Angry Bear

Slightly left of center comments on news, politics, and economics from an economist.


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The U.S. Healthcare System
1, 2, 3, 4, 5, 6, 7
Social Security Insurance
1, 2, 3, 4, 5, 6, 7
Kash's Reasons To Vote For Kerry
1, 2, 3, 4, 5
The Bush II.0 Economy
1, 2, 3, 4, 5
Consumption Taxes
1, 2, 3, 4, 5
Dividend Taxes
1, 2, 3, 4
Rawls and
Progressive Taxation

1, 2, 3
Red vs. Blue
1, 2, 3, 4
Four Views of
The Red/Blue

Free Trade
1, 2, 3, 4, 5, 6, 7
Housing Market
1, 2, 3, 4, 5, 6, 7, 8, 9


Wednesday, December 28, 2005

CBPP on the Budget and Tax Cuts

As the GOP argues that Congress is cutting spending to reduce the deficit, Robert Greenstein, Joel Friedman, and Aviva Aron-Dine present evidence that demonstrate: (1) their actions will actually increase the deficit and (2) their actions are just another example of reverse Robin Hood-ism:
Sometime early next year, the House of Representatives is expected to vote on the budget reconciliation legislation that the Senate passed on December 21 and the House passed in a slightly different version on December 19. That legislation would make significant cuts in a number of programs serving low- and moderate-income families and individuals, including Medicaid, child support enforcement, and student loans.

Supporters of the legislation defend the cuts as “tough choices” that need to be made because of large and growing budget deficits. These claims are undercut by the fact that, in the last six weeks, the House has passed four tax-cut bills that together cost more than twice what the budget reconciliation bill saves. The claims are further undermined by Congress’s unwillingness to rethink any previously enacted tax cuts as part of its supposed reevaluation of priorities in light of deficits.

In particular, Congress has chosen to allow two tax cuts that exclusively benefit high-income households - primarily millionaires - to begin taking effect on January 1, 2006. By 2010, these tax cuts will eliminate two current provisions of the tax code that limit the value of the personal exemptions and itemized deductions that people at high income levels can take.


Corporate Taxation, Transfer Pricing, Growth, and Efficiency

Kash treats us to a recent analysis of corporate taxation from the CBO with page 9 addressing transfer pricing:

Internal transfer pricing provides another means for shifting profits out of high-tax countries. Multinational corporations engage in a substantial amount of international trade between affiliated companies located in different countries. A multinational firm may try to shift profits out of high-tax countries by setting their internal prices artificially high or low for goods or services that are traded between its business affiliates in different countries. For example, the firm may shift income out of a high-tax country when an affiliate in that country is paid too little for its export sales to affiliates in low-tax countries. It may also shift income when an affiliate in a high tax country pays too much for imports purchased from affiliates in low-tax countries. In such instances, the cross-country tax differentials may also influence where businesses choose to invest but in a more complicated way than by simply moving their production operations to low-tax countries. Instead, tax planning may require that businesses structure their activities in ways that make it easier to shift income. Such planning may result in economically inefficient behavior by the company, both in terms of how it must structure its operations and finances to shift the income and in terms of the direct costs that it must pay to acquire planning expertise and either avoid or resolve controversies with tax authorities.

The incentives to shift profits between two countries depend for the most part on the differences between statutory tax rates. That contrasts with the incentives for the location of capital used in production, which depend on the ways in which a wider range of tax provisions work together to determine the taxes imposed on new investment. When a company shifts profits from a high-tax to a low-tax country, the company pays tax on those profits at the lower statutory rate. The company’s tax saving equals the amount of profits shifted times the difference between the statutory tax rates in the two countries. In that way, the shifting of income may also redistribute tax revenue between the two countries, as the company pays tax to the low-tax country - at a lower rate- instead of paying it to the high-tax country. As a result, only part of the revenue lost by the high-tax country represents a reduction in the taxes paid by the company. The rest is revenue gained by the low-tax country.

Footnote 29 is of special interest:

The United States and other member countries of the Organization for Economic Cooperation and Development impose limits on the ability of companies to manipulate such internal transfer pricing, generally on the basis of the arm’s-length principle. Under that approach, the “correct” price is the price at which companies or people would be willing to trade if those traders were not economically related. In many cases, determining the correct arm’s length price - especially when the item traded is unique, such as a patent or a trademark- is difficult. As a result, taxpayers and tax authorities often disagree about the correct price.

There are two points contained in this brief statement. One relates to the issue of intangible valuation, which we discussed here. While we noted that representatives of multinationals often game this issue, tax authorities also play advocacy games at times. The OECD introduces transfer pricing thusly:
A large share of world trade consists of transfer of goods, intangibles and services within multinational enterprises. To determine tax liability in each jurisdiction, the right price (arm's length price) has to be applied, the OECD has issued guidelines on this principle to avoid double taxation.

One summary of the OECD Transfer Pricing Guidelines notes:
These guidelines maintain the arm's length principle of treating related enterprises within a multinational group and affirm traditional transaction methods as the preferred way of implementing the principle. These controversial issues are not just of interest to tax experts. National tax administrations, taxpayers and business people alike, all have a share in avoiding conflicting tax rules which might seriously hamper the development of world trade.

