Monthly Archives: March 2009

Tax Hike Impacts on Behavior

Trickle-down apologists keep trying to sell the snake oil that tax hikes hurt the economy by decreasing investments.  That pretty much has been debunked.

[H]uge tax cuts in 2001 and 2003 signed into law by President Bush were actually followed by a pronounced decrease in the fraction of G.D.P. devoted to business investment (although the fraction of G.D.P. invested in homes rose apace, begetting the current financial crisis in the mortgage market). Remarkably, the fraction of G.D.P. devoted to business investment also fell after the enormous tax cuts during the Reagan years. Even more remarkably, it rose after the tax increases during the Clinton years.

Chart of total private investment as total of GDP 1980-2000

In case you missed it, another canard of trickle down devotees – that if you raise taxes in a jurisdiction, people will move out – has shown to be false.

“At the level we’re talking about, there’s no quantitative evidence that it affects the mobility decisions of affluent taxpayers,” said Douglas S. Massey, a demographer at Princeton University and president of the American Academy of Political and Social Science.

…New Jersey raised taxes on the wealthy in 2004, increasing by 2.6 percent the tax rate levied on those making more than $500,000 a year; and Gov. Jon S. Corzine this month proposed a new increase on high earners.

But a study by Professor Massey and two colleagues, published in September, estimated that the previous tax increase cost New Jersey only 50 to 350 existing “half-millionaire” households — a relatively small number against the total of 44,000 such households in the state.

While those departures cost the state about $38 million a year in revenue, the study estimates, the higher taxes levied on those who stayed have brought in an average of $895 million a year. Also in 2004, California voters approved a 1 percent income tax surcharge on personal income over $1 million, and Silicon Valley and Beverly Hills appear to remain well populated with the wealthy. From 2004 to 2007, according to a study by the California Budget Project, a left-leaning research organization, the number of millionaire taxpayers rose by close to 50 percent, well outpacing the 8.6 percent growth in the total number of those paying personal income tax.

“It is one of the oft-cited urban legends in California politics — that the rich are leaving California because of higher taxes,” said Jean M. Ross, the project’s executive director.

Between 2003 and 2005, after the Sept. 11 attacks, New York State imposed a temporary surcharge on incomes of more than $100,000, as did New York City. While the city did lose residents at all income levels in 2005, according to a 2007 study of population data published by the city comptroller, William C. Thompson Jr., households with incomes of $250,000 and higher were the least likely to leave.

Why do people decide to live in a certain area?  Young singles probably look for good jobs and a vibrant social environment.  Young couples?  Good jobs, affordable housing, safe environments.  Young families?  Ditto, plus good schools.  Retired folks?  Maybe a warmer environment but also safe communities.  This is the only group that I think might even consider a move due to taxes in the hopes they can preserve their nest egg.  Otherwise, taxes fall way down on the list of reasons to choose where you live.

What’s Wrong with CNBC

Over the past several weeks, much has been reported about the dust-up between CNBC and Jon Stewart of “The Daily Show.”  Specifically Jim Cramer and his bad stock picking calls.  While that’s fair game, the larger issue is CNBC’s cheerleading for Wall St. while the economy tanked due to the Master of the Universe risk taking with our money.  CNBC simply didn’t do its journalistic job, which is to look skeptically at Wall Street’s compensation scheme that promotes bad risk taking.

Today on CNBC we see a perfect example of CNBC’s bias, this time by Erin Burnett and Mark Haines.  Early in their show, they look at whether the bill to tax AIG bonuses will slow the recovery.  Of course, when you promote the segment by asking that question, you reveal your bias.  Then, when you have two guests with the same view, well, fair and balanced doesn’t come to mind.  Then Burnett, who has become increasingly full of herself in the past year, suggests that pension funds don’t really understand what happening.

Later on in the program, they have Congressman Brad Sherman(D-Calif.) explaining why Congress passed the tax bill yesterday devised to recover AIG bonuses.  You can argue whether this is a good bill.  But listen to the questioning by Burnett and Haines.   They clearly reveal their biases in their questions.

Haines doesn’t just ask questions, he tells us he knows that if people on Wall St. made just $250,000, they’d all go overseas to work.  First of all, there is nothing in any bill that keeps all salaries on Wall St. to $250,000.  But he clearly demonstrates the Wall St. mentality that they are so bright, they must have multi-million dollar salaries.

Burnett trumps Haines, however,  She asks why Sherman thinks that anyone making over $250,000 is “a  bad person.”  Talk about demonizing people.  No one ever said people making over $250k are “bad people.” 

Later in the interview, Haines says that neither he or Burnett were in favor of the bailouts.  But earlier in the interview, to counter a Sherman argument, Haines states the view that if we didn’t bail them out, the entire system might have collapsed.

If you listen to this entire interview, you can see why I and other think CNBC lacks any journalistic integrity.

