income

Jane White: The Social Security Fix: End Corporate Welfare

March 28, 2011

With momentum building to rein in record budget deficits, Democrats are sharply divided over whether to tackle Social Security by raising the retirement age and/or raising the income ceiling that is taxed from the first $106,800 of wages to the first $170,000. Senator Majority Leader Harry Reid and Sen. Chuck Schumer are lining up against such measures and Reid scheduled a rally on Capitol Hill on Monday to show support for Social Security and opposition to cuts in benefits. Bur why are the only options on the table to cut or not to cut what is already a meager wage replacement scheme? Moreover, we need to acknowledge that our personal and federal financial deficits are more a function of corporate tax dodges than reckless spending. How about actually taxing the companies that got rid of pensions as a way of bankrolling more generous Social Security benefits, along with forcing them to turn 401(k) plans into real pensions? Let’s face it, while the working class is struggling to make ends meet and unemployment remains stubbornly high, the corporate class is doing just fine. U.S. corporate profits hit an all-time high at the end of 2010, according to data from the federal Bureau of Economic Analysis. Corporations reported an annualized $1.68 trillion in profit in the fourth quarter, exceeding the previous record of $1.65 trillion in the third quarter of 2006. Not only are companies reaping profits but they are laughing all the way to the bank when it comes to overseas tax breaks. Thanks to an arm-twisting in 2009 by the CEOs of IBM, Caterpillar, Cisco and others, BusinessWeek reports that the Obama administration backed down from its proposal to raise some $160 billion by hoisting taxes on U.S. companies overseas profits. As a result of various overseas tax dodges, many multinationals pay less than the statutory rate of 35%, according to The Analyst’s Accounting Observer; Big Pharma paid around 23% in 2008 and info tech companies paid about 26%. Between tax breaks, tax cuts and the fact that hedge fund managers can pay capital gains tax instead of income tax, we’ve created a corporate welfare state. The corporate share of the nation’s receipts has shrunk from 30% of all federal revenue in the mid-1950s to 6.6% in 2009. Since federal revenue in 2009 was $2.1 trillion, if the corporate share had stayed at 30%, that would have brought in $630 billion in revenues in that year alone. I apologize to readers who may be tired of reading my rants about the retirement crisis, but this is the biggest economic disaster that nobody’s talking about except for a recent article in the Wall Street Journal . If 85% of Boomers can’t afford to retire, college graduates won’t be able to find jobs. What’s more, If these Boomers have to transform themselves from spenders into savers, that shift is going to take a wrecking ball to the 70% of U.S. economic growth that’s driven by consumer spending. As I said in a previous post, even if Social Security were solvent, it’s downright stingy. The only workers for whom 70% of wages will be replaced by Social Security are those making minimum wage at age 65; since benefits average $1,067 a month. Given that the median wage for that age cohort is around $65,000, only a tiny minority of Americans can rely on Social Security alone. We need to force companies to bankroll a more secure retirement, whether it’s footing more of the bill for Social Security and/or making 401(k) plans into actual pensions by contributing the equivalent of 9% of pay to their accounts, as Australian employers are required to do. What’s tragic about the current stand-off between the Tea Party anti-tax zealots and the Democrats is that as recently as the mid-1990s there was an actual consensus among liberals and conservatives, including the antigovernment Americans for Tax Reform and Ralph Nader’s liberal Public Interest Research Group, that strove to curtail subsidies and tax breaks for business. Sen. John McCain went so far as to call for an independent “corporate welfare commission,” declaring that “Congress has not got the political guts to address this issue of corporate pork.” Unfortunately, I couldn’t find any updates showing that this commission was ever created, more evidence that this partisan divide is turning this country into a shipwreck.

Read the full article →

Michael Spence: Observations on the Evolution of Economic Policies

March 25, 2011

It was a privilege to participate in the IMF conference devoted to rethinking policy frameworks in the wake of the crisis. Highly encouraging was the openness of the discussion, the range of views, the willingness to question orthodoxy, and the posture of humility. One gets the impression that the crisis has triggered a response that it should trigger, and we have embarked on a path of rethinking conceptual frameworks and policy choices in a way that will contribute to the stability of the system. That said, the good news is that we recognize that in finance and parts of macroeconomics the models or frameworks are incomplete. That represents a challenge to the academic community. But it also means that, in the short run, participants and regulators will be operating with incomplete models. This will require judgments (which will be uncomfortable in contrast to the earlier sense of certainty). There will be mistakes. And, as Olivier Blanchard said in his excellent summary , we will proceed step-by-step, evaluating the impacts of policy choices and sometimes reversing course. This is relatively familiar territory in developing countries, where changes in the institutional depth of the economy mean that models (especially advanced country models) are not very precise in predicting market responses to policy choices. Nevertheless theory is still useful when used judiciously. In that context, you can think of this as analogous to navigating with charts that are incomplete. Having said that, we do in principle have the option of returning to old patterns while waiting for different or more complete models to be developed and tested, I think there is a widespread recognition that this would be a risky mistake. I offer some thoughts stimulated by the spirit of the conference; not as a summary, or even an ordered set of priorities, but as a contribution to a general discussion that we all hope might stimulate further research and policy analysis, and ultimately progress. 1. The Dynamics of Risk in the Financial System The dynamics of the risk characteristics of the financial system are not well understood by the participants or the regulators. Fixing this represents a central challenge and opportunity for economists. I think it is one of the hardest challenges in the area of economic and financial theory. With most investors paying more attention to risk factors, and the costs and benefits of liquidity, they are constantly adjusting their investments and the structure of the assets they hold. So, relationships between assets, prices and risk may only remain stable for a few months at a time. The old model with stable relationships, implemented through a largely fixed asset allocation framework is broken. That doesn’t mean that diversification is a silly idea. But the challenge is to implement it effectively. Most of the discussion concerns adjustments to the regulatory approach. This is too narrow. Although self-regulation failed in the run up to the crisis, and cannot be relied as the principal element of stability, it remains important. A financial system in which the participants and regulators accurately perceive risk will behave differently, and defensive action by participants when is accurately perceived will be a contributing factor. 2. Multiple Targets and Instruments It may not be unanimous, but it is close, that the single target – single instrument approach to policy is not sufficient for achieving financial and macroeconomic stability. Nor are policies that focus on the flow of funds or resources, and prices likely to be sufficient. And given the state of our knowledge, at this point, we are going to have to pay attention to balance sheet variables and linkages at the micro and macro levels. There will be warning signs or puzzles, and we are going to have to be willing to act on them without being able to give air tight arguments that there are problems. That is at variance with our earlier mindset in which the preferred course was inaction unless there was a clear case for intervention. This asymmetric attitude needs to be abandoned in favor of a more balanced assessment of the benefits and risks of inaction versus action. 3. Understanding Structural Changes in Advanced Economies The structure of all economies evolves in ways that affect the income distribution and employment opportunities. This evolution is driven by powerful market forces operating in the global economy. And, after these changes, economies don’t return to their previous average behavior. The vast majority (by population) of the emerging economies only become big once. Major technological innovations can also produce shifts in structure. Paying attention to structural evolution and incorporating it into longer term policy frameworks seem to me important and worth institutionalizing, with supporting research. It is of course easier to think about efficiency and market failures and even stability, than it is to address distributional issues and consider interventions that may adversely affect dynamic efficiency at the global level. But the alternative, ignoring the distributional and structural issues, doesn’t seem right and has risks. There are more and less harmful ways to nudge structural evolution. Ignoring the issue raises the risks of choices that run toward the more harmful end of the spectrum. 4. Ban High Speed Trading I would ban high speed trading–the automated, computer-driven trading of large volumes of financial assets in a short timeframe–by introducing lags in the trading process or increasing capital requirements or both. As far as I can see, it is entertaining, but it’s largely a zero-sum game, using resources, contributing potential volatility in markets. The economic benefits in terms of enhancing the pricing, capital allocation and risk spreading functions of the financial system, seem negligible. 5. Financial Regulation Financial regulation is a huge subject, rightly receiving lots of attention. These are just a few thoughts. At the macro level, it seems clear that we need to restrict excessive leverage. Ditto for banks. Regulating the shadow banking system is crucial. The crisis experience surely tells us that. I would have liked to hear much more about what is needed to properly regulate this part of the financial system in order to ensure stability. This involves ratings, capital requirements, incentives, and structures that, unlike the present ones, allow the unwinding of securitized assets in an efficient way after a shock or crisis. As far as I can tell, the procedures for dealing with underwater mortgages held in trusts supporting securitized assets are essentially broken. This makes recovery from crisis, shocks, and asset bubbles less efficient and much too lengthy. Finally, it seems to be that the current structure of the financial system–as it has evolved with a pattern of reduced regulation with respect to the separation of functions–is shot through with actual and potential conflicts of interest. These adversely affect incentives and performance and perhaps more importantly trust. This needs to be addressed by regulators, but also by the industry itself. There remains much more to be done, particularly on the industry side. Crossposted from iMFdirect .

Read the full article →

In AT&T Deal, Bankers Guaranteed To Benefit As Consumers And Shareholders Hope For Best

March 23, 2011

Eleven years ago, at the height of the telecom bubble, Deutsche Telekom paid about $51 billion for one of America’s smallest national cell phone companies, hoping to gain entry into the burgeoning U.S. market. On Monday, the German giant announced it’s selling the offspring of that deal — T-Mobile USA — to AT&T for $39 billion. That 2000 investment — now worth about 40 percent less after adjusting for inflation — has cost Deutsche Telekom and its shareholders dearly. The benefits for the American public, which were widely touted at the time as the German company fought for regulatory approval, are debatable. But the bankers on those deals sure made a killing. And while it remains to be seen whether the same purported “synergies” and “cost savings” that were peddled in 2000 will ultimately benefit AT&T’s shareholders who are being promised the same thing, bankers once again are poised to strike it rich. Bankers’ fees will roll in regardless of whether their advice will ultimately benefit their clients. “When you look at investment bankers, their job is to put buyer and seller together,” said Matt McCormick, a portfolio manager at Bahl & Gaynor, which oversees about $3.2 billion. “Much like a real estate broker, if you’re trying to buy a house, does the broker really care if you’re in a ranch, or a two-story home, or with a pool or not? They are only paid if a deal gets done.” AT&T’s shareholders are cool to the idea. McCormick, who oversees about 500,000 shares of AT&T for clients, said the benefits of the deal are “yet to be seen.” Shares in AT&T are up 0.6 percent since Friday. Bankers will probably pocket about $120-140 million off the AT&T and T-Mobile deal, according to Teck-Tjuan Yap, managing director at Freeman Consulting Services. For JPMorgan Chase, which advised AT&T and provided a $20 billion loan, it’ll likely be much, much more after a few years, one prominent bank analyst said. Richard Bove, an analyst at Rochdale Securities, told clients that the purchase could be worth upwards of half a billion dollars for JPMorgan after fees and other sorts of income over the coming years are considered. Bankers, unlike shareholders, are always among the biggest beneficiaries when companies merge. Back in 2000, when Goldman Sachs was advising VoiceStream Wireless, the firm that eventually became T-Mobile, it made at least $80 million off its sale to Deutsche, securities filings show. That $80 million is worth $103 million in today’s dollars. Investors fared worse. Shares of Deutsche Telekom closed at 10.8 Euros on Tuesday, down about 60 percent from when the firm announced it was buying VoiceStream. In July 2000, Deutsche’s shares were trading in the 25-Euros range. Even investors who bought houses in Miami at the height of the housing bubble in 2006 have fared better. Their investment is down only about 49 percent, according to the S&P/Case-Shiller Home Price Index. The initial investment in T-Mobile was apparently so bad for Deutsche’s investors that they celebrated the sale to AT&T. Deutsche’s shares are up 12.6 percent since Friday’s close. But the wisdom of Deutsche’s bankers’ advice at the time isn’t what generated their fees. Donaldson, Lufkin & Jenrette, a firm that was eventually bought by Credit Suisse, got paid to get the deal done. That’s generally how it works, according to Alex Edmans, a finance professor at the University of Pennsylvania’s Wharton School and a former investment banker at Morgan Stanley. “Bankers’ fees are not contingent on the success of the deal,” Edmans said. “How much a banker gets paid for advising on a deal doesn’t depend on whether it creates shareholder value or whether they could sell it for more later. They get a fee for the announcement and the completion of the deal.” Edmans reckons that this may skew incentives towards completing a deal “at any cost, even if it’s not in the client’s interest.” There are three benefits from getting a deal done — regardless of its merits, he said. First, the bank immediately receives fees. Last year, mergers and acquisitions generated $17.9 billion in fees for investment banks, a 23 percent increase from 2009, according to data compiled by Bloomberg. Second, the banks on the deal improve their rankings among peers. Wall Street compiles lists ranking firms based on the income banks generate off M&A and the value of their deals. These lists are incredibly important — both for bragging rights and for landing future clients. Edmans said the potential of moving up these lists creates a “huge incentive” to get deals done as potential clients largely decide which bank they’ll pick for future deals based off their rankings. Third, deal activity improves a bank’s market share, particularly if the deal is huge. Predictably, there’s an emphasis on doing lots of deals, rather than being selective about which truly are the best for clients. The AT&T deal is the largest telecom acquisition since AT&T purchased BellSouth in 2006 for about $102 billion, according to Dealogic, a data provider. Thanks to the proposed purchase, JPMorgan moved one spot up in the rankings, according to data compiled by Thomson Reuters. “Even if you do a lot of value-destructive deals, this doesn’t seem to reduce your market share going forward,” Edmans said. “That sort of discouragement doesn’t really seem to exist.” “This isn’t optimal for the industry,” he added. There’s a way to ease the distortion caused by such incentives, Edmans argues. He said clients should judge banks based on the quality of their advice, rather than on the number of times they’re asked to provide that advice. In a paper with Jack Bao of Ohio State, Edmans and his colleague ranked banks based on whether investors cheered a proposed deal. By looking at the stock price of the affected companies over a three-day period immediately preceding and following a deal’s announcement, they found that the biggest banks were among the worst when it came to advising successful mergers. Goldman Sachs was about 10 times worse than the average firm, Edmans and Bao found. Morgan Stanley was just a tad better than Goldman. JPMorgan was also significantly worse than average. Their paper will be published in the Review of Financial Studies. Edmans and Bao found that middle-tier investment banks advised the best deals, likely providing the best advice, according to their metric. The big banks like Goldman and Morgan, Edmans said, probably advised bad deals because they had other interests in getting the deal done, like future opportunities underwriting the firm’s bonds or new stock issuance, as opposed to simply getting paid for providing good advice. “Given how the industry works, the banks are doing the rational thing,” Edmans said. That particularly makes sense in cases in which banks aren’t even brought in for their advice. “Being a consultant I hate to say this, but sometimes consultants are called onto a job just to validate what the CEO and CFO want,” said Yap of Freeman. “The question is: are the bankers basically called in to validate or justify,” or are they brought in to provide good counsel? Yap asked. He said that for AT&T, the question may not be about the benefit of purchasing T-Mobile, but rather the detriment that could arise from a competitor buying the nation’s fourth-largest wireless provider. If AT&T didn’t attempt to merge with T-Mobile, for example, the firm could face the prospect of declining market share if a competitor joined forces with Deutsche’s American subsidiary. AT&T and T-Mobile said the value of the “synergies” from their merger — corporate lingo for the savings derived from eliminating duplicative employees and activities — are “expected to exceed the purchase price of $39 billion,” according to a joint statement. That’s nothing new to McCormick, the money manager. “The usual things I look for in every press release are always statements like, ‘This will mean more synergies’ or ‘This will lead to more cost savings,’” he said. Firms are “always touting those key points again and again and again.” “But the truth is, they rarely work out.” ************************* Shahien Nasiripour is a business reporter for The Huffington Post. You can send him an e-mail ; bookmark his page ; subscribe to his RSS feed ; follow him on Twitter ; friend him on Facebook ; become a fan ; and/or get e-mail alerts when he reports the latest news. He can be reached at 646-274-2455.

Read the full article →

Scott Bittle and Jean Johnson: Fiscal Follies: Is it Time to Raise Taxes, Simplify Them, or Both?

March 21, 2011

Americans face two very annoying prospects in the next few weeks. One is that the government may shut down because elected officials can’t agree on a federal budget that begins trimming the country’s routine deficits and spiraling federal debt. The threat of a gridlock-induced shutdown just makes the second annoyance all the more annoying: a lot of us will begin the headache-inducing process of filling out our income tax forms. Even if you pay someone or buy software to help you, there’s still the aggravating exercise of hunting down the paperwork, rummaging through bank statements, and scanning or photocopying all those little perforated W-this and W-that forms just in case something gets lost. It’s a pain. No one likes paying taxes, which helps make one vocal segment of the body politic more influential, namely the group that is ready to rise up against any politician who dares state the obvious : The country will almost certainly have to raise taxes in some form to make any serious dent in our long-term fiscal problems. All the major commissions and independent studies say this. When our organization, Public Agenda, surveyed Beltway insiders last November , three-quarters agreed that both spending cuts and tax increases would be needed to solve the problem . Most crucial perhaps, nearly two-thirds of the public (64 percent) sees a combination of cutting spending and raising taxes as “the best way” to reduce the deficit. Just 31 percent prefer only cutting spending; an infinitesimal 3 percent prefer just raising taxes. Well, what do you expect? As we said, no one actually likes paying taxes. But even with such broad agreement that higher taxes are probably a given, there’s even more agreement that the current U.S. tax system is a mess. Surveys routinely show that 8 in 10 Americans consider the tax code too complex . Since it runs to about 67,000 pages (making War and Peace look like a pamphlet in comparison), you can’t really fault the public’s judgment on this. A study by the Tax Foundation showed that businesses, nonprofit organizations, and individuals put in a total of 6 billion hours calculating their taxes at an estimated cost of more than $265 billion . Not surprisingly, most people support a major revamp. Corporate taxes are a prime example. The official corporate tax rate is 35 percent, pretty high by international standards. But there are so many special provisions that some of our major corporate citizens pay just a sliver of that. According to an analysis by The New York Times , 115 of Fortune 500 companies pay less than 20 percent in federal and other corporate taxes, and some very successful enterprises pay much less. The study calculated Boeing’s tax rate at 4.5 percent. Southwest Airlines paid 6.3 percent; Yahoo, 7 percent, General Electric, 14.3 percent. As the Times’ David Leonhardt said: “Arguably, the United States now has a corporate tax code that’s the worst of all worlds. The official rate is higher than in almost any other country, which forces companies to devote enormous time and effort to finding loopholes. Yet the government raises less money in corporate taxes than it once did, because of all the loopholes that have been added in recent decades.” At least taking advantage of loopholes is legal. The IRS estimates that we lose at least $250 billion a year to outright cheating . Given the recent brawl in the U.S. Congress over attempts to cut $60 billion from the budget, an extra $250 billion a year would be really, really welcome in these tough times. But to get even half of that, the IRS would need more agents, more audits and possibly even more paperwork. Instead, House Republicans have proposed significant cuts to the IRS budget , which may actually drive collections down. So, since we almost certainly have to raise taxes in some manner at some point to get the budget under control, is it actually fair to the American people to do it without reforming our chaotic maze of a tax system? How are we going to persuade people to pay more to a system that has so many holes? Maybe it’s time to trot out that old political motto — never let a crisis go to waste. The Simpson-Bowles budget proposals marry tax simplification to the urgent need to do something about the budget. They recommended a menu of changes that reduce tax rates for both individuals and corporations, but eliminate many of the tax credits and deductions that make the tax code so impenetrable (Yes, they do recommend eliminating the home mortgage deduction, but only for second homes and mortgages over $500,000 ). There’s another sign of détente in the works. The conservative Heritage Foundation has had kind words for Democratic Senator Ron Wyden’s corporate tax reform proposal. And President Obama says that he wants “something smarter, something simpler, and something fairer” for corporate taxes too. The trouble is that the idea of simplifying taxes often draws broad support. It’s when the debate gets down to specifics that things fall apart. Everybody wants taxes to be simpler — until they find the loophole that’s just right for them. That’s when the lobbyists and the lawyers come out of the woodwork battling for the provisions their clients wants. Special interests seem to trump the general interest over and over again when it comes to tax reform. Will the prospect of higher taxes finally spur us to streamline the tax code? We’ll be watching, but in the meantime, we’ll be riffling through our desks looking for a couple of lost 1099 forms.

Read the full article →

Study: 9 Million Laid-Off Americans Lost Health Insurance In Last Two Years

March 18, 2011

WASHINGTON — During the last two years, 57 percent of Americans who lost a job that provided them health insurance — nearly 9 million people — could not afford to regain coverage, according to a new study published by the Commonwealth Fund, a longtime advocate of health care reform. In addition, 19 million Americans who tried to buy a health plan in the individual insurance market between 2007 and 2010 were either rejected due to a prior health condition or unable to find affordable coverage that fit their needs, according to the Commonwealth Fund report. “This means that already stretched family budgets are vulnerable to catastrophic losses and bankruptcy in the event of a serious accident or illness, and that families face significant financial barriers when trying to obtain needed medical care and timely preventive services,” the report’s authors wrote. The authors found that some 52 million Americans had no health coverage in 2010, compared to roughly 38 million in 2001. And nearly 49 million adults spent 10 percent or more of their income on out-of-pocket costs and premiums in 2010, they found, up from roughly 31 million in 2001. High health care costs mean less money to spend on basic necessities. About 22 million working adults couldn’t afford food, heat and rent due to medical bills in 2010, the research found, and health costs forced 4 million people into bankruptcy. The government allows laid-off workers to remain on their former employers’ health insurance via the COBRA program, but workers must pay the full cost of the insurance — their share plus their former employer’s share — which is often unaffordable. The stimulus bill of 2009 provided a 65 percent subsidy for COBRA plans, but Congress dropped the subsidy last May due to deficit concerns. About 50.7 million Americans had no health insurance in 2009, according to the latest government data, and 16.7 percent of the U.S. population was uninsured, the highest proportion since the government began tracking such figures in 1987. Commonwealth Fund President Karen Davis said on Tuesday, however, that last year’s health care overhaul legislation will help ensure that nearly everyone, including the jobless, has access to affordable and comprehensive health insurance by 2014. “The silver lining is that the Patient Protection and Affordable Care Act has already begun to bring relief to families,” she said. “Once the new law is fully implemented, we can be confident that no future recession will have the power to strip so many Americans of their health security.” But the health care law doesn’t prohibit health insurers from discriminating against Americans with preexisting conditions until 2014, meaning those who lose their employer-sponsored health insurance have few options in the meantime. The law did create a program called the Pre-Existing Condition Insurance Plan designed to cover those excluded from the individual market until 2014, but enrollment has been low, with only about 12,000 participants to date. Once the law’s provisions are more fully implemented, uninsured Americans are supposed to have access to affordable health insurance through Medicaid or private health plans available on state-run exchanges, while low-income families will receive tax credits to help them afford coverage. The Commonwealth Fund survey of 3,033 adults between ages 19 and 64 was conducted by Princeton Survey Research Associates International from July to November of last year, according to the report’s authors. The full report is available here

