Kevin Drum - January 2011

Creeping Tyranny

| Fri Jan. 7, 2011 3:49 PM EST

Go read this Glenn Greenwald post and this followup from Nick Baumann about Gulet Mohamed, an American citizen who was recently arrested in Kuwait, brutally tortured (I think it's OK to use the word since it's someone else's police we're talking about), and then put on a no-fly list so he can't return to America. This is not the first time this has happened, and if you're really worried about an increasingly tyrannical government, this is the kind of thing to worry about. If a crime has been committed, then let him come home and charge him. If not, then he's an American citizen, and no American government should be allowed to unilaterally strand its own citizens overseas. This whole affair is revolting.

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Quote of the Day: Cutting Government

| Fri Jan. 7, 2011 3:39 PM EST

From Republican Speaker of the House John Boehner, asked by NBC's Brian Williams to name a federal program that could be cut:

I don't think I have one off the top of my head.

Roger that. After 20 years in Congress, and after waging a brutal midterm campaign focused almost solely on the need to slash government spending, Boehner can't come up with a single program cut off the top of his head. He's a real profile in courage, isn't he?

Simple Taxes for Thee, But Not For Me

| Fri Jan. 7, 2011 3:22 PM EST

Via Megan McArdle, Howard Gleckman at TaxVox summarizes the #1 tax problem identified this year by Nina Olsen, the National Taxpayer Advocate at the Internal Revenue Service: complexity.

Olsen estimates that individuals and businesses spend 6.1 billion hours preparing their returns. That equal to a year’s labor by three million full-time workers. Individual taxpayers are so befuddled by the Code that she reports 89 percent either pay a preparer or buy commercial software to help with the paperwork. The total cost of compliance in 2008, Olsen estimates, was $163 billion, or more than 11 percent of total income tax collections. The average out-of-pocket cost per taxpayer: $258. Something is very wrong when we have to pay a vendor $258 just to perform the most basic of civic duties.

....More troublingly, all this complexity is driving people to cheat. More than 60 percent of self-employed workers (whose income tax is not withheld) either under-report income or over-report deductions. Olsen attributes at least some of this behavior to taxpayers’ belief that they are paying more than their fair share while others are avoiding tax. Nobody, she says, wants to be a “tax chump.”

I don't disagree with this. I would love to create a simpler tax code, and on the business side I'd be willing to do away with the corporate income tax entirely. As a confirmed bleeding heart liberal, of course, I'd like to do this in return for a code that's more progressive and raises more revenue. But also as a confirmed bleeding heart liberal, I'd like to point out a few things about tax code complexity that our conservative aristocracy doesn't often acknowledge:

  • That $258 number is an average, and most likely includes a whole lot of people paying $29.95 for a copy of TurboTax and a rather smaller number of people paying their Park Avenue accountants $100,000 per year. The average schmo doesn't spend anything like $258 on tax preparation. And keep in mind that a fair number of low-income filers use tax preparers like H&R Block not because they need help, but because they offer "refund anticipation loans" that allow people to get their refund checks faster. (At the cost of a fat fee, of course.)
  • But aside from these kinds of loans, why do low and middle-income filers use any tax preparation at all? Most of them have only wage income and very simple filing requirements. The reason varies, of course, but a lot of it is due to the complexity and auditing requirements associated with the Earned Income Tax Credit. And why is the EITC audited so vigorously? Because Republicans insist on it. We don't want poor people gaming the system for a few hundred extra dollars, after all. This might not be so bad (there really is a certain amount of fraud associated with EITC claims) except that.....
  • The vast bulk of tax avoidance is done by the rich, not the poor. David Cay Johnston reported on some of the most baroque tax avoidance schemes for us last year, and he estimates that in total this costs us something like $300 billion per year. And to make things even worse, Republicans have waged a decade-long war to reduce audits of the rich by the "jackbooted thugs" of the IRS. Just to take the most recent example, Johnston reported in 2006, "The federal government is moving to eliminate the jobs of nearly half of the lawyers at the Internal Revenue Service who audit tax returns of some of the wealthiest Americans, specifically those who are subject to gift and estate taxes when they transfer parts of their fortunes to their children and others."

