It's Still The Economy, Stupid


Friday, May 16, 2003  

SENATE COMMITS ECONOMIC SEPPUKU.

MaxSpeak is very confused by Senate Republicans' notion of tax reform. The aim of Republicans is to boost investment, capital formation, and long-term economic growth. That's their story, anyway. No little disbelief attaches to the idea that lower taxes on dividends will be helpful in this endeavor. Let's make believe this is true too. So why does the Senate bill a) delay the full dividend exclusion a year; b) provide a disincentive for firms to buy plant and equipment; and c) phase out after three years?

(b) requires a bit of explanation. Under present law, a firm that uses a dollar of profits to buy plant and equipment pays tax on this dollar (after taking out whatever it can depreciate for that year). There is some capital gain to owners of the firm, itself benefitting from lighter tax treatment. If the same firm uses the dollar to pay dividends, it is taxable to individuals. If the latter tax is now reduced or eliminated, there is less incentive for the firm than before to buy plant and equipment. This raises the question you hear from some Wall Street types, "Why should I buy stock in a firm that has no good use for its own money?"

The cynical answer to all three is it makes for a lower sticker price. True enough. But suppose you really believed tax cuts would be helpful in spurring investment and speeding the economy out of the employment slump we are in. Wouldn't it be smarter to start at 100 percent and phase out? Remember in light of business cycle considerations the time to boost investment, if it were possible (which I doubt), is right now. The phase-in is critically wrong in that light. The phase-out is bad too: it's a wet blanket on investment projects that last beyond the phase-out of the tax break. The disincentive on the firm side is just idiotic. Senator Nickles (R-Palookaville) defended it on simplicity grounds. Unfortunately, simple rules can imply perverse tax incentives.

Passage of this treacle followed by a failure of employment to grow could be a death blow for tax cut politics.

posted by Max | 2:05 PM |
 

FLIGHT OF THE DEFICIT CHICKEN-HAWKS.

(x-posted to MaxSpeak)

A handful of senators claim to be committed to a limit of $350 billion in tax cuts this year, for the sake of lower deficits. Some of them have gone belly-up on this promise, namely George Voinovich (R-OH) and 'New Democrats' Evan Bayh (D-IN) and Ben Nelson (D-NE). To her credit, Olmpia Snowe (R-ME) did not melt.

The bill that passed last night does not have $350 billion in tax cuts. It has $420 billion. The sticker price falls to $350b because of "offsets," also known as tax increases. These increases will never see the light of day, because they are either large or very small. The large one -- a $30 billion tax hike on Americans working abroad -- will never get by the House of Representatives. Too obvious. The cats and dogs will be picked off, one by one, because the elimination of any single one has negligible incremental impact on the big numbers, and major impact on a very small number of people. If conventional habits persist, the small will prevail over the large, given the disparate stakes involved. Meanwhile, the House will not settle for the Senate's upper limit because it falls below their lower limit. Any compromise, properly speaking, should lose the votes of the deficit chicken-hawks noted above.

It's well known that the cost of the bill is obscured by multiple phase-ins and phase-outs, even ones, as noted in the previous post, that defeat the purpose of the bill. It is worth noting that the family-oriented tax cuts -- the Child Tax Credit and the marriage penalty fix -- phase out after 2006, while the rate decreases for very high income persons do not. The priorities are clear.

posted by Max | 2:04 PM |
 

Tax cut passes Senate

(x-posted at To the point)

I think the operative word about the tax cut passed by the Senate yesterday comes from the executive director of GOP-aligned fiscalled conservatve group the Concord Coalition:

"It is a measure of how far fiscal discipline has slipped that the Senate would even consider such hocus-pocus in the wake of the Enron accounting scandal," said Robert Bixby.

Indeed. This plan is dishonest on so many levels, and problematic on so many levels, I'm not going to get into the details. Suffice to say, it's unfair, but more than that, it's ineffective and will wreck the economy, but more than that, it's unfair, but more than that, it's ineffective and will wreck the economy...

posted by Matthew | 7:58 AM |


Thursday, May 15, 2003  

Red vs. Blue

Atrios points out that Red states are stealing from blue states. Inspired by MB's great work here , I went to the full report Atrios cites, added some color-coding, and made some graphs. While the subsidies are much larger in the Red states (those that in principle dislike government subsidizing anything), they are not quite as bad as I thought. I suspect the explanation that our system is designed to favor smaller states by giving them disproportionate representation in the Senate (two per state) and the Electoral College (1 per member of Congress, so a three vote minimum). Still, the citizens of conservative states don't seem particularly opposed to federal largesse (It's always fun to listen to Ted Stevens of Alaska--a top beneficiary--rant and rave against the govenment).