Simply put – the central goal of the OECD to promote growth and free trade with adherence to arm’s length pricing for intercompany transactions seen as a central element of achieving this goal. The concern that national tax authorities such as the IRS or Revenue Canada might try to advocate positions contrary to this goal is shared by not only the OECD but also by Kash and Alfons J. Weichenrieder as co-authors of Tax Competition And Transfer Pricing Disputes:

Transfer pricing regulations, which are designed to limit multinationals' profit shifting activities, have been tightened in recent years in the US. These new regulations have been enacted to increase the tax revenue collected from multinationals, in response to domestic political concerns that foreign companies are not contributing adequate tax revenues. This paper examines the implications of such a struggle by governments to collect tax revenues from multinational firms. It is shown that such behavior will lead to a non-cooperative equilibrium characterized by the double taxation of corporate profits, and consequently by a depressed level of international trade. Conversely, cooperation between governments could potentially increase both tax revenues and trade.

Interestingly, a December 8, 2005 Memorandum of Understanding between the IRS and Revenue Canada “to resolve disagreements in respect of the underlying facts and circumstances in [double tax] cases”, which followed a June 3, 2005 Memorandum of Understanding that vowed to strive for reciprocity and consistency in resolving double tax cases. The two tax authorities have been quarreling with each other on a host of transfer pricing issues, but finally agreed to a process where these double tax disputes would be resolved using the arm’s length standard based on the actual facts in each case. I guess one might applaud these agreements except for the fact that both Canadian and U.S. law codified the arm’s length standard, which is an economics principle that must look at the actual facts in any particular case, many years ago. So the cynic in me asks what do these Memorandum of Understandings do other than say that the tax authorities will follow their own laws? Duh!

But you might ask don’t the tax authorities have economists working for them as do the representatives of national tax authorities. While they do, I would ask you to review some of the insightful (if not jaded) comments from AB reader OldVet as to how the attorneys for the IRS seem to get in the way of effective transfer pricing enforcement while those pretending to be economists for the representatives of the taxpayer play the economists at the tax authorities for fools with “analyzes” so disingenuous that I suspect the National Review would refuse to put their writings up as being credible. Note, however, that the point that Kash and Alfons J. Weichenrieder make is that tax authorities often ask their economists to also act like overpriced whores. At the end of the day, honest multinationals have to pay more to avoid double taxation, while those who engage in transfer pricing manipulation to evade U.S. taxation somehow escape effective scrutiny. I wish it were as simple as the line in Shakespeare's Henry VI: "The first thing we do, let's kill all the lawyers". Yet, these lawyers are trained to be advocates. Economists are not trained to be paid whores, but alas we see so many behaving that way.


Tuesday, December 27, 2005

Ireland's Corporate Taxation

PGL's insightful post about corporate taxation and Ireland's economic growth reminded me of something I read recently from the CBO. In November they published a very interesting report entitled "Corporate Income Tax Rates: International Comparisons."

A few weeks ago I noted the surprising fact that Ireland actually taxes capital income at a much higher rate than the US does. Well, the above-mentioned CBO report contained another tidbit that was surprising to me: while Ireland has a statutory marginal tax rate far lower than that of the US (12.5% in Ireland versus 39.3% in the US), the difference in effective tax rates is much smaller. The reason is that the US has very liberal depreciation schedules, which significantly reduces the taxes that US corporations must pay. The result is that the effective tax rate that US corporations pay on the income from their investments in machinery and equipment is actually only around 22%, versus about 10% for Ireland. That's certainly a substantial difference, but far smaller than it seemed at first glance.

Even more surprising, however, was table 2-1 from the CBO report that showed that, somewhat counterintuitively, Ireland actually collects a much larger slice of national income in corporate income taxes than the US does, despite their tax rate being lower. The US collects only about 1.8% of GDP in corporate income taxes, while Ireland collects about 3.7% of GDP in corporate income taxes. This extremely large share of national income being paid as taxes by corporations in Ireland is astonishing, particularly given Ireland's very low statutory tax rate.

Much of the explanation for this, I'm sure, is exactly the phenomenon that PGL described wherein US (and other) multinational corporations effectively transfer some of their profits to Ireland to take advantage of its lower corporate income tax rate. The Irish government thus effectively collects tax money from multinational corporations on income that was actually earned by those corporations in other countries, and which would otherwise generate tax revenues for other governments.

So Ireland enjoys a decided benefit from its low corporate income tax rates. But note that this benefit is a very different one from the typical supply-side argument in favor of low taxes, which is that low taxes promote growth by promoting capital investment and thus generating economic growth. There certainly was a lot of capital investment in Ireland during the 1990s. But much of the gains to Ireland from its low tax rates were simply due to profit transference from the US to Ireland by US multinational corporations. As I've argued before, the link between economic growth and tax rates has yet to be established.



The Irish Economic Miracle and Tax Policy

A couple of weeks ago Kash challenged a claim that Ireland’s growth was due to low taxation of capital income:
Ireland has indeed been the fastest growing economy in the OECD (that's the club of the world's richest countries). But it has HIGH taxes on capital, not low ones.