Maybe Not Piano Wire, But Bars Would be Nice

There apparently is a case to be made against AIG and Goldman Sachs, at the very least.

William Black, a law professor at the University of Missouri-Kansas City, envisions a federal investigation into AIG’s past accounting, securities disclosures and executive-pay program. Black was the litigation director of the Federal Home Loan Bank Board and helped bag the "Keating Five" lawmakers during the savings-and-loan scandal in the late ’80s and early ’90s.

As the bottom was falling out of its derivatives trading, AIG was reporting healthy profits, he told me. That’s not allowed. Meanwhile, the company created a short-term bonus system for its top execs.

The massive prior bonuses should be clawed back, he said, "and we do that by establishing that there is accounting fraud and by putting in intelligent, vigorous investigators."

Speaking of which, Goldman Sachs said that it had no material exposure to AIG, but we now learn that it has received $13 billion in AIG bailout money. "That’s a felony to make a false disclosure," Black adds.

…Back to AIG. In addition to making extremely risky contracts and being leveraged to the hilt, the company failed to put in appropriate loss reserves should something go wrong. The reserves are required under Generally Accepted Accounting Principles (GAAP), according to Black. These are the rules accountants must follow in preparing financial statements.

"If you’re publicly traded, the SEC rules require that you follow GAAP," he says. "If you don’t follow GAAP, then it’s securities fraud."

The excuse that the auditor gave the accounting a green light won’t fly. Enron and the infamous Lincoln Savings & Loan had clean opinions, too.

It’s not piano wire, but maybe we could settle for the Ken Lay compromise.

What’s in a Word: Moderate?

What is a moderate?  Is someone who is pro-choice, against the death penalty, opposed to gay rights and in favor of lower taxes a “moderate”?

And what is the opposite of a moderate?  An immoderate?  An extremist?  Careless?  Gluttonous?

I ask because yesterday, as most days, The Washington Post used the word a lot. 

“[W]hen a more expansive proposal…was modified to appeal to moderate Democrats and Republicans….”  (Does this mean all Republicans are moderate or that none of them are?)

“…troublesome moderates…”

“Some moderate Democrats are arguing…”

…the type of moderate who could cool the nation’s long-simmering judicial battles.”  (as opposed to those hot-headed progressives and conservatives?)

“…judicial moderates with … a record of what he considers good judgment…”  (as opposed to progressives and conservatives with poor judgment?)

I’m not passing judgment on The Post’s good reporters.  It is a institutional problem, not only at The Post but at virtually every newspaper in the U.S.  They feel compelled to describe people in politics as either liberal, conservative or moderate.

I think moderate is a word with meaning.  My unabridged Random House dictionary that always sits opened next to my desk is not, at more than 2,000 pages, moderate.  I guess that makes it inferior to a smaller, more moderate, student dictionary.  Nonetheless, according to my sidekick, the first definition of moderate is “kept or keeping within reasonable or proper limits.”  Which means liberals and conservatives are not proper or reasonable.  The second and third definitions may be more accurate, i.e., “of medium quality, extent,” or “mediocre, fair.”  By the fifth definition we come to what Post writers and editors must mean: “a person who is moderate in opinion or opposed to extreme views or actions, esp. in politics or religion,” thus placing progressives and conservatives in the “extreme.”

If you examine a recent report on the political ideals of the American public, you will find them extreme.  There is widespread support for many typically “liberal” policies, along with large pluralities who think that homosexuality is “unnatural” and nearly as many people who think immigrants are a “burden” on society as those who don’t.  Are these people extremists?

Are moderates more measured, reasonable, temperate, level-headed, thoughtful?  Or are they just the people who think with both hands, as in  “on the one hand…”? 

Describing politicians as moderate is passing judgment on them because the word itself is affirmative in meaning.

What if The Post banned the words moderate, liberal, conservative, progressive, reactionary and extremist  to describe politicians?  What would readers lose, other than the newspaper’s pre-defined category of thought?

Journalists often describe those who are commenting on a policy as belonging to a political caste.  By preceding Kathryn Kolbert’s comment with an identification of her organization as a liberal advocacy group, The Post enabled a lot of people to discount her thoughts before she uttered them.  But, The Post is bi-partisan, or perhaps prejudicial on an equal opportunity basis.  “The Judicial Confirmation Network, a group that supports conservative nominees….”  Pity the poor reader who doesn’t know how to judge ACORN as it is described in the story as only an “advocacy group.”  Advocates for what?  What would readers be left with if the newspaper didn’t feel compelled to ascribe a general, vague definition to political thought?  Heaven forbid they would judge the comment on its merits.  If by using terms like moderate, liberal or conservative to describe someone who is quoted journalists are forewarning the reader that, as Mark Twain once said, “taffy is being pulled,” then why include the quote at all?