This post isn't a disagreement that we ought to have a simpler tax code. It's just a reminder that a big part of the reason for that complexity is that rich people want it that way. A simple tax code is hard to game, after all. If we really, truly tried to create a simpler tax code that removed all the common ways that high-income taxpayers fleeced the system, the loudest cries of anguish would come from conservatives, not liberals.

Huzzah for Healthcare Reform!

| Fri Jan. 7, 2011 1:41 PM EST

It's no surprise that President Obama has threatened to veto any repeal of healthcare reform that reaches his desk. (It won't reach his desk, of course, since it'll never get past the Senate. But put that aside for now.) Still, surprise or not, Jon Cohn thinks it's a sign of a welcome new aggressiveness in the Democratic caucus:

For most of last year, Democrats were playing defense on health care, responding to Republican criticisms or, in many cases, trying desperately to change the subject of debate. Now something has changed. Congressional Democrats are challenging Republicans, daring them to come out against the bill's more popular provisions.

....Of course, they may not have a choice. Republicans have made repeal a top priority, so the fight is going to take place whether or not Democrats want it. But I think it also reflects a changing dynamic, as well. According to Greg Sargent, who was among the first to spot the shift, House Democrats in particular are aware of the opportunity they missed last year, while the party and most of its leaders were trying so hard to save endangered incumbents. They think they're in a stronger position now, since people are starting to see the law's benefits and repeal will mean changing an increasingly favorable status quo.

Granted, it's always easier to be aggressive in the minority than the majority. And it's easier still to be aggressive when there's no election looming. But isn't there something else at work here as well? An awful lot of the centrist Dems who considered healthcare reform politically toxic are gone. There's a small rump of Blue Dogs left in the House (mainly the dozen or so dead-enders who voted for Heath Shuler to replace Nancy Pelosi for majority leader), but it's in dire shape. Most of the Democrats left in the House are eager to back healthcare reform and represent districts where it's safe to do so.

The Senate is a somewhat different story, but it matters less there since any attempt to repeal ACA will simply be filibustered and die. Still, whatever the reason, it's sort of refreshing to see Dems fighting for healthcare reform a little more openly these days. It's certainly good practice, anyway.

Playing Games With the CBO

| Fri Jan. 7, 2011 1:17 PM EST

Bruce Bartlett on what motivates the longtime Republican hatred of the Congressional Budget Office:

CBO’s great sin, in Republican eyes, is that it’s always telling them that their pet ideas are wrong: tax cuts don’t automatically pay for themselves through the Laffer Curve, the Affordable Care Act didn’t raise the deficit, the budget can’t be balanced only by cutting domestic discretionary spending, and other heresies to Republican dogma.

The latest incarnation of this assault on reality is typically childish: the GOP leadership is declining to officially reappoint Doug Elmendorf to head the CBO even though both the chairmen of the House and Senate Budget committees (one Republican and one Democrat) have recommended it. It sure is good to see that the grownups are back in charge, isn't it?

A Wee Question

| Fri Jan. 7, 2011 10:21 AM EST

Here is a question for you. Suppose that you lead a comfortable middle-class life. Let's say that you're in your 30s, married, two children, and you make $100,000 per year. I offer you a fair coin flip with the following possible outcomes:

  • Heads: You will be stripped of most of your assets and will earn $30,000 per year for the rest of your life. That's all you get, and neither friends nor family can top it up for you.
  • Tails: You will earn $1 million per year for the rest of your life.

Treat this as a serious question. Would you take me up on my offer to flip the coin?

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The Great Middle Class Swindle

| Fri Jan. 7, 2011 7:00 AM EST

Matt Yglesias isn't buying my story that skyrocketing Wall Street earnings—and the skyrocketing incomes of the super-rich in general—are basically coming out of the pockets of the working and middle classes:

I think what Kevin’s story keeps missing is a plausible causal account of how a tiny number of financiers have been able to hoover up money from the median wage earner....I can tell you a story about how a tiny number of financiers have been able to hoover up money from the broad class of rich people in the 80th-99th percentile who own the bulk of the financial assets in the country by swindling them. I can tell you a story about how a tiny number of financiers have been able to hoover up money from the broad class of rich people via the income tax and “bailouts.” But the median wage earner seems harder to me.