Since I’m Irish, I have been intending to post something on the economic miracle. While Kash was upset with James Glassman, the right-wings supposed expert on Ireland’s economy seems to be Benjamin Powell who penned Economic Freedom and Growth: the Case of the Celtic Tiger:
Most theories of economic growth can be dismissed as an explanation for the rapid growth of the Irish economy. The thesis of this paper is that no one particular policy is responsible for Ireland’s dramatic economic growth. Rather, a general tendency of many policies to increase economic freedom has caused Ireland’s economy to grow rapidly.

In a way, Kash might be happy to seem Powell rejecting a single theory of economic growth, but as I read Powell’s paper, he attributes Ireland’s growth to only two alleged causes – a reduction in tax rates and some bizarre rightwing index known as economic freedom. As one reads his paper, notice that Ireland’s income tax rates are still high and its tax system is still progressive. It is true that Ireland has a low corporate tax rate – a theme that we will return to. Also notice how Powell rejects Keynesian factors and convergence theory (see Brendan Walsh and Patrick Honohan), and the following measurement issue as possible factors for the rapid increase in Irish income:

One alternative explanation is that there has not been a “Celtic tiger.” As The Economist (1997:21) reported, “Is it too good to be true? Yes a few critics say: it was all done with smoke mirrors and money from Brussels.” One argument is that Ireland’s GDP is much higher than GNP because of the amount of profits that foreign-owned companies send back to their owners overseas. The high GDP numbers, therefore, do not necessarily translate into wealth for the Irish citizens. Yet, The Economist also notes that “Ireland’s GNP has been growing nearly as quickly as its GDP.” The dramatic economic growth in the 1990s is not only evident from the increases in both GDP and GNP but also in other statistics.

But Ireland’s GDP does exceed its GNP by about 20% as noted here, here, and here:

Gross domestic product (GDP) is the total value of all goods and services produced in an economy in a given time period. Gross National Product (GNP) is the total value of all goods and services produced in an economy in a given time period which accrues to the residents of a country. The difference is made up of net factor flows, which in reality includes net profit repatriation by multinationals and interest on the foreign component of the national debt. In Ireland's case, GDP is significantly larger than GNP because of the large US multinational presence here.

I emphasized the RTE-Business definition partly because the link provides growth rates for GDP and GNP, which indicate that GNP growth was less than GDP. Using data from table 12 of the Budgetary and Economics StatisticsApril 2005, I have graphed the GDP/GNP ratio from 1990 to 2004. It does seem the GDP growth has exceeded GNP growth for much of the past 15 years. For more discussion, see this post.

But I’ll concede the point that real GNP has also be growing quickly over the last several years as does Antoin E. Murphy who also notes the difference between GDP and GNP growth as he discusses the role of transfer pricing manipulation plays in exaggerating Ireland’s reported GDP and the fact that it was employment increases as much as increases in output per worker that led to the growth in output per capita.

Pierre Fortin also attributes the increase in output per capita to an increase in the employment to population ratio:

Over the past decade, Ireland’s real domestic product per head has doubled, and its national unemployment rate has declined from 16 percent to less than 5 percent. This has made the Irish Republic one of the ten richest countries in the world. This economic is the joint outcome of a long-term productivity boom dating back to the 1950s and 1960s, and a sudden short-term output and employment boom that has seen Ireland’s job performance recover, since 1993, all the ground lost during the previous twenty years. It turns out that, for several decades, Ireland has been remarkably supportive of long-term productivity growth through its openness to free international trade and investment, its business-friendly industrial and tax policies, and its free secondary and low-cost higher education. The short-term aggregate demand push experienced since 1993 has been fuelled by the solid economic recovery in Europe and the United States, continued improvement in Ireland’s international cost competitiveness, streamlined public finances, and low (net-of-inflation) interest rates. The aggregate supply response to this expansion in demand has included a sharp increase in women’s labour force participation rate, a large flow of new and return immigrants, and massive foreign direct investment, particularly from U.S. multinational corporations. In combination, these developments in labour and capital markets have kept the boom going with no increase in inflation until late 1999. The extended noninflationary response also owes much to Irish fiscal discipline, consensus-based wage moderation, and participation in the Single European Market and the European Monetary Union.

In other words, one can have an aggregate demand stimulus without reckless fiscal policy – just as George W. Bush has proven the converse. Robert Rubin would be proud even if Benjamin Powell has yet to grasp what the Keynes really meant in the General Theory.

Returning to Powell’s thesis that lower tax rates and increasing economic freedom were the primary cause of the Irish economic boom, the Irish Congress of Trade Unions argues:

Of late, a myth has grown up around the birth and, indeed, the conception of the Celtic Tiger. A growing number of influential commentators and politicians have taken to asserting that tax cuts were the key stimulus for the period of remarkable economic growth Ireland enjoyed between 1994-2001. Indeed, they repeat this assertion as if it were a matter of established economic fact – an irrefutable economic law – rather than the political contention it actually is. To date this claim, dressed up as established fact, has gone largely unchallenged. Yet, an examination of the evidence reveals it has little basis in reality. In fact, the evidence reveals that reductions in taxation followed the economic expansion – tax cuts did not spawn the Celtic Tiger. The promotion of the myth that low taxes created the Irish economic ‘miracle’ is part of a wider, conservative political agenda which, in essence, seeks to limit the role of the state and maintain
the benefits reaped by a small minority, during the Celtic Tiger years.