A quick search finds 14 articles or Post blog postings yesterday that used the word moderate to describe someone in the American political area.

Here’s a proposal:  If The Post wants to raise the level of political discourse above that of a pre-pubescent argument, e.g., “Your mother wears combat boots,” let’s drop the pre-ordained descriptions.

I hope The Post will consider this modest, dare I say moderate, proposal.

Sen. Warner is a “ConservaDem”?

According to Rachel Maddow’s report tonight, our own weak-kneed, afraid of his own shadow Mark Warner is part of the new turncoat Democrats in the Senate.  This guy is, simply put, a coward.

Obama Explains the Need to Bail Out AIG

I have argued here and here that Obama needs to do a better job of explaining how we got into this financial mess, how his policies will get us out of it and, most important, how we prevent a repeat in the future.

A little while ago, the president gave an impromptu press avail and made a small, but good start.  I don’t have the video just yet.  But when he was asked if he could explain to the American people why it’s important that taxpayers bail out AIG.  Here is a summary of what he said:

AIG issued a lot of insurance policies to banks against losses for the bad investments they made.  Once those investments went south, AIG was forced to pay, but it hadn’t enough capital.  If AIG was then allowed to go bankrupt and not pay the banks, those banks would have failed and the investments of many Americans in those banks –- through their 401k’s and pensions — would have been decimated.  Small businesses would also not be able to tap into credit lines to keep their businesses going.

He then explained that it was critical that moving forward that financial institutions and those who issue insurance policies have more capital, so that if they are forced to pay out, they can do so without going under.  In other words, they need a better asset backing for the insurance policies.

All in all, it was a good start.  Here’s how he could have improved upon the explanation:

  • He could have added that banks were also buying securities (mortgage-backed securities and other exotic derivatives) without enough capital to protect themselves against losses. 
  • The reason AIG could issue those policies is because the U.S. has insufficient regulations to require assets to back those insurance policies.
  • He needed more info. on why bank failures hurt the country.  That may seem elemental, but a lot of people don’t understand why it matters.  It’s not just a matter of depositors losing their money.  The FDIC can protect some of that.  But if many big banks fail, the U.S. doesn’t have the money to pay depositors.  We can print money, but then the value of the dollar would drop so precipitously that our entire  economy would be threatened by hyper-inflation.
  • Explain better how 401k’s are invested:  The organizations that — labor unions, investment concerns paid to invest 401k contributions – typically invest employees funds in banks and insurance companies.  If they go bankrupt, the 401k tanks.
  • A bit more detail on the kinds of regulations he would propose would have been helpful, including saying specifically that he wants to make sure that, going forward, no institution is “too big to fail.”

Still, this is the kind of explanation Obama needs to make in a series of fireside chats.


After watching CNBC today, I wonder where were all the folks who claim we must honor AIG’s employee contracts when everyone was saying we must break the union contracts of auto workers?

Fireside Chats Redux

After President Obama addresses Congress last month, while most folks thought it was a great speech, I suggested he missed an opportunity to explain to the American people what’s happening to the economy, how it happened and how his plans address not only the crisis but how we can prevent a reoccurrence in the future.  After all this talk, does anyone really know what a derivative is and how unwinding them requires people expert in their structure?  People are rightly angry about the bail out of irresponsible traders and business leaders who threw caution to the wind in search of obscene profits, not only for their companies but for themselves.  Their anger – my anger – is completely justified.  But anger is not the best emotion to anchor a recovery.

Obama is apparently considering now a series of “fireside chats” first used by FDR to explain not only his economic policies but the state of the economy and how he thought he could fix it. 

I hope Obama goes through with it and carefully crafts each message.  But he needs to do more than just explain the problems and how’ll he’ll solve them.  He needs to emphasize what policies he will put in place to prevent a recurrence. 

The outrage, of course, is palpable against business in general and specifically against the financial sectors.  But there is also a growing sense that our economic system is no longer a just one.  It is acutely slanted toward moneyed interest.  The trickle down economy is now seen for what it is – a condescending bone thrown to the masses.  Work is devalued and capital is king.  An array of excuses – globalization is a favorite – is put forth to justify the exploitation of people who actually work and produce things.

If Obama’s descriptions of what has happened to our economy are to be be believed, he will need to spend just as much time explaining what he will propose to reorder our economic priorities and fashion an economic construct that levels the playing field.  That’s not socialism; it’s fairness.  It’s collective responsibility.

What angers people today is not only what has happened but that no one sees a clear answer to the question:  How do we avoid this in the future?  From corporate bailouts to outrageous compensation to lax regulation, what’s the plan?

Most important, he needs to tell us how we will demand a restructuring of businesses, especially financial institutions – so that nobody, no company – is “too big to fail.”

These chats could be a defining moment for the young president.  Let’s hope he seizes the opportunity.