It looks like there's something funny in the graphs because you might expect that everything has to average out to one. My guess is that they are using income taxes paid by each state and transfers made to each state. Presumably, this reflects deficit spending and other sources of revenue. Overall, a slight majority of Blue states get less than $1.00 returned back per dollar put in, while the vast majority (27/31) of Red states break even or better. (Click on each image to get the full size version).

AB (X-posted at Angry Bear)



    

UPDATE: Oops, Gore won Oregon. Luckily, since Oregon is dollar for dollar even, it doesn't really change the basic point (Thanks to Minder in comments).

posted by Angry Bear | 3:08 PM |
 

I Didn't Think this Would Make it Through the Senate

From the NYT, among others: "Republicans Woo Moderates on Tax Cut". It looks like the Republicans have 50 votes in the Senate, with Dick Cheney holding the tie-breaking 51st, for an amendment to replace the Grassley-proposed and Senate Finance Committee approved version of the dividend tax cut. Zell Miller voted for the tax cut (as I predicted here), and Democrat Ben Nelson of Nebraska (Red State) also will vote 'aye'. Voinovich gave in to pressure and agreed to vote yes, stating "[this plan] gets the biggest bang for the buck that we can possibly get" (rather Panglossian).

Technically, Voinovich did not reverse course as the plan comes in at $350b. Of course it only achieved that number via the dishonest accounting of sunset provisions: 1/2 of dividend income is excluded from taxation in 2004, followed by 100% of dividend income from 2005-2007, at which point the exclusion will in principle sunset (so the 10-year cost of the tax cut uses the assumption that dividends will be taxed from 2008 onward). Still, this plan will cost much more in lost revenues than Grassley's. How did they add this cut and still keep under $350b?

The more robust dividend plan shaves tax cuts for married couples and small businesses to make room for more dividend breaks in the bill, which cuts taxes $350 billion over the coming decade [according to Sen. Don Nickles (R-Ok)].

Fantastic!

Olympia Snow held her ground ("My position hasn't changed"). And the story didn't say, but it looks like Chafee and Collins also stood firm (48 Democrats+Jeffords+Chafee+Collins+Snow-Miller-Nelson = 50).

AB

X-Posted at Angry Bear.

posted by Angry Bear | 11:18 AM |
 

Ten Things I Hate about HMO's


Hey, there. Teddy Salad here. MB has very generously allowed me to contribute to this wonderful and very necessary blog. A quick orientation. I'm an economist working with the government sector. My philosophy is Austrian and my political affiliation is Green. While those in the know are trying to reconcile how I keep those two ideologies in my head without spontaneously combusting, I'll have you know I have a patented cranial-insulation technology that keeps me and everyone in my blast radius quite safe. Trust me. My personal blog is The Hot Seat, but this is the only time you'll see that reference as it is a personal blog where I post things that are too personal, too technical or just too damn stupid to post here. And my real name is not Teddy Salad. That's from a Monty Python skit. I wasn't sure what to use for my first contribution, but as it's a personal introduction, it should probably be somewhat personal, and I'll start with the economics in the next entry. Okay. Introduction over. Rant begins...now.

In my non-blogger existence, I've been doing a lot of work around the house my wife and I bought in February. And my back starts to hurt. So I go to my doctor to have it checked out. Ring up a $20 co-payment right now for the medical-industrial complex. Cha-ching. The doc checks it out and tells me to get an MRI. He also recommends a blood test because my cholesterol was a bit high on a test I took a couple years ago.

I say okay to both, because my hypochondriac brain has already morphed what is probably a bulging disk into an inoperable spinal tumor with heart disease as the sugary icing, and it couldn't hurt to have a blood test to boot, especially since I won't pay for it. Cha-ching. Rack up two more payments to our decentralized medical bureaucracy and moral hazard.