I do not wish to dismiss the role that the low corporate tax rate played in attracting investment from the technology leaders during the U.S. productivity boom of the late 1990’s. Brendan Walsh provides an interesting discussion of how Ireland’s position in the European Union and its income tax incentives to U.S. multinationals made Ireland an attractive place for foreign direct investment. U.S. tax planners also realized that the Republic of Ireland was expecting them to create employment opportunities as the price of favorable tax rates.

One should also recognize – as did Antoin E. Murphy that much of this attraction was the ability of these multinationals to source their U.S. created income as if it were Irish GDP ala transfer pricing manipulation. For example, a recent article in the Sunday Times by Tom McEnaney notes that Microsoft Ireland had received 7.5 billion euros in gross profits during its latest fiscal year renewing a discussion as to whether Microsoft “uses Ireland to shelter profits”. Microsoft’s worldwide gross profits were over $33 billion. Mr. McEnaney also notes that Microsoft’s effective tax rate for the year was 26%. Whether Microsoft is involved with the type of transfer pricing manipulation we discussed here is not clear.

Mark Cassidy provides more discussion and evidence on the role of foreign direct investment of certain U.S. multinationals in the Irish economic miracle.

The Irish economic miracle was in part an employment boom as it had laid the foundation for a productivity boom many years earlier. This employment boom piggybacked the U.S. technology boom with U.S. multinationals realizing that Ireland not only was a gateway into the European Union that could avoid customs duties but also a means for reducing its effective tax rate by using transfer pricing manipulation to shift U.S. income into tax-advantaged Ireland. The really odd thing about the tax cut jihadists in the U.S. is that they are now complaining that the IRS might actually enforce section 482 of the U.S. tax code. Their hypocrisy is apparent when they claim – as many have been recently doing – that enforcing section 482 will lead to an outsourcing of jobs to low-tax jurisdictions. The Irish know that the lack of enforcement of section 482 has been part of their success in attracting jobs from U.S. multinationals.


Menzie Chinn on the Post-recession Employment Record

Dr. Chinn begins his post by quoting the President's year-end list of accomplishments:
The Economy Is Growing And Creating Jobs. Since May 2003, the economy has added nearly 4.5 million new jobs. The unemployment rate is down to 5 percent - lower than the average for the 1970s, 1980s, and 1990s. Last quarter, the economy grew at 4.1 percent and has been growing steadily for more than two years.

He then provides some illuminating graphs to suggest that the employment record is not as great as advertised. For discussions of real wages, see James Hamilton.

Update: For those of you who decided to read the comments under Menzie’s post, you’ll see the old Household Survey canard again from “Kane” (signed Tim). Yes, the reported figure has risen by about 5 million since George W. Bush took office but let’s remember why they put the footnote that reads: “Data affected by changes in population controls in January 2000, January 2003, January 2004, and January 2005”. Let’s also remember that the employment to population ratio exceeded 64% in 2000 and is less than 63% now.


Can Congress Deny Birthright Citizenship?

Stephen Dinan of the Washington Times argues that it can and it should:
“There is a general agreement about the fact that citizenship in this country should not be bestowed on people who are the children of folks who come into this country illegally,” said Rep. Tom Tancredo, Colorado Republican, who is participating in the “unity dinners,” the group of Republicans trying to find consensus on immigration. Birthright citizenship, or what critics call “anchor babies,” means that any child born on U.S. soil is granted citizenship, with exceptions for foreign diplomats. That attracts illegal aliens, who have children in the United States; those children later can sponsor their parents for legal immigration. Most lawmakers had avoided the issue, fearing that change would require a constitutional amendment - the 14th Amendment reads in part: “All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States.” But several Republicans said recent studies suggest otherwise.

Even if Congress could end run the 14th Amendment, I consider this proposal offensive. Dinan makes two claims without citing any support for either. What is his evidence for the premise that birthright citizenship attracts immigration (I refuse to use the term “illegal aliens” in this regard)? And it is interesting that he suggests “recent studies” suggest that Congress can pass a law that is clearly at odds with the 14th Amendment – and yet Dinan fails to identify a single one of these alleged studies.

The coverage of this issue from Jim Puzzanghera is more convincing in its counterargument on the legal issue:
According to the Constitution's 14th Amendment, ratified in 1868 to give former slaves U.S. citizenship, "all persons born or naturalized in the United States and subject to the jurisdiction thereof, are citizens of the United States." Tancredo said citizens of other countries are not subject to U.S. jurisdiction, and he added that drafters of the 14th Amendment did not intend it to apply to children of illegal immigrants. But in a case in 1898, the Supreme Court ruled that a Chinese immigrant born in San Francisco was legally a U.S. citizen, even though federal law at the time denied citizenship to people from China. The court said birth in the United States constituted "a sufficient and complete right to citizenship." Rep. Zoe Lofgren, D-Calif., who serves on the House immigration subcommittee, said it would take a constitutional amendment to deny birthright citizenship.

The unambiguous words of our Constitution and the ruling from the Supreme Court – what part of either does Mr. Dinan fail to understand?


Housing and GDP, 1945-2004

Via BubbleMeter, this graph of the value of GDP and the total value of all housing (the creator of the graph titled it "THIS IS THE HOUSING BUBBLE"):

It's hard to see how population growth or shifts in other economic fundamentals explain why the value of housing should now be over 1.5 times the value of national income.



