econscius

Archive for the ‘Federal Deficit’ Category

Big Bird Doesn’t Need Obama’s Federal Handout

In 2012 Elections, Federal Deficit on October 10, 2012 at 9:22 pm

Big Bird - Library of Congress, Living Legends, Award & Honors, 2000.jpg

Being a 1%er, Big Bird doesn’t need your taxes.  If you have children, surely you’ve spent plenty on Elmo, Big Bird, Muppets and other Sesame Street character royalties.  Perhaps you’re a PBS contributor.  To get our federal deficit under control, we need to cut spending.  President Obama thinks it’s an outrage Mitt Romney suggested easing Sesame Street off its federal subsidy, but the outrage  lies in a President who refuses to cut spending, even in unnecessary areas, though the country’s credit rating was downgraded on his watch.

There are more than 500 cable channels, including channels devoted to History, children’s TV shows, public affairs, documentaries and culture.  Is it unthinkable PBS could survive on its own?  Sesame Workshop President and CEO Gary Knell received $956,513 in compensation in 2008. [1]  “Sesame Street is a lucrative enterprise.” [1] From 2003 to 2006, Sesame Street earned $211 million in toy and consumer product sales. [1]  Its 2009 tax form shows Sesame Workshop took in $140 million in 2008 in 2008, with government grants accounting for just over $14 million of that (roughly 10 percent). [1]   The proportion from government was down to 6% in 2011. [4]

“Sesame Street appears in more than 120 countries,” [2] with licensing revenue achieved from all.  Big Bird has his own spot on Hollywood’s Walk of Fame. 

According to Slate, “The Workshop earned about $45 million in merchandising during 2010, which accounted for one-third of its total revenue. The rest came mainly from distribution fees and royalties, and from an assortment of private donors, corporate sponsors, and government.” [3]  Sesame Street is obviously very profitable because, “The production budget for Sesame Street domestically is about $16 or $17 million per year, which produces about 26 episodes.” [3]

The Wall Street Journal provides data on Sesame Street’s significant assets:

At the end of fiscal 2011, Sesame Workshop and its subsidiaries had total assets of $289 million. About $29 million was held in cash and “cash equivalents,” mainly money-market mutual funds. Another $121 million on the balance sheet was held in “investments.” According to the accompanying notes, these investments included stakes in hedge funds and private-equity funds. [4]

Everyone likes Big Bird.  He is in no danger of extinction if he loses his government handout.  President Obama should be ashamed of his false claims and unauthorized usage of Big Bird in Obama’s campaign ad.  Big Bird should at least receive royalties for the Obama campaign, but the President would prefer to pay with your tax dollars. [5]

 

Sesame Street logo.svg 

[1]  http://www.politifact.com/truth-o-meter/statements/2011/feb/28/jim-demint/sen-jim-demint-takes-aim-muppet-lobby/

[2] http://www.nytimes.com/2005/12/12/business/media/12sesame.html?pagewanted=print&_r=0

A sample international licensing deal with British retailer Marks & Spencer is located at:  http://www.licensing.biz/news/4600/MS-to-debut-Sesame-Street-apparel.

Another example of the licensing value of the iconic Sesame Street characters is seen with Google at http://www.licensing.biz/news/4231/Sesame-Street-celebrates-40th-with-Google.

[3] http://www.slate.com/articles/business/explainer/2012/01/does_sesame_street_lose_money_.html

 

[4] http://online.wsj.com/article/SB10000872396390443982904578046671220961776.html

[5] http://www.cbsnews.com/8301-250_162-57528812/sesame-workshop-to-obama-take-big-bird-ad-down/

For more on the business history of Sesame Street, see http://www.referenceforbusiness.com/businesses/M-Z/Sesame-Workshop.html

Pictures from Wikipedia Commons.

Obama’s Buffett Rule AMT Math Off by Factor of 289, or $1.4 Trillion/Year

In Federal Deficit, Income Tax Rates, Warren Buffett on April 11, 2012 at 5:50 pm

Smartcard2.png

President Obama claimed the new Alternative Minimum Tax he calls the “Buffett Rule” would eliminate the deficit. [1]  He is off by a factor of 289, or $1.4 Trillion per year.

The Obama AMT (“Buffett Rule”) would raise about $4.7 billion per year [1].

The Obama deficit in the past 365 days was $1,359.1 billion [2].

Just yesterday, White House officials conceded the Buffett Rule would only produce $47 billion over ten years in additional tax revenue for the government. That amounts to just 0.6 percent of the $7 trillion in spending projected for that period. [1]

Whatever the merits of demerits of the proposal, the claim was wildly false.  Personally, I’d recommend cutting spending.  Eliminating Obama Administration give-aways to for-profit businesses under the guise of ‘green’ initiatives would reduce more than the Obama AMT would.

[1] http://www.cbsnews.com/8301-503544_162-57411687-503544/white-house-pushes-buffett-rule-on-taxes/

[2] Using search range of April 11, 2011 ($14,267,760,539,191.80) to April 10, 2012 ($15,626,832,596,694.90) at http://www.treasurydirect.gov/NP/NPGateway

Pictures from Wikipedia Commons.

