  No one ever advocated for anything, they just advocated.  It was simple, clear and correct.  Then, out of the world of social services, where “advocate” is a job title, came the practice of advocating for.  People started by advocating for the homeless or low-income youth, which is fine, and ended up advocating for changes in tax policy or agency budget increases, which is not fine at all.

It comes down to the difference between means and ends.  You advocate for an end.  You advocate a means to that end.  Are activists of such limited moral imagination that they think a higher tax bracket here or more regulations there are ends in themselves?  It sure sounds this way.  If your true goals are economic fairness and public health, however, you will advocate for them, and not for specific policies to bring them about.

The fight for maintaining linguistic distinctions is ultimately about maintaining mental distinctions.  We need those.

Eurozone 101

This morning’s blogpile brought wise words from Jeffry Frieden about the Eurozone crisis.  If you haven’t read it, follow this link straightaway.  Even if you think you already know the whole story, his clarity and ability to get to the heart of the matter is a breath of fresh air.  Naturally, I like his Keynesian take on the credit relationship:

For two years, Europe’s governments have been grappling with how to address this continuing debt crisis. But most of the public discussions have been highly misleading. In Northern Europe, and especially Germany, the tone has been one of outraged indignation. This high moral tone is misplaced. Certainly many Southern European banks and households, and the Greek government, borrowed irresponsibly; but German and other Northern European banks and investors lent just as irresponsibly. It’s not clear that there’s any real ethical distance between irresponsible borrowers and irresponsible lenders.

The Hole at the Heart of the Left

This from a review by Beverly Gage of Michael Kazin’s book, American Dreamers: How the Left Changed a Nation:

The left is in crisis because its animating vision — of a world transformed through socialism — has all but collapsed. Kazin is right to note that not all leftists identified as Socialists or Communists, and not all have considered economics the central site of contest. But socialism was always the big idea that explained how issues like racial inequality, gender oppression and factory wages all fit together.

Exactly right.  Socialism also played a crucial political role by mobilizing its followers into a counterforce against the dominant class.  In its absence we are left with appeals to reason and morality: all well and good, but not enough if you think that power of the political-economic variety largely determines how the world works.

After the Double Dip

Even though most industrialized economies are groaning under stagnant growth and high unemployment, elite opinion has it that the really important thing is to reduce fiscal deficits.  This is orthodoxy in the US and gospel in Europe.  Largely because of procyclical policy we are staring at a possible second dip into the Great Recession.

Among the many nasty outcomes of such a re-dip, one is sure to be a further deterioration in public debt-GDP ratios.  Everything conspires to this: tax revenues will fall, transfers to the swelling ranks of the poor and unemployed will rise, and the denominator—GDP itself—will shrink.  “Responsible fiscal policy” will be a victim of the downturn, and nothing can be done about it.

So let’s look ahead.  Suppose we end up in this second dip, and government debt undergoes a new round of expansion: what then?  If current debt-to-GDP ratios are “unsustainable”, what will the guardians of fiscal responsibility say about the even higher levels on the horizon?  Is this another sort of doom loop, a downward spiral of economic collapse and self-defeating austerity?

I don’t have a crystal ball, but a little ground-level political economy is the next best thing.  I predict that all concern about fiscal rectitude will be thrown out the window as soon as the next downturn takes hold.  A sudden consensus will emerge everywhere that governments must borrow to the hilt in order to bail out investors and set a floor under effective demand.  In fact, today’s austerian orthodoxy will vanish from public memory, as if it never existed.

After this it becomes a bit more difficult to forecast.  As with all models, the political economy model (the dominant class of wealth-holders spans the feasible political space) ends up extrapolating from the past.  It tells us that, after private portfolios are again rebalanced toward publicly issued assets in the crisis, concern will shift back to the solvency of sovereigns, and austerity will once more be on the table.  But this assumes that learning does not take place.

And it also assumes that, in the next panic, there is no force, internal to the financial elite or outside them, that ejects them from the driver’s seat.

Environmental Regulation and Jobs, Again

Over at Econbrowser, James Hamilton argues that environmental regulation may be a job-killer after all.  There are two themes: the first is that US trade is weighted toward natural resources, and regulation is raising costs and reducing capacity in these tradables, and the second is that, in recessionary times, jobs lost due to regulations are not regained elsewhere.  I think he overstates his points, but he clarifies important issues that tend to get muddied in economic debates.

