2010 - %3, December

Deadweight Losses Among the Super Rich

| Mon Dec. 20, 2010 1:58 PM EST

After reading a new paper on income inequality, Tyler Cowen says this is a "scream it from the rooftops" result:

....we find that a one percent increase in the net of tax share is associated with an 0.7 percent reduction in incomes earned by people in the top 0.1 percent of the income distribution, which would imply that if we were to raise top marginal tax rates further on these taxpayers, the increase in deadweight loss would be substantially larger than the increase in revenue raised [emphasis added]. However, we find essentially no evidence at all of any responsiveness of people below the top 0.1 percent...

The paper is here. I read it over the weekend, and since a lot of people probably saw Tyler's excerpt I thought it would be worthwhile to point out a couple of things:

  • The authors find a long-term elasticity of income with respect to tax rates of 0.72 for earners in the top 0.1%, "suggesting a high degree of responsiveness to incentives for income-earning efforts [] among those with the highest incomes." In other words, when tax rates go up, super high earners earn less and deadweight losses are large. However, elasticity for earners in the top 1% is -0.34. In other words, merely moving down from the top 0.1% to the top 1% apparently changes your responsiveness to tax incentives from +0.72 to -0.34. That's an extremely dramatic result and should make us very suspicious.
     
  • And sure enough, using a slightly different model that incorporates a six-piece spline, elasticity among super high earners changes to -0.27. The authors are unsure of which model is better, and acknowledge that the emergence of such a large change from a fairly small modification to their model "reduces our confidence in the conclusion that the decisions of high-income people about how much income to earn and report are highly responsive to tax rates."

I'd say a bit more. Even if you assume that the original number is correct, you have to ask yourself what it means. For someone earning a million dollars a year or more, why would their income go down because their tax rates went up? Because they decided to work less? That's highly unlikely, and the kind of people who earn money at this level — primarily CEOs, executives, and financial industry professionals — aren't paid based on how many hours they work anyway. Would Wall Street traders make fewer trades? That also seems unlikely, but even if they did it just means that someone else would do it. (Though who knows? Less trading might actually be a net benefit to society, not a deadweight loss.) Would they quit their jobs? Again unlikely, but in any case this would have no effect on society at large. Would they get lazy and drive their companies into a ditch, therefore lowering their bonuses? That hardly seems likely either.

The problem here is twofold. First, the calculation of elasticity is obviously very sensitive to the parameters of the model you use. Second, it's very difficult to conceive of an actual mechanism in which higher taxes on top earners translates into lower work performance and therefore deadweight loss to society. My guess is that super high earners respond to tax increases mainly via accounting strategies, not work effort, and in any case, any reduction in their earnings simply ends up going somewhere else anyway. In fact, if you take the original model in this paper seriously, an increase in high marginal tax rates reduces the earnings of the 99.9th percentile but increases the earnings of the 99.0-99.9th percentile. In other words, the total earnings of the top 1% probably go up on net.

But if you still want a "scream it from the rooftops" result from this paper, try this one instead:

The real income growth rate for non-financial executives in the top 0.1 percent was 7 times as large as for non-financial executives in the 99th to 99.5th percentile range....The heterogeneity in income growth rates across professions within the top one percent, and the divergence in incomes within professions in the top one percent, both suggest that the causes of rising top income shares cannot just, or even primarily, be things that are changing in similar ways over time for everyone within the top one percent, such as federal marginal income tax rates.

According to the authors, skill-biased technical change and globalization are unlikely candidates too, and the superstar effect is too small to have a significant impact. It has to be something else. Something that's driving enormous changes not just at the top, but at the very tippy top. The financialization of the U.S. economy, along with changes in norms of corporate governance, seem like the best guesses to me. Anybody got a better one?