Read the full article →

Nathan Newman: How Amazon’s Unfair Practices Are Worsening State Budget Crises

March 18, 2011

I love Amazon. Our family is a Prime member and, living in New York City without a car, we order from Amazon what feels like every other day. And their service is fabulous, with usually next-day diaper delivery for our new baby and customer service where you reach a real human being instantly. And pretty much a no-questions-asked return policy. So with such great service and wide popularity with its customers, why does Amazon feel it can only compete with an unfair tax advantage? As I detailed here , Amazon is unfortunately leading the political charge against states seeking to require online retailers to collect sales taxes on goods sold in their states. Just this past week, Amazon terminated its whole Illinois affiliate program , where local websites link to Amazon, in order to evade a recently passed Illinois law that required online retailers market in the state to pay sales taxes if they had people in the state marketing on their behalf. Losses of state and local sales tax revenue from online retailers evading the tax will total an estimated $11.4 billion by 2012, according to this University of Tennessee study . That adds up to hundreds of thousands of teachers that states will need to fire, community health clinics closed across the nation, and cutbacks in public safety in all our communities. Why Won’t Amazon Compete on a Level Playing Field: I live in New York which passed a similar law, and Amazon chose not to terminate its affiliate program here, so I pay sales tax on Amazon purchases. But that hasn’t stopped me and other state residents from using Amazon, since even with sales tax, it often provides better value than competitors locally. But why should Amazon ever get the unfair competitive advantage of not having to collect sales taxes? A basic principle of tax policy is that the same product should be taxed the same whoever sells it. Customers should never be making decisions based on evading taxes; otherwise, less efficient retail strategies may be adopted based on the tax system rather than on the inherent value of the service. Online Tax Evasion Shifts Tax Burden onto Low-Income Families: And it’s just economically unfair to make it more expensive to shop at a local store than to shop online. Online shoppers at places like Amazon are wealthier than people who only shop locally. So if online shoppers aren’t paying the sales taxes needed for local schools and hospitals, that means the tax burden shifts from wealthier residents to poorer residents. Most people don’t realize lower-income families pay a higher percentage of their income in state and local taxes than the wealthy , so the rise of online shopping and tax evasion is just making a bad situation worse. Excuses for Online Sales Tax Loophole aren’t Persuasive: And the following are just a few quick rebuttals to Amazon and other online retailer arguments as to why they deserve their loophole. I’m going to tap a report by Michael Mazerov at the Center on Budget and Policy Priorities, who has been birddogging Amazon for years on this issue, for many of these arguments: Myth: Online Retailers Don’t Benefit from Sales Taxes: First, Amazon contracts with delivery trucks using roads paid with tax dollars and their users benefit from state investments in broadband expansion in states across the country. Second, the sales tax isn’t paid by Amazon; it’s paid by its customers, who live and benefit from the wide range of services paid for with local and state tax dollars. Myth: Collecting taxes from multiple states is too complicated: In a database-driven world, which Amazon and online retailers specialize in, matching different tax rates to different customers is just not very challenging. And since Amazon already collects sales taxes on behalf of companies like Target, who have a physical presence in most states and are obligated to collect all sales taxes, it actually has the infrastructure in place. In fact, it calculates and collects sales tax in some states on behalf of approximately 5,000 independent merchants that sell items on its website, despite its public complaints of how tough it would be to collect from its own customers. Myth: Tax Avoidance is not a Big Part of Amazon’s Strategy: The reality is that Amazon has created multiple corporate subsidiaries to try to evade state taxes. For example, Amazon subsidiary A-9, based in California, is responsible for the ongoing refinement of the search engine customers use to find items on Amazon’s website — obviously a key asset for a company that sells 24 million different products – yet Amazon doesn’t pay sales tax in that state. It has inventory warehouses in Arizona, Indiana, Nevada, Pennsylvania, Texas, and Virginia structured as separate corporations, so that Amazon ships its own goods using its own warehouses in those states, yet claims it has no physical presence. And then there are just the gross political deals, such as the one currently being proposed in South Carolina, where Amazon will build its own warehouse in that state, yet will receive a special tax break from the state explicitly allowing it to evade taxes. The state Chamber of Commerce and conservative groups are condemning this $40 million giveaway to Amazon as a grossly unfair deal for the company. Need a Federal Solution: Ultimately, even the laws like New York’s and Illinois’s will only address part of the problem of online retailing. What’s needed is a federal law requiring all retailers selling goods in any state to collect and remit sales taxes to the home state of each customer. A Main Street Fairness Act has been introduced repeatedly over many years, but is now needed even more desperately by state governments facing massive deficits. Crossposted from TechProgress

Read the full article →

Robert Reich: As the Global Economy Trembles, Our Nation’s Capitol Fiddles

March 17, 2011

Why isn’t Washington responding? The world’s third largest economy suffers a giant earthquake, tsunami, and radiation dangers. A civil war in Libya and tumult in the Middle East cause crude-oil prices to climb. Poor harvests around the world make food prices soar. All this means higher prices. American consumers, still reeling from job losses and wage cuts, will be hit hard. (Wholesale food prices surged almost 4 percent in February, the largest upward spike in more than a quarter century.) Even before these global shocks the U.S. recovery was fragile. Consumer confidence is at a five-month low. Housing prices continue to drop. More than 14 million Americans remain jobless, and the ratio of employed to our total population is at an almost unprecedented low. So you might think our elected representatives would want to avoid a repeat of what happened the second half of 2010 when the fragile recovery began tanking. They’d certainly want to prevent a double-dip recession. You’d think they’d be creating booster rockets to counter these recessionary forces — freeing up more spending, exempting the first $20,000 of income from payroll taxes, imposing a moratorium on bank foreclosures, giving Americans another six months to file their income taxes, lending states whatever money they need to prevent more of their own budget cuts. Think again. Amazingly, the big debate in Washington is about how whether to cut $10 billion or $61 billion from the federal budget between now and September 30. House Majority Leader Eric Cantor recently stated the Republican view succinctly: “Less government spending equals more private sector jobs.” In the past I’ve often wondered whether they’re knaves or fools. Now I’m sure. Republicans wouldn’t mind a double-dip recession between now and Election Day 2012. They figure it’s the one sure way to unseat Obama. They know that when the economy is heading downward, voters always fire the boss. Call them knaves. What about the Democrats? Most know how fragile the economy is but they’re afraid to say it because the White House wants to paint a more positive picture. And most of them are afraid of calling for what must be done because it runs so counter to the dominant deficit-cutting theme in our nation’s capital that they fear being marginalized. So they’re reduced to mumbling “don’t cut so much.” Call them fools. The U.S. economy is flirting with another dip at a time when the global economy is teetering and most Americans are still in economic trouble. But nothing is being done in our nation’s capital because knaves and fools are in charge.

Read the full article →

GOP Gov’s Proposed Higher-Education Cuts Draw Protests

March 11, 2011

HARRISBURG, Pa. — Pennsylvania’s new Republican governor is under fire for proposing the nation’s biggest cuts in higher education – more than 50 percent for some universities – while refusing to tax the gas drilling that is fast becoming one of the state’s largest industries. Some critics of Gov. Tom Corbett are frustrated that he won’t tap such a rich source of tax revenue when the state is looking at a projected deficit next year of $4 billion. “This is the most irrational public policy I’ve ever seen in my life,” Democratic state Sen. Daylin Leach said Thursday. “He’s supposed to be fighting for Pennsylvania. He’s saying that Pennsylvania can’t have this money.” Corbett has a long opposed any tax on the gas extracted from the rich deposit known as the Marcellus Shale, and he repeated that stand Tuesday in the same speech in which he outlined the cuts in education. He said a tax would hinder the growth of natural gas drilling in Pennsylvania and prevent the state from becoming the national hub of the industry. “Let’s make Pennsylvania the Texas of the natural gas boom,” he urged lawmakers. “I’m determined that Pennsylvania not lose this moment. We have the chance to get it right the first time, the chance to grow our way out of the hard days.” Corbett contends the industry has already plowed billions of dollars into the state, spawned economic booms in some of Pennsylvania’s most depressed areas and generated new revenue from the income, sales and other existing taxes. Pennsylvania is the largest gas-producing state without a gas extraction tax. In the $27.3 billion budget he presented to lawmakers, Corbett proposed slashing spending on higher education by $644 million, including a more than 50 percent reduction for the 18 state-supported universities and colleges, which include Penn State, Pittsburgh and Temple. He also proposed a $1 billion cut for Pennsylvania’s public schools. “Despite state subsidies over the past decades, tuition has continued to increase,” the governor said. “If the intent was to keep tuition rates down, it failed. We need to find a new model.” Students, faculty members and administrators are mobilizing to convince lawmakers, many of whom are on their side, that the cuts are unreasonable. What effect the cuts would have on the campuses remains unclear, although tuition increases are likely and the closing of some of Penn State’s 24 satellite campuses is possible, officials said. Penn State has 87,000 students all together. “Everything is on the table,” said Penn State spokeswoman Lisa Powers. Molly Stieber, 21, president of the University of Pittsburgh’s student government, said she expected Corbett would call for modest cuts for higher education because of the state’s financial problems, but nothing as radical as he proposed. “I was completely blindsided. … Fifty percent was just unprecedented and scary,” said Stieber, 21, a junior from Lancaster who is majoring in political science. Stieber and her Penn State counterpart, Christian Ragland, are urging students and parents to contact their legislators. Plans for protest rallies and a day of student lobbying at the Capitol are in the works, they said. “Now we’re in aggressive mode,” said Ragland, 22, a senior from New Jersey majoring in political science. Corbett, who received nearly $1 million in campaign contributions from donors connected to the gas drilling industry, ran on a pledge not to increase any state taxes or fees. Republicans control both houses of the Legislature, giving Corbett a strong advantage in the budget negotiations that will take place in the coming weeks. Democratic former Gov. Ed Rendell and leaders of the Senate GOP majority sought to negotiate a compromise on a drilling tax last fall, but the effort failed. Some Democrats are renewing the push this year. “It’s a matter of fairness that these drillers pay,” said Rep. Greg Vitali. He said annual revenue from his bill would amount to $200 million this coming year and rise to $430 million by 2015-16. David Masur, director of the lobbying group PennEnvironment, said a tax would have “zero political fallout,” since it would be paid not by ordinary Pennsylvanians but by the drilling companies. “Where are they going to go?”" he asked. “The gas isn’t going anywhere.”

Read the full article →

Amazon Tax: $150 Million Windfall, Or Job-Killing Promise?

March 10, 2011

On Thursday, Governor Quinn signed a measure he called the “Mainstreet Fairness Act,” levying a new set of taxes on online retailers. Depending on who you ask, the law, known colloquially as the “Amazon Tax,” will be a massive windfall in state revenues, or a set of empty promises that will cause companies to flee the state and revenues to drop. The bill passed both houses of the state legislature with sweeping majorities. Its main targets are so-called “affiliates” of major internet retailers like Amazon.com and others. These companies derive revenues by passing users along to Amazon and the rest, and earning a percentage of the sales; affiliates located in Illinois will now have to collect and remand sales tax to the state. Until now, residents of Illinois were required to report all purchases from out-of-state sites like Amazon and pay the sales tax voluntarily along with their income taxes, according to the Illinois Department of Revenue . But few taxpayers even know that fact, and since enforcement is difficult if not impossible, it was rarely paid. Senate President John Cullerton was one of the chief proponents of the new law; when the bill passed, he issued a press release praising its benefits . “Under this proposal, Illinois would generate an additional $150 million in much-needed revenues in our efforts to prevent millions of dollars in cuts to public safety, health care, and education that would occur without action,” Cullerton wrote. He also said the bill “will help spur economic activity and job growth within the state by leveling the playing field for Illinois’ small businesses” — brick-and-mortar stores that have to collect sales tax face unfair competition from retailers like Amazon that don’t charge the tax, the argument goes. And some Democrats in Congress tried to enact similar legislation on a national level last summer. But critics of the measure in Illinois cite the examples of previous states that have tried to pass similar Amazon taxes. In those cases, Amazon followed through on a threat it’s made in Illinois as well: to simply terminate its contracts with all the affiliates in those states. That happened in Colorado almost exactly a year ago , as it did in North Carolina and Rhode Island, three other states with similar measures on the books. Providence Business News reported after the tax was passed there: Officials at the R.I. Department of Revenue “do not believe that there has been any sales tax collected as a result of the Amazon legislation,” said Paul L. Dion, who heads the department’s revenue-analysis office. Indeed, Amazon, Overstock.com, and several other online retailers have promised to cut off Illinois affiliates similarly if the law went through. And the Chicago Tribune quoted the owner of one of the affiliates , FatWallet.com, saying that he wouldn’t simply roll over and take it. “The reality is that as a business owner with 52 employees, we’re not going to just get shut down because of a law Illinois passes,” CEO Tim Storm said. “Our customers don’t care whether we’re in the state of Illinois.” Still, after weighing both sides, Governor Quinn signed the bill into law Thursday afternoon. “This law will put Illinois-based businesses on a level playing field, protect and create jobs and help us continue to grow in the global marketplace,” he said in a press release. Tell us what you think:

Read the full article →

Retail Investor Realty Income Corp. Expanding into More Property Types

March 10, 2011

Realty Income Corp. has agreements to acquire up to 33, single-tenant, long-term, net-leased properties for approximately $544 million. In this go round, however, the investment firm is expanding beyond its traditional retail investment platform to also include distribution, office and manufacturing properties. The properties it plans to acquire are in 17 different states and consist of approximately 3.8 million square feet of leasable space. The…

Read the full article →

Jason Alderman: Insurance Reality Check

March 3, 2011

When it comes to insurance, many people face the Goldilocks dilemma: Am I buying too much coverage, not enough, or just the right amount? Unfortunately, there’s no easy way to choose; and even when you do settle on coverage levels, your needs will probably change as your living situation evolves — say when you marry, divorce, have a baby or retire. So how do you determine the proper insurance levels while ensuring that you’re not wasting money on unneeded coverage — or worse, leaving yourself and your family exposed? Here are a few considerations for some of the more common insurance types: Health insurance . Everyone needs medical insurance, even the young and healthy. One serious accident or unexpected illness could wipe out your savings and plunge you into debt or even bankruptcy. If you’re covered through your employer, carefully compare all plans offered. The one with the lowest premium may not necessarily be your best option. Consider how other factors add up — things like deductibles, copayments, allowed/disallowed benefits, out-of-network charges (important if your doctor/hospital isn’t in the network) and whether your regular medications are covered under the plans’ drug formularies. Also compare costs to cover you and your children as dependents under your spouse’s plan options, if available. Just make sure the coverage is comparable for the price, and exercise caution if you fear your spouse may be vulnerable to a layoff. If you’re not covered though your employer, you may have other options: If recently laid off, ask about COBRA continuation coverage through your former employer. If under age 26, you may be able to enroll in a parent’s plan, even if married or not living at home, thanks to the Affordable Care Act. (See HealthCare.gov for details.) High-deductible plans provide comprehensive coverage for catastrophic illnesses at much lower premiums than comparable low-deductible plans. An insurance broker can help you find appropriate private coverage — try the National Association of Health Underwriters if you don’t know one. But be aware that even minor preexisting conditions may render you ineligible. Most states provide high-risk insurance for people who don’t qualify for private insurance. It’s costly, but no one can be turned away. Visit the National Association of State Comprehensive Health Insurance Plans ( NASCHIP ) for information. Health Insurance Portability and Accountability Act (HIPAA) insurance may provide coverage if your COBRA has expired and you don’t qualify for private insurance. Eligibility rules are very complicated so consult a knowledgeable insurance broker. Life insurance . This one really depends on your family situation. If you’re single with no dependents, you may get by with minimal or no life insurance — although you may want enough to cover your own funeral expenses. But if your family depends on your income, many experts recommend buying coverage worth at least five to 10 times your annual pay. A few other considerations: If you’re young and healthy you may be able to get a better deal on your own than through your employer’s plan. After your kids are grown you may be able to lower your coverage; although carefully consider your spouse’s retirement needs. Most people don’t need life insurance on their children, since children don’t have earnings to offset; but you might want spousal coverage if you depend on his or her income or would need to pay for child care to keep working full time. If you’re divorced and alimony and/or child support is included in the settlement, buy a life insurance on the person paying it, naming the receiving ex-spouse as beneficiary. SmartMoney.com has an online calculator that can help you determine how much coverage you should have. Automobile insurance . Almost every state requires insurance if you own or drive a car, and for good reason: It protects you financially should you cause an accident or be hit by an uninsured driver. Rates may vary considerably depending on such factors as: coverage and deductible levels for liability, uninsured motorist and collision; work commute; age and driving record; vehicle year and model; number of insured family members; and security features (alarm, airbags, secured parking, etc.). Ruth Stroup, a Farmers Insurance Group agent from Oakland, California sees many of her new clients coming in with ill-fitting policies. She offers a few tips for lowering car insurance costs: Shop around — rates vary widely among carriers. Increasing your deductibles from $250 to $1,000 might lower your premium by 15 to 30 percent. Ask about discounts for safe drivers, age 55+, linked homeowners/renters insurance, etc. With collision and comprehensive coverage, most carriers pay only up to the vehicle’s actual cash value, minus deductibles. Thus, some people with older cars drop this coverage, since repairs often cost more than the car’s worth. But remember: If you drop this coverage and later rent a car, you’ll need to purchase the rental agency’s collision and comprehensive coverage to be fully protected. “My biggest tip on auto insurance is to make sure your liability insurance relates to your net worth and income,” said Stroup. “It only takes one accident to wipe out your savings. Transferring this risk to an insurance company is very inexpensive for good drivers.” Homeowners/Renters insurance . Your home is probably your largest investment, so don’t risk losing it and its contents through an unforeseen disaster, accident or robbery. Renters also need insurance: Your building itself is probably insured by the owner, but your contents are not. You — not your landlord — are responsible for replacing damaged or stolen possessions. A few tips: Review your coverage periodically to adjust for inflation, home improvements, new possessions, change in marital/family status, etc. The market is competitive, so compare your rate with other insurance carriers. Make sure to get “apples to apples” quotes, since policies may have varying provisions. Replacement cost insurance is more expensive than actual cash value insurance but may be worth the difference. For example, the former would replace a stolen 10-year-old TV with a new one, whereas the latter would deduct 10 years’ of depreciation from the settlement. Buy additional coverage on expensive items like jewelry, art and computers, which may have limited coverage. Coverage you may not need . Many people opt to forego these plans: Primary mortgage insurance (PMI). As soon as the outstanding balance on your mortgage drops below 80 percent of your home’s value, federal law allows you to drop this coverage — coverage which protects the lender, not you. Extended warranties. These policies often duplicate coverage already provided in a standard warranty; plus, your credit card may provide its own warranty on purchases. Flight accident insurance. The risk of plane crashes is miniscule, and you may already be covered if you bought the ticket with a credit card — read your policy for rules. Before buying a standalone policy on a boat, RV or other big-ticket item, compare the cost of adding a rider to your homeowner’s insurance policy. Don’t forego critical coverage to save a few bucks: It’s not worth it in the long run. This article is intended to provide general information and should not be considered legal, tax or financial advice. It’s always a good idea to consult a legal, tax or financial advisor for specific information on how certain laws apply to you and about your individual financial situation. To participate in a free, online Financial Literacy and Education Summit on April 4, 2011, go to Practical Money Skills .

Read the full article →

Industrial Income Trust Announces Appointment of Scott Recknor as Senior Vice President — Asset Management

March 2, 2011

DENVER, CO–(Marketwire – March 2, 2011) –   Industrial Income Trust Inc. (IIT), an industrial real estate investment trust that owns and operates distribution warehouses, announced the appointment of Scott Recknor as Senior Vice President, Asset Management.

Read the full article →

Make Money And Do Good Is The New Corporate Buzz

March 1, 2011

By Michelle Nichols NEW YORK, Feb 28 (Reuters) – Admitting you are making money by doing some good in the world is no longer a dirty little secret, it’s called “creating shared value” — the new catch phrase in corporate and philanthropic circles. More than 90 chief executives will meet in New York on Monday, International Corporate Philanthropy Day, for the Board of Boards CEO conference, where one of the key topics to be discussed is creating shared value. As the U.S. economy slowly recovers from the worst economic downturn in decades, corporate philanthropy is no longer just about writing a check for charity as executives look to use their core business to do social good, experts say. The growing trend was dubbed “creating shared value” by Michael Porter of the Institute for Strategy and Competitiveness at Harvard Business School, who said companies need to reconnect business success with social progress. “We need to understand that what’s good for the community is actually good for business,” said Porter, who spoke to business leaders about the idea at the World Economic Forum in Davos last month. “If we can organize ourselves to do this stuff inside our operating units rather than on the side we can have a profound effect on many of the most important social issues of our time,” he said. Porter said Swiss food company Nestle (NESN.VX) had worked with poor coffee farmers to help them improve their farming practices. As a result, higher yields and quality increased their income, their environmental impact was reduced and Nestle boosted its reliable supply of good coffee. “HOLISTIC APPROACH” Robert Harrison, chief executive of former U.S. President Bill Clinton’s Clinton Global Initiative (CGI), said more and more companies “are building into their DNA doing social or environmental good.” “The idea of making money and at the same time achieving some social good or environmental good, I would say, is the accepted ideal or the goal for many corporations,” he said. Harrison said an example of this was a CGI commitment made by Wal-Mart Stores Inc (WMT.N) to work with its tens of thousands of suppliers to reduce packaging, saving the company billions of dollars and cutting its carbon footprint. The Clinton Global Initiative, which has brought together chief executives, world leaders and humanitarians annually since 2005 to address global woes, hopes to further encourage U.S. companies to create shared value with a conference in Chicago on June 29 and 30 to address the fragile U.S. recovery. “(It will be) very much focused on economic recovery and how to create green jobs and how to create more jobs and essentially what are some things that people can do, both commit to do and ideas to do in the future that will advance our economic recovery,” Harrison said. Corporations made up 4 percent of U.S. giving in 2009, while individuals accounted for 75 percent, giving $227 billion, according to a Giving USA Foundation report researched by The Center on Philanthropy at Indiana University. Charitable contributions by corporations were valued at $14.1 billion in 2009, the report said. Two-thirds was cash and in-kind contributions from company budgets and the rest grants by corporate foundations. “One of the things about corporate philanthropy that’s evolving is an emphasis on a holistic approach as opposed to just writing checks,” said Patrick Rooney, executive director of The Center on Philanthropy. (Editing by John Whitesides) Copyright 2011 Thomson Reuters. Click for Restrictions .