China Plans To Buy Italy As The Crisis Ends Italian Corporatism

Italian PM Berlusconi has managed to pass another round of austerity bills through the lower house of Italy's parliament, despite another round of sex scandals. This round includes as part of the effort to keep the funding countries of the eurozone helping them out, a massive privatization wave of state-owned enterprises: 431 at the municipal level, 19 at the provincial (county) level, 34 at the regione (state) level, and 25 at the federal level, with the crown jewels on the chopping block being those in the energy sector, ENI and Enel. La Republicca reports that the Chinese Investment Corporation (CIC), the main Chinese state sovereign fund, is interested in buying major portions of these, particularly the energy companies. Given that ENI has been the largest foreign company operating in the oil industry in Libya, this might allow the Chinese to make up for goofily backing the loser in the war there and likely getting frozen out of future deals.

This privatization wave would essentially end the legacy of state-owned enterprises in Italy that dates back to the corporatist approach implemented by Mussolini during the fascist period. Unlike in Nazi Germany where the name of the ruling party (National Socialist) made it look like a socialist party when in fact it nationalized nearly nothing, in Italy the fascist corporatism involved a lot of nationalizing in its effort to overcome class conflicts by strong natonalism, as it followed Roman Catholic doctines developed in the 19th century to counter the push for classic socialism based on a Marxist workers' uprising. As long noted by many conservative and libertarian critics, Mussolini first emerged in politics in Italy in WW I in the socialist movement, and only went to the hard nationalist right after the war, seizing power in 1922.

Whereas in Germany, there was a thorough-going restructuring of its economic system after WW II (large companies that supported the regime were broken up, such as IG Farben), this did not happen in Italy, where the local population tended to support the invading Americans against the Germans once Mussolini fell from power. Italy would become politically democratic in its own peculiar way after the war, there was only a limited amount of economic restructuring occurred, with only limited privatization of the sectors nationalized under fascism. There has been a gradual move to privatization in recent decades, but now under fiscal pressure from the crisis and the ECB reluctantly buying Italian bonds to keep the spreads over the equivalent German ones from exceeding 5% by too much, Italy is preparing for a truly massive wave of privatization that will profoundly alter the economic landscape, with many worried about what it will mean if indeed China ends up a major buyer of these companies.

Still Fighting the Good Fight

This I found in a TNR article about Elizabeth Warren's Senate run:

"Another staunch conservative, Barbara Anderson, president of the libertarian group Citizens for Limited Taxation and longtime weekly columnist for the Salem News, explained to me, “Harvard becomes a picture in the dictionary next to ‘overeducated liberals,’” adding that her son’s economics professor at the University of Massachusetts-Amherst had “kidnapped his brain.”

This is of course what happened to Peter in grad school. My own brain was kidnapped at AU!

Social Security v. the Galveston Plan: the Privatization Debate Redux

PolitiFact is providing some important reporting on a claim being made by some of the GOP Presidential hopefuls:

"The city of Galveston, they opted out of the Social Security system way back in the '70s," Cain said. "And now, they retire with a whole lot more money. Why? For a real simple reason -- they have an account with their money on it. What I'm simply saying is we've got to restructure the program using a personal retirement account option in order to eventually make it solvent."

Oh boy – it sure sounds like Herman Cain is arguing that privatization will lead to a better return than the current system. Theresa M. Wilson a few years ago did a comparative analysis of the two systems and noted that the Galveston strategy of investing retirement funds is conservative much like that strategy of the Social Security Trust Fund. In fact, the Galveston real return on its investments was only 4.62 percent over the 1981 to 1997 period as compared to a 4.88 percent return for Social Security funds over the same period.

So how can it be that the Galveston plan gave some participants more retirement funds? Well perhaps it is due in part to the fact that this plan is a defined contribution plan whereas Social Security is a defined benefits plan. As PolitiFacts notes:

participants who had higher earnings and fewer or no dependents generally fared better under the Galveston plan, particularly over the near term. But workers with lower earnings and more dependents tend to receive more money under Social Security ... "It's a great plan if you have worked under the plan for many years, if you do not die and leave any dependents, if you are not divorced from someone covered in the plan and if you are not interested in having your retirement income stream protected against inflation," said Eric Kingson, a professor at Syracuse University's School of Social Work and a longtime skeptic of the plan. "Short-term workers who leave the plan receive little if any benefits for their work and do not have their years under the Galveston Plan covered by Social Security. Low-income working persons do not receive anything approaching the kind of protection they receive under Social Security."

It does appear that the Republican candidates for President want to return to the 2005 lies about how Social Security is inferior in every respect to defined contribution plans. I guess we have to relive this unfortunate debate.