Monday, December 26, 2005

Multinationals and National Income Accounting

One of the joys of blogging is that one occasionally gets interesting emails from AB readers such as this one:

When a US based manufacturer (Caterpillar jumps to mind) makes products in Brazil and sells them in Europe, would that count as an export? What about a Toyota Camry manufactured in Ohio? Is that an import?

The first example is similar to something that the folks at Street Authority had in mind:
GNP: Gross National Product measures the total amount of goods and services that a country's citizens produce regardless of where they produce them. As a result, GNP includes such items as corporate profits that multinational firms earn in overseas markets. For example, if an American firm operates a plant in Brazil, then the profits that the firm earns would contribute to U.S. GNP.
GDP: By contrast, GDP measures the total amount of goods and services that are produced within a country's geographic borders. Therefore, for GDP purposes, an American company with a plant in Brazil will actually contribute to Brazilian GDP.

The value-added produced when the Brazilian subsidiary of Caterpillar can be thought of being composed of Brazilian wages and the profits for the U.S. shareholders of Caterpillar. Both are counted as Brazilian GDP with this transaction being seen as a Brazilian export to Europe. The profits generated, however, represent U.S. net income from abroad and would be part of our GNP and not Brazil’s GNP.

In the second example, let’s imagine that Toyota’s U.S. subsidiary sells the Camry to some U.S. retail distributor for $20,000 with the cost of components being $15,000 and value-added created in the Ohio plant being recorded as $5000. All of that value-added is counted as U.S. GDP with this being a U.S. produced car, which is purchased by a U.S. consumer. Of course, we could ask where those components were produced. Of the $5000 in value-added, let’s assume that $4000 is wages with $1000 being the profits for Toyota’s shareholders. In our example, Japanese net foreign income from abroad is $1000, which is deducted from U.S. GNP.

The following graph shows the ratio of U.S. GDP to U.S. GNP over the past 35 years. Note that GNP has slightly exceeded GDP as the U.S. has consistently had positive net foreign income from abroad. The rise in the GDP/GNP ratio in the early 1980’s likely reflects the fact that our current account deficits virtually wiped out the net creditor position of the U.S. with the U.S. now in a position of having negative net foreign assets. So why hasn’t the GDP/GNP ratio surprised unity – since one would expect the U.S. to have negative net foreign income from abroad?

I guess the accounting answer is that the profits from U.S. investments abroad are higher than the profits from foreign investments in the U.S. Of course, the allocation of accounting profits for a multinational enterprise depends on its intercompany pricing policies. While the IRS strives to enforce arm’s length pricing, one can identify situations where foreign parent corporations source very little profits in their U.S. subsidiaries, while U.S. parent corporations can source substantial portions of their profits in foreign low-tax jurisdictions.

I can think of two excellent examples of where transfer pricing manipulation distorts the calculation of GDP. One comes from Russia and the types of transfer pricing issues that are part of the Yukos Oil scandal as discussed by the World Bank with the Introduction noting:
Part II addresses a puzzle in Russia’s national accounts. According to official data, the oil and gas sector in Russia comprises less than 9 percent of GDP, while exports from this sector alone amount to 20 percent of GDP. At the same time, the production of services exceeds the production of goods by a wide margin, while the official share of non-market services is very small. Other data also raise questions – for example, the trade sector in the official accounts is huge and profitable, with about one third of GDP and half of all profits generated by trade. We argue that these puzzling observations can be explained by transfer pricing. Many large Russian companies use trading companies to market their output. Using transfer pricing, a firms’ production subsidiary sells output cheaply to the same firm’s trading subsidiary, which then sells it to customers at market prices. Hence, most of the value added accrues to the trading company. Tax can be avoided if the trading subsidiary is able to pay a lower effective tax rate than the production subsidiary would have without the “transfer” of value added. Since Russia’s national accounts are not adjusted for these schemes, transfer pricing has the effect of greatly exaggerating value-added in the service sectors, especially in trade, and underestimating it in industry, especially industries that make heavy use of transfer pricing, such as oil and gas. Correcting the trade margins, using international comparisons, results in oil and gas almost tripling in size, industry again becoming the largest sector, and market services losing some of their weight in GDP. The results are published in part II of this report, including a conversion table that compares the shares of various sectors in GDP before and after the recalculation.

But I’m only warming up for a longer post on the Irish economic miracle – so my second example of transfer pricing manipulation and GDP accounting must wait until later this week.


Social Security: Two Wise Men on Meet the Press

My only request to Santa this year was for us to see an intelligent discussion of the Social Security issue on Meet the Press. When Tom Brokaw and Ted Koppel decided to grace the show yesterday morning, I had thought for a moment that Santa had granted my wish:
MR. RUSSERT: Is there a story that you think was underreported this year?
MR. BROKAW: Yes, I do. I think a big story that was underreported within industrial foundation of America, General Motors may not survive. That has been the cornerstone of American industry, all those manufacturing jobs in Detroit, the automobile industry defined who we were. And at the secondary level of that story is "What's going to happen with pensions in America and companies and corporations?"
MR. RUSSERT: A thousand companies...
MR. RUSSERT: ...have failed pensions.
MR. BROKAW: Yeah. And the arithmetic is pretty simple. We're either all going to pay for it at great expense or a lot of people are going to get to age 65 and not have the money that they expected to have there.