Read the full article →

With Lockout Looming, NFL Owners Downplay Economic Benefits Of Football

March 1, 2011

WASHINGTON — In the past two decades, National Football League owners have received at least $5 billion from local governments to build and maintain football stadiums for their lucrative franchises. The argument was almost always the same: With a little taxpayer investment, the city would get a big boost in economic activity. With no investment, the team would up and leave. With three days until the owners lock out the players for refusing to give up their claims to $1 billion of the sport’s $9 billion in annual revenues, local officials and players are raising concerns that a canceled season could deprive cities of needed economic activity — as much as $160 million per city, according to the NFL Players Association — at the worst time possible. But now that the argument is working against it, the NFL calls such concerns “fairy tales.” Economists have debunked claims that a shutdown would devastate a stadium’s host city, or that a new stadium offers the kind of windfall that would justify significant public contributions. But NFL Commissioner Roger Goodell had a different take in 1997, when he was a league executive. “A new stadium provides more than just a new place to watch a game,” Goodell said at the time. “It can revitalize and stabilize both a team and a city.” “For them to be dismissive of the NFLPA’s claims now is sort of ironic,” said Dennis Howard, a business professor at the Lundquist College of Business in Oregon. “Many of them have used the economic benefit argument as a way of extracting significant public support for new stadiums.” Twenty-eight of the league’s 31 stadiums (the Jets and the Giants share the New Meadowlands Stadium) have been built with some amount of public financing, according to the National Sports Law Institute at Marquette University’s law school. Eleven have been 100 percent publicly financed. Taxpayers have put up more than $5 billion since 1990. In Indiana in 2004, the president of the Marion County Capital Improvement Board argued that a new publicly-funded multi-use venue would keep the NFL’s Indianapolis Colts from leaving town, which would “create 1,500 full- and part-time jobs and annually produce $104 million in economic benefit.” The $750 million Lucas Oil stadium went up in 2008, with the public bearing 50 percent of the cost. In Ohio in 1995, a Hamilton County commissioner argued that a study showed the Cincinnati Reds and Bengals were worth $160 million a year to the city’s economy, according to the Pittsburgh Post-Gazette, and that the town should pony up. Paul Brown Stadium was built in 2000 as a $453 million gift from taxpayers. The Maryland Stadium Authority, which successfully poached the Cleveland Browns and renamed them the Baltimore Ravens in the mid-1990s, estimated that a football stadium inhabited by Cleveland’s team would add 1,400 jobs and $123 million annually to the city’s economy. The state of Maryland coughed up $200 million for a stadium, built in 1998. The city of Cleveland, meanwhile, ponied up 76.5 percent of the $315 million used to build a new stadium for a new Browns team in 1999. Now, the NFL’s owners are threatening to scrap the coming season if the players, who currently receive 50 percent of the $9 billion revenue pie, don’t cede $1 billion of that revenue. The owners say they need the money for stadiums, but the players union is skeptical because the owners have refused to open their books to show how they spend the cut of revenue they already receive. Owners also want limits on rookie pay and two additional regular season games. The players, for their part, have been happy with the status quo, and say more regular season games will lead to more players with grievous injuries. The NFL owners’ threats of abandoning host cities or a whole season are probably more trustworthy than the economic arguments in favor of public financing for stadiums or the players’ claims of an economic calamity precipitated by a work stoppage, both of which have been deemed false by academics. Analyzing economic data from local Florida economies during professional sports strikes and lockouts — like the one that may be at hand for the NFL — economists Robert A. Baade, Robert Baumann and Victor A. Matheson concluded in a 2006 paper ( PDF ), that a team’s presence or absence does not have a measurable impact on the surrounding local economy, despite the estimates by “sports leagues, franchises, and civic boosters” using “league and industry-sponsored studies.” “An analysis of taxable sales in Florida cities demonstrates that none of the 6 new franchises or 8 new stadiums and arenas in the state since 1980 have resulted in a statistically significant increase in taxable sales in the host metropolitan area,” they wrote. “In addition, using the numerous work stoppages in professional sports as test cases, again no statistically significant effect on taxable sales is found from the sudden absence of professional sports due to strikes and lockouts.” Mark Rosentraub, a sports management professor at the University of Michigan, told HuffPost that the NFLPA overreached with its $160 million estimate of the economic impact of a lost season. “It fails to account for the fact that people spend money anyway,” Rosentraub said, noting that people will spend their disposable income at places like movies theaters and restaurants if not football stadiums. Rosentraub said, however, that while a canceled game won’t have a big effect on a region as a whole, it could have big effects within that region. And smaller cities would suffer more without a season, he said, than larger cities would. “It’s gonna matter a whole lot to the city of Cleveland,” he said. “It won’t even be perceivable in San Diego.” It could also matter a lot to some of the individual people who work at or near stadiums. John Marler is a beer vendor at professional hockey, baseball and football games, as well as special events, in Detroit. Marler, 25, told HuffPost that if there’s no football season, he’d lose about 15 percent of his income. “Basically, you’re just taking money, you’re taking revenue away from businesses that provide jobs,” said Marler, a member of the AFL-CIO-affiliated union Unite Here, which has partnered with the players’ union to fight the lockout. “The people that lose — it’s the businesses, it’s the people that work in casinos, the people that work in stadiums. Those are the people that lose out.” And Jerry Watson, owner of a bar near Lambeau Field in Green Bay, Wis., told HuffPost that without an NFL season, his business would lose a third of its income. “It’s going to hurt the state of Wisconsin,” he said. The Baltimore Business Journal estimated that the state of Maryland stands to lose $3.8 million in revenues just from ticket sales. When HuffPost first asked the NFL to respond to various mayors’ complaints that a lockout would hurt their cities, a league spokesman sent a link to a story in the Atlanta Journal-Constitution that rate the $160 million claim “false.” The story suggested Baade’s more modest estimate of a $16 million impact would be more accurate. Nevertheless, several experts seemed to find the NFL’s “fairy tales” position deeply ironic in light of the arguments used to win taxpayer dollars for new stadiums. “This is a classic case of the NFL talking out of both sides of its mouth,” Tim Chapin, an associate professor in the department of urban and regional planning at Florida State University, wrote in an email. “The economic benefits are HUGE when the NFL needs a stadium built, but the benefits are minuscule when the numbers don’t reflect well on the league. The truth is that the economic benefits are relatively small, but they are almost certainly in the millions.”

Read the full article →

Investors Prepare for Code Red as Income, Spending, Manufacturing, Services, Jobs, and Politics Dominate a Busy U.S. Week

February 27, 2011

Investors Prepare for Code Red as Income, Spending, Manufacturing, Services, Jobs, and Politics Dominate a Busy U.S. Week

Read the full article →

Robert Creamer: No Mr. Boehner, America is Not "Broke"

February 15, 2011

Once again on the Sunday news shows, Republican Leader John Boehner declared that “America is broke” — his premise for why we “can’t afford” important investments that are critical to America’s future. In fact, of course, America is far from “broke”. It is the largest economy in the world. After collapsing as a result of the recklessness of the big Wall Street banks — and Republican economic policies in late 2008 — the economy has, in fact, grown for six consecutive quarters. The stock market has almost doubled since the crash — regaining most of its value. Corporate profits are soaring. And American corporations are now sitting on close to two trillion dollars in cash. What’s more, we still have the same highly-skilled, productive labor force and the same stock of plants and equipment that we did before the financial meltdown — the same ability to create the goods and services that are the real measures of economic wealth. The problem isn’t that America is “broke.” The problem is that economic growth is not being shared with most Americans. The problem is that the very rich are wealthier than ever and everyone else is falling behind. Not only does that mean that the massive store of wealth that we create today is not widely shared. It also means that — taken together — we have less wealth as a nation because so many Americans who could be creating goods and services are unemployed, creating nothing. Of course the implication of the “America is broke” mantra is that we have to make massive cuts in programs and services that benefit the middle class and poor because we “can’t afford them” — us being broke and all. Frankly, you have a hard time taking that kind of talk seriously from a guy who just recently demanded that America continue to give massive tax breaks for the wealthy for the next two years — and who wants to flat out abolish the estate tax that, by definition, benefits only the sons and daughters of multimillionaires and billionaires. Is America broke? Have a look at John Paulson. In 2007, as the financial crisis descended, he made $4 billion in personal income betting against subprime mortgages that helped sink the rest of the economy. Last year he made a record $5 billion in personal income as the manager of a hedge fund. By the way, had he somehow managed to make that astronomical sum of money laying bricks or sweeping floors, he would have paid taxes at a rate of 35% on the bulk of that income. Instead, he paid at a rate of only 15%, since he earned his money by speculating as a hedge fund manager instead of making a useful good or service. Makes sense, right? Last year Mr. Paulson made as much as 100,000 of his fellow citizens who earned $50,000 per year. Paulson’s haul may have been a record, but Appaloosa Management’s founder David Tepper and Bridgewater Associates chief Ray Dalio each did pretty well too — between $2 and $3 billion each. And the rest of Wall Street was back in the money as well. Boehner’s attempt to justify massive cuts in investments that will grow the economy in the future — like education and infrastructure; or his insistence on cutting money that is used by the states to pay firefighters and police; or cuts in programs that take food out of the mouths of poor children — are outrageous so long as most of our economic growth goes into the hands of the wealthy few. Let’s remember a few key facts about our current federal deficit: The last time the federal budget was actually in balance was not under the Republicans — but rather under Bill Clinton. The current deficit was caused exclusively by the Bush tax cuts, two unpaid-for wars that cost trillions, and the largest recession in eighty years — caused by the same Republican economic policies Boehner is trying to sell today. Between 2001 and 2008, the Bush Administration and the Republican Congress rolled up more federal debt than all other Administrations in the history of the United States combined. It is entirely possible to deal with the federal deficit without making the middle class and poor pay the bill. My wife, Congresswoman Jan Schakowsky, who was on the President’s Fiscal Commission, outlined precisely such a proposal last fall. It makes many cuts to spending that go for unnecessary tax expenditures like subsidies to Big Oil and it relies on making the wealthiest among us pay their fair share. It makes the people who had the economic party over the last two decades pay the bill — not middle class and low income Americans who didn’t even get an invitation. The deficit is not some inevitable consequence of our being “broke” — or some law of nature. It was caused by human decisions to allow wealthy people to reduce their contribution to our common activities and to use them, instead for themselves. For example, it is entirely possible to raise the same amount that Boehner has proposed cutting in the 2011 (this year’s) federal budget simply by adding a few new tax brackets to the tax code for those who make more than a million dollars. You bump the tax rate up at a million dollars, at ten million, at fifty million — and a billion. You don’t even have to raise them that much. Right now people who make5 billion per year — America’s economic royalty — pay taxes at the same rate as upper middle class professionals who make360,000 — where the current highest tax rate of 35% kicks in. Often, because of tax loopholes — or because they’re hedge fund managers — they actually pay less. The reason why this approach works so well is that all the new income is going to that tiny percentage of the population. To fix the deficit, you have to go where the money is. Yesterday the President proposed his fiscal 2012 budget. It makes major investments in precisely the areas that will help us out-build, out-educate and out-compete the rest of the world in the 21st Century. His budget includes new investments in education, clean energy and infrastructure. Many of these initiatives have already been attacked by Republicans because “we can’t afford them — after all, American is broke.” We may not be broke now, but we really will be broke if we don’t invest in the future. The President also proposed cuts in a number of areas that we truly can’t afford (and really never should have done in the first place) — like subsidies to the oil and gas companies that are making record profits. He also proposes $78 billion cuts in military spending over the next five years. But the President was also forced to propose cuts in important programs that benefit average Americans. He proposed cutting the home-heating program, community block grants that are critical to low-income communities, and even the fund to clean up the Great Lakes. These are important programs that are critical to real people and to our future. The President himself supports these programs. He was not forced to propose the cuts in programs like these because America is broke — he made these proposals because the Republicans insisted on continuing the Bush tax cuts for the wealthy for the next two years and that limits investment in important priorities. Think of it. It is outrageous that we should cut money that assures that people don’t freeze in the winter so that the likes of John Paulson — the $5,000,000,000,000 dollar man — will not have to pay a couple of percentage points more on his income taxes. But that is exactly the consequence of Republican insistence that the Bush tax cuts for the rich continue. And it is just the beginning of the menu of Republican “priorities” that we will see laid out over the next several weeks. All of this “America is broke” — “just stop the spending” — rhetoric sounds very appealing until you start looking at who is hurt by the cuts, and who benefits by not paying their fair share to finance government — the things we do together. Over the next few weeks, the budget debate will shift from the rhetorical and abstract to the personal and concrete. If progressives can make that happen, the Republicans will be forced into a full retreat when it comes to the budget debate. It’s about time. Robert Creamer is a long-time political organizer and strategist, and author of the book: Stand Up Straight: How Progressives Can Win, available on Amazon.com .

Read the full article →

White House Acknowledges ‘Real Impact’ Of Cuts To Energy Assistance Funding

February 14, 2011

WASHINGTON — The Obama administration acknowledged on Monday that its proposal to slash funding for heating assistance to the poor would, in fact, hurt the poor. “This is a very hard cut,” White House budget director Jacob Lew said during a press conference. “This is a cut that has real impact.” The White House’s proposed budget for fiscal year 2012 halves funding for the Low Income Home Energy Assistance Program, reducing its allocation to $2.5 billion from just over $5 billion. LIHEAP doles out money to states, which then hand it over to local relief agencies, which review personal financial data to ensure that applicants for the assistance really need it. Eligible applicants have the money credited to their accounts with the local utility company. Roughly 8.3 million people used the program last year. Its target population is the elderly and the disabled. The National Energy Assistance Directors’ Association, a group that represents state aid officials in Washington, estimated that the reduction would amount to 3.1 million households going without assistance on heating and cooling costs (not 3.5 million, per a previous estimate). “I thought the administration would draw a circle around the social safety net for low income families. I thought we were part of that safety net,” NEADA director Mark Wolfe said. “These are families who, without LIHEAP, will fall behind on their bills or cut back on basic essentials because they don’t have any discretionary income.” Nearly two-dozen people who use the program told HuffPost in emails and phone interviews what LIHEAP has meant for them in recent years, and what they thought of Obama’s decision to sacrifice its funding to appease deficit hawks. “Obama was supposed to have this image that he was for the everyday person,” said Karrin Herring, a resident of Beaver County, Pa., who said she received $300 from LIHEAP in the fall to pay her heating bill. “It helped me out and I was glad to get it, too.” Herring, a 56-year-old middle school registrar, is disabled with avascular necrosis in her knees. She said she’s still in the president’s corner, despite her frustration over LIHEAP. “For him to go straight to a program like this, especially when there are so many unemployed people out here now, a lot of times through no fault of their own, and more people needing the LIHEAP, I just couldn’t understand why he would even think about this program in particular. They can find someplace else to cut some money if they really wanted to.” Christie Graber of Council Bluffs, Iowa, said she just recently qualified for $350 in assistance for her heating bill after applying for LIHEAP for the first time. Graber, a 60-year-old former event planner, said she gets by on $1,035 monthly Social Security disability checks. “I think he can cut other places,” she said of the president’s proposal to cut LIHEAP. “I’m very disappointed. I campaigned for him. I believed in him. I was thrilled. I had tears in my eyes watching the election results come in … I don’t think he should cut help to the poor.” Michele Tracey of Sun City, Calif., said LIHEAP has paid her electric bill for four or five months during the summer for the past three years. “There’s a lot of people more hurting than us, but that program is one of the really helpful programs. California’s not a real cheap state to live,” said Tracey, 50. She said she and her husband, who is 62, support their family-of-four with his Social Security disability payments supplemented with money she makes as an occasional substitute teacher. “It really helps,” she said. “If it goes, I’ll sure miss it.” Lew defended the decision to cut LIHEAP funding, citing declining energy prices. “Going back to 2008, the program was funded at roughly $2.5 billion,” Lew said. “We had a huge spike in energy prices, and the program doubled to $5 billion. We’re now at a price level that’s close to where we were before that increase. looking at our fiscal challenges, we can’t straight line the program at $5 billion. We went back to the level it was at when prices were roughly the same.” It’s true that energy prices have declined, but as has been pointed out by opponents of the cuts, the economy is in worse shape than when the funding was increased in 2008. “It’s done an enormous amount of good for a lot of people,” Lew said. “It was meant to be a grant program that the states administered. Balancing our fiscal challenges and the funding change from 2008 until now, we made the tough decision. We said in the documents and the budget that we will keep our eyes on what prices go and what the need of the future is, but we can’t cruise at a historic high spending level when we’re trying to make these very difficult savings. In terms of investing in the future, we’ve been very clear that we need to create more opportunities to invest in education, in innovation, and in billing the infrastructure for the future, so we’ve had tough tradeoffs.” The administration’s proposal is not about to skid through Congress. A bipartisan bloc of 32 senators has already insisted that the White House back off the program.

Read the full article →

Lawrence G. McDonald: Fannie Mae and Freddie Mac’s Days Are Numbered, But It’s a Big Number

February 3, 2011

In my New York Times Best Selling book, A Colossal Failure of Common Sense — The Inside Story of the Collapse of Lehman Brothers , I make a strong case. Our government allowed Fannie Mae and Freddie Mac to become a giant mortgage backed security hedge fund, complete with 70-1 taxpayer funded leverage. They had sub Libor financing, meaning the luxury of borrowing money at one of the lowest interest rates in the world, all risks backed by the US taxpayer. To understand this kind of leverage imaging walking into the most profitable casino in Las Vegas, all you have is $100 in your pocket. Yet, because of your good credit, the casino allows you to play blackjack with $7000 at risk on the table. The slightest loss and your equity is wiped out. That’s exactly what happened to Fannie and Freddie and today the US taxpayers have lost well over $360 billion in this reckless risk taking bonanza. That’s over half the cost of the entire war in Iraq. It wasn’t always this way but as Samuel Johnson once said, the road to hell is paved with good intentions. In the 90′s Fannie and Freddie only used 30-1 leverage but the great enabler, US Congress, was there all they way either ignoring or clueless as to the real risks lurking below the surface. I know a thing or two about risk and leverage. My former employer was levered 40-1, that was before we filed Chapter 11 bankruptcy. Uncle Sam chose not to save Lehman yet letting her fail cost the taxpayer dearly. When that $660 billion domino fell, she obliterated the value of Fannie and Freddie’s $5 trillion mortgage portfolio, crushing the US taxpayer in the process. Thank you Hank Paulson. Where We Stand Today The recent conferences in Washington debating reform of Fannie Mae and Freddie Mac are filled with political mud slinging, it’s the ultimate blame game. Last week’s release of the Financial Crisis Inquiry Commission’s (FCIC) Report and Dissents are making big headlines. Yet, the story within the story is how political infighting tore this dysfunctional commission apart, ten million dollars spent and we have very little to show for it. I am outraged that President Obama has not stepped in here. I think he blew a golden opportunity to lead and protect billions of US taxpayer dollars at stake. The FCIC report is a joke, it’s the rehash of all rehashes. It looks like my book, Andrew Ross Sorkin’s Too Big to Fail and Michael Lewis’ The Big Short . All thrown into one 700 page document. Is there anything new we have learned in the Commission’s report? Are there clear recommendations that will help prevent another financial crisis? No. The commission was divided by politics and their conclusions are as messed up as a Brett Farve retirement party, his 7th one no less. Ironically the most hapless part of the commissions report is probably the most important. What really went wrong with Fannie and Freddie and how do we fix them? The real battles are being fought within the Obama Administration, among regulators over smaller related housing issues, and between Republicans in the new Congress. The next few weeks will show significant developments in some of these areas, but the process for reforming Fannie and Freddie, the housing finance system more broadly, lags far behind the deficit and job creation in the minds of Congress and the Obama Administration. It’s a shame but look for this battle to take years, not months, dragging out the uncertainty and sclerosis which has plagued the housing markets for the past several years. The Obama Administration has recently leaked reports to the press that their report outlining suggested reforms to Fannie Mae and Freddie Mac, will be delayed till mid-February, from the statutory due date of January 31. The Deadly Divide? My friends at DCTripwire [firewalled] tell me the likely causes of this delay are twofold: (1) A lack of senior staff at Treasury and the Federal Housing Finance Agency (FHFA)–the same over loaded team responsible for implementing many of the rules and regulations of the Dodd-Frank Act. Guess what? They’re also in charge of Fannie and Freddie reform. (2) The fact that there is a divide within the Obama Administration, both substantively and politically on any reform efforts. One side is determined to maintain some sort of government (and hence taxpayer) guarantee of mortgage securities, providing support of middle class homeowners. The other side seeks to remove the government from having either an explicit or even implied guarantee. Instead they hope to trade this removal of the government from the market for the creation of a fund to assist low-income citizens in attaining affordable rental housing. We all know President Lincoln once said “A house divided against itself cannot stand.” Well, this one can’t even roll over. Why? Because Treasury Secretary Geithner (and former National Economic Council Director Larry Summers) are in the former group, while Housing and Urban Development (HUD) Secretary Shaun Donovan and other progressive members of the Administration are in the latter. This might explain President Obama’s silence over the politically handicapped Financial Crisis Inquiry Commission. Even with the Administration’s move back towards the political center, I think the President’s chum Tim Geithner wins and their report, whenever it is issued, will maintain some government role in the mortgage market. I’m told the report will also spell out several options for housing finance reform, in very broad terms, and will not be in legislative language. The Obama Administration wants this report to add to the discussions on Fannie and Freddie, but for political reasons, they want to allow Republicans in the House of Representatives to launch the first salvo in this legislative battle. Inside the Reform Process Despite the lack of concrete action by the Administration, there are several regulatory actions that are being discussed or implemented at present. The first actions have been taken internally by Fannie and Freddie. They each have improved their balance sheets since conservatorship began. Credit standards have been raised, and both they are refusing to purchase mortgages from borrowers with poor credit scores. Fees that each entity charges to banks to guarantee their loans have also been increased and this income has helped to rebuild their balance sheets. Fannie and Freddie still owe a substantial quarterly payment to the Treasury Department in the form of a 10% dividend on the Treasury’s preferred stock. If this dividend was lowered, it would allow the them to begin to repay the billions in taxpayer support and simplify any future restructuring. Any change to the dividend would need to be approved by both Treasury and the Federal Housing Finance Administration (FHFA) which is the GSEs conservator. Expect that any changes will be subjected to heavy Congressional scrutiny. In a move I support, Fannie and Freddie are contemplating is a shift in the ways that servicers are compensated. This is crucial because the incentives in the mortgage servicing business are all screwed up and have hurt the foreclosure process. According my DCTripwire, a Federal Housing Finance Administration / HUD study is being made of future mortgage servicing structures and compensation for single-family conforming mortgage loans. Servicer compensation at present is based on a minimum servicing fee that is included in the mortgage rate, and thus decreases the flexibility of servicing non-performing loans, which has the potential to affect negatively both borrowers and guarantors. Democrats will continue to hammer on mortgage servicers and the lack of investigation and sanctions by the Obama Administration on servicers. Special Inspector General for TARP, Neil Barofsky has assured the Congressional Oversight Committee that criminal investigations and audits of the largest servicers are currently underway, in addition to the 50 state attorneys’ general investigation, though he also emphasized that the Administration could and should do more in this area. Fannie and Freddie Reform Efforts in Congress After the release of the White House report on options for the future of housing finance, look for Congress, especially Republicans in the House of Representatives, to take the lead in proposing GSE reforms. The House Financial Services Committee has already scheduled four hearings on housing and GSE-related topics. When following these developments, it is important to note that the Committee’s rules have reverted to “regular order” whereby the Subcommittee Chairs will hold all, or nearly all, of the hearings on individual topics and investigations , leaving the full Committee hearings, led by Chairman Spencer Bachus (R-AL), for marking up legislation and receiving prominent figures, such as Federal Reserve Chairman Bernanke. Reading between the lines, in my opinion I don’t think House Speaker Boehner and House Finance Committee chair Bachus are all that close these days, especially on reform of Fannie and Freddie. Boehner’s Boys This Subcommittee move is significant change and will introduce important new names and characters into the contentious world of housing finance, including the Rep. Neugebauer (R-TX); Rep. Jeb Hensarling (R-TX), Committee Vice-Chair; Rep. Scott Garrett (R-NJ), Chairman of the Subcommittee on Capital Markets & GSEs (Fannie and Freddie). The list of hearings shows that housing finance and GSE reform are the main focus of the Committee, save Dodd-Frank oversight and macroeconomic policy. What has also become apparent is that Committee Republicans are no further along in devising a credible plan for reform of the GSEs than they were during Dodd-Frank Act negotiations. After conversations with House staff, it is likely that Vice-Chairman Hensarling’s bill from the 11th Congress remains the starting point for Republican legislative reforms. The bill was widely derided in the 111th Congress as “unserious,” since it remains ideologically pure, and refuses to acknowledge the fact that the GSEs currently represent nearly 100% of the mortgage securitization market, alongside an extremely weak housing market. With this in mind, look for the Obama Administration, despite their internal disagreements, to acknowledge this reality and allow Republicans to take the lead in this contentious area as part of a delaying tactic, hoping to push reform off for as long as possible. As mentioned earlier, House Republicans have painted themselves into a corner, consistently and eagerly proclaiming that any government guarantee or involvement in the housing finance markets, save perhaps the Federal Housing Administration and Veterans Administration (for providing assistance to first-time moderate income homebuyers), is unacceptable. Look for any House Republican bill to draw heavily from the work of Peter Wallison, who along with Alex Pollock and Edward Pinto, have recently released a White Paper entitled : “Taking the Government Out of Housing Finance: Principles for Reforming the Housing Finance Market.” Rep. Garrett, who is expected to lead the way on this issue, has been quoted this past week saying definitively, “There can’t be any explicit guarantee. The main problem has been that the taxpayer has been on the hook for this credit risk for a long time. We are adamant there should be no more bailouts.” This will make any compromise with the Democrat-controlled Senate very difficult, if not impossible, let alone with the Obama Administration. Although Garrett and his fellow House Republicans are often portrayed as sympathetic to the financial services industry, the Congressman has also been quick to pour his scorn on an industry proposal, from the Financial Services Roundtable, which proposes to replace the GSEs with several privately capitalized firms that would package mortgage-backed securities, while the federal government would guarantee the interest and principal for investors. In theory the very same entities securitizing nonconforming and private label securities would also be the co-owners of the guaranteeing entities, but these would only be allowed to work with traditional, conforming, 30 year mortgages. The Federal guarantee would not apply to the new entity itself, or any debts or securities issued by them to cover the costs of their operation. The Long Road Ahead The problem for Garrett and other Republicans will be the presence of a “federal catastrophic insurance fund,” similar to that which was put in place after 9/11 for terrorism reinsurance. This fund would support the guarantee only if one of these firms fell into financial trouble. The guarantee firms would contribute to the insurance fund and several layers of capital would need to be used up before the government was responsible. Even this level of taxpayer exposure is unacceptable to many Republicans. Instead of any government support, the Republican school of thought espouses a housing finance sector where the government operates only on the margins, by setting and enforcing standards for what types of mortgages can be securitized, what are appropriate servicing standards and procedures, and potentially by explicitly offering rental assistance for affordable housing. Most plans for privatization of the GSEs are implemented chiefly through the gradual reduction in the size of the conforming loan limit (at a rate of around 20% per year), so that in theory, the private sector is able to securitize more and more newly originated mortgages, and/or an alternative such as covered bonds are introduced. Due to the problems that may result from such a plan, it is likely that the Senate Banking Committee will proceed on GSE reform at a far more deliberate pace than the House akin to the recent Dodd-Frank Act preparations. The Senate Committee (which has yet to hold its first organizational hearing) also will have several new personalities, including a new Chairman, Tim Johnson (D-SD). Its increased Republican presence, which is increasingly made up of conservative-leaning members, will likely echo the House Republicans. Two Senate Republicans are likely to emerge as key thought-leaders in this debate, Senator Mike Crapo (R-ID) and Bob Corker (R-TN). Early indications are that although they each consistently show concern for taxpayers, they both recognize the inherent risks of rushing though a privatization of the GSEs with a weak housing market and without deep and serious reforms of the other aspects of housing finance, such as the rules regarding securitization (including servicing standards, representations and warranties.) It is doubtful that any substantive legislation will be introduced before the summer and even then, it will likely only be in the House, with the Senate months, if not nearly a year behind. For more info go to www.lawrencegmcdonald.com or www.dctripwire.com

Read the full article →

Howard Schweber: Laffer Curves and Tax Cuts: What Does It Take to Kill a Zombie?