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Joe Nocera on the GOP's Financial Crisis Commission Fail

| Mon Dec. 20, 2010 1:20 PM EST

Last week, the Republican members of the Financial Crisis Inquiry Commission released a nine-page, three-footnote minority report (or "preport," really—the actual report hasn't been released yet) blaming the financial crisis on Fannie Mae, Freddie Mac, and government incentives to give loans to minorities. It's all poppycock, but that didn't stop them from writing it. The words "Wall Street," "interconnected," "shadow banking," "deregulation," and "credit default swap" were nowhere to be found in the GOPers' account of the crisis. But that didn't stop them from pretending it was a serious effort.

The Republican members of the panel have since been the target of much well-deserved mockery, but the New York Times' Joe Nocera really takes them to task in a long column (Nocera gives them credit for 13 pages, but he's counting the title page and table of contents): 

The Republican minority, fearing their view would get short shrift, pre-emptively put forward a CliffsNotes version of their theory of the case. In other words, they responded to a report that hasn't even yet been written, much less read and voted on by the members.

Is there such a word as "presponse?" Perhaps we should coin it to describe what took place this week at the F.C.I.C.

It would all be pretty laughable if it didn't have serious consequences. But it does. First, with the commission's Republican members having now issued this public, partisan smoke signal, the final product, no matter how rigorous, will be inevitably dismissed as a Democratic document. As a result, it will have little impact and, once Bill O'Reilly has finished mocking it, will be consigned to the dustbin of history. By creating this partisan rift, the Republicans have succeeded in tarring the entire enterprise.

[...]

Next year, the House of Representatives will be in Republican hands. High on the agenda for the new majority is its own version of financial reform. The Republicans hope to minimize the impact of the Dodd-Frank bill while at the same attacking — and fixing — what they see as the "true" culprit of the financial crisis.

To fix a problem, though, it helps to know what the problem is. The F.C.I.C., with all those witnesses and documents, could have really helped here. But the paper released by the commission's Republicans this week reads as if they couldn't be bothered. It simply reiterates longstanding Republican dogma that could have been written without a $6 million investigation. None of which bodes particularly well for the next two years of "financial reform."

The Republican minority feared "their view would get short shrift" because their view is wrong. As Nocera explains in the rest of his column (and as Andy Kroll and I have explained repeatedly on this blog), Fannie and Freddie didn't cause the financial crisis. Nor did the Community Reinvestment Act, the 1976 law that is meant to encourage some lenders to lend to minorities. Any serious, evidence-based examination of the financial crisis would not point to Fannie, Freddie, and the CRA as causes.

But in the world that the Republican members of the FCIC inhabit, it apparently doesn't matter that an idea is wrong: it still deserves time, attention, and $6 million of the taxpayers' money.

What an embarrassment. 

P.S.: Look, like Nocera, Andy and I are totally in favor of reforming Fannie and Freddie. As Nocera concludes, "Who Isn't?" Blaming the crisis on the government is a great GOP talking point. If Republicans just want to score political points, that will work great. But actually reforming Fannie and Freddie in a meaningful way is going to require a much deeper, more sophisticated understanding of the crisis. The FCIC minority report isn't making that any more likely.

Food Safety Bill Survives

| Mon Dec. 20, 2010 1:10 PM EST

In an unanticipated turn of events, the Senate managed to pass the Food Safety and Modernization Act on Sunday with bipartisan support. The bill puts stricter safety standards on imported food, and requires larger producers to follow tougher rules. It also introduces provisions designed to prevent outbreaks of diseases like E.coli and salmonella.

"Families in Nevada and across America should never have to worry about whether the food they put on their table is safe," Senate Majority Leader Harry Reid said in a statement. "Tonight we unanimously passed a measure to improve on our current food safety system by giving the FDA the resources it needs to keep up with advances in food production and marketing, without unduly burdening farmers and food producers."

The battle to get this legislation passed has been a long, frustrating, and sometimes hamfisted one. As Mother Jones' Stephanie Mencimer wrote last week, Congress had originally passed the bill earlier this month. But the next day, it turned out that senators had accidentally included tax provisions in the bill, which must originate in the House. That rendered the measure unconstitutional. And an attempt to include it as part of the Senate omnibus spending bill died last week along with the rest of the bill $1.1 trillion, earmark-loaded wish list.