But then Russert said something that had me thinking that he had too much eggnog:
MR. RUSSERT: Ted Koppel, I was reading a Government Accountability Office report. $20 trillion in government liabilities in 2000. It's now $43 trillion in 2004 - Medicare, Social Security, pensions.

Or maybe Russert was giving another gift to Bob Somerby. Thankfully, Koppel bailed Russert out with:
But, you know, to follow up on Tom's point. I think the medical care, which is a function of what we're talking about - yes, we have been priding ourselves on having the best medical care in the world--and you know something? You can get the best medical care in the world, he can get the best medical care in the world, I can. Most Americans can't.

Indeed, most of this alleged $43 trillion long-run shortfall comes from the assumption that Medicare spending has no tax base. But why not also assume that defense spending has no tax base? Defense spending is currently running at approximately 4.75% of GDP or $600 billion a year. Let’s assume a steady state model where real defense spending rises at 2.5% per year and the real interest rate 4%. By golly, the present value of these expenditures is $40 trillion.

The real problem is that this Administration dramatically reduced taxes even as it was increasing defense spending and enacting a prescription drug benefit. I guess Russert’s attempt at a point is that we can afford a low tax regime with high defense spending only if we eliminate Medicare. But we could also afford a low tax regime with the current Medicare program if we eliminate the defense department. Of course, national security concerns mandate that we maintain at least some level of defense spending, but why can’t Russert even utter the possibility that we increase the tax base? I guess viewers of Meet the Press will have to wait for a new moderator before we are granted our wish for an intelligent discussion of the Social Security issue.

Update: Tim Graham at NRO’s The Corner must have watched a different episode of Meet the Press than I did:

it was a predictable hour of liberal sermonizing. It's a scandal that America won't raise taxes.

No Tim – it’s a scandal that the writers at the National Review refuse to admit to their readers than massive Federal deficits are nothing more than deferred tax liabilities that our children will have to pay someday.


Saturday, December 24, 2005


A recent Washington Monthly profile of Kos stirred a debate over the merits of, well, the bulk of what we do here at Angry Bear.

Atrios writes that facts, charts, and the like are to some extent pointless in the current environment:
I've said this before, but there's just little point in detail-oriented grand policy proposals when Bush and Republicans are in office. Just about everything their side offers up involves tax cuts, corporate pork, or cuts to programs that help keep granny from freezing to death in winter. The rest are complete disasters for obvious reason, like the Medicare drug plan, and there's really not much to discuss.

If our team actually had some power we could be debating the merits of various universal health care proposals, or considering just how large a minimum wage increase might be appropriate, or various other wonky things. It would be good fun. But we live in an unserious age where the people running the government have no interest in policy and the people not running government have no ability to get anything passed without having anything good about it destroyed by the
Of course, we spend more time on debunking than "grand policy proposals" per se here, because there's so much debunking to be done and there is in fact little likelihood of grand proposals going anywhere in the near term.

Kevin Drum offers a modest defense of the value of wonkery:
My own view is that in addition to activism, which blogs obviously excel at, blogs can also be very good at what I call "policy-lite" — short but serious takes on policy issues leavened with enough red meat to make it entertaining. It's not the same thing as a Brookings white paper or even a 5,000-word Washington Monthly article, but blogs do provide a forum to educate and inform at a non-expert level in between all the snarkiness and partisan catcalling.
"Policy - Lite"? Not exactly flattering, but not exactly inaccurate, either

Henry Farrel chimes in with this more vigorous defense:
Not only is a certain amount of wonkishness on the left a good thing in itself, but it can be an important political weapon. Looking back to the Social Security debate, left-of-center blogs played a real role in helping to torpedo Republican proposals – but it wasn’t only the Cossacks (or even Josh Marshall’s information-gathering campaign to separate the sheep from the goats) that did the trick. Wonkish critiques of the bogus figures and rationales that the administration was floating helped shift the public debate from one about a purportedly necessary and inevitable reform, to one about a political ploy that looked like backfiring.
Finally, Max also weighs in:
Some people are saying that in an adverse political environment, research or policy are not very important. My self-interest here is obvious, but maybe I can still convince you this is a mistaken belief.

One implication that might be drawn from this belief not asserted explicitly is that facts don't matter. All that matters is who can shout the loudest. I beg to differ. You may be able to shout, but if what you have to say is crap, the volume isn't much of an asset.
Max even gives two specific examples, Social Security and the purported job-growth-and-tax-cuts relationship, in which both detailed and policy-lite critiques helped inform and even shift the terms of debate away from the Republican-framed talking points.

I'm clearly not neutral, so it comes as no surprise that I side with Max and Henry. While its demise now seemed inevitable, thinking back to the early days of the proposed reform/privatization of Social Security, it seemed a matter not of if, but when and how bad? the would reform be. Similarly, despite its continuing efforts, I think the administration has failed in its attempt to convince people that the tax cuts stimulated job growth, or even that the overall job market is in good shape. For example, the December WSJ-NBC polls (pdf, subscription required) show that, even as gas prices ease, Bush's rating on the economy is a meager 38 approve-54 disapprove.