January 31, 2011

I. The Theory: Laffer Curves, Supply Side Tax Cuts, and Demand Side Tax Cuts We are hearing a lot these days about the lessons of the Reagan tax cuts. We are also being treated to a revival of the Laffer Curve. Which is… interesting. There are two basic arguments for using tax cuts to stimulate the economy. One is the supply-side version: that’s the argument that cutting taxes for high earners will cause them to invest more in the economy, which will ultimately produce more jobs. You may recall this as the “trickle down” theory, later rebranded as the “rising tide lifts all boats” ideal. This argument makes sense so long as two things are true: that the economy is being held back by a shortage of capital available for investment, and that high earners are being held back from investing because they do not have the money to do so. Given that we are currently in a situation in which corporations are sitting on record amounts of uninvested capital and have just recorded the most profitable quarter in all of American history, it’s a little hard to see how those descriptions apply. The demand-side approach to tax cuts favors cuts for low and middle earners, in the hope that they will spend the extra money and thus stimulate the economy; this is essentially using tax cuts as a form of Keynesian stimulus. That argument makes sense so long as two things are true: that the economy is being held back by a lack of demand, and that there are lots of people who would buy more things if they had the money to do so. In the current economic climate, that seems like a fairly plausible pair of assumptions. But! The Laffer Curve provides supply-siders with a different explanation for why tax cuts for high earners will stimulate the economy. Laffer’s curve describes a theory about human motivation. It goes like this. Suppose you have someone earning $100 a year and paying 25 percent in taxes. That is, he gets to keep $75 out of that $100. Now suppose he has an opportunity to earn $120 next year, but the tax rate on that next $20 will be 35 percent. Laffer argued that a certain number of people would rather not earn that extra $20 if they only got to keep $13 of it — they would rather earn $100 and take home $75 than earn $120 and take home $88, maybe because there is extra work or risk involved in earning that next $13. As tax rates get higher, the number of people who are unwilling to earn more money if they will have to pay higher rates on that additional income goes up. At a certain point — the tipping point in the curve — cutting tax rates at the top of the scale will persuade enough people to be willing to make more money who otherwise would have refused to do so that the total tax revenues received will go up. Laffer never claimed that tax cuts will always result in increased revenue — it all depends on where you start on the curve. (To see the theory explained in Laffer’s own words, go here .) George H.W. Bush called this “voodoo economics,” and it’s not hard to see why (not that liberals talking about health care reform are above engaging in a bit of voodoo economics of their own.) On the one hand, it’s hard to quibble with Laffer’s contention that many people would decline to earn more money if it were going to be taxed at a rate of 100 percent — it’s what happens at other levels that becomes a matter for speculation, and perhaps some historical evidence. II. What Are Actual Tax Rates? There is something very strange about the way both Democrats and Republicans have been framing the conversation about tax cuts. The question a month ago was whether to retain all of the Bush tax cuts (the GOP’s position), or only those affecting income below $250,00 for a household and $200,00 for an individual. Here’s the strange part. Both sides were framing this in terms of distinguishing among persons, as in “we want a tax cut for the middle class but they want a tax cut for the rich.” But that is simply not true. We are talking about marginal tax rates here. That is, it is not the case that a household making more than $250,000 would pay the old, pre-tax cut rate on all their income, only on income above the $250,000 cap. On all their income up to that limit they would pay the same rate as everyone else. When we say that the top federal income tax rate is 37 percent, we don’t mean that the taxpayers who are in that bracket pay 37 percent in taxes on all their income, only on the income that the earn above the cut-off. The effective tax rates are quite different. Then, of course, there is the matter of the relentless focus on federal income taxes. Leaving aside state and local taxes (a significant omission given the importance of property taxes, state sales taxes, licensing fees, and so on). Focusing only on federal taxes, here are the effective rates as of 2005, according to the Congressional Budget Office. For each of several categories of households, I include the effective rates for all federal taxes, individual income taxes, payroll taxes, and corporate taxes. (I am not including federal excise taxes, which are not significant.) Note that these categories overlap, as the top 1 percent is included in the top 5% percent and so on. – top 1%: all taxes, 31.2%; income tax, 19.4%; payroll taxes, 1.7%; corporate tax, 9.9% – top 5%: all taxes, 28.9%; income tax, 17.6%; payroll taxes, 3.5%; corporate tax, 7.4% – top 10%: all taxes, 27.4%; income tax, 16.0%; payroll taxes, 4.8%; corporate tax, 6.1% – top 20%: all taxes, 25.5%; income tax, 14.1%; payroll taxes, 6.0%; corporate tax, 4.9% – everyone: all taxes, 20.5%; income tax, 9.0%; payroll tax, 7.6%; corporate tax, 3.1% That’s just the effective federal tax rates. A different question is what share of federal tax revenues, in each categories, come from each of these segments of the population? Again, these are 2005 data from the CBO: – top 1%: all taxes, 27.6%; income tax, 38.8%; payroll taxes, 4.0%; corporate tax, 58.6% – top 5%: all taxes, 43.8%; income tax, 60.7%; payroll tax, 14.4%; corporate tax, 74.9% – top 10%: all taxes, 54.7%; income tax, 72.7%; payroll tax, 25.8%, corporate tax, 81.6% – top 20%: all taxes, 68.7%; income tax, 86.3%; payroll tax, 43.6%; corporate tax, 87.8% (Source: Historical Effective Federal Tax Rates, 1979 to 2005 (Congressional Budget Office, December 2007), here . What about fairness? Don’t the highest earners pay more than their share in taxes? The answer is, “yes, by a little bit,” but not nearly as much as most people tend to think. Here is a look at the distribution of wealth, divided into all wealth, non-home wealth (known as “financial wealth”), and income. These data come from a study of 2007 Survey of Consumer Finance conducted by the Federal Reserve: – top 1%: all wealth, 34.6%; non-home wealth, 42.7%; income, 21.3% – top 5%: all wealth: 61.9%; non-home wealth, 71.4%; income, 36.9% – top 10%: all wealth, 73.1%; non-home wealth, 81.5%; income, 46.8% – top 20%: all wealth, 85.1%; non-home wealth, 91.6%; income, 61.4% (Source: Edward N. Wolff, “Recent Trends in Household Wealth in the United States: Rising Debt and the Middle-Class Squeeze–an Update to 2007,” Levy Economics Institute of Bard College working paper, March 2010.) So, for example, in 2006 (located neatly between the two years of the data presented above), the top quintile of households earned 55.7 percent of pretax income and paid 69.3 percent of federal taxes, while the top 1 percent of households earned 18.8 percent of income and paid 28.3 percent of taxes. But note that these last numbers are distorted by the fact they compare income to all taxes, not just taxes on income — If you look at the overall distribution of only federal taxes, the system is slightly progressive, and if you factor in the regressive effects of state and local property and consumption taxes, the entire system is even less progressive than that. III. What Did the Reagan Tax Cuts Actually Do? Historical discussions often lead into an impossible maze of information. For starters, there is the correlation-causation problem (if a tax cut is followed by growth, does that show that the tax cut caused the growth?) Nonetheless, we can at least look at some of the claims being made and try to focus more precisely on the areas of ambiguity. There are four major periods of tax cutting in modern history: the 1920s, the Kennedy administration, the Reagan administration, and the George W. Bush administration. I will focus primarily on the Reagan administration, with a few comments about the very large tax increases that were signed into law by Franklin Roosevelt. We frequently forget that in addition to several tax cuts focusing on income taxes, Reagan also signed off on about a dozen tax increases, primarily on payroll and excise taxes. Measured in dollar value, the tax increases were about half as large as the tax cuts. In one way, this complicates the picture: What if there had been no tax increases? (Or, conversely, what if there had been no tax cuts?) If our question is “what is the effect of tax cuts on economic growth,” this makes things complicated. On the other hand, if our focus is on the effects of tax rates on federal tax revenues — the Laffer Curve claim — we have a genuine experiment: by tracking the tax revenues that flowed in from the increased taxes and the decreased taxes, operating under the same economic conditions, we have an actual empirical test. Another question is how we separate the effects of tax cuts or increases from changes in the overall economy. Again, the fact that these cuts and increases occurred simultaneously helps solve that problem. It is also the case, however, that economists measure the effects of tax rates on revenues in terms of a percentage of GDP rather than in gross dollar amounts. During periods of growth, this begs a very large question: what if economic growth would not have occurred but for the tax cuts in question? On the other hand, Reagan approved both tax cuts and tax increased during a recession. I’ll come back to both of these points in a minute. A. Tax Cuts and Tax Revenue: the Reagan Case The main Reagan tax cut was the Economic Recovery Tax Act of 1981. That law had a number of elements that were phased in over time, reaching full implementation in 1983. By a nice coincidence, 1983 was also the year in which the most important tax increases took effect (the Tax Equity and Fiscal Responsibility of 1982, raising payroll taxes and certain excise taxes) took effect. Those and other Reagan tax increase were seriously regressive : In 1980, according to Congressional Budget Office estimates, middle-income families with children paid 8.2 percent of their income in income taxes, and 9.5 percent in payroll taxes. By 1988 the income tax share was down to 6.6 percent — but the payroll tax share was up to 11.8 percent, and the combined burden was up, not down. To test the effects of the two laws, I looked at the average for the four years following complete implementation (1983-1986), and compared that to the average for the preceding four years (1979-1982), using data compiled by the Tax Policy Center. The results : – income tax revenues: 1979-82, 9.075% of GDP; 1983-86, 8.05% of GDP (down 11.29%) – payroll tax revenues: 1979-82, 5.925% of GDP; 1983-86, 6.275% of GDP (up 5.5%) – corporate tax revenues: 1979-82, 2.125% of GDP; 1983-86, 1.375% of GDP (down 35%) But actually, the corporate tax cuts took effect in 1982. If we shift the years to that 1982 is included in the post-tax-cut category, the results are even more stark: the average corporate tax revenues from 1979-81 were 2.33% of GDP; from 1982-86 that average falls to 1.4%. And just for comparison, for the four years from 2006-2009, the averages are: – Income tax revenue: 7.65% of GDP – Payroll tax revenue: 6.275% of GDP – Corporate tax revenue: 2.125% of GDP To repeat the point, during the very same years, in the very same economy, tax cuts resulted in a decrease in tax revenues measured as a portion of GDP while tax increases resulted in an increase in tax revenues measured in exactly the same way. Which, of course, leaves the question of the relationship between tax cuts and overall economic growth. B. Tax Cuts and Growth Here, we can range a bit more widely, recognizing that the larger the historical sweep of the discussion the more we are certainly omitting critical variables. Nonetheless, this exercise may be useful as an antidote to the kind of monocausal, ahistorical claims that are sometimes made on behalf of cutting taxes, such as this statement from the Heritage Foundation : There is a distinct pattern throughout American history: When tax rates are reduced, the economy’s growth rate improves and living standards increase…Conversely, periods of higher tax rates are associated with sub par economic performance and stagnant tax revenues…President Hoover dramatically increased tax rates in the 1930s and President Roosevelt compounded the damage by pushing marginal tax rates to more than 90 percent. The preceding discussion was premised on the idea that we should look at tax revenues as a share of GDP. What if, instead, we look at the average annual change in tax collections? Here I do not have data breaking everything down by specifics, but on the other hand we have some long-term historical data which is potentially informative: – FDR 121.3% – Truman, 3.7% – Eisenhower, 2.4% – Kennedy, 4.8% – Johnson, 6.9% – Nixon, 0.3% – Ford, 6.4% – Carter, 3.0% – Reagan, 2.4% (Source: U.S. Office of Management and Budget, Historical Table 2.1, Budget for FY 1997.) That figure for FDR is not a misprint — over 13 years, the total increase in tax revenues was 1,865%. FDR raised the top rate from 25 percent to 91 percent (that rate had been lowered in the 1920s from 75 percent). What about general rates of economic growth? Here are the figures for increase in real GDP during the key years of FDR’s administration, according to the Bureau of Economic Analysis: – 1934,+10.9%; – 1935,+8.9%; – 1936, +13.0%; – 1937, +5.1%; – 1938, -3.4%; – 1939,+8.1%. What makes that 1938 figure so interesting is that in 1937, under pressure from conservatives in Congress, Roosevelt cut back on stimulus spending programs. Looking across a range of administrations , we get the following figures for overall economic growth: Kennedy-Johnson (49 percent over eight years), followed by Clinton (34 percent), followed by Reagan (32 percent), Nixon-Ford (24 percent) and Eisenhower (21 percent). IV. Conclusions(?) Actually, there are no clear affirmative conclusions to be drawn here except that we have overwhelming reasons to reject the claims being made by supply-side tax cut enthusiasts. The data certainly do not show that tax cuts never stimulate economic growth, nor even that they never stimulate economic growth enough to pay for themselves — the data on the Kennedy tax cuts suggest that this is exactly what happened. But those were primarily demand-side tax cuts, similar to the tax cuts that were the largest element in Obama’s stimulus package. The supply-sided, Laffer-curved theory of tax cuts as stimulus started out as voodoo economics 30 years ago. Today, Paul Krugman calls them ” zombie ” theories. Which brings us to the question that has been plaguing Hollywood and cable television lately: Just what does it take to kill a zombie?

Read the full article →

Elinor Steele: Talking With Iraq’s Women: Big Dreams and Enormous Challenges

January 31, 2011

In my six years managing worldwide communications for Tupperware, I’ve met with businesswomen from around the globe, from accomplished cosmopolitan women in European capitals to incredibly resourceful women in places like Indonesia and South Africa with no formal education who practically willed themselves to succeed. I’ve always been moved and motivated by these wonderful women, but the women I met — in, of all places, Baghdad — have affected me like few others. First, let me explain what brought me to Iraq. Tupperware CEO, Rick Goings, and I were invited as part of the Department of Defense Task Force for Business and Stability Operations partnering with Business Executives for National Security Delegation. The goal of the delegation was to learn about Iraqi businesswomen, the challenges they face in their country’s rapidly changing (and rapidly growing) economy, and the potential business and investment opportunities there. As studies have repeatedly shown, providing earnings opportunities for women is critical to a country’s growth. The World Economic Forum’s 2009 Global Gender Gap report suggests that closing the gender gap could boost U.S. GDP by as much as 9 percent, European GDP by as much as 13 percent and Japanese GDP by as much as 16 percent. The potential for growth is even greater in developing countries. As the Atlantic pointed out in a powerful article last summer, the greater the economic and political power of women, the greater a country’s economic success. Iraq is an interesting case, because juxtaposed with its long history of empowering women and incorporating them into the traditionally male-dominated Arab society, is a disturbing increase in violence against women since the start of the war. Female Iraqi professionals are often targeted for abduction and murder. Solving this problem will be the first critical step toward the success of women in Iraq, and likely the success of the Iraqi economy as a whole. My natural orientation is to believe that with sheer determination anything is possible. I’ve seen that first-hand working at Tupperware. But seeing the challenges women in Iraq are up against puts my belief to the ultimate test. After 30 years of war, Iraq has become a brown, dusty and fractured country. The infrastructure to rebuild is nearly nonexistent. We stayed in a compound in the international zone. There are heavy and huge metal gates with round-the-clock armed guards — one of many security checkpoints that you must pass through to go in or out of the Green Zone. As many of you know, the Green Zone is a 5.6 sq. mile area in central Baghdad that is the main base for foreign and Iraqi government officials. The official name is the International Zone, or as referred to locally, the IZ. The Red Zone obviously connotes danger, and refers to anything outside the Green Zone — which, in practical terms, is the rest of the country. Parts of the IZ were originally home to the villas of government officials and a number of palaces belonging to Saddam Hussein and his family. It was the center of Ba’athist Iraq. Our visit began with an introductory session during which we spoke with nine Iraqi businesswomen. Nearly all of them own construction or supply businesses that they built through contracts with the American military or American companies and non-governmental organizations (NGOs). I was especially impressed with a strong and confident woman named Azza. Azza returned to Iraq from the United States with her husband in 2004. He is a government official who works on educational partnerships for Iraq and the U.S. She leads training and development seminars aimed at helping small and women-owned Iraqi businesses win contracts. She also coordinates with NGOs to fund Iraqi women’s initiatives. Azza has a bachelor’s degree in business administration and a master’s in information technology, and she is determined to use her knowledge to help Iraqi women develop and grow businesses. Best of all, Azza has been encouraging every woman she meets with to be a leader in her community and to work with other women. This is essentially the model we’ve used to grow the Tupperware business in emerging markets — provide one woman with an earning opportunity that gives her money and self-confidence, then encourage her to serve as a mentor to others so they can achieve the same things. However, Iraq has unique obstacles that could make this model, or any business model, difficult to implement. While the women we met are amazing, this group was much different than businesswomen in other countries, due to the nature of their work. Most of the women’s businesses are heavily dependent on one customer — the U.S. government. Our government is not only the source of much of their income, but also the root of many of their contacts. When the U.S. pulls out of Iraq at the end of the year, most, if not all, of these contacts will disappear and these Iraqi businesswomen will have to transition to either contracting with the Iraqi government or establishing their businesses in the private sector. Two major challenges with this are an inherent distrust of the Iraqi government and the fact that these women aren’t able to find banks to lend them money. There’s a vicious cycle at work here. These businesses can’t transition to the private sector without financing, yet no bank will lend them money without 30 percent collateral and a business plan that demonstrates proof that they can be profitable. We asked why the women we met can’t take the knowledge they gained working with the U.S. government and use it to generate contracts with the Iraqi government. They responded that they don’t know if the Iraqi government will pay on time — or at all. However, they all hope that things will improve with the new government in place and that corruption will decrease. Of course, the problems go deeper than just the business environment. There are social obstacles that must be overcome as well. I’ll talk about those in my next post. In the meantime, I’d love to hear your thoughts on how American businesses can help improve the situation in Iraq.

Read the full article →

Robert Stavins: Pursuing Real Environmental Justice in California

January 31, 2011

California Governor Jerry Brown plans to move forward with the implementation of Assembly Bill 32, the Global Warming Solutions Act, under which California seeks to take dramatic steps to reduce its greenhouse gas emissions. Questions have been raised about the wisdom of a single state trying to address a global commons problem, but with national climate policy developments having slowed dramatically in Washington, California is now the focal point of meaningful U.S. climate policy action. California’s Plan A key element of the mechanisms to be used for achieving California’s ambitious emissions reductions will be cap-and-trade, a promising approach with a successful track record, despite its recent demonization as “cap-and-tax” by conservatives and other opponents in the U.S. Congress. Under this approach, regulators restrict emissions by issuing a limited number of emission allowances, with the number of allowances ratcheted down over time, thus assuring ever-larger reductions in overall emissions. Pollution sources such as electric power plants and factories are allowed to trade allowances, and as a result, sources able to reduce emissions least expensively take on more of the pollution-reduction effort. Experience has shown that cap-and-trade programs achieve emissions reductions at dramatically lower cost than conventional regulation. Concerns Yet some groups in California have been very uneasy about the prospect of cap-and-trade. In particular, the Environmental Justice movement has opposed this approach, citing concerns that it would hurt low-income communities. Professor Lawrence Goulder of Stanford University and I addressed such concerns in an article in The Sacramento Bee . One expressed concern has been that a cap-and-trade policy might increase pollution in low-income or minority communities. The apprehension is not about greenhouse gases (the focus of AB 32), since these gases spread evenly around the globe and thus would have no discernible impact in the immediate area. Rather, it’s about “co-pollutants,” such as nitrogen oxides, carbon monoxide, and particulates, which can be emitted alongside greenhouse gases. Because a cap-and-trade system would reduce California’s overall greenhouse gas emissions, it would also lower the state’s emissions of co-pollutants. Still, it’s possible, though unlikely, that co-pollutant emissions would increase in a particular locality. But here it’s crucial to recognize that existing air pollution laws address such pollutants, and so any greenhouse gas allowance trades that would violate local air pollution limits would be prohibited. If current limits for co-pollutants are thought to be insufficient, the best response is not to scuttle a statewide system that can achieve AB 32′s ambitious targets at minimum cost. Rather, the most environmentally and economically effective way to address such pollution is to revisit existing local pollution laws and perhaps make them more stringent. While much attention has rightly been given to the effects of potential climate policies on environmental conditions in low-income communities, it’s also important to consider their economic impacts on these communities. Reducing greenhouse gas emissions will require greater reliance on more costly energy sources and more costly appliances, vehicles and other equipment. Because low-income households devote greater shares of their income to energy and transportation costs than do higher-income households, virtually any climate policy will place relatively greater burdens on low-income households. But because cap-and-trade will minimize energy-related and other costs, it holds an important advantage in this regard over conventional regulations. Moreover, a cap-and-trade system gives the public a tool for compensating low-income communities for the potential economic burdens: If some emission allowances are auctioned, revenues can be used to mitigate economic burdens on these communities. The Way Forward All in all, cap-and-trade serves the goal of environmental justice better than the alternatives. This progressive policy instrument merits a central place in the arsenal of weapons California employs. Beyond helping the state meet its emissions-reduction targets at the lowest cost, it offers a promising way to reduce economic burdens on low-income and minority communities.