....Here’s another story. A lot of the median wage earner’s money has been hoovered up by the health care system. If we had single payer health insurance in the United States then increases in per capita health care spending would exhibit themselves as higher taxes....The last part of my story is monetary policy. It used to be the case that monetary policy errors were two-sided. Sometimes wages grew too fast (inflation) and sometimes they grew too slowly (recession), but since 1980 we’ve only ever erred in one direction and experienced three labor market recessions and zero outbursts of inflation.

As it happens, swelling health care benefits aren't enough to account for more than a small amount of middle class income stagnation over the past three decades. The arithmetic just doesn't work out. But Matt is right that the weakest part of my story is coming up with a good causal account of how the top 1% sucked up so much money from the middle classes. But I think it's a mistake to get overly wonky and look for some kind of geometric proof of how this happened. You're just never going to get that. You're never going to be able to point to a specific policy at time X that caused a specific transfer of income share at time Y.

As another blogger put it, "It’s as if the major banks have tapped a hole in the social till and they are drinking from it with a straw." Except it's not just the banks. It's their super-rich clients, too.

Still, I don't think that a plausible story of causation is really all that hard. First, take a look at middle class income stagnation. What caused that? Matt already pointed to one cause: monetary policy since the late 70s that's kept inflation low at the cost of keeping labor markets persistently loose. To that, I'd add several other trends that have marked the past three decades: trade policies that accelerated the decline of U.S. manufacturing; domestic deregulation policies that squeezed workers; stagnation in the minimum wage; immigration policies that reduced wages at the low end; and a 30-year war against labor that devastated unions and reduced the bargaining power of the working class.

On the merits, you can argue for or against any of these individual policies. But there's very little question that collectively they are (a) policies strongly promoted by business interests and the rich, and (b) they suppressed middle class wages. Note that a few of these policies are global in nature, which explains why some other advanced countries also saw a certain amount of middle-class wage stagnation, but that all of them were promoted very aggressively in America, which explains why we saw more of it than most countries.

Now, if these policies hadn't been in place, middle class wages would likely have grown at about the same rate as the overall economy—just as they did in the postwar era. But they didn't, and that meant that every year the money that would have gone to middle class wage increases instead went somewhere else. It was a vast and steadily growing pool of money, and the chart on the right gives you an idea of its size by 2005. It comes from Jacob Hacker and Paul Pierson, and it shows how much income would have gone to different groups if their income had grown at the same rate as the broad economy. The bottom 80% lost $743 billion by growing more slowly. The top 1% gained $673 billion by growing more quickly. That's a pretty close match. And the upper middle class, in the 80th-99th percentile? They didn't score the huge payoffs of the super rich, but they did fine, posting a net gain of $126 billion. In other words, the well off mostly don't seem to have suffered at the hands of the super rich. Instead, the money gained by the top 1% seems to have come largely from the bottom 80%.

But what's the mechanism? What are the policies that allowed this pool of money to flow into their hands? Again, you can point to several things. Just to name a few: reduced high-end marginal tax rates on income and capital gains; relentless financial deregulation; weak antitrust enforcement leading to industry consolidation; the emergence of high-speed trading profits available only to well-connected financial firms; crippling of the IRS's ability to audit high earners; a persistent strong dollar policy; and the ability of the rich to make big financial bets backstopped by government bailouts. All of these are policies promoted largely by business interests and the rich.