But you can bet, since this is the U.S., that arranging this won't be free. I call the MRI place and they say my insurance requires an authorization code and my doctor should have given me one. I call my doctor during my lunch break, which also happens to be their lunch break. They get a two hour break, apparently. That must be some union! Where can I sign up? But I digress...I've made two wasted phone calls, and know I need to make two more just to get an appointment. Then I need to take time off from work for the appointment. This is no problem for me, since I work in the government sector and have an exceptionally cool boss. My wife, on the other hand, would probably need her company to do their own tests to make sure she wasn't faking just to take sick leave. Anyway, my quest to get my back checked out is just beginning, and part of the "productivity enhancing process" that makes health care so "affordable" is that I have to do most of the legwork. But I guess I want to be healthy, don't I?

This is about the time I start fantasizing about a single-payer health insurance system. Not because it is demonstrably cheaper and provides better health care outcomes. Not because, from a strictly economic theory perspective, it is the cheapest and most efficient system. No, the reason I am fantasizing about it at all is because my country does not have one, and instead has this f---ed up HMO s--t!

I'm trying to determine what logical reason Americans would have to reject a cheaper, better system. Last year, a bill went before voters in Oregon proposing a single-payer system for the state, and a massive spending campaign by the HMO industry and their minions led to its rejection. The argument in Oregon was that the cost of the system would be something along the lines of $40 billion a year. Opponents of the bill neglected to mention that taxpayers would save more money than that by not having to fork over money for insurance premiums, but that was lost in a blitz of negative ads that overwhelmed the meager budgets of the bill's supporters.

Back in 1993, Bill Clinton proposed overhauling the HMO system with one managed by the government. Even though this wasn't a single-payer system (nor proposed solely by Bill Clinton), but instead a regulated-for-profit-oligopoly of HMOs, it drew out the unified opposition of every entity profiting from the current system. This campaign gave birth to the "Harry and Louise" ads that slammed the plan as "limiting access to doctors", "too expensive", and "rationing care".

But now that we've lived another decade under our HMO-based system, I'm wondering what planet people have to be living on to reject a single-payer system. HMO's don't ration care? They don't limit access to doctors? And dear god, we spend 15% of our GDP on medical care, $1.5 trillion! The developed nations average is around 10%.

I'm convinced that the reason Americans don't overthrow the system right now is because they fear the unknown. Very few Americans know what it is like to live under a single-payer system and few remember what it was like back prior to the 1970s when the health care industry was less bureaucratic and corporatized (but ah, those multi-hour doctor waits!)

I'm one of the fortunate ones, because my wife is from Taiwan and she has told me about the health care system there. They have a single-payer system that takes a fixed percentage out of everyone's paycheck (less than that your Medicare deduction) for the medical care fund. Every citizen gets about 20 "tickets" a year for an appointment at any doctor they wish. Tickets are transferable, so if you don't use them you can give them to someone else. To use a ticket, you just walk into the doctor's office (no appointment required, no referral required) and ask to see someone. You pay an equivalent of $2 in an administration fee. The doctor bills the government medical care fund. That is it. To let you know how much I value a functional health care system, you need to know that I'm learning Chinese so that I can leave this country and work in Taiwan before I retire. My wife's family has about 20 close relatives so it's tickets aplenty. Sure, I'll lose out on all the money I've "donated" to the system while young and healthy, but I value very highly not dying because my HMO has declined my care request, or booted me off their plan because I'm old and on Medicare. I'm simply not all that hopeful that such a system is possible unless Americans realize what they are missing.

In the spirit of informing the vast majority of our society about the benefits of a single payer plan, I propose a variation on the "take your kids to work day" called "take yourself to experience a single-payer health care system day". Every American would be matched up with a partner of similar age and gender in a European, Canadian, South or Central American, African, Australian, or East Asian country that has a single-payer system. They can share their involvement with such a system and the pros and cons of health care in their respective country. I guarantee that after just one of these TYTEASPHCS days, this country will have a single-payer system unless the HMO industry puts armed guards at the polls.

Update...the MRI needed to be approved by the HMO and the paperwork delayed the decision until today. The request was denied . My back still hurts. Appeals process is just beginning.

posted by Teddy | 11:06 AM |


Wednesday, May 14, 2003  

A suggestion on taxonomy

(Cross-posted at To the point.)