Read the full article →

Dollar Softness Ahead of the Income Report

January 31, 2011

Dollar Softness Ahead of the Income Report

Read the full article →

Jason Alderman: Taxes Follow You Into Retirement

January 26, 2011

Wouldn’t it be nice if, after decades of hard work, scrimping and saving, you could retire and no longer have to worry about paying taxes? But that’s about as likely as the Cubs winning the World Series. Even if your income drops significantly after retirement, chances are you’ll still be taxed on a portion of it. And, depending on where you choose to retire and your income sources, you’ll probably also face additional taxes on everyday purchases, real estate, capital gains, inheritances — the list goes on. Here are a few tax-related issues to consider when budgeting for your living expenses during retirement: Taxes on Social Security benefits. Most people can begin collecting Social Security benefits as early as age 62, although if you draw benefits before your full retirement age, your benefit amount may be reduced significantly. “Full retirement age” is 65 for those born before 1938 and gradually increases to 67 for those born in 1960 or later. (To calculate your full retirement age by birth year, click here .) Keep in mind, however, that even though many states don’t tax Social Security benefits, they are counted as taxable income by the federal government. So, depending on your overall income, you may owe federal income tax on a portion of your Social Security benefit. The formula is complicated, but basically: Single people whose combined income from all sources is less than $25,000 are not taxed on their Social Security benefit. (“Combined income” is adjusted gross income plus nontaxable interest earned plus half of your Social Security benefits.) For combined income between $25,000 and $34,000, you will be taxed on up to 50 percent of your benefit. For income over $34,000, up to 85 percent of your benefit may be taxable. For married people filing jointly: benefits are not taxable for combined income below $32,000; benefits between $34,000 and $44,000 are up to 50 percent taxable; benefits over $44,000 are up to 85 percent taxable. For more details, read the IRS’ Tax Topic 423 and Publication 915 . Working and Social Security. Some people find that after opting to collect a reduced Social Security benefit before full retirement age, they can’t make ends meet and must go back to work. But this can backfire: If your wages are more than $14,160 a year, you will lose one dollar of Social Security benefits for every two dollars you earn over that amount. (Note: Investment income doesn’t count.) If you’re scheduled to reach full retirement age during 2010, the benefit reduction will drop to $1 for each $3 you earn above $37,680 until the month you reach full retirement age. After that, there is no further reduction. So, if you think you’ll need to continue working to make ends meet, it might be wiser to hold off on collecting Social Security until you reach full retirement age. Be aware, though, that these benefit reductions are not completely lost: Your Social Security benefit will be increased upon reaching full retirement age to account for benefits withheld due to earlier earnings. One last point about taxes and Social Security: Any wages you earn after you’ve begun to collect Social Security retirement benefits are subject to Social Security and Medicare taxes, regardless of your age. To learn more, read How Work Affects Your Benefits at the Social Security website. Taxes on IRA and 401(k) withdrawals. After age 59 ½, you can start withdrawing balances from your IRA or 401(k) without paying the 10 percent early withdrawal penalty. However, don’t forget that you will pay federal (and state, if applicable) income tax on the withdrawals — unless it’s a Roth plan, whose contributions have already been taxed. Other taxes. Some people move to another state after retirement thinking they’ll lower their tax burden. For example, seven states do not tax personal income (although another two do tax dividend and interest income). And five states charge no sales tax. But because property, inheritance and fuel taxes and other cost-of-living expenses vary significantly by community, you should only consider such moves after doing thorough research. The Retirement Living Information Center features breakdowns of the various kinds of taxes seniors are likely to pay, state by state, including taxes on income, sales, fuel, property, inheritances and other items. You may want to consult a financial planner long before retirement to make sure you fully understand all the many tax and income implications. If you don’t have one, the Financial Planning Association is a good resource. Bottom line: Be sure to include taxes among the many expenses you need to plan for at retirement. This article is intended to provide general information and should not be considered legal, tax or financial advice. It’s always a good idea to consult a legal, tax or financial advisor for specific information on how certain laws apply to you and about your individual financial situation. To participate in a free, online Financial Literacy and Education Summit on April 4, 2011, go to Practical Money Skills .

Read the full article →

Watchdog: Justice Thomas Failed To Report Wife’s Income

January 23, 2011

Reporting from Washington — Supreme Court Justice Clarence Thomas failed to report his wife’s income from a conservative think tank on financial disclosure forms for at least five years, the watchdog group Common Cause said Friday. Between 2003 and 2007, Virginia Thomas, a longtime conservative activist, earned $686,589 from the Heritage Foundation, according to a Common Cause review of the foundation’s IRS records. Thomas failed to note the income in his Supreme Court financial disclosure forms for those years, instead checking a box labeled “none” where “spousal noninvestment income” would be disclosed.

Read the full article →

Anna Cuevas: Hope for Homeowners, Says HAMP

January 12, 2011

Meet Harry. Harry is a professional visual artist in business for himself, and for many years he has owned his home for quite some time as well. Harry did not buy above his means. His area has a high cost of living but Harry had a thriving business, in fact he has even done freelance work for many big corporations when the economy was doing better and more money was in their budgets. When the mortgage meltdown began Harry did not even think it would affect him, but it really did. Little did he know that he was about to embark on one of the most difficult journeys of his life, the fight to save his family home. When the his customers began to cut back, Harry’s income began to take a big hit. Harry was a very responsible family man and the thought of not being able to meet his obligation tore him up inside. The stress began to affect his concentration on developing new business, and even his health began to deteriorate as he could not even sleep at night. Harry began to worry day and night about what to do about his bills and his mortgage. How would he ever get out of this downward spiral. He decided to apply for HAMP and what he thought was going to be a helpful situation put him deeper and deeper in the hole and made him almost paralyzed in the fear of potentially losing his home. The anguish he felt was almost unbearable. He went to an agency for assistance and yet again he was denied and no one really understood why. The problem was in not understanding his income as a self employed borrower , knowing where he could begin to make changes to his bottom line, and lastly, how the bank would view his application. In a time where businesses were cutting back Harry also needed to revisit his company’s budget and outgoing expenses. He tried again and reapplied on his own after that and was denied again. Harry quickly realized in the words of Albert Einstein that “the definition of insanity is doing the same thing over and over again and expecting different results.” Something had to change, or Harry would lose everything he has worked so hard for. When desperate times call for desperate measures the logical steps of lowering expenses and finding ways to increase profit are not always crystal clear. It is especially difficult to focus on taking the right action when your thoughts are frozen in anxiety and despair. It took some time for Harry to get himself back on track and regroup. But once he had clear goals and targets he needed to reach he was able to execute his plan and strive for the changes he had to make in his business model to save his home. Next he realized he did not understand the program he was applying for, so he began to empower himself with information and he knew exactly where his financial package stood in the eyes of the lender before he sent in his package to Bank of America this forth and hopefully final time. He began to meditate, get closer to God and think and act positive, determined, focused and with a real knowing that he would succeed and would not give up until he saved his home. Unfortunately, the resubmission of his HAMP application was initially met with resistance and he could not get anyone to see the month and months of work Harry had done to make changes to his business finances as they kept reverting to the numbers he had submitted in late 2009 versus taking into account the great changes Harry had strived so hard to make in 2010. He had to put together some escalation letters, be persistent in his endeavor to succeed, and not take no for an answer. Harry finally got someone to listen to his request and his new HAMP application was finally accurately reviewed. Less than one month later, Harry was approved for his affordable and permanent loan modification. Whatever the mind of man can conceive and believe, it can achieve. Napoleon Hill Now Harry and his family can smile for the camera and say HAMP! Harry saved his home and he also learned some valuable lessons in perseverance, resilience and self advocacy, not to mention the power of positive thinking to improve all aspects of your life. Harry is on the road to recovery from the downward spiral of the economy he fell victim to. Things are really looking up for Harry and his family. Harry now knows that there is a light at the end of the tunnel and you have to take a step back and out of your current personal drama to find the path that leads you out, then find the courage within to take action and devise a clear plan. It may take some time, focus and vision but there is a way to get through the hard times. Be your own best advocate, the only way you can do that is to get the information you need to so that you are empowered when you are trying to save your home. To think for yourself you must question authority. The days of just accepting the answer you get are over, you must be proactive on your own behalf, period. **** Anna Cuevas is an invited blogger on The Huffington Post, author of several soon to be published books including “Fight for Your Dreams” with Bestselling author, Les Brown . Anna is the Founder of www.askaloanmodguru.com a blog dedicated to empowering homeowners with free information they need to confidently apply for a loan modification and also providing the latest Do It Yourself loan modification tools to Save Your Home. Request your free copy of “Dirty Little Loan Modification Secrets You Must Know” along with free bonus materials that take the guess work out of the loan modification process to stop your foreclosure dead in it’s tracks.

Read the full article →

Eric Schoenberg: Zombie Economics and Just Deserts: Why the Right Is Winning the Economic Debate

January 7, 2011

Economist Paul Krugman recently decried “zombie economics,” policies advocated by “free-market fundamentalists [who] have been wrong about everything yet now dominate the political scene more thoroughly than ever.” I share his chagrin, but suggest that the problem is that Krugman was wrong to also assert that “economics is not a morality play.” In fact, I believe that defeating the zombie-like resilience of laissez faire capitalism will require directly refuting the moral belief in the inherent fairness of free market outcomes. Consider a recent suggestion by Harvard economist Greg Mankiw, former Chairman of George W. Bush’s Council of Economic Advisors, that tax policy should be based on a ” Just Deserts Theory ” under which “people should get what they deserve.” This principle, a restatement of Equity Theory, proposed by psychologist John Adams in 1963 to explain how people evaluated distributional fairness, has long played a central role in tax debates , and is one that I, like many liberals, heartily endorse. Indeed, I think that widespread support for free markets is based more on belief in their inherent morality than on belief that they promote economic growth, potentially explaining the religious fervor of free-market fundamentalists defending their faith despite the considerable counter-evidence provided by recent events. Mankiw concisely summarizes the theory underlying the ethical argument for market capitalism: “under a standard set of assumptions… the factors of production [i.e., workers] are paid the value of their marginal product… One might easily conclude that, under these idealized conditions, each person receives his just deserts.” Mankiw’s long-standing opposition to higher taxes on the wealthy suggests that he thinks these conditions usually pertain in the real world, too. Consider me skeptical. The list of “standard assumptions” open to question is long, but two are particularly problematic (Northwestern economist Jonathan Weinstein has critiqued several others). First, how can we be sure that marginal productivity is the same as social contribution? A safe cracker in a criminal gang may indeed receive loot equal to his marginal productivity, but this doesn’t mean that he is creating social wealth. Thus, financial industry profits accounted for over 40 percent of all corporate profits in 2004-5 , but does anyone seriously contend that Wall Street created (rather than redistributed) 40 percent of wealth during that period? The second problem is one that Mankiw himself acknowledges when he comments that the dramatic growth in income at the very top of the economic pyramid might be thought of as a lottery, with a few lucky winners reaping the lion’s share of rewards. As economists Robert Frank and Philip Cook point out in their book The Winner Take All Society , technological change and ever-larger markets have caused small differences in ability, effort or luck to translate into large differences in income. Economic theory says that such “tournament rewards” create an incentive for individuals to exert maximal effort, consistent with just deserts as long as you don’t mind that “losers” get much less despite trying nearly (or just) as hard. But theory also says that tournament rewards create an incentive for people to sabotage the efforts of others and to take on as much risk as possible. Given the role that excess risk played in Wall Street’s meltdown, this is hardly a ringing endorsement for the fairness (or efficiency) of free market outcomes. So Mankiw’s “easy” conclusion that markets deliver just deserts depends critically on his own moral intuition about what is just. Given humanity’s well-known ability to convince ourselves that what is in our own self-interest is fair, it is hardly surprising that wealthy conservatives like Mankiw would believe that free market capitalism delivers fair outcomes. But it is noteworthy that in one real-world situation with tournament rewards — lotteries — society typically imposes taxes in excess of 50 percent, since winners pay regular income taxes on earnings already halved by the governmental sponsor’s share of the pot. Moreover, a large body of laboratory research investigating moral intuitions regarding the division of a pool of money has demonstrated the powerful appeal of an equal split , a preference consistent with anthropological evidence that hunter-gatherer groups are remarkably and consistently egalitarian. While a handful of studies have demonstrated that preferences for equality in the laboratory are (slightly) reduced when subjects have to earn the money at stake, this involves experimenters (who provide the money in the first place) making it clear that they consider the earner to have made a commensurate contribution in the laboratory setting. So, sure, people like just deserts when there is compelling evidence that they are indeed just. But the egalitarianism of hunter-gatherers, whose groups undoubtedly included considerable and obvious variation in individual abilities, suggests that the standard of proof for justifying inequality can be quite high. I therefore think it likely that conservative icon Joe the Plumber favors lower taxes not simply because his own personal experience suggests that smarter and harder-working plumbers (granted, he isn’t actually a plumber ) tend to provide better services and to have proportionately higher incomes as a result, but also because authorities like Mankiw assert that a complicated mathematical theory says that this intuition is true throughout the economic system. To be sure, populist Joe might claim to disdain elite theory, but as Keynes once observed, “practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.” Thus, Tea Party advocates sustain their belief in the market’s fairness by blaming the government for bailing out Wall Street and interfering with the market’s ethical magic , explaining why their initial targets were Republicans who supported the bailout ( like Mankiw ). Meanwhile, Democrats have completely failed to link higher taxes on the wealthy to populist anger at those who prospered while driving the economy into a ditch. To regain the initiative, I believe, progressives must directly challenge the claim that unfettered markets create just deserts. This won’t be easy. Free market fundamentalists have the advantage of a simple message — ending bailouts will deliver just deserts — and of nearly limitless funds from rich folks who benefited from the bailout but are happy to claim that it should never happen again. Let me therefore suggest one way to start: replace the estate tax with an inheritance tax. Republicans use the term “death” tax to imply that society is confiscating a lifetime of just deserts wealth. But if taxes are to be based on Mankiw’s proposal that those “who contribute more to society deserve a higher income that reflects those greater contributions,” then inheritors who have contributed nothing themselves should pay substantially higher rates (full disclosure: I am myself an inheritor). I believe a debate about inheritance taxes will allow us to distinguish two arguments that appear similar but are critically different. The claim that people should get their just deserts is tricky to implement, but offers a valid moral principle to guide public debate. But the closely related argument that government should “keep its hands off my money” represents pure selfishness by people who refuse to acknowledge that public goods like education and defense are essential for the creation and protection of private wealth. Progressives have to make clear that the attempt to eliminate taxes on inheritors suggests that conservatives believe that all-you-can-eat socialism is fine for the rich as long as there is just-deserts capitalism for everyone else.

Read the full article →

Andrew Sum: Ringing Out the Lost Economic Decade of 2000-2010: Part Two

January 7, 2011

The long lasting economic troubles experienced by the Japanese economy in the 1990s have frequently been referred to by economists as the Lost Decade. In our previous blog, we argued that the past decade (2000-2010) was in many respects a “lost decade” for our nation’s economy. The performance of the U.S. economy in producing additional real output (GDP), new payroll employment opportunities, or any employment for workers (16+) over the past decade was the worst in the past 70 years. Total payroll employment in 2010 was below its level in 2000 for the first time since the Great Depression. These declining labor market opportunities for the vast majority of workers also were accompanied by very weak performance in raising the real weekly earnings of most employed workers, increasing real household income, or reducing poverty problems. There was, however, one area in which the U.S. economy performed well over the past decade. That area was the sharp gain in labor productivity in the nonfarm business sector of the economy. Between 2000 and 2010 (through the 3rd quarter), real output per hour of work in the nonfarm business sector increased by slightly more than 29%, its best record since the decade of the 1960s. Normally, this sharp gain in labor productivity would have been expected to substantially improve the real weekly earnings of many American workers. Unfortunately, this was not the case. A combination of very slack conditions in labor markets, especially at the beginning and end of the decade, increased international competition, and a declining union bargaining presence kept the increases in hourly and weekly earnings well below the strong gain in labor productivity. The median real weekly earnings of the nation’s full-time wage and salary workers rose by only slightly more than 2% over the decade. Among males, the increase in median real weekly earnings was only a little more than 1% while women’s weekly earnings rose more strongly by 7% over the decade. The youngest workers (those under 25 years of age) fared the worst, experiencing a three per cent decline in their median weekly earnings while 25-34 year olds’ and 45-54 year olds’ weekly earnings remained flat, and older workers (55+) gained 11%. The mean weekly earnings of the nation’s nearly 90 million private sector, production and non-supervisory workers increased by only 4% over the decade. In contrast, corporate profits (before tax) increased in real terms (in constant 1999 dollars) by $470 billion or 58%. The growth in the level of these pre-tax corporate profits was about five times higher than the total growth in the annual pre-tax earnings of the nation’s nearly 90 million production and non-supervisory workers. The declines in payroll employment, the steep rise in unemployment and underemployment, and limited wage gains for those in the bottom and middle of the weekly wage distribution helped push down the real annual incomes of nearly all U.S. households. The median real annual income of U.S. households declined over the decade by $2,600 or 5%. This was the first time since the end of World War II that median household income failed to grow over an entire decade. Real annual incomes of U.S. households fell all along the distribution from top to bottom; however, the relative sizes of these income losses were largest at the bottom and middle of the distribution. The real income of those at the 10th percentile fell by close to 10 per cent, those in the middle of the distribution by 5 per cent, and those at the near top of the distribution (90th and 95th percentiles) by only one per cent. These divergent trends in annual income losses generated an increase in the degree of inequality in the household income distribution of the nation. The share of aggregate household income captured by the top quintile increased over the decade, rising above 50% by 2001 and hitting 50.4% by the end of the decade (in 2009). Every other group’s share of the income pie declined over the decade. In 2009, the most affluent one-fifth of households received more income than the bottom 80 per cent of households combined. In his 1937 Inaugural Address to the nation, then President Franklin Roosevelt exclaimed that, “The test of our progress is not whether we add more to the abundance of those who have too much; it is whether we provide enough for those who have too little.” The economic results for the past decade clearly indicate that we have failed this test. The combination of declining real household incomes and a worsening degree of inequality combined to push up the incidence of official poverty problems by the end of the decade. In 2009, the overall poverty rate of the nation had increased to 14.3%, the highest person poverty rate since 1994. All of the increase in poverty problems took place among the nation’s non-elderly population under age 65, with the youngest members faring the worst. More than 1 of every 5 children under age 18 were living in poverty, with more than 38% of children in the nation’s youngest families (head under 30) being poor in that year. Among the nation’s 18-64 year olds, 13% were poor, the highest such poverty rate among this age group since the early years of the 1960s. The War on Poverty was being lost in the Lost Decade. One can only hope that this outcome will not be repeated in the new decade. But as Jose Saramago noted in The Double (2007), “It is a well known fact that no human being can live solely on hope”. Andrew Sum and Joseph McLaughlin, Center for Labor Market Studies, Northeastern University.

Read the full article →

Bank Of America’s Mistaken Foreclosure Reportedly Ruined Couple’s Finances

December 30, 2010

Yet another nightmare story has emmerged involving a mistaken foreclosure. Bank of America reportedly put a Connecticut family’s home in foreclosure despite the fact that the couple never missed a payment — and was actually in the process of refinancing their mortgage with the bank. According to CTWatchdog.com , Shock Baitch and his wife Lisa (Friedman) Baitch wanted to refinance their mortgage with Bank of America, but a bank representative reportedly put the couple into the Home Affordable Modification Program, the Obama administration’s much-maligned foreclosure prevention initiative. The program was created to help struggling borrowers. Unfortunately, the Baitch’s weren’t struggling. In an interview with CTWatchdog.com , Baitch was understandably livid: “Bank of America lied and submitted fraudulent information to the credit bureaus and now I am literally and financially paying for it,” Baitch said. “I looked into help with a consumer counseling service, but we can’t participate because our income is too low to meet the payment requirement. I looked into bankruptcy, but we have too much equity in the house. I cannot meet the minimum payments now on the credit cards…” The Baitch’s story is one of a growing number of seemingly mistaken foreclosures involving mortgage servicers, may of which have left homeowners to pay for the legal and administrative costs required to rectify their situation. In October, Bank of America admitted there had been problems with some foreclosures. And while the mortgage servicing industry has repeatedly stated that the problems involve only a handful of homeowners, housing advocates aren’t so sure. In December, the Associated Press took an in-depth look at the subject. In addition to an investigation launched by all 50 states , the AP found homeowner lawsuits in Florida, Nevada, Texas and Pennsylvania, and class action suits in Kentucky and California. Here’s more from the AP: “This is the worst I’ve ever seen it,” says Ira Rheingold, an attorney and executive director of the National Association of Consumer Advocates. Diane Thompson, a lawyer with the National Consumer Law Center, has defended hundreds of foreclosure cases. “In virtually every case, I believe the homeowner was not in default when you looked at the surrounding facts. It is a widespread problem throughout the country.”

Read the full article →

Max Fraad Wolff: Sell Local?

December 28, 2010

Local and state finances receive very little national attention. Across the most recent economic crisis local government finances have taken an epic battering. The situation in California has received some attention, less than it deserves. The terrible toll of past policy and present economic weakness has not been drawn out into the light of debate. This short article seeks to start the conversation for three reasons. First, the financial condition in our 50 states, 3000 counties and 36,000 municipalities is severe. Second, state and local governments employ almost 10% of the US population and have been firing folks at a brisk clip. Thirdly, contraction in state and local government hiring, spending and service provision threatens to lower economic growth, reduce quality of life and increase inequality of income and opportunity. We are early into a decentralized, local austerity program similar to events in the Euro Zone. How bad is it? Bad. The states are in serious difficulty. As the recession began in late 2007 states were already spending at a fairly high clip and taxing at relatively low rate levels. As recession took hold demands for state services — direct and through aid to localities — increased sharply. States rely heavily on income and sales taxes. Consumption fell, employment fell and wages were stagnant to down. This reduced all the major sources of revenue. US states continue to face record demands for services, pension costs and health care costs. States have unfunded health and pension liability claims that run many hundreds of billions of dollars. Revenues are significantly down from 2007 levels. From 2003-2007 states were beneficiaries of revenues from booming construction, housing markets and retail spending. Housing has been in the worst recession in living memory and the average house price is off more than 25% since 2006. Declining personal income tax receipts, falling corporate income tax receipts and declines in sales tax have created one of the largest declines in income to US states in modern history. 2010 is shaping up to be a better revenue year than 2009. However, there will be widespread and long term deficits in most states. States face over $110 billion in budget shortfall in 2011. Many states have been getting by through a combination of federal assistance and issuing federally subsidized bonds — Build America Bonds. These two short term measures will be trailing off across 2011. Localities relay on state assistance for nearly $1 in every $3 that they spend. Localities depend heavily on property taxes for the balance of their income — in some cases sales taxes. The massive decline in property values in the US over the last few years will begin to put pressure on already stretched local and municipal budgets. It takes several years for falling property prices to show up in declining revenue to localities. Property is reassessed only every few years. State aid will be in decline as federal stimulus to states will trail off this year and states are in dire financial health. Local areas spend more than half their budgets on education and social services. These budgets are under significant and growing pressures. Like states, most municipalities have a fiscal year that ends in June and begins in July. Look for battles over wages, benefits and employment levels to heat up this spring. Massive pressure to lower costs and employment at the state and local level are here and are likely to grow more intense soon. According to research from the Congressional Budget Office (CBO) local governments have cut their spending by 2% and reduced their workforces by 241,000 since the start of this recession. Bureau of Labor Statistics (BLS) data shows that states have reduced their payrolls by 166,000 between November of 2009 and November 2010. There is every indication that these trends, state and local, will continue and are likely to become more dramatic. As payrolls are cut we should expect less service provision despite the continued high demand for services. This is a recipe for stresses for public educational institutions, law enforcement, colleges, universities, infrastructure and many other services. The reductions in spending and employment at the state and local levels will reduce economic growth. Reduced growth is likely to acutely affect lower income populations. Cuts in progressive and graduate federal income tax, estate taxes and capital gains taxes reduce the tax burden on the most affluent. Rising local property taxes, rising sales taxes and declining services at the state and local level are regressive. Taxes that land hard on lower and middle income households will rise and services to these households will fall. Headwinds The most recent tax bill reduces the income tax levels on more affluent Americans. This is likely to hurt localities. How? Municipal bond markets are how localities and local authorities — schools, utilities, water facilities — raise money for projects. They sell bonds — called municipal securities — to raise money. The income from these bonds is usually tax exempt. The higher the investor’s tax rate, the more appealing municipal bonds usually are. Cutting the tax rate on higher income earners lowers the appeal of municipal bonds. Additionally, there is growing worry that we are likely to see rising defaults or attempts to renegotiating debts from municipalities over the next 6 to 12 months. Thus, our recent tax cut will further complicate the present difficulties in the municipal bond market. A federal program — part of the stimulus — has been subsidizing the interest cost of local bond issuers. This is set to expire after 2011. There is every reason to believe that states and localities will continue to reduce spending and employment. This will mean fewer and more stressed budgets and personnel dealing with historically high levels of need. Education and basic social services are likely to suffer the lion’s share of pain. This bodes very poorly for equality of opportunity. At risk communities are already suffering from weak labor markets, low wages and the end of unemployment benefits. To this we will add a shrinking pool of opportunity for secure jobs with high benefits in state and local employment. We are likely to see public sector unions weakened. There is a great coming fight about public sector pension benefits. Beginning in February and March there will be several rounds of contentious and dramatic suggestions of social spending cuts as Congress is required to debate and vote on raising the national debt ceiling. We now run the risk that 2010 closes with tax cuts heavily beneficial to the most affluent Americans and 2011 begins with service, education and employment cuts that will fall hard on the least affluent.