Food saftey advocates and Hillwatchers were all-but-certain that the bill's passage was a lost cause. Its fate now rests in the hands of the House, where it will return this week.
 

While the GOP Was Stonewalling on START...

| Mon Dec. 20, 2010 12:49 PM EST

On Sunday, Senate Minority Leader Mitch McConnell announced that he "cannot support" ratification of START, also known as the Strategic Arms Reduction Treaty, a bilateral pact the US entered into with Russia nearly two decades ago to keep the countries for nuking one another into oblivion. McConnell accused Democrats of "rushing it right before Christmas."

"I think if they'd taken more time, I know the members of the Foreign Relations Committee spent a lot of time on this but the rest of us haven't, and so all of the sudden we're once again trying to rush things right here before Christmas Eve," McConnell said on CNN on Sunday. "I think that was not the best way to get the support of people like me."

Now, START has been on the table since waaay back in April, when President Obama and Russian President Dmitry Medvedev signed the new treaty. So the idea that the Republicans have not had enough time to review it is, well, silly. Democratic staffers must be getting a little punchy over on the Hill, because last night they released an illustrated list of things that have happened in the time that senators have had to consider the treaty. The list:

A Few Things That Happened While Republicans Failed to Read the START Treaty:
  • Chilean Miners trapped and released.
  • Lady Gaga debuted her meat dress.
  • Lindsay Lohan returned to rehab, was released, and went back in again.
  • Major League Baseball 2010 season began and ended.
  • LeBron James announced, "I'm taking my talents to South Beach."
  • BP/Deep Horizon oil spill sprung and contained.
  • Donovan McNabb debuted with the Redskins, and was benched. Twice.
  • Spain won the World Cup.
  • The biggest overhaul of America’s financial laws in decades was debated and passed.
  • Prince William and Kate Middleton got engaged.
  • Larry King announced his retirement.
  • Conan returned to Late Night.
  • Kanye West released his latest album and apologized to former President George W. Bush.
  • Former President George W. Bush released his memoir, Decision Points.

Quote of the Day: McConnell on START

| Mon Dec. 20, 2010 12:42 PM EST

From Republican minority leader Mitch McConnell, explaining why he opposes the New START treaty:

All of a sudden, we're once again trying to rush things right here before Christmas Eve. I think that was not the best way to get the support of people like me.

Translation: he's pissed that Democrats successfully repealed DADT and is bound and determined to get back at them. The childishness that passes for politics these days is endlessly astonishing.

Innumeracy on the Street

| Mon Dec. 20, 2010 12:08 PM EST

The New York Times inadvertently explains the financial crisis today: Wall Street traders, it turns out, are innumerate. Many firms doubled base salaries and eliminated bonuses for midtier employees after the crash, and apparently this is causing panic among the troops:

One executive, whose firm prohibited discussing the topic with the news media, said the bump in base salaries had confused people, even though their overall compensation was the same. “People expect a big bonus,” this person said. “It is as if they don’t even see their base doubled last year.”

Dealing with the Zeros can be complicated. “It’s a real headache,” said another senior banker, who asked not to be identified because the topic is so volatile at his company.

But not to worry. The Zeros might be confused by this financial trickery, but the industry as a whole is still doing great:

In terms of overall profit, Wall Street is on track for one of its best years ever, although it will trail 2009, which was pumped up by federal bailout money and the rebound from the financial crisis. In the first three quarters of the year, Wall Street earned $21.4 billion, putting it on track to easily outpace 2006, when the economy was booming, and well ahead of the New York City government’s initial estimate of $20.6 billion for profit in all of 2010.

Chief executives, says the Times, will continue to get paid the old-fashioned way, "with bonuses climbing into the stratosphere as the shock of the financial crisis fades and pay for the top tier climbs back toward historical averages." Good to hear.