There's no indisputable smoking gun here. As I said, you're just never going to get that. What we have, however, is still very, very suggestive. The argument goes like this. (1) For three decades we've had wage suppression in the middle classes, largely as a result of policies promoted by the rich. (2) Conversely, the well off in the 80th-99th percentile have mostly kept up. Their incomes haven't skyrocketed, but they've done fine. This is important since political opposition from this class is generally pretty effective and probably would have derailed the entire project. (3) The aggregate pool of money lost by the working and middle classes is suggestively similar to the amount gained by the super-rich. (4) A wide variety of policies have coalesced that have allowed the super-rich to funnel this money in their own direction. As Tyler Cowen put it, "It’s as if the major banks have tapped a hole in the social till and they are drinking from it with a straw." Except it's not just the banks. It's the banks and all their super-rich clients.

Demographics and Destiny

| Fri Jan. 7, 2011 2:32 AM EST

I've seen this before, but today Daniel Gros reiterates the point that Japan, far from being an economic basket case, has actually done pretty well given its aging population:

Policymaking is often dominated by simple “lessons learned” from economic history. But the lesson learned from the case of Japan is largely a myth. The basis for the scare story about Japan is that its GDP has grown over the last decade at an average annual rate of only 0.6% compared to 1.7 % for the US.

....But this picture of stagnation in many countries is misleading, because it leaves out an important factor, namely demography.

How should one compare growth records among a group of similar, developed countries? The best measure is not overall GDP growth, but the growth of income per head of the working-age population (not per capita). This last element is important because only the working-age population represents an economy’s productive potential....When one looks at GDP/WAP (defined as population aged 20-60), one gets a surprising result: Japan has actually done better than the US or most European countries over the last decade. The reason is simple: Japan’s overall growth rates have been quite low, but growth was achieved despite a rapidly shrinking working-age population.

I know this interpretation has its critics, but I've always found it pretty persuasive. As any corporate CEO can tell you, growth hides a multitude of sins. And while in theory it should be possible to gracefully transition to slow or flat growth, in reality it's almost always very, very painful. All the little problems that you could ignore and all the encrusted barnacles that you could shake off suddenly become enormous impediments that gum up the works and make it nearly impossible to maintain your existing infrastructure.

In any case, Gros says that Italy and Germany are headed in the same direction as Japan (Russia is already there), while France, the UK, and America are in relatively good shape. And although Gros doesn't mention it, there's another country in the rapidly aging camp too: China. By 2030 they'll have a greater proportion of the elderly than the United States. This is one reason why I'm skeptical of alarmism about China's imminent takeover of the world. I don't doubt that China will continue to grow and flex its muscles, but in the long term they have a demographic time bomb to deal with that's worse than ours, and they'll have to tackle it as a considerably less wealthy country than us. It doesn't mean they're doomed, but it does mean that their path to world domination has a few roadblocks in its way.

The King's Speech

| Fri Jan. 7, 2011 12:41 AM EST

I saw The King's Speech last night. Seemed like a pretty good movie, though the Wikipedia entry on George VI certainly suggests that director Tom Hooper stretched the truth a wee bit. But I'm curious: did anyone else think it a little jarring that he chose a German symphony1 as the background music for the scene where King George reads the speech declaring war on Germany? Or was that a deliberate choice with a significance that escapes me?

1A good German symphony! Beethoven's 7th. But still German.

Two Christmases

| Thu Jan. 6, 2011 4:19 PM EST

Welcome to the recovery:

Retailers did not get all that they wanted for Christmas, with December sales coming in lower than expected. But the holiday season altogether was still the strongest since 2006, and several categories including luxury continued their growth.

....“A lot of companies and sectors out there did well, better than analysts expected,” particularly the more exclusive retailers, said Chris Donnelly, a senior executive in the retail practice at Accenture, the consulting firm.

....Luxury items continued to rise, even more so than analysts had expected, with the two higher-end stores reporting results — Nordstrom and Saks Fifth Avenue — beating estimates by the biggest amounts. At Saks, sales at stores open at least a year, a measure called same-store sales, rose 11.8 percent, beating estimates of 3.9 percent. And Nordstrom’s rose 8.4 percent, versus estimates of 3.4 percent.

Italics mine. Holiday sales overall weren't bad, which is a promising sign. But maybe not so promising for ordinary working schlubs.