We should not call Bush's fiscal plans a 'tax cut' anymore. It's not. We will have to find the money eventually, whether that's through inflation or increased taxes later on. And meanwhile, local and state taxes go up to address gaping budget deficits on the local level.

We should call it what it is: A Debt Increase Plan

The reasoning for the new taxonomy is that marketing-wise, it reframes the debate on reasonable terms. It's also more accurate, because essentially the tax burden on most people will go up (due to increased borrowing costs because of the lower attactiveness of tax free munis and thus higher resulting tax rates from states and localities) in the short-term while in the long-term Bush's implicit tax increase will be hidden as higher inflation.

UPDATE ONE: This could nicely piggyback on necessary Congressional actions on the debt ceiling, which are always embarrassing and are sort of the natural place for the Democrats to show how irresponsible the other party is.

UPDATE TWO: Let me make a preemptive strike against those who say 'well why don't you just cut spending...'

RESPONSE A: (From the comments area of Brad Delong): Deficits exceed discretionary nondefense spending.

RESPONSE B: Simple. Because Bush isn't cutting spending. He's doing the opposite. In fact, spending is actually increasing quite dramatically (up 22% since he took office, I think). I don't dispute that spending needs to go up for defense and other national priorities, just that you can't have the government expend resources and then pretend they don't come from somewhere. They do, and if you don't collect the resources in tax revenue, you have to collect them elsewhere, usually by crowding out investment from the private sector or by inflating away the value of money. It's simply basic accounting. Thus the 'tax relief' just isn't 'relief', it's a shift in resources that will damage the economy, probably hurt the rich, definitely hurt the poor, raise our debt level, and raise tax burdens on lots of people.

posted by Matthew | 12:36 PM |


Monday, May 12, 2003  

And the Red states get bluer over increasing unemployment

Over the weekend on the Daily Kos, RonK, filling in for Kos, took a look at the strengths and weaknesses of the 2004 Senate races, and other related state politics concerns for Democrats. Within comments, I pointed to the graph I drew last month, looking at how specific state unemployment levels could conceivably impact a close Presidential election.

I received an update via email from the BLS last week, but didn't have time to run new numbers. My sense, though, was that unemployment numbers had increased in nearly all the battleground states.

I was correct. Only in Pennsylvania and West Virginia did the local unemployment rate decrease. Last month, only two states had seen an increase of 2.0% or more; this month, the number increased to seven.

State
R/B
Electoral Votes
Margin
(Bush vs Gore+Nader)
2001-03 Change in
Unemployment Rate
Colorado
R
8
4
3.2
Oregon
B
7
-5
3.2
Michigan
B
18
-7
2.2
Virginia
R
13
7
2.1
Ohio
R
21
1
2.0
Arizona
R
8
3
2.0
New Hampshire
R
4
-3
2.0
Wisconsin
B
11
-4
1.7
Pennsylvania
B
23
-7
1.5
Iowa
B
8
-3
1.5
Florida
R
25
-2
1.5
Minnesota
B
10
-7
1.3
Nevada
R
4
2
1.3
Missouri
R
11
1
1.2
Arkansas
R
6
4
0.7
New Mexico
B
5
-4
0.7
Tennessee
R
11
3
0.6
Louisiana
R
9
7
0.6
West Virginia
R
5
4
0.2



Ron mentioned he'd like to see the numbers for the "hard" Red states. Always willing to crunch more unemployment numbers, here they are:

State
R/B
Electoral Votes
Margin
(Bush vs Gore+Nader)
2001-03 Change in
Unemployment Rate
Texas
R
32
19
2.9
Oklahoma
R
8
22
2.5
South Carolina
R
8
15
2.5
Utah
R
5
36
2.3
North Carolina
R
14
13
1.8
Kentucky
R
8
13
1.6
Indiana
R
12
15
1.5
North Dakota
R
3
25
1.4
Mississippi
R
7
16
1.4
South Dakota
R
3
22
1.4
Kansas
R
6
18
1.1
Georgia
R
13
11
1.1
Idaho
R
4
40
1.0
Wyoming
R
3
41
0.8
Alabama
R
9
13
0.8
Alaska
R
3
21
0.7
Montana
R
3
19
-0.3



Looks like Bush has some explaining to do back in his home state.

[x-posted at Wampum]

posted by MB | 7:20 AM |
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