Two cheers for wonkery.



Thursday, December 22, 2005

My Christmas Tribute to the Most Bizarre Attempts at Economics in 2005

I am happy to report that the National Review is not shying away from saying Merry Christmas as they tout what they call the “Best of NRO Financial 2005”. Of course, we have had some real fun with a few of their silly op-eds such as John Tamny lecturing Paul Volcker about trade deficits. Then there are those free lunch supply-side types who don’t understand what Keynes had to say.

But picking on these amateur economists is not in the holiday spirit. Besides, their resident economist topped all of the rest for confusing the Chinese economy with the U.S. economy as he was trying to explain high oil prices. But Dr. Canto at least did not confuse economics with religion.

Given that I have quite a number of old principles of economics text written by Paul Samuelson collecting dust in my office, maybe this should be my Christmas gift to the NRO Financial staff.

Merry Christmas and Happy Holidays!


IRS Argues That the Bush Tax Cuts Reduced Tax Revenues

The IRS Quarterly Statistics of Income Report has hundreds of pages of new numbers, but one well respected tax publication provides this summary:
The 2001 and 2003 tax cuts shrunk individual income tax revenues in 2003 despite a rise in taxable income and forced over 400,000 new taxpayers onto the rolls of the alternative minimum tax, according to IRS data released on December 21. The IRS’s latest Statistics of Income Bulletin showed total individual taxable income rising 2.5 percent to $4.2 trillion from 2002 to 2003. But despite the extra $90 million in taxable income in 2003, the IRS found that total individual income tax collected actually fell 6.1 percent to $748 billion as a result of the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA). “This was the third successive year that total income tax declined,” the report said. “The decline in total income tax for 2003 reflects the reduction in tax rates under JGTRRA.” Total revenue would have declined even further, the report found, had AMT revenues not conversely jumped 38.2 percent, with 23.4 percent more taxpayers paying the tax. “This is largely attributable to the decrease in ordinary tax rates due to JGTRRA, while the tax rates on alternative minimum taxable income remained the same as 2002,” the report said. “Over 0.4 million more taxpayers were required to pay the AMT for 2003.” … The IRS also found that a 23 percent jump in total capital gains and dividends income was responsible for a large portion of the 2003 increase in taxable income, with wage and salary income rising just 2 percent. Capital gains and dividends income received the largest tax rate cuts under JGTRRA, contributing to the decline in revenues. The IRS report found that all income classes but the lowest saw smaller average tax rates in 2003, but that higher-income groups received a much larger percentage tax cut. “The lower average rates for these higher-income returns not only reflect the decrease in tax rates on ordinary income but also a new preferential tax rate for certain qualified dividends and long-term capital gains sold after May 5, 2003, which were introduced in JGTRRA,” the report stated.

Now to regular readers of the Angrybear – this is old news. But some folks are slow learners.


The Fatal Flaw of "Starve the Beast"

Yesterday's budget-cutting action by the Senate highlights the major problem faced by those who want to cut government spending: it is deeply unpopular to do so.

The 'starve the beast' notion that cutting taxes leads to large deficits, which in turn forces spending cuts, has already been completely and repeatedly debunked. But the difficulty with which the solid Republican majorities in both houses passed tiny, tiny spending cuts ($8 billion per year out of a budget of $2,500 billion per year) is remarkable. The vote in the House was 212-206, while the vote in the Senate was 51-50. This highlights the fact that 'starving the beast' simply won't reduce the size of government, because even Republican representatives are reluctant to cut spending.

The reason is, of course, that the American people by and large like the size of the federal government. They like the things that it spends money on. And because members of Congress know that cutting spending will be unpopular and hurt their chances for reelection, they won't really do it in any meaningful way, no matter how large deficits become.

One last note, which is really a quibble with the Washington Post. Their lead paragraph read:
Senate Republicans, by the narrowest margin yesterday, pushed through a major budget measure that would trim federal spending by nearly $40 billion over five years, but they were stymied by Democrats in their effort to open Alaska's wilderness to oil drilling.
"Major" budget measure??? I don't know any metric by which a change in spending of 0.3% should be called major...


UPDATE: Extra zero in the last sentence removed.


Wednesday, December 21, 2005

Deficit Forecasts: Does Treasury Secretary Snow Have a Point?

The Carpetbagger, Kevin Drum, and Brad DeLong are hammering Snow for this statement:
President Bill Clinton left office in 2001 with a federal budget surplus of $127 billion. President George Bush ran a deficit of $319 billion in 2005. So who deserves more credit for fighting red ink? No question, says Treasury Secretary John Snow: It's his boss, Bush. Sipping a latte at a Starbucks coffee shop with reporters in Washington two days ago, he said that "the president's legacy will be one of having significantly reduced the deficit in his time," and said Clinton's budget was a "mirage" and "wasn't a real surplus." Snow said the Clinton surplus was inflated by a stock-price bubble and that Bush will be remembered for cutting the gap from a record $412 billion in the 2004 fiscal year.

OK – to say the historical figures are not real is either incredibly stupid or dishonest. But let’s read further:
Government forecasts for continued surpluses depended on those tax payments continuing, Snow, 66, said. “You're going to make a lot of mistakes if you forecast based on a bubble,” he said. “Bubbles burst.”