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State AGs Sue Bank of America

| Mon Dec. 20, 2010 11:04 AM EST

As officials from all 50 states investigate the causes of the recent "Foreclosure-gate" fiasco, two attorneys general have decided to go after Wall Street on their own. On Friday, Arizona and Nevada's attorneys general slapped Bank of America and its mortgage servicing subsidiary with a blistering lawsuit (PDF). The states say the lender made "false assurances" about modifying homeowners' mortgages while foreclosing on them at the same time and gave "inaccurate and deceptive reasons" for rejecting loan modification requests. "Nevadans who were trying desperately to save their homes were unable to get truthful information in order to make critical life decisions," Nevada attorney general Catherine Masto said in a statement.

The states suing Bank of America are among the hardest hit in the housing meltdown. In the third quarter of 2010, Nevada led the country in foreclosures, with one in every 99 properties in foreclosure—five times the national average. What's more, 54 percent of all home sales in the Silver State were of foreclosed properties, according to RealtyTrac. Arizona had the fourth-highest foreclosure rate.

Here's more from the New York Times on Arizona and Nevada's suit:

Indeed, according to the lawsuits, Bank of America’s efforts were the most anemic of the big banks and were not confined to the Western states but rather “reflect a pervasive nationwide pattern and practice of conduct.” The lawsuit noted that Bank of America ranked last in “virtually every homeowner experience metric” monitored in a monthly report on the federal home loan modification program.

Ms. Masto of Nevada said her office’s findings were confirmed by interviews with consumers, former employees, third parties and documents. Former employees said that Bank of America’s modification staff was “chaotic, understaffed and not oriented to customers,” according to a news release. One former employee said, “The main purpose of the training is to teach us how to get customers off the phone in less than 10 minutes.”

Another employee said, “When checking on a borrower’s status, I often found that the modification request had not been dealt with or was so old that the request had become inactive. Yet, I was instructed to inform borrowers that they were ‘active and in status.’ One time I complained to a supervisor that I felt I always was lying to borrowers.”

In its defense, a Bank of America official told the New York Times that the bank was disappointed with the suit. The attorneys general, he added, didn't fully take into account Bank of America's efforts to help beleagured homeowners.

For Bank of America's foreclosure relief efforts, though, the devil is in the details. As the bipartisan Congressional Oversight Panel highlighted in its December report, Bank of America's success rate in the Obama administration's flagship relief effort, the Home Affordable Modification Program (HAMP), is a miserable 30 percent. By contrast, top performers like Wachovia Mortgage and HomeEq Servicing boast rates of 89 percent. Bank of America's mortgages, together with JPMorgan Chase and CitiMortgage, also comprised two-thirds of all loan modifications that are stuck in foreclosure limbo, waiting to either be approved or dumped from HAMP.

Protesting homeowners getting arrested? A top state investigator pledging to "put people in jail" for foreclosure fraud? When you put the data alongside the Arizona and Nevada attorneys general's body of evidence, it's not hard to see why American are so angry about the foreclosure debacle.

Learning Japanese With Weezer's Rivers Cuomo

| Mon Dec. 20, 2010 7:25 AM EST

Hurley, the latest release from irreverent alt-rock foursome Weezer—and the band's first on indie label Epitaph—debuted at No. 6 on Billboard's chart of the Top 200 albums—not bad for a band whose loyal old fans had been griping that something (presumably something dark and evil) had become of the band they grew up on. The album marks a reversion to Weezer's earlier self, and not just stylistically; most of the lyrics evoke a state of perpetual adolescence. In "Memories," front man Rivers Cuomo recalls pissing in plastic cups before we went on stage / playing hacky sack back before Audioslave was in rage. And, in "Trainwrecks," We think it's uncool to be on time / Mooching off our friends is not a federal crime. The album is simple and nostalgic, with plenty of raw guitar hooks.  