Read the full article →

Number Of Uninsured Americans Soars Above 50 Million

December 28, 2010

Less than a year ago, Francis Campos-Dunn was still working at a county hospital in the San Francisco Bay Area, helping patients navigate the often-maddening bureaucracy required to draw on their health insurance. These days, she has a new set of problems to navigate: how to manage her own care without any insurance of her own, having slipped into an unfortunate but fast-growing slice of the population–Americans who have lost their jobs and now lack health coverage. Back when was still working, Campos-Dunn, 42, earned $4,000 a month, enough to make her co-payments for regular medical care. These days, she depends on $300 a month contributions from her 16-year-old son–money he earns at a part-time job–just to pay to the rent. When a recent seizure left her with two broken teeth, she skipped the required treatment and opted to have the teeth pulled instead, because she lacked the funds–a choice that would have previously seemed unthinkable. As the Great Recession has sown unemployment and downgraded work even for those people who have held on to their jobs, the number of Americans lacking healthcare has swelled beyond 50 million, according to a sobering new report from the Kaiser Foundation . Among the report’s most troubling findings: The number of Americans without any health care coverage grew by more than four million in 2009. That left almost one-fifth of non-elderly people uninsured. Among those between 19 and 29 years old, nearly one-third lacked coverage. The study underscores the degree to which the recession has accelerated the loss of basic elements once viewed as inextricable pieces of a middle class life. The number of Americans lacking medical coverage now exceeds the population of Spain. Nearly all Americans over 65 are insured by Medicare, the government-run health care plan, but those beneath that age are increasingly vulnerable to losing health care once provided by their employers or finding themselves unable to afford private coverage, according to the report, “The Uninsured: A Primer.” As those lacking health insurance grow in number, so do those missing out on necessary medical attention. About one-in-four uninsured adults have forgone care in the past year because of costs, compared to only 4 percent of those who have private coverage, according to the report. Those lacking health coverage are vulnerable to what has become a commonplace financial calamity: confronting a medical emergency, and having to pay for care entirely out of pocket. This year, 27% of uninsured adults used up most or all of their savings paying medical bills, according to the study. Half of these uninsured households had total assets of $600 or less. Medicaid covers Americans with the lowest incomes, but that fact merely mitigates conditions for people in abysmal circumstances: Medicaid beneficiaries are typically in much worse health than those with private coverage. They are likely to have incomes that place them well below the poverty line, and to suffer health conditions that impede their ability to work, exacerbating their difficulties. Under the health reforms championed by President Obama, Medicaid is set to expand in 2014 to cover almost all people under 65 with incomes up to 138% of the federal poverty line. That would provide health care to many more Americans who now lack coverage. But until then, many Americans will continue to shoulder the burden of unaffordable health care costs. The soaring number of people falling through the cracks and going without health insurance is in large part the result of the recession, which has eliminated millions of jobs, along with employer-sponsored coverage. Roughly half of all working age Americans with insurance have it through their employer. Even among those who have avoided unemployment, millions have been forced to take temporary or part-time positions for lack of available full-time work, often surrendering their benefits in the process. More than half of those who are officially unemployed have no health coverage whatsoever, according to a Rutgers University study, “The Shattered American Dream: Unemployed Workers Lose Ground, Hope, and Faith in their Future.” Those numbers increase to nearly 60% for those who have been unemployed for over six months. Six in ten Americans have been unemployed for over a year. Yet even if the economy soon adds more jobs and lowers the ranks of the unemployed, the scarcity of health coverage is likely to endure, argues one of the study’s authors, Carl Van Horn, Professor of Public Policy at Rutgers University and Director of the John J. Heldrich Center for Workforce Development . Long before the recession, he noted, having a job conveyed no guarantee of coverage. “Just recovery of jobs isn’t sufficent to address the issue,” he said. “A lot of the jobs that people are getting are part-time jobs and/or don’t have healthcare benefits attached to them.” And even those who are eligible for healthcare in the wake of job loss cannot always take advantage of what is available to them. “It’s pretty obvious that government policies are confusing,” Van Horn said. “A lot of folks are losing their jobs for the first time and they don’t know what they’re even entitled to.” Paying for healthcare can be one of the first things to go for families dealing with constrained finances. Over 50% of those surveyed said that healthcare was one of the expenses they could not afford to pay. “We have an employer-based healthcare system,” Van Horn said. “And if your lose your job, unless you’re old or very poor, you have no health care insurance.” In San Mateo, California, just south of San Francisco, Francis Campos-Dunn understands this fact all too well. For years, she has contended with a variety of often-expensive health problems, making her insurance situation particularly crucial. Her administrative job at the San Mateo County Hospital provided for her needs and also delivered insurance for her son and a granddaughter. But late last year, she was laid off, and so began a painful and bewildering lesson in the particularities of the American health care system. Kaiser, the giant health maintenance organization, offered her the option to continue her health insurance for $1,500 dollars a month. But that outstripped her total income– a disability payment of $1,300 a month. So Campos-Dunn turned to Medical, California’s state-run health insurance–the state’s version of Medicaid. But they told her that her income exceeded the allowable limit by $32 a month and denied her claim, she says. Undeterred, she appealed, was granted a hearing and was subsequently approved for the state insurance. But three weeks later, another letter arrived informing her that once again, she made too much money to qualify for the state’s health insurance. Since her unemployment, she has struggled with this ceaseless back and forth with the bureaucracy, going without care for weeks in between. “I never thought I’d be in this position,” she said. “I used to help families get on insurance. I used to hear all these problems. I used to think anything was possible to try to figure out a way around it so they could get health insurance. Now I have no health insurance.” With her medical condition continuing to require care, her battle to keep up has worn her down past the point where she can even muster the effort to continue fighting. “It got up to a point where I didn’t even try to deal with them anymore,” she said. “If I ended up in the hospital I’d just pay the bill.” She now owes Kaiser over $55,000, she says. She owes the San Mateo County Hospital–her old employer– over $22,000. “I just don’t think it’s right,” she said. “I’ve been working since I was 15 years old and now I can’t access what I need because I make 32 dollars too much.”

Read the full article →

Economy Recovering Slowly, As Jobs And Housing Fail To Add Much To Growth

December 23, 2010

A growing sense that the economy is finally mounting a genuine recovery was reinforced this week as the government released several encouraging pieces of data. But the progress appeared modest and still tenuous, suggesting that even palpable improvement to the nation’s fortunes may not yield vigorous economic expansion anytime soon. As millions of people still struggle to find work, and as many continue to lose their grip on their homes–adding to a still anxiety-provoking glut of foreclosed real estate– many experts anticipate that a significant period of pain may yet lie ahead. Consumer spending, which comprises roughly 70 percent of the nation’s activity, increased in November–the most encouraging sign of all–and new and existing homes traded hands more briskly than in the previous month, even as those levels were down from a year earlier. But economists emphasized that substantial pressures continue to weigh on American consumers, raising questions about the intensity and sustainability of any recovery on the heels of the Great Recession. Ordinary consumers are still absorbing the reality of weak household finances, lost wealth, large credit card debts, and gnawing worries about the job market. Until the economy can again be fueled by spending based on solid and sustainable paychecks–a still faraway moment in the midst of 9.8 percent unemployment–growth is unlikely to be powerful enough to become self-perpetuating, economists said. Ordinary people must first see their finances improve, enabling consumer demand and corporate hiring to start reinforcing each other. “It’s a mixed bag,” said Chris Christopher, senior principal economist for IHS Global Insight. “Certain things are looking good, and certain things, well, you have to wait and see.” Even things that are looking better are far from looking great. Last month, consumer spending picked up slightly, and home sales quickened their pace, according to data released Wednesday and Thursday. As the holiday season began, consumers increased their spending by a relatively brisk 0.4 percent in November compared to October, according to the Bureau of Economic Analysis . Meanwhile, income grew 0.3 percent in November. But economists emphasized that these improvements were relatively modest. Spending and income gains were lower in November than in October. They did look much better, though, than a bleak September, when income didn’t grow at all. Housing sales were similarly lackluster, even as they improved. Sales of previously owned homes increased 5.6 percent in November, while sales of new homes climbed 5.5 percent in the month, according to new releases from, respectively, the National Association of Realtors and the U.S. Commerce Department. But when the yardstick is the same month last year, November’s sales of existing homes were down 27.9 percent from last year, and sales of new homes were down 21.2 percent. Real estate prices, meanwhile, continue to fall, making homeowners more vulnerable to default and foreclosure, and leaving banks still uncertain about the extent of the losses they may yet have to absorb. That tends to make banks more conservative, hanging on to their dollars as opposed to lending them out. Tighter bank credit puts the clamps on businesses that might otherwise expand and hire. Indeed, as economists this week tried to assemble a coherent picture from a flood of contrasting data points, many concluded that modest improvements were unlikely to prove sufficient to lead to robust consumer spending. With the labor market still weak and housing continuing as a drain on the wealth of many Americans, consumers appeared unlikely to spend the dollars necessary to promote a strong recovery. Once the holiday season is over–and with it, the usual seasonal boost to shopping– consumer spending is expected to diminish before it grows again. “That pace of growth is not going to stick around,” said Anika Khan, an economist at Wells Fargo. “Consumers are still fixing their balance sheets.” After many spent above their means in the years leading up to the financial crisis, Americans are now struggling to pay down their debt. That process isn’t easy. During the third quarter, banks wrote off $16.8 billion of debt, accepting losses for loans that wouldn’t be paid back, a recent study shows. On net, consumers increased their debt during that period by $6.5 billion. Still, even as consumers remain generally cautious–and for good reason–the data released on Wednesday and Thursday amplified hopes of a broader economic improvement. Gross Domestic Product, which measures the total output of the U.S. economy, grew 2.6 percent in the third quarter, according to the BEA . Other factors are promoting growth. If consumers aren’t driving, they’re at least riding. “The consumer is able to keep pace with the overall economy,” said Robert Dye, a senior economist with PNC Financial Services Group. “They’re not driving the economy forward, but they are keeping pace.” Consumers face myriad woes. Even as income grew last month, 9.8 percent of the workforce remains unemployed. Companies, apparently waiting for demand to pick up before they resume expansion, are generally sitting on cash rather than using it to hire workers: Relative to their short-term liabilities, corporations are more flush now than they have been in more than 50 years. Indeed, corporations are sitting pretty. Since last year, corporate profits have grown a massive 26.4 percent, the BEA data show. But this boon for bosses isn’t all bad for their would-be employees. Even if corporate cash-hoarding is directly hurting consumers, corporate profits are indirectly helping them. Moreover, the rosy corporate situation seems to be a leading cause of the increase in consumer spending. Stock portfolios are in relatively strong shape. Even as home prices fell in the third quarter, and homeowners saw the stake they can claim in their most valuable asset erode by 2 percentage points, the net worth of households increased 2.2 percent, according to recent data from the Federal Reserve . As the S&P 500 increased 9.6 percent during the third quarter, the gain in household wealth came almost entirely from the stock market. Americans’ stock portfolios have made them relatively optimistic, even as home values slide, said Christopher, the IHS Global Insight economist. Consumer sentiment increased this month to reach its highest level since June, according to a Thursday release from Reuters and the University of Michigan. If home price declines seem obscure to some consumers, stock market gains are relatively easy to perceive. “You know almost on a daily basis what your stock market holdings are,” Christopher said. “With housing, you don’t know how to respond to it exactly.” Further, stock gains are helping to offset losses of income and home value, said Bernard Baumohl, chief global economist for the Economic Outlook Group. “Americans are in a much better position to spend again,” Baumohl said, adding that as consumers take on more debt, they are doing so responsibly, in keeping with their income. “Households have certainly been taught a lesson,” he said. Other economists cautioned that a strong recovery is still far off. Christopher called the unemployment crisis an “extreme drag.” Kahn said the housing market is “dead in the water.” Aaron Smith, an economist at Moody’s Analytics, said the recovery has yet to achieve “escape velocity.”

Read the full article →

Dave Johnson: Blaming the Economy’s Victims for Economic Crimes

December 22, 2010

This post originally appeared at Campaign for America’s Future (CAF) at their Blog for OurFuture . I am a Fellow with CAF Blame the unions, blame the unemployed, blame loans to the poor, blame the government. As income and wealth increasingly go to a few at the top, public anger is directed at the economy’s victims. I am in a clinic all day participating in a medical study, so I was talking to one of the nurses. She brought up that California is in real trouble, is going broke, it’s a real mess. She says she doesn’t know what we’re going to do. She has heard that, “lots of states are going bankrupt. There is no money anymore.” So I asked her what we should do about it. She said it is because of the unions. “It’s just ridiculous. They want so much.” I asked if she follows the news closely, she said she does. “I watch the news a lot.” Some facts: California is famous for leading the country in a wave of anti-government tax-cutting and into Reaganism . We cut taxes an an anti-government ferver and increased prison spending in a law-and-order fever. Then the federal government cut taxes and increased military spending, leading to big deficits. Now we’re out of money to run the state government and the country is getting there, too. California’s problems have little or nothing to do with what state employees are paid, and a lot to do with tax cuts and people across the state not getting paid enough. Blaming The Unions This weekend CBS’ 60 Minutes joined the anti-worker chorus, blaming public employee unions for the problems faced by the states. Media Matters, in 60 Minutes’ one-sided, GOP-friendly report on state budgets describes the segment, In 2,600 words about state deficits, you won’t find the phrase “tax cuts.” Instead, CBS adopts the Republican framing that deficits are all about spending — frequently with loaded phrasing like “gold-plated retirement and health care packages.” And throughout the report, CBS allows Christie, New Jersey’s Republican governor, to launch attacks on unions and make unsupported claims about budget problems, all without ever challenging his assertions and without including substantive disagreement from Christie critics. … You’d never know from CBS’ report that a big part of the reason that “Christie and his predecessors” failed to make required contributions to the pension fund is that they decided to use the money for tax cuts instead. [emphasis added] Mike Hall at the AFL-CIO blog explains that New Jersey’s workers and pensions are not the problem, While politicians like Christie rail against the pensions public employees have secured through collective bargaining–painting them as overly generous golden parachutes, McEntee notes the average annual pension for an AFSCME member is $19,000, and the workers contribute 80 percent during their lifetime on the job. Tax cuts, income and wealth going to a few at the top, but the unions take the blame because they fight for a better life for working people. Blaming The Unemployed The unemployed and the checks they get are often blamed for their plight. They are called “lazy,” and it is even suggested the be tested for drugs . CAF graduate David Sirota, in Why the ‘Lazy Jobless’ Myth Persists The thesis undergirding all the rhetoric was summed up by conservative commentator Ben Stein, who insisted that “the people who have been laid off and cannot find work are generally people with poor work habits and poor personalities.” [. . .] The trouble, though, is that the whole narrative averts our focus from the job-killing trade, tax-cut and budget policies that are really responsible for destroying the economy. And this narrative, mind you, is not some run-of-the-mill distraction. The myth of the lazy unemployed is what duck-and-cover exercises and backyard nuclear shelters were to a past era–an alluring palliative that manufactures false comfort in the face of unthinkable disaster. Blaming The Poor And Government Republicans on the Financial Crisis Inquiry Commission are sabotaging the commission’s work, demanding that “Wall Street” and “deregulation” not appear anywhere in the report. They are refusing to participate , instead releasing a counter-report blaming the government, claiming We, the People forced the giant banks to give home loans to the poor , and blaming the poor for receiving those loans. What People Think People tend to think about what is put in front of them to think about. That’s why everyone goes to see a new movie on the first weekend instead of waiting until they can get good seats with no lines. Wall Street and the likes of the Chamber of Commerce understand this so they put scapegoats in front of the public to mask what they are doing. Right now there is a corporate/right campaign to blame working people for the problems they caused. Like 60 Minutes this weekend, the news sources are run by big corporations, and they have been saying over and over (and over and over) that unions and the unemployed and the poor and the government are the cause of the problems. (When was the last time you saw a union representative on TV, explaining the benefits of joining a union ?) And, naturally, after hearing these things over and over (and over and over), viewers like the nurse at the clinic I am in think they should blame the unions, the unemployed, the poor, the government, too. So much of the income and wealth are concentrating at the top. Taxes have been cut so far. The things our government does for us have been cut back so far. Working people’s wages have been stagnant for so long. But the blame right now is directed at the unions, the poor, the unemployed and our government: We, the People. As the AFL-CIO blog concludes , The long term solution to state and local fiscal challenges … is “a robust economy, one that is creating jobs and replenishing tax revenue.” To repeat: The long term solution to state and local fiscal challenges… is “a robust economy, one that is creating jobs and replenishing tax revenue.” Sign up here for the CAF daily summary .

Read the full article →

Employed But Struggling: Report Finds 1 in 3 Working Families Near Poverty

December 21, 2010

Michelle Feliz, a single mother living in Boston, can’t afford day care for her one-year-old son. She can’t afford new clothes for her teenage daughter. Late last year, she applied for food stamps. Unlike many Americans increasingly seeking public assistance, Feliz, 35, is employed. Yet what she earns in her job as a secretary does not cover even her most basic needs, leaving her scrambling to keep food on her table. In the aftermath of the worst economic downturn since the Depression, much attention has been focused on the 15 million people who are officially out of work, yet even among those who have jobs, livelihoods and living standards have been substantially downgraded. Growing numbers of employed people live in near poverty, struggling to make ends meet. Almost a third of America’s working families are now considered low-income, earning less than twice the official poverty threshold, according to a report released Tuesday by the Working Poor Families Project . The recession, which has incited layoffs and wage cuts, reversed a period of improvement: Between 2007 and 2009, as the recession set in, the percentage of U.S. working families classified as low-income grew from 28 percent to more than 30 percent. Workers who once focused on career advancement now live paycheck to paycheck. The American middle class, in effect, is eroding. “They’re no longer working actively, with a chance to advance and gain more experience and skills,” said Brandon Roberts, manager of the Working Poor Families Project and a co-author of the report. “They’re just putting pieces together to stay afloat, to meet basic needs.” Last year, 45 million people, including 22 million children, lived in low-income households, according to the report. As breadwinners lost jobs or suffered pay cuts, the report notes, the number of low-income families grew to 10 million last year, an increase of almost a quarter-million from 2008. The problem is worse among minorities: 43 percent of America’s working families with a minority parent are low-income, the report finds, compared to 22 percent of white working families. Feliz, who is Latina, has a job. But she’s barely scraping by. “I had to take this job because it was the only thing I could find,” Feliz said. “I was making more money than I’m making now.” Once an officer manager at Oficina Hispana, an English language education program, Feliz was laid off in 2007 when her employer didn’t get a crucial grant. She collected unemployment insurance for half a year, she said. The week before the benefits expired, she got her current job as a secretary at the University of Massachusetts Boston. Her annual salary dropped from $42,000 to $37,000. And her dream of opening a shelter for female victims of domestic violence was deferred. “Career-wise, that set me back a lot,” she said. She now struggles just to put food on the table. She applied for food stamps in November of last year, she said, but was denied because her salary was just above the cutoff. So she began clipping coupons. When her son came down with a bad fever recently, she feared she would have to make a difficult choice: stay home and risk losing her job, or take him to prohibitively expensive day care. Fortunately, her parents, who also live in Boston, were able to look after him. “I’m afraid to stay home,” Feliz said. “If I take too many days off, I could lose my job.” Feliz, who has an associate’s degree from Roxbury Community College, is taking classes in human services and management at UMass Boston, and her employer agreed to help foot the bill. She hasn’t given up on her dream, but her focus right now is on preserving her income. “I’m doing at least three people’s jobs,” she said. “It’s hard.” Her son’s father, who pays child support, is similarly struggling to keep two part-time jobs, Feliz said. The crisis extends beyond the struggling breadwinners. Children in low-income families suffer from diminished educational opportunities and compromised health care, according to the new report. Nationwide, 35 percent of children in working families are living in low-income households, the report finds, and childhood poverty tends to persist into adulthood. “That has serious implications for children, not only today, but as they look to the future,” Roberts said. “The odds are being stacked against them.” Living in a low-income family can take a psychological as well as financial toll. Feliz has striven to raise her children’s spirits, pushing her daughter to do well in school. “I want her to be able to get a good job,” she said, “to have things I’m not able to give her.”

Read the full article →

Lita Smith-Mines: There’s No Place Like Numb

December 20, 2010

He was a business owner who’d weathered economic downturns before. When things were bad he fretted and worried, but he always believed that an upturn was around the corner. In 2010, he begged, borrowed, and stretched to make payroll each week. Scrounging together extra money for the lavish bonuses of years past was inconceivable, but what surprised him was his reaction to the realization. “I wasn’t upset. I didn’t sweat. I was numb. Just numb,” he said. For decades, she ran a highly successful business, lavishing gifts upon customers, vendors, and employees throughout the holiday season. It was difficult to do in 2009, but she decided to be generous despite a faltering bottom line. “Last year I maxxed out some credit cards to make the holidays jolly.” This year, her income diminished further, so the presents petered out. “I knew I was lucky to still be in business, so I gave holiday gifts maybe 10 seconds of thought before discarding the whole idea. And I realized that I didn’t even care. I just felt dead inside.” I understood precisely about feeling zilch. I had just reacted to the demise of two real estate deals in one day with nothing but utter indifference. The first transaction crashed and burned after two different lenders denied the buyers a mortgage, and the second one conked out after the appraisal came in $17,000 lower than the contract price. In 2010, the real estate market semi-emerged from a two-plus year wasteland of disinterest, fueled by a few bold buyers and some exceedingly flexible sellers. I was elated as deals came across my desk, but that elation evolved into anger each time a deal disintegrated. Week in and week out, transactions would give up the ghost somewhere between offer and acceptance, or end up kicking the bucket after contract but before closing. Banks get the bulk of the blame, but there’s enough to go around for those who begin deals they don’t have the funds or the capacity to complete. As my law office filled with the chalk outlines of deceased deals, my emotions plummeted. My feelings had fallen to absolute zero by the time the last two passed away. I should have been incensed at the circumstances that prevented more deals from closing, depriving my bank account of fees it so sorely craved. But I wasn’t mad, sad, troubled, or dismayed; nowadays, a deathly dullness has settled over my business consciousness. I am desensitized to any further downturn, just like the anesthetized business owner walking into his warehouse to drop the bonus-free bomb, and the proprietor who dully deflected her assistant’s questions about seasonal largesse with a terse “There’s nothing for anyone this year.” As business owners, we all are trying to hang on for dear life. But how do you keep a grip when your fingers have grown numb?

Read the full article →

Jacob S. Hacker and Paul Pierson: The Great Disconnect

December 15, 2010

If an economic catastrophe befalls Americans and no one in power hears it, did it happen? That was the question raised by a new Yale/Rockefeller Foundation report released yesterday that looks at the economic experiences of Americans during the Great Recession. Since one of us (Hacker) was a coauthor, we obviously gave it extra attention. Yet the picture it painted — based on a two-wave survey between March 2008 and September 2009 — was only confirmation of what most Americans know: there’s a lot of economic pain out there. According to the report, more than 90 percent of Americans experienced at least one major economic “shock” during these 18 months: a substantial drop in wealth or income, a large increase in nondiscretionary spending (such as medical costs), or similar dislocation. Even if you ignore big wealth losses — ubiquitous because of the fall in the housing and the stock markets — roughly 7 in 10 Americans saw their earnings substantially decline or their nondiscretionary expenses substantially rise. Nearly a quarter saw their income fall by 25 percent or more. Even more worrisome, those who experienced these shocks were much more likely to report serious economic deprivation (going without food, housing, or medical care because of the cost). And this was true for middle-income families as well as the least advantaged. Indeed, more than half of families with incomes between $60,000 and $100,000 that experienced employment or medical disruptions reported being unable to meet at least one basic economic need. Against this backdrop, the tax-cut deal brokered by President Obama looks like very weak tea. Extended unemployment benefits are a vital lifeline that will encourage spending to revive the economy, and the temporary cut in payroll taxes will provide an important, albeit modest and short-lived, boost. But a huge chunk of the bipartisan deal is tax cuts that the Congressional Budget Office has judged singularly ineffective as economic tonic, including massive cuts for the richest of Americans and their heirs that will pile on future debt, exacerbate inequality, and crowd out other, more effective measures — all for little or no short-term economic gain. What about a major effort to create jobs to rebuild our crumbling roads, bridges, and transportation system? Nope. What about giving more relief to struggling states that are laying off teachers and first responders? Nada. Perhaps we could step up the implementation of the health care law to provide expanded Medicaid benefits during this weak recovery, when millions of Americans are still losing their jobs and health insurance. Are you kidding? That the tax-cut deal may well be the best that Obama could have gotten only makes the joke crueler. What’s wrong with our politics that so much hardship evokes so little response? At the event launching the Yale/Rockefeller foundation report, the panelists — Ezra Klein of the Washington Post , Larry Mishel of the Economic Policy Institute, and Stuart Butler of the Heritage Foundation — seemed genuinely puzzled by this question. Even Butler, an astute conservative thinker who saw the report as a chance to have a real conversation about the level and distribution of economic risk in the United States, appeared not to have a precise response. Two answers floated around the room. The first is that our political system is so dysfunctional that even political leaders deeply worried about what’s happening just don’t see any prospect for serious action. Klein fingered the Senate filibuster, which has showed its ugly head again and again during the lame-duck session. With an intense conservative minority in the Senate, everyone from the president to those peddling deficit-reduction proposals to liberal democrats simply assumes that nothing that involves direct job creation or serious public spending or increased revenues — even revenues gained by letting tax cuts expire — is feasible. But there was second hypothesis: Maybe a good chunk of the political class is just so insulated from the realities in the report that they don’t feel the same sense of urgency that most Americans do. Things are terrible on Main Street, but on Wall Street, Pennsylvania Avenue, and K Street, they don’t look so gloomy. How else can we explain why everyone in Washington was talking about deficit reduction (at least until they decided to blow another hole in the budget), even while polls show that Americans ranked it way, way below fixing the economy? It’s not clear which is scarier — that our leaders don’t think they can lead, or that they don’t want to. Either way, the middle-class economy keeps falling, and no one is there to hear it. Jacob S. Hacker and Paul Pierson are the authors of Winner-Take-All Politics: How Washington Made the Rich Richer–And Turned Its Back on the Middle Class

Read the full article →

John Robbins: Who’s Done More Damage, Bernard Madoff or Alan Greenspan?