There is a limited but important point in this statement. If we realize that we have a one-time and temporary piece of goods news on tax collections and one is silly enough to extrapolate some long-run deficit forecast based on the false assumption that this one-time surge is permanent, one will make a mistake. But that is exactly what this Administration is doing when they claim that current fiscal policy will see a sizeable reduction in the deficit over the next few years.


Tuesday, December 20, 2005

SnoopGate: Incompetence as an Excuse for Violating the Constitution

The need for speed is one of the specious arguments put forth by President Bush for the end-run around the FISA Courts. Never mind the fact that the FISA Courts act quickly and have approved over 99% of the requests made over the years. Never mind the fact that the government can wiretap even before getting a warrant. So I was wondering what the rightwing would come up as their latest in lame excuses for the excesses of this White House – and it seems Byron York exceeded expectations:
At his news conference this morning, the president explained that he believed the U.S. government had to "be able to act fast" to intercept the "international communications of people with known links to al Qaeda." "Al Qaeda was not a conventional enemy," Bush said. "This new threat required us to think and act differently." But there's more to the story than that. In 2002, when the president made his decision, there was widespread, bipartisan frustration with the slowness and inefficiency of the bureaucracy involved in seeking warrants from the special intelligence court, known as the FISA court. Even later, after the provisions of the Patriot Act had had time to take effect, there were still problems with the FISA court - problems examined by members of the September 11 Commission - and questions about whether the court can deal effectively with the fastest-changing cases in the war on terror. People familiar with the process say the problem is not so much with the court itself as with the process required to bring a case before the court. "It takes days, sometimes weeks, to get the application for FISA together," says one source. "It's not so much that the court doesn't grant them quickly, it's that it takes a long time to get to the court. Even after the Patriot Act, it's still a very cumbersome process.

At first, I thought this was a slap in the face of our government officials – saying they were so incompetent that we had to throw out the Constitution because they could not get their bureaucratic act together. I was wondering if Mr. York would provide a single example of his thesis – when he did:
Lawmakers of both parties recognized the problem in the months after the September 11 terrorist attacks. They pointed to the case of Coleen Rowley, the FBI agent who ran up against a number roadblocks in her effort to secure a FISA warrant in the case of Zacarias Moussaoui, the al Qaeda operative who had taken flight training in preparation for the hijackings.

This is the same example provided by William Kristol and Gary Schmitt, but notice this is a pre-9/11 example. Let us recall that the bulldog of the Clinton era, Richard Clarke, was hounding Condi Rice at the NSA to break down the bureaucratic barriers and to “shake the trees” but Dr. Rice simply ignored Mr. Clarke. So the York-Kristol-Schmitt thesis seems to be that her incompetence granted her boss the right to violate the Constitution and our liberties.

But as I think about it – suppose that we had an effective NSA today (after all, Dr. Rice was moved out of NSA over to head the State Department) that wanted to spy on some anti-war protestor. I bet that the Administration would find it difficult to write their request for a warrant – especially if that individual was last found protesting a war over 30 year ago.

Update: A FISA judge resigns in protest. Also, a few AB readers reminded me that NSA in the alphabet soup of D.C. talk refers to the National Security Agency and not the former National Security Advisor who to this date has not learned how to tell the truth:
United States secretary of state, Condoleezza Rice, has denied US president George W Bush ordered illegal domestic spying. However, she would not comment on reports that US phones and e-mails are monitored without court approval.

Update II: AB reader Lena keeps pointing to the Chicago Tribune op-ed from John Schmidt. Thinkprogress provides the rebuttal. Which brings up an important point – the rightwing apologists for Bush are parading a host of former Clinton officials as some sort of justification for Bush’s illegal activity. Even if someone from the Clinton White House said this illegal act was OK by them, I don’t care. But as Thinkprogress also points out in other posts – the apologists are not being honest in many respects.


The Most Important Question

From Bush’s press conference yesterday, justifying his violation of US laws:
“[I]t was a shameful act for someone to disclose this very important program in a time of war.”
“We're at war, and we must protect America's secrets.”
“[T]his is a different -- a different era, a different war.”
Given how centrally Bush is relying on the notion that the US is currently at “war” against terrorists when explaining his authority to override US law (note that the "war" he is referring to is not the war in Iraq, but rather the "War on Terror"), there is one central, crucial question that I think the press corps needs to ask again and again, until it is answered: When will this “war” end?

Will the US be in a “time of war” forever? If not, when will the US be able to declare victory in this “war”? When there is no person left on the planet who would like to commit an act of terrorism? When there is no person left in the world who would like to harm Americans? When there are just 10 terrorists left, or 100, or 1000? What are the possible scenarios under which this “war” could be declared to be finished? Or is this state of "war" for the US permanent?

Bush was asked something similar yesterday and refused to answer. But a straightfoward answer to this question would be hugely illuminating, because the answer would tell us Bush's view about when the President will have to resume upholding the laws of the United States.



Recent Posts

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* Can Congress Deny Birthright Citizenship?
* Housing and GDP, 1945-2004
* Multinationals and National Income Accounting
* Social Security: Two Wise Men on Meet the Press
* Wonkery


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