Hurley also addresses the band's present: In "Time Flies," Cuomo croons: Look into the mirror, there were lines around my eyes. And: I'm still in the race, and I'm barely keeping pace, but it's worth the ride. Which all might look kind of depressing on paper, but Cuomo still delivers his lines with the characteristic flippancy his fans so love: Even when I'm gone this stupid damn song will be in your head / I'll be looking down with a twinkle in my eyes. There's no forgetting that Weezer's still just a bunch of overgrown kids proud to put their nerdiness on display. We caught up with Cuomo recently to ask about his favorite music, aging rock stars, and what's on his iPod.

The Cover of the Mother Jones

| Mon Dec. 20, 2010 7:00 AM EST

[Read also: The Mother Jones editors-in-chief on Haiti vs. pot.]

When I turned in a story about Burmese refugees late last year, my mom thought (based partly on the sheer staggering size of it—it came in at more than 10,000 words) that it was going to be on the cover of Mother Jones. When it wasn't, because this creepy dude was, she dragged my uncles Ted and George, my aunts Paula and Kim, and my 80-year-old grandmother into a friend's studio to complain about it to the tune of Dr. Hook's "The Cover of the Rolling Stone," then sent the recording to me. 

Well, guess what. Despite one of my coworkers telling me she couldn't read it past the first paragraph and another saying it gave her nightmares, my Haiti feature is on the cover of the new subscribers' issue of Mother Jones. (The newsstand version sports a more fun/less horrifying topic: pot.) In honor of my mother's wish being fulfilled (and because I have a really high threshold for embarrassment), I'm sharing the best song-present ever. (Speaking of pot, comma, my mother's affinity for, be prepared for congas. And kind of a nonsequitur about my father, her ex-husband, being a pervert. I think the song's writer, Shel Silverstein, would be...pleased?)

A Bitter Pill for Aid Reform

| Mon Dec. 20, 2010 7:00 AM EST

In Washington, interdepartmental turf wars start not with a bang but a paper.

For Secretary of State Hillary Clinton, there's a pivotal skirmish brewing over development and diplomacy policy. In Clinton's corner are the State Department and the US Agency for International Development. But across the ring lurks Bob Gates' Defense Department, the undisputed heavyweight champ of intragovernmental cage fights.

The controversial paper in question? The sort-of-heralded inaugural Quadrennial Diplomacy and Development Review (QDDR), the State Department and USAID's sweeping review of current aid policy, complete with instructions on how to supposedly revolutionize it. The QDDR offers a number of suggestions for cutting costs, and argues for increasing the authority of US diplomats and aid officers around the world. The end goal: to transform (or restore, depending on whom you talk to) USAID's position as the preeminent aid delivery organization in the world. But the report also represents Clinton's steely determination to wrest control of civilian-driven projects back from a Pentagon that has absorbed the lion's share of the development-related burden over the past decade.

At a town hall meeting on Friday, Clinton said there are certain irrefutable truths at work: the US spends twelve times as much on defense as it does on development, and that's not likely to change. Another irrefutable truth: the wars in Iraq and Afghanistan have forced American soldiers into moonlighting as ambassadors and development experts. Clinton pointed out that both the Bush and Obama administrations have, over time, ceded control of diplomacy and development to the Pentagon.

For better or for worse, soldiers tend to serve as the first responders to major crises in places where the United States has vested interests—i.e., pretty much everywhere. But Clinton is selling the QDDR as a first step towards restoring balance in the defense/diplomacy relationship. The document calls for hiring 5,500 new foreign and civil service officers and granting expanded authority to current officers. But before civilians can win back territory from the military, State and USAID probably need to improve their own operations with better coordination and smarter management—if only to overcome the skepticism of foreign aid critics on Capitol Hill, such as incoming House foreign affairs committee chair Ileana Ros-Lehtinen (R-Fla.), who has called for cuts in foreign assistance overseen by the State Department.

So Clinton's fight is not just with the Pentagon, but also with the Hill. And for ammo, she may need more than one dense, jargony report.