December 11, 2010

Exactly two years ago today, I received a phone call from hell. My financial adviser and close friend, with whom I had invested all of my family’s life savings, called to tell me that overnight we had lost 95 percent of our net worth. It turned out that our life savings had been invested in a fund that had been handled by Bernard Madoff. Because we weren’t direct investors (I didn’t even know who Madoff was prior to his arrest), there was no hope of our ever recovering a penny. Tragically, what happened to my family overnight is happening to many, many people today, only more slowly. It is one of the darkest nightmares of our times that so many people are losing their homes, their pensions, their jobs, their savings, and any semblance of financial security. The official unemployment rate is 9.8 percent, but if you include the underemployed (those who have part-time work but can’t find a full-time job, though they need one), and add in also the huge numbers of unemployed people who have given up looking for work because they feel the search is hopeless, the figure rises to above 22 percent. There are already 19 million vacant homes in the country, with another 10 million foreclosures in the pipeline. The average household credit card debt is nearly $16,000. And the U.S. dollar, which has been the world’s reserve currency for almost 100 years, is losing value and appears increasingly unstable. How did we ever get into such a mess? Last year, a Newsweek poll found Bernard Madoff to be the most despised person in history. Having been a victim of his fraud, I understand. But some people think that when it comes to wreaking financial havoc, Madoff was a piker compared to the man who was dubbed history’s greatest Federal Reserve chairman upon his retirement in 2006 — Alan Greenspan. Why? Because Greenspan may be more responsible than any other single human being for the disastrous developments in our nation’s economy. Author Matt Taibbi doesn’t mince words on the subject. In his new book about how bubbles and bailouts have decimated the U.S. economy, he none-too-subtly calls Greenspan “the biggest asshole in the universe.” Madoff lived high and mighty as a billionaire as long as he kept his Ponzi scheme afloat. Greenspan was revered as long as he kept the party going for the ultra-rich, as long as he kept one bubble after another inflated. But with every party, there’s always the morning after. The collapse of Madoff’s Ponzi scheme bankrupted not just tens of thousands of families, but many charitable foundations, nonprofit organizations, and hospital and school endowments. The bursting of Greenspan’s bubbles, on the other hand, decimated the entire U.S. economy, bankrupting tens of millions of families. In his biography of Greenspan, appropriately titled Greenspan’s Bubbles , MSN Money columnist William Fleckenstein recounts the devastating series of bubbles and crashes that directly ensued from Greenspan’s policies. The Savings and Loan scandal was the first tip-off. As a paid consultant for Lincoln Savings and Loan, Greenspan was an ardent advocate of Savings and Loan deregulation. When Lincoln’s parent corporation went bankrupt in 1989, more than 21,000 mostly elderly investors lost their life savings. This was, however, peanuts compared to what was to follow. With Greenspan as the head of the Federal Reserve from 1987 to 2006, and with his policies running the show, the tech bubble was inflated only to burst in 2000, closely followed by the real estate bubble that began to burst in 2007, and the credit bubble that burst in 2008. Greenspan’s policies contributed massively to each of these bubbles, and thus to their inevitable collapse. Like Madoff’s Ponzi scheme, they provided illusory returns, not based on any real goods, services or value provided, but rather on the attraction soaring returns have for new entrants into the game. The costs of each of these market collapses are measured not in the billions but in the trillions of dollars, and they’ve come so quickly on the heels of one another that we may think of them as business as usual. That’s why it’s important to grasp that, prior to Greenspan’s arrival, the U.S. had been nearly bubble-free for more than 50 years. The only exception? A brief mania for gold and other precious metals in late 1979 and early 1980. Prior to running the Federal Reserve, Greenspan headed the National Commission on Social Security Reform. The original intent behind Social Security was generous and benevolent. At the height of the Great Depression, our society resolved to create a safety net that would pay modest benefits to retirees, the disabled, and the survivors of deceased workers. It was the formalizing of the long-respected tradition of supporting elders and others who are less able to fend for themselves. The idea was to create less fear and more economic security. But once Greenspan got involved, things immediately began to change. His policies triggered a staggering transfer of wealth from the lower and middle classes into the hands of the richest members of society. It is not an exaggeration to say that the resulting concentration of money and power in the hands of the few is undermining the economy, corrupting democracy, deepening the racial wealth divide, and tearing communities and families apart. It was primarily due to Greenspan’s proposals that the Social Security tax rate went from 9.35 percent in 1981 to 15.3 percent in 1990. Social Security taxes are borne primarily by the lower and middle economic classes. They only apply to wage income, not to investment income, so people who work for a living pay through the nose while those who invest for a living pay not at all. Fair, right? Social Security taxes are currently capped at about $106,000. This means that a married couple who earns $106,000 a year will pay more than $16,000 in Social Security taxes. They will pay the same amount that Oracle CEO Larry Ellison and his wife will pay, even though Ellison’s income over the past 10 years was nearly $2 billion . A couple near the bottom of the economic ladder, earning $30,000 a year between them, obviously has nothing to spare, yet they pay $4,590 in Social Security taxes. Billionaire investors and hedge-fund managers, meanwhile, may pay nothing, because they can usually structure their income so that none of it is subject to Social Security or Medicare taxes. The policies that were implemented following the recommendations of Greenspan’s commission have produced, in the last 20 years, $1.7 trillion in new taxes borne almost entirely by the lower and middle class. There might have been some justification for this if the amount of benefits you would eventually receive was directly related to the amount of money you paid into the pool, and if the money was set aside for future Social Security recipients. Prior to Greenspan’s reforms, that’s essentially how things were done. But thanks to his innovations, this is no longer the case. The money is no longer held separate from the rest of the budget, and has been used instead for other government spending. It was George W. Bush’s first Treasury secretary Paul O’Neill who publicly announced the bad news. “I come to you as managing director of Social Security,” he said. “Today we have no assets in the trust fund. We have the good faith and credit of the United States government that benefits will flow.” It’s hard to avoid noticing that Social Security is increasingly taking on some of the characteristics of a legally-mandated Ponzi scheme. Bernard Madoff was a liar and psychopath who recklessly stole tens of billions of dollars. He will spend the rest of his pathetic life in prison. Alan Greenspan, on the other hand, is still widely admired. Not that long ago, he was almost considered a candidate for Mt. Rushmore. He was certainly the most influential proponent of financial deregulation in the last century. But a generation from now, who will history judge with more scorn? For practical, down-to-earth advice on how you can thrive in these hard economic times, see John Robbins’ new book, The New Good Life: Living Better Than Ever in an Age of Less . John’s other bestsellers include The Food Revolution and Diet For A New America . He is the recipient of the Rachel Carson Award, the Albert Schweitzer Humanitarian Award, the Peace Abbey’s Courage of Conscience Award, and Green America’s Lifetime Achievement Award. To learn more about his work, visit www.johnrobbins.info .

Read the full article →

Tom Silva: The Great American Payout

December 7, 2010

America is a nation of optimists. Just two years after declaring this the worst financial crisis since the age of Busby Berkeley and speakeasies, it now appears that we are starting to ante up again by releasing our cash. Maybe spending is part of what makes us American–our founding fathers, who were products of the Enlightenment, taught us to reject the old-world notions of asceticism and praying for a better day in favor of enjoying the spoils of our labor and securing our rewards in this life. And now, here we are. Usually depressions are followed by extended periods of hoarding cash and sinking money into only safe investments but recent events seem to suggest we’re moving in another direction. Take the banking industry which declared aggregate profits in the third quarter totaling $14.5 billion, more than seven times greater than last year during the same period, according to the FDIC’s Quarterly Banking Profile (QBP) for the third quarter of 2010. Part of the reason for these buoyant numbers is that banks released their rainy day provisions into earnings causing FDIC chief Sheila Bair to warn bankers that they may be reducing their loan loss reserves too early. Provisions for loan losses dropped to their lowest level in three years–reserves against future slid to 63.9% of noncurrent loans from 65% in the second quarter–even as “troubled loans remain near historic high levels,” Bair said. This is the first time that loan-loss reserves have fallen since late 2006. To be sure, most of Bair’s comments are aimed primarily at mid-sized and smaller banks that have yet to show consistent credit quality improvement unlike the bigger banks. And, no doubt, we need liquidity in the economy and the banks need to provide it but it behooves the industry to be careful to cover the bets at a time when the number of troubled banks is at 860, the most since 1993. In the real estate industry, some of the largest companies, including Simon Property Group Inc., Kimco Realty Corp. and Nationwide Health Properties Inc., raised their quarterly dividends in November and more companies are expected to follow suit in the months ahead. The higher payouts reflect the higher rents and better occupancy levels, which are boosting the income pool for dividends. This a serious about face from the past 36 months, when REITs, along with other public companies, were slashing or suspending dividends to preserve cash. In 2010, 37 REITs have raised dividends; seven have cut them. To compare, 61 companies either cut or cancelled dividends in 2009. REITs aren’t alone in raising dividends. Many large-cap and cash-flushed companies are expected to do the same. A recent report by Markit, a financial information services firm, expects a 50% jump in dividend increases for S&P 500 companies in the fourth quarter from last year. Currently, there is an estimated $2.0 trillion in net cash sitting in non-financial corporate treasuries. The payout enthusiasm has affected even some of the holdouts: Cisco Systems announced plans to pay a stock dividend for the first time in its more than quarter of a century in business. Apple is sticking to its guns by sitting on its nearly $46 billion. One reason for paying dividends, outside of magnanimity, could be the tax rates. Under current federal individual income tax law, both capital gains and corporate dividends are taxed at a reduced 15% rate. However, those reduced rates are scheduled to expire at the end of 2010, raising the hit on dividends to increase to as much as 39.6%. And finally, there’s us, the consumer. Our national savings rate was 5.7 percent in October — still strong when you consider that it was at 0% in 2004. An article in the Christian Science Monitor in 2004 summed it up this way: “Americans have stopped saving for a rainy day. Instead, they are living paycheck to paycheck, depending on credit cards to get them through emergencies, and hoping that the rising value of their homes will give them a retirement nest egg.” However, that 5.7% looks meager when you consider that Europeans hover around a 14% savings rate in the Eurozone. The 5.7% also is a contrast with some of the other recessionary periods, for example the the early 1980s when American savings levels were in the 9% to 10% range. It’s worth noting that this comes at a time when, the government reports, consumer spending rose 2.6% in the third quarter, the fastest pace since the fourth quarter of 2006. Clearly, we’re feeling the same optimism as our corporate and financial counterparts. “One today is worth two tomorrows,” Benjamin Franklin once said. What could be more American?

Read the full article →

Jared Bernstein: A Plan Comes Into Focus and It’s All About Jobs

December 7, 2010

As you probably know by now, a framework is emerging from the negotiations between the administration and the Congress on what to do about the expiring Bush tax cuts. As this plan takes shape — and I’ll be the first to admit there’s stuff to like and dislike about it — one thing is clear: it’s a much stronger plan on our number one priority — JOBS — than anyone expected. Our administration and our friends in Congress fought hard to block the two-year extension of tax cuts for the top 2% of households, and if there were a way to hold that line without putting working families and our economy at risk, we would have done so. Those temporary high-end cuts do not stimulate growth or jobs. But agreeing to them does break the stalemate and in doing so, sets the stage for a package that both shields the middle-class from an imminent tax increase and promotes significant economic growth and jobs. That said, some would have had us take up this fight, regardless of the costs to the working families and the broader economy. But in a fragile recovery, with an opposition determined, as seen in numerous votes so far, to block permanent middle-class tax relief without permanent cuts for the wealthy, a victory in that fight would have been a Pyrrhic one. And, as he said yesterday, President Obama was simply “not willing to let working families across this country become collateral damage to political warfare in Washington.” In the absence of a deal, that collateral damage would amount to well over a million jobs and tax increases of $3,000 for millions of middle-class families. So the President stood firm on these key principles: 1) if we must accept tax cuts for the wealthiest Americans over the next two years, then taxes must not go up for lower and moderate income families, and 2) we must do all we can to support jobs and growth. We won big on both. Here’s what’s in the plan agreed to this morning: A full extension of Unemployment Insurance for 13 months, an extension that will protect more than 7 million workers from losing their benefits, will help the unemployed make ends meet, and will create more than 600,000 jobs next year. It’s probably the single most effective thing we can do to support jobs and the economy. A new, job-creating payroll tax cut for workers: a 2% payroll tax cut for rover 155 million workers, providing about $120 billion in tax relief administered through higher paychecks. The key word here is “new.” This piece of the agreement goes beyond extending policies that were already in place and is widely recognized as a potent way to generate jobs and growth. If you earn $25,000 a year, this boosts your take home pay by $500; if you earn $50,000 a year, it adds $1,000; and if you earn $75,000, it adds $1,500. That’s real money that will help strapped working families, and, once they pump it back into the economy, will create more jobs. The CBO recently reviewed this idea and wrote: A payroll tax holiday that applied to the employees’ share of the tax would have the advantage of directing more of the reduction to households more likely to spend it, even reaching taxpayers who could not qualify for a rebate on the basis of income tax returns. Extending the Bush tax cuts for two years: The deal extends the Bush income tax rates for two years. As noted, that meant breaking through the political impasse by accepting a) a temporary extension of the high-end cuts, and b) a regressive adjustment to the estate (the Lincoln-Kyl proposal–read about it here). We strongly object to both, and I assure you, these are fights we will live to have another day. But it also means staving off a significant tax increase for millions of middle-class families — more than $2,000 for the typical family in the middle of the income scale. The deal also fixes the AMT to ensure that an additional 21 million households will not be hit with a tax increase. A set of other tax credit extensions, essential to the well-being of lower-income and middle-class families. These include the Earned Income Tax Credit, a wage subsidy to low-income workers that will benefit 10.5 million working parents with 15 million kids, the1,000 Child Tax Credit, an extension which preserves tax relief to 6.5 million lower-income families with 18 million kids, and the American Opportunity Tax Credit, helping millions of families to partially offset the cost of college. Business tax cuts targeted at investment and growth, including full expensing of investments and an extension of the R&D credit. All told, we’re talking about serious tax relief and targeted jobs measures quickly getting to work in an economic recovery that remains fragile. A typical working family with two members whose combined earnings are $75,000 comes away from this deal with over $2,000 in tax relief from the rate extensions, and another $1,500 from the payroll tax cut. So that’s the deal as it stands, folks. Like I said, we don’t love everything about it — our opposition to the high-end and estate cuts not only remains strong, but reversing those policies will be at the heart of the fight over taxes, jobs, and deficits over the next two years. In the meantime, it’s all about jobs, and in that regard, there’s a very strong plan taking shape here.

Read the full article →

Gary Shapiro: Deficit Tests Our Democracy

December 7, 2010

After a disaster we look back to see what we should have done differently. The Challenger retrospect revealed a flawed launch decision process. The failure to find Iraqi weapons of mass destruction disclosed weak and exaggerated intelligence. Katrina showed that Mother Nature, poor planning and weak design could fatally combine. 9-11 taught us that a 747 could be a weapon of mass destruction. The sub-prime mortgage fiasco popped the canard that we should overreach our income when buying homes. These crises and lessons, while horrible and painful, did not test or threaten our unique form of democracy. However, a century from now, historians may declare that our nation failed because our elected leaders did not confront and resolve our budget deficit problem. I applaud President Obama for trying. Failing to get congressional approval of a binding vote from a deficit commission, he tried a voluntary approach. He appointed a deficit commission, and they have put forward a plan to increasingly lower the annual deficit. The measures proposed are difficult but long overdue – bitter medicine to avoid grave illness. The plan, if enacted, will avoid the tougher situation we will face in the next decade: our lenders get nervous, interest rates rise, and debt consumes our budget – shriveling funding for national defense, children, elderly and the poor. The issue is not whether the Obama debt commission’s plan will work. The math paints clear choices. The issue is not even whether the plan fairly shares the pain. Yes, the entitlement crowd complains that age 65 is a sacred retirement milepost, but its historic relativity to lifespan is irrelevant. The anti-tax people protest that by some definitions the plan raises taxes without guarantees of spending cuts. Others whine that certain historic incentives like the mortgage interest deduction are divine and more important than our national health (yet, when Congress eliminated the credit- card interest deduction, somehow we kept borrowing). Rather, the big issue is whether our cleaved parties and the American people can address and avoid the impending debt crisis. The jury is out, but the tea leaves concern me. On the one hand, with roughly half of Americans receiving government payments, we may be past the tipping point of finding politicians who are willing to risk reelection by cutting largesse. With only half of Americans actually paying income taxes, the entitlement society is putting the productive society at risk. Politicians have responded by avoiding the issue, and the media and American public have been complicit in this denial. Take the 2008 presidential election. The choice was either a candidate promising bigger government and no tax increases for all but wealthy Americans, or a candidate promising no new taxes and not offering any spending cuts. After the big government candidate was elected and delivered on his promises, the 2010 voters voiced concern about government spending. Yet, even in the 2010 election, few candidates described how they would cut government spending. The earnest promise of cutting “waste, fraud and abuse” is the bi-annual electoral ruse. It avoids the challenge of saying which programs will be cut or what taxes will be raised. The only alternative to spending cuts or taxes is economic growth. Yet, no economist envisions the type of amazing growth necessary to get us out of our fiscal mess without serious cost cutting, tax increases or a combination of the two. We are not holding legislators accountable. We pay them to decide among competing priorities. Yet, because of re-election concerns or ideology, members of Congress have been unwilling to make or advocate necessary policy choices. Republicans have signed the pledge on tax increases and have shown no stomach for real cost cutting. Democrats are happy to raise taxes on jobs creators, but they also are disinterested in the tough challenge of budget cuts. American business leaders are aghast. They view budgeting as a tool for setting priorities by separating the mission critical from the requested. That’s how businesses and countries succeed. How is it that a new 2010 British government has already decided and begun executing a deficit reduction plan? Americans, sadly, are struggling to attract enough votes just to make a credible deficit commission suggestion to a Congress seemingly incapable of even addressing a unanimous report. How is it that we ask young Americans to risk life and limb abroad while legislators won’t even risk re-election to make tough decisions for our country? The board of directors of the Consumer Electronics Association (CEA), the organization I lead, representing 2,000 technology companies, decided years ago that nothing is more important to the health of our industry than the health of the U.S. economy. Moreover, they agreed that our long-term economic health is in danger primarily due to the actions of our government, especially the exploding deficit. Last week, the CEA board reaffirmed this view and embraced the plan of the Obama deficit commission. While no one likes the sacrifice it entails and we can debate the mix of cuts and taxes, it is our best and, at this point, only hope to avoid the long- term economic destruction of America. If we do not address the deficit, we are threatening not only the nation we leave our children, but also the viability of the representative democratic experiment that is the United States. Gary Shapiro is the president and CEO of the Consumer Electronics Association, which represents more than 2,000 U.S. technology companies.

Read the full article →

Joe Biden To Do Damage Control With Democrats Over Tax Cut Plan

December 7, 2010

WASHINGTON — The White House on Tuesday urged congressional Democrats to quickly embrace a contentious tax cut plan that President Barack Obama cut with Republicans, arguing that the rank and file need to move on to other issues before the party loses control of the House in January. White House aides said Vice President Joe Biden will ask Democratic lawmakers to swallow their objections to the administration’s proposed compromise with the GOP when he attends a closed luncheon with senators at the Capitol. Obama’s plan would extend Bush-era tax cuts for all Americans, including the richest, while also extending unemployment benefits and reducing payroll taxes for a year. Before the GOP assumes the House majority next month, the White House wants Congress to take up ratification of a new nuclear treaty with Russia, then address the Dream Act, a measure to give young people whose parents brought them into the U.S. illegally a path to legal status. Democrats also want to vote on whether to repeal the military’s policy that prevents gays from serving openly in the armed services. Republicans control neither the House nor the Senate – and certainly not the White House. But they largely dictated the terms of Obama’s proposed tax-cut compromise, which disgruntled House and Senate Democrats will discuss in separate closed meetings Tuesday that are likely to be rowdy. Republicans prevailed on their biggest demand: continuing Bush administration tax cuts for the wealthiest Americans, despite Obama’s 2008 campaign promise to let them expire for households earning more than $250,000 a year. Obama, while acknowledging Democratic unrest, agreed to extend the tax breaks for two years, whereas Republicans wanted a permanent extension. Obama explained Monday that the concession was the only way to prevent a congressional impasse that would cause the tax cuts enacted in 2001 and 2003 to expire, as scheduled, for all taxpayers. With 9.8 percent of Americans unemployed, he said, that would be “a chilling prospect.” Liberal groups were furious at his willingness to bend, but Obama said he rejects “symbolic victories” that hurt average Americans. His plan also would renew jobless benefits for the long-term unemployed, and grant a one-year reduction in Social Security taxes paid by workers but not by employers. The president had barely stopped speaking Monday before top Republicans applauded his proposals, while most Democrats kept a sullen silence. Senate Minority Leader Mitch McConnell, R-Ky., thanked Obama for “working with Republicans on a bipartisan plan to prevent a tax hike on any American and in creating incentives for economic growth.” Because they hold solid majorities in both chambers, Democrats must provide many votes for the tax package to become law, even if Republicans overwhelmingly support it. Some Democrats quickly denounced the plan. “Senate Republicans have successfully used the fragile economic security of our middle class and the hardship of millions of jobless Americans as bargaining chips to secure tax breaks for the very wealthiest among us,” said Sen. Tom Harkin, D-Iowa. Urging his colleagues to quickly back the compromise was Sen. Joe Lieberman, I-Conn., who caucuses with the Democrats. “This tentative agreement is an example of Washington working across party lines to confront the challenges facing our nation,” said Lieberman, who is up for re-election in 2012. The emerging agreement includes tax breaks for businesses that the president said would contribute to the economy’s recovery from the worst recession in eight decades. The proposed Social Security tax cut would apply to virtually every working American. For one year they would pay 4.2 percent of their income, instead of 6.2 percent, to the government retirement program, fattening U.S. paychecks by $120 billion in 2011. Someone earning $40,000 a year would receive a $800 benefit, and a $70,000 earner would save $1,400, officials said. More than three-fourths of all Americans pay more in these so-called payroll taxes than in federal income taxes. The White House said money from other sources would be shifted so the Social Security trust fund loses no revenue. Obama said he reluctantly made another concession to Republicans, concerning the estate tax. It would tax estates worth more than $5 million at a rate of 35 percent, a GOP goal. Democrats favored a $3.5 million threshold, with a 45 percent tax on anything higher. Obama’s willingness to compromise with Republicans comes a month after the GOP won resounding victories in congressional, gubernatorial and state legislative elections. Addressing his liberal critics Monday, Obama said, “Sympathetic as I am to those who prefer a fight over compromise, as much as the political wisdom may dictate fighting over solving problems, it would be the wrong thing to do.” “I’m not willing to let working families across this country become collateral damage for political warfare here in Washington,” he said. Under his plan, unemployment benefits would remain in effect through the end of next year for workers who have been laid off for more than 26 weeks and less than 99 weeks. Without an extension, 2 million individuals would have lost their benefits over the holidays, the White House said, and 7 million would have done so by the end of next year. Obama’s proposal also would extend a variety of other tax breaks for lower and middle-income families, including the Earned Income Tax Credit and the child tax credit. ___ Associated Press writer Julie Pace contributed to this report.

Read the full article →

TAX CUT MYTHS: Fact Checking The Showdown In Congress

December 4, 2010

NEW YORK — As debate rages on extending tax cuts set to expire at the end of the year, politicians are making misleading statements about who might be hurt or helped. Before the midterm elections, President Barack Obama insisted that lower income-tax rates should be permanently extended only to those he called the “middle class.” People in the top two tax brackets would face higher rates. Now, with Republicans triumphant, the White House is trying to hash out a compromise so rates don’t automatically revert to their higher, pre-2001 levels for everyone in the new year. One possible deal: extending all the lower rates for a yet-undetermined period of time, perhaps two or three years. Time is running out, as is patience. In a purely symbolic vote, House Democrats on Thursday passed a bill extending lower rates for everyone but those in the top brackets. House Republican leader John Boehner said the vote ran counter to efforts to forge a deal, dubbing it “chicken crap” political maneuvering. Here are a few myths, half-truths and short-hand distortions that have marred the debate: _ Under the Obama plan, taxes will increase for families making more than $250,000. Wrong. Actually, a family could make a lot more and still not face higher taxes. Obama wants to raise the top two brackets from 33 percent to 36 percent and from 35 percent to 39.6 percent. The first of the two – 36 percent – is widely assumed to kick in at $250,000. Obama says that himself. But that’s not right. The higher rate would apply to families with $232,000 or more of taxable income, or what’s left after personal exemptions and deductions have been subtracted from income. Deductions can be sizable, especially for wealthy people. Think state and local taxes, mortgage interest and charitable contributions. The result is that a family making $300,000 or even more could have taxable income of less than $232,000. “A lot of people making more than $250,000 won’t be paying higher taxes,” says Clint Stretch, a managing principal of Deloitte Tax. So where does the $250,000 come from? That’s a number for “adjusted gross income,” which is total income minus a few things like 401(k) contributions and alimony payments. A family that had adjusted gross income of $250,000 and took two personal exemptions, plus a standard deduction instead of itemizing, would have taxable income of $232,000. So $250,000 is distorting. It refers to adjusted gross income, not total income. And most people in that income range itemize their deductions. The key number for families is taxable income of $232,000; for individuals, it’s taxable income of $191,000. Only 2 percent of U.S. households would face the 36 percent tax rate, according to the nonpartisan Tax Policy Center, a Washington think tank. _ Tax hikes would prevent small businesses from hiring. Well, maybe. But the numbers cited as proof are flimsy at best. Critics say Obama’s plan to raise taxes on the highest earners would hobble the businesses that generate most of the nation’s new jobs. Yet fewer than 3 percent of small businesses produce enough income to face the higher rates, according to the Tax Policy Center. Some Republicans note that this tiny slice accounts for half of total small-business income. So the damage to the economy would be more than you’d think, they say. But many of these businesses aren’t what most people would consider small anyway. The IRS doesn’t have a category of tax filers called “small business.” Analysts who study taxes use the next best thing, which isn’t very good at all: business owners who use their personal 1040 to file taxes instead of a corporate return. For example, some hedge funds and law firms pay their taxes through the personal returns of their individual partners. While these are lumped in as “small businesses” and would pay higher taxes, they are far different from the retail stores and small manufacturers that most people associate with the term and which would not pay higher taxes. _ Keeping Bush’s tax cuts for the top earners would swell U.S. debt by $700 billion, unconscionable in an age of budget-busting outlays. Somewhat misleading. The lower tax receipts would accumulate over 10 years – not one year. On average, that means $70 billion less for the government each year, or about 1/30th of all federal receipts. _ Bush tax cuts for millionaires average more than $100,000 a year and should be eliminated. Misleading, again. The term millionaire can include people making tens of millions or even billions. Their tax breaks are much larger. An average doesn’t capture the benefit for most millionaires. According to Deloitte Tax, a typical family making exactly $1 million pays about $50,000 less each year in federal income taxes than it would if the Obama plan were rejected and the tax cuts expired. _ The rich would pay 36 percent or more of their income in taxes under Obama’s plan. Wrong. A rich family would pay 36 percent – and 39.6 percent – only on taxable income above $232,000. The family would continue to benefit from the other four brackets established earlier this decade – 10 percent, 15 percent, 25 percent and 28 percent – on taxable income below $232,000. A family with taxable income of $350,000 would pay a higher rate on $118,000. The family would pay $42,480 in taxes on that amount, or $3,540 more than it pays now. Of course, for the really rich, the two higher brackets would take a bigger bite. A family making $2 million would pay about $100,000 more in taxes under Obama’s plan, according to the Tax Policy Center. _ The tax debate is all about income tax rates. Wrong. For all the attention given to higher taxes on earned income if current rates expire, the big hit to some families will come from taxes on capital gains and dividends. The government now takes 15 percent of both. If the Bush cuts aren’t renewed, the tax on long-term gains would rise to 20 percent. And the rate on dividends would shift to your income tax rate, or a maximum 39.6 percent. Under Obama’s plan, the tax on dividends would rise to 20 percent for everyone. If Congress doesn’t act to stop taxes from reverting to their pre-2001 levels, new limits would be placed on deductions and exemptions, too. And a $1,000 child credit would be halved.

Read the full article →

4 Million Set To Lose Unemployment Benefits — Even If Congress Passes Extension

December 3, 2010

Even as Congress debates whether to extend emergency unemployment checks for more than 6 million Americans who are approaching the 99-week-limit, some four million others are facing the certain end of their benefits over the next year, unless an entirely new program is crafted. This is the sobering conclusion of a report released by the President’s Council of Economic Advisers on Thursday. The study forecast that the exhaustion of unemployment benefits for so many will curb spending power enough to significantly impede an already weak economic recovery. The typical household now receiving emergency unemployment benefits would see their income fall by a third should they lose their checks, according to the report. Among the roughly 40 percent of households in which the person receiving a check is the sole breadwinner, income would fall by 90 percent. The existing emergency unemployment program, which extends benefits for nearly two years, expired on Wednesday. Without an agreement to extend the program, the economy will lose about 600,000 jobs, as the spending enabled by continued unemployment checks ceases. National economic output–which expanded at an annual pace of 2.5 percent during the summer months–would fall off by 0.6 percent. That disturbing prospect does not even account for the roughly four million people who would exceed even the extended limits in the emergency program. Were that many jobless people left to fend themselves without unemployment checks, that would pose significant risks for the broader economy, say economists. They cite the fact that consumer spending accounts for roughly 70 percent of all economic activity. “If you’re looking for economic recovery supported by consumers, it’s discouraging,” said Henry J. Aaron, an economist at the Brookings Institution, a research institution in Washington. “It’s drag on the economy.” Many economists argue that paying unemployment benefits is among the most effective ways the government can spur the economy: Jobless people tend to spend nearly all of their unemployment checks, distributing those dollars throughout the economy. “There’s very few things we can spend money on that probably have such an immediate impact on household consumption as unemployment benefits for the long-term unemployed,” said Gary Burtless, a former Labor Department economist and now a fellow at Broookings. But even as the White House pushes Congress to reauthorize the existing emergency program, little discussion centers on what to do to prevent another four million jobless people from losing public assistance. If any active proposal exists to support this group, it remains well hidden. “That’s not where the war is being fought right now,” said Aaron. “Given the current configuration of political forces, nobody is proposing to do anything about it.” A senior administration official, who spoke on the condition of anonymity, said the White House is now focused on trying to persuade Congress to reauthorize the existing emergency unemployment program, which would protect 6.7 million unemployed workers from losing their checks over the next year. (See the below chart from the CEA’s report.) Given that even this goal is now uncertain, seeking yet another program for the four million jobless people at risk of exhausting emergency assistance seems futile, the official said. “The President will continue to work to ensure that Americans fighting to find a job can keep food on the table and make ends meet,” White House spokeswoman Amy Brundage said in an e-mailed statement. The diminishing support for the growing ranks of the long-term unemployed seems certain to add to demands on an already strained social safety net. Research shows that the longer a worker has been without a job the harder it is to find a new one, raising the likelihood that many of those losing their checks at the end of their 99-week term will have great difficulty securing a paycheck. Yet even those who lose their unemployment checks will not necessarily qualify for other forms of aid, like food stamps, said Burtless. “Only a pretty small fraction of the people who exhaust benefits are going to qualify,” Burtless said. Many of these workers have long been employed and have accumulated savings and assets such as houses, which makes them ineligible for support, he said. More than 6.3 million workers were out of a job for at least 27 weeks in November, comprising nearly 42 percent of all unemployed Americans, according to Labor Department data released Friday. The Federal Reserve forecasts that the unemployment rate will still be as high as 9 percent this time next year, and about 8 percent at the end of 2012, according to minutes from the central bank’s Federal Open Market Committee meeting last month. “What we’re seeing right now is the Christmas present from Scrooge,” said Aaron, the Brookings economist. “Merry Christmas, we’re cutting off your benefits.” ************************* Shahien Nasiripour is the business reporter for The Huffington Post. You can send him an e-mail ; bookmark his page ; subscribe to his RSS feed ; follow him on Twitter ; friend him on Facebook ; become a fan ; and/or get e-mail alerts when he reports the latest news. He can be reached at 646-274-2455.

Read the full article →

Charles H. Green: The Best Movie You Haven’t Heard of: Inside Job

November 22, 2010

Here are the ratings (% who liked) from Flixster for some of the movies playing this weekend: 90% The Social Network 88% Inside Job 81% Unstoppable 78% MegaMind 78% Jackass 3-D 77% Red 75% Skyline 65% Due Date 65% Morning Glory 64% The Next Three Days 54% Saw 3D You know The Social Network. But how about the #2 movie, Inside Job ? Ever hear of it? 96% of the critics liked it. Rotten Tomatoes rated it 96% . It’s narrated by Matt Damon. Feeling out of the loop yet? Why haven’t you heard of this movie? More on obscurity later, but here’s the official synopsis: ‘Inside Job’ is the first film to provide a comprehensive analysis of the global financial crisis of 2008, which at a cost over $20 trillion, caused… ‘Inside Job’ is the first film to provide a comprehensive analysis of the global financial crisis of 2008, which at a cost over $20 trillion, caused millions of people to lose their jobs and homes in the worst recession since the Great Depression, and nearly resulted in a global financial collapse. Through exhaustive research and extensive interviews with key financial insiders, politicians, journalists, and academics, the film traces the rise of a rogue industry which has corrupted politics, regulation, and academia. It was made on location in the United States, Iceland, England, France, Singapore, and China. There has been no shortage of books and articles about the meltdown. But most of those have had a reporter’s flavor to them–here’s what happened, then here’s what happened next. I felt that no one had really pulled it together with a narrative theme and the data to back it up. Until this weekend, that is. The theme is now not just clear, but tight. Bad things happened. They were not an accident. They were the results of bad people behaving badly. They knew what they were doing. They did them anyway. And to this day, they refuse to acknowledge responsibility. Think of this movie as what Michael Moore would produce if he had a PhD in economics and a career as a Federal Prosecutor. It’s the project of Charles Ferguson , who in fact does have a PhD in political science from MIT (he has also consulted to the White House and the Department of Defense, was a Senior Fellow at Brookings, and a member of the Council on Foreign Relations). You may know Ferguson as the director of No End in Sight , a powerful documentary about the Iraq war. He’s confident enough to interrupt an economist and say , ‘You can’t be serious about that. If you would have looked, you would have found things.’ Or to tell a former Bush administration under-secretary of the Treasury, “Forgive me, but that’s clearly not true.” Here is a review by A.O. Scott , in the New York Times. Boston.com calls it “a masterpiece of investigative nonfiction moviemaking — a scathing, outrageous, depressing, comical, horrifying report on what and who brought on the crisis. Here’s Kenneth Turan’s review in the LA Times. Go see for yourself; see the trailer here . The Role of Ideology in the Meltdown There’s much to say about this documentary; I’ll limit my thoughts to just one–the role of ideas in the meltdown. In this day and age of neuro-explanations and insistence that only measurable behavior is relevant for management, the role of ideas gets pooh-poohed. Big mistake. I’ve written before about the power of strategic doctrine taught in business schools to negatively influence our general business thinking. But after seeing this documentary, I’m newly persuaded. Ideas have huge power: especially when those ideas happen to greatly serve the economic interests of patrons. In the pharmaceutical industry, it’s become well accepted that a researcher or writer who takes money from a drug company is at the very least subject to rules of disclosure. Failure to do so constitutes an immediate presumption of conflict of interest. Yet somehow, we have never held our nation’s leading economists and business school faculty to the same standards. One of the most eye-opening aspects of Inside Job for me was to put this issue front and center. Some of Fergusons’ hardest-hitting interviews are with the elite heads of academic institutions: Frederic Mishkin , a former Fed governor, now at Columbia Business School; his boss Glenn Hubbard , chairman of the Council of Economic Advisers under George W. Bush; John Campbell , Harvard’s economics department chairman; and fellow Harvard economist Martin Feldstein . They come off, respectively, as incompetent, blustering, inarticulate, and smug. None of them seem to have noticed a disconnect between their laissez-faire ideas and the disasters engineered by those who quoted them; much less any sense of impropriety at the comfortable financial relationships they shared with those very firms. Somewhere there is a researcher at Harvard Medical School screaming at the injustice of his not being published in NEJM because of some disclosure requirements, while his academic counterparts in business and economics were happily and openly opining on the health of the Icelandic banking system and the liquidity of the US subprime mortgage market, all the while getting very well paid . (Note: b-school profs provide functional consulting services to companies all the time; I don’t see that as an issue. This is vastly different; more another time). Results of the Meltdown Ferguson touches clearly, albeit briefly, on one enduring outcome of this decades-long debacle–the increased gap in the US between the haves and the have-nots. In 1976, the richest 1% of Americans had 9% of the income . Now they have 24%. From 1980 to 2005, 80% of the gain in income went to the top 1% . Guess what industry disproportionately accounts for that gain? But the most significant casualty, I think, is a great old American belief: the belief that you can make it here in the good old USA, land of opportunity, where anyone can be what they want. You don’t have to be limited by the circumstances of your birth, like in all those Old World countries. Sorry: no longer true. By one study , it is harder for someone to get ahead now in the US than it is in Denmark, Australia, Norway, Finland, Canada, Sweden, Germany, Spain, and even France. Only Italy and the UK are more class-bound, and I’ve seen other studies where even the Brits are less sclerotic than we are. That decline in opportunity is another result of greater income disparity. Again, one of the legacies of the financial industry. You may disagree with a lot of what I’ve said here. You may think this movie won’t change your mind; and since it’s extremely hard to change people’s minds, you may be right. But if so, may I suggest you owe it to yourself to see it–if only to write back and point out the flaws in the movie.

Read the full article →

David Fiderer: The Fannie Mae Accounting Scam Promoted by the Chairman of the S.E.C.: A Case Study

November 19, 2010

There are myriad accounting tricks to deceive the public, but Christopher Cox chose one of the simplest. The Chairman of the S.E.C. moved billions of dollars from one side of the ledger to the other side, but didn’t mention how he had shifted the numbers. He then filed a lawsuit charging Fannie Mae with concealing $11 billion in losses, despite the fact that those losses had actually been disclosed in Fannie’s public financial statements, in a category called “Accumulated Other Comprehensive Income (Loss).” He bamboozled Congress, the press, the public and the U.S. District Court into thinking that Fannie was not transparent about what it was doing. Nothing better exemplifies the extent to which he politicized the regulatory function of his agency. Cox didn’t act alone. The S.E.C. collaborated with Office of Federal Housing Enterprise Oversight on a two-year investigation into Fannie Mae’s books. Disregard for Generally Accepted Accounting Principles “resulted in Fannie Mae overstating reported income and capital by a currently estimated $10.6 billion,” said the OFHEO . The 340-page OFHEO report and the 23-page S.E.C. complaint allege all sorts of accounting infractions, but neither specified where the multibillion-dollar losses actually came from. This was back in the halcyon days of May 2006, when Fannie’s regulators insisted that it was excessively conservative in its lending policies. The S.E.C. complaint alleges a panoply of accounting violations, but almost all of them are rounding errors, nickel and dime stuff in the context of a trillion dollar balance sheet and billions of dollars in reported earnings. For instance, the S.E.C. said Fannie misrepresented its financial position because it accrued 30.4 days of interest each month, instead of using the actual number of days. It also said Fannie had defrauded investors by making $100 million in excessive provisions for loan losses. Virtually all of the $11 billion shortfall was attributed to improper designation of financial hedges. Here’s the critical paragraph in the S.E.C. complaint: The Company disregarded the requirements of [Financial Accounting Standard] 133 and qualified transactions for the “short-cut” method based on erroneous interpretations and an unjustified reliance on materiality. By failing to comply with the requirements of SFAS 133, the Company failed to qualify for hedge accounting. This failure led to the Company publicly issuing materially false and misleading financial statements for the periods covering the first quarter 2001 to the second quarter 2004. The vast majority of the anticipated restatement of at least an $11 billion reduction of previously reported net income is a result of Fannie Mae’s improper hedge accounting. The S.E.C. makes two critical points: 1. Fannie improperly failed to mark-to-market certain financial positions, and 2. The S.E.C. reviewed those financial positions and found that the net positions created billions of dollars in losses. Testifying before Congress, Cox characterized the $11 billion number as, “the lower bound of the estimate.” The whole case revolves around the application of FAS 133 . When it was first implemented, FAS 133 gave companies a lot of latitude as to how they could recognize noncash mark-to-market gains or losses. One company might choose to recognize the change in value on its income statement. Another company might characterize the same item as an adjustment to shareholders equity, rather than on the income statement. The adjustment would be disclosed as, “Accumulated Other Comprehensive Income (Loss).” Either way could be acceptable under FAS 133 — it is literally six of one, half dozen of another — and any junior analyst would adjust for those differences when evaluating financial performance. The essence of the S.E.C.’s case is its contention that Fannie committed fraud by recognizing the gains and losses as direct adjustments to equity instead of putting them on the income statement. That’s a common form of window dressing, but the only people who would be misled would be those who don’t know how to read financial statements. And even if you think the distinction is valid, it was dishonest of the S.E.C. and the OFHEO to withhold the fact that the changes in net income were derived by reversing out items elsewhere in the financial statements, and the fact that Fannie had publicly disclosed its FAS 133 losses. For 2001 and 2002, Fannie recognized $11.8 billion in losses in the category of Accumulated Other Comprehensive Income (Loss). They included, for 2001, a $4 billion loss for “Transition adjustment from the adoption of FAS 133,” plus another $3.4 billion loss for “Net cash flow hedging losses on derivatives hedging debt.” In 2002, Fannie recognized another $8.9 billion loss in “Net cash flow hedging losses on derivatives hedging debt.” All of this is set forth, clear as day, on page 124 of its 2003 10-K . Nobody, or at least nobody who is minimally competent, could miss it. Also, when Fannie was forced to unravel all the financial positions it had deemed as hedges, the net result showed billions in dollars of gains , not losses. By reversing the previously recognized AOCI losses, plus by recognizing the market-to-market gains in AOCI, shareholder equity for year-end 2002 had almost doubled, from $16.3 billion to $31.9 billion. When Fannie Mae released its restated financials in December 2006, six months after the overblown media narrative about Fannie Mae’s accounting problems had calcified into the zeitgeist, almost no one looked at the numbers and asked where they came from. By every standard metric — cumulative net income, shareholder equity, corporate cash flows — Fannie’s financial position turned out to be far stronger than originally reported. But that’s not how the media perceived it. The company, which already settled with the S.E.C., was loathe to challenge or embarrass its regulators and gave only selective data in its press release : “The cumulative impact of the restatement was a total reduction in retained earnings of $6.3 billion.” The dominant narrative, that Fannie was a corrupt, out-of-control enterprise, seemed to be set in stone. When Cox and Lockart announced their phantom $11 billion losses, politicians were quick to make comparisons to Enron and Worldcom. “It’s fair to argue that this is perhaps more significant or more grave than Enron,” said Senator Richard Shelby. “Though, perhaps the biggest difference at the moment is that the guys at Enron have been convicted.” As it turns out, no one misrepresented Fannie’s financial position more egregiously than Cox and OFHEO Director James Lockhart. None of the foregoing suggests that Fannie is anything but a financial basket case today. But its losses are not from trading, but from credit losses on bad loans. Why is any of this important today? Because pundits and politicians like to conflate issues. When the OFHEO first argued that timing differences fee amortization represented “systemic risk” in October 2004, Barney Frank and other Democrats argued several things: That any earnings manipulation should be punished, that the OFHEO had not quantified any FAS 133 gains or losses, and that the shifting of income from one period to the next is not the same thing as a direct threat to safety and soundness. Bush administration regulators pushed Fannie and Freddie into high-risk loans, which is why Republicans are eager to claim that Fannie’s chief enabler was a congressman in the minority party helped draft GOP-sponsored legislation for increased government oversight. Also, Lockhart’s deputy, a holdover from the Bush administration, is Fannie’s chief regulator and has an incentive to sanitize his predecessor’s feeble record.

Read the full article →

Tim Ryan: Investors Need Tax Certainty

November 17, 2010

Uncertainty. It’s the reoccurring theme reverberating throughout our economy at the moment. It’s on the minds of politicians, business owners, and American families. Recent economic data also suggests that uncertainty is having a material impact on growth. Some certainty was provided to financial markets and the broader economy after the enactment of the Dodd-Frank financial reform law. More work still needs to be done by regulators in crafting the new rules the law requires, but nevertheless, the path forward is clearer than it was before Dodd-Frank became law. But key contributors to our economy: financial markets, investors, businesses and families are still unclear over what their tax burden will be next year. Congress has an opportunity and responsibility to address this important issue before the end of the year. Our member firms employ hundreds of thousands financial advisers that work with millions of Americans everyday to help them plan their financial future. One of the most frequent questions these advisers here from their clients is what will happen to capital gains and dividend tax rates, and how that will affect their investments. Unless Congress acts, the taxes on capital gains and dividends will increase substantially in 2011. The capital gains tax rates would increase by as much as 33 percent, from a current maximum rate of 15 percent to 20 percent. The tax hike for dividends is even more drastic, with tax rates for many investors increasing by nearly 164 percent. These increases do not include the additional 3.8 percent tax on investment income that was already passed this year as part of the health care reform bill. While all investors will be affected by this increase, senior citizens will be hit the hardest. According to the Tax Foundation , 42 percent of taxpayers over 65 reported dividend income on their tax returns. The vast majority of dividend income, 48 percent, is earned by those over 65, and dividend income accounts for 6 percent of all the income earned by seniors. Additionally, one-third of all taxpayers reporting capital gains income are over 65 and they earn 30 percent of all capital gains income. Taxing investment not only hurts America’s savers and investors, it undermines potential economic growth and job creation. According to the Heritage Foundation , high tax rates on capital gains and dividends would lead to 270,000 fewer jobs in 2011 and 413,000 fewer jobs in 2018. The economic effects would be felt in take-home pay as well. Personal income after taxes would decrease by $113 billion after inflation in 2011 and $133 billion after inflation in 2012 when compared to tax rates that would have existed under the current policy. Indeed, gross domestic product (GDP) would fall by $44 billion in 2011 and $50 billion in 2012 if taxes on capital gains and dividends were left to rise to pre-2001 levels. The numbers speak for themselves. American investors — especially seniors — are faced with potentially massive tax hikes, and time is running out. Given the still fragile state of our economy, Congress absolutely must continue the current rates on capital gains and dividends regardless of income level to provide increased certainty for American businesses and families, but for our future economic growth and job creation. Tim Ryan is President and CEO of SIFMA the leading financial services trade group which represents hundreds of securities firms, banks and asset managers throughout the country.

Read the full article →

← Previous Entries

Next Entries →