Road Trip to See Your Tax Dollars at Work: $140,000 Car for the 1%

In Electric Cars, Federal Deficit, Obama Administration, Tax Breaks, Top 1% on February 1, 2012 at 11:30 pm

In the interest of optimizing your blog reading experience, econscius went mobile today to see what all the taxpayer subsidies are doing for us in the world of electric cars. 

I took my blog on the road to see a Tesla Roadster at a Tesla Motors showroom.  More precisely, the Tesla vehicle at a Tesla Motors showroom.  These things aren’t exactly flying off the shelves and there is only one at the nearby dealership.  The car is very sharp, indeed, but it runs about $140,000.  The base price is supposed to be $109,000 so I am unclear why they were quoting me a much higher price.  Perhaps this yellow one has some upgraded options or maybe it is just supply and demand, they only have the one for sale here.  Perhaps I’d need to negotiate better.  Nevermind, though.  If you can afford $109,000 plus Illinois sales tax, you probably can afford $140,000.

The car is an example of fine design and engineering.  If I ever sell advertising on this blog and become filthy rich, sure, it would be nice to have one or two of these in an expanded garage!

“Filthy rich”?  Does that imply the 1% to you?  You know, the folks who earn over $343,927 a year? [1]  There are not many working class people who can afford to purchase a Tesla.

I hope you don’t mind a few Reverse Robin Hood manuevers subsidizing your 1% neighbors who’d like a Tesla!  Because you are doing exactly that.  According to the IRS, this Tesla Roadster qualifies for a $7,500 tax credit under Internal Revenue Code 30D, the “Qualified Plug-In Electric Drive Motor Vehicles”. [2]

There was a tax break of up to 50% of the cost of a battery charger installed in your garage, but the new frugal Congress just ended that credit. [3]

Tesla also received a $465 million loan from the Federal Government to develop an electric sedan. [4]  Unlike some other bankrupt Obama Administration green initiatives (think Solyndra, Beacon Power or Ener1), Tesla has not yet defaulted on its loan.  Also, there actually is a car here that runs and is freeway legal in every state.  Perhaps even more surprising, the Tesla is mostly made here in America unlike the Fisker electic car which is backed by a $529 million US government loan, only to be made in Finland! [5]  Tesla liked its first loan from you, the taxpayer, so much it was requesting a new one, but that financing need seems to have died down in the wake of the Solyndra scandal. [6]   Oddly enough, Tesla has never been profitable and continues to rack up a half billion in losses, despite the taxpayer assistance and the high price of the Roadster. [5]

This roadster will only go 244 miles on a battery charge [7], so it is best for cruising around and showing off to the yard help in a 1% neighborhood; it is not for driving the kids to camp or seeing the relatives in Ohio.

Thank you for reading, but please get back to work; President Obama and your Tesla desiring wealthy neighbors would appreciate you working a bit harder to provide the taxes to fund these cool toys for the 1%!  The Obama campaign contributors who will reap the rewards if Tesla is successful [5] surely would appreciate you putting in a little ovetime so they can get richer.

I know, I know, you say “what ever happened to Venture Capital?”  Yes, it is true that way back, before 2009, private investors used to invest their own money in new business ventures.  It worked for Microsoft, Groupon, Facebook, eBay, Amazon and thousands of other companies.  But that is so pre-Obama.  Today, private investors still put forward new companies but instead of turning to Venture Capitalists for funding, you the taxpayer are to be on the hook for tens of billions in government “investments”.  Enjoy the view of the Tesla, you paid for it!

Roadster 2.5 windmills trimmed.jpg

[1] https://econscius.wordpress.com/2011/11/17/who-are-the-top-1-most-arent-in-finance-fewer-still-in-mortgages/

[2] http://www.irs.gov/businesses/article/0,,id=214841,00.html and http://www.fueleconomy.gov/feg/taxevb.shtml

[3] http://www.usatoday.com/money/autos/environment/story/2011-12-30/electric-car-charger-tax-breaks/52234182/1

[4] http://www.wired.com/autopia/2009/06/tesla-loan/

[5] http://abcnews.go.com/Blotter/car-company-us-loan-builds-cars-finland/story?id=14770875

[6] http://blog.sfgate.com/energy/2011/09/28/tesla-fed-loan-update/

[7] http://www.carsdirect.com/electric-cars/how-much-does-the-tesla-roadster-cost

Showroom picture by author.  Windmills and roadster picture from Wikipedia Commons.

Trust A CPA: Warren Buffett is Wrong About Tax Rates

In Federal Deficit, Income Tax Rates on August 19, 2011 at 1:33 am

Legendary investor Warren Buffett penned a New York Times opinion piece about tax rates.   Surprisingly, he presents some very misleading information.  Fortunately, anyone can easily obtain actual average tax data from the helpful IRS website.  Yes, I said “helpful IRS”. 

Mr. Buffett says he calculated his personal average tax rate, including Social Security and Medicare payroll taxes, and came up with 17.7%.  Other people in his office paid more, anywhere “from 33 percent to 41 percent and averaged 36 percent”. [1]    I assume his co-workers’ calculations are accurate.  But Buffett is an aberration among the rich and his staff is not middle class, as we know from comparing them to the IRS’s own tax tables.

The chart below shows the actual average federal income tax paid by 2008 income cohort.  The top 1% paid an average 21.0% of income, the top 50 percent paid an average 13.2% and the bottom 50% paid a mere 2.6%.

FIG.1 [2] Item, tax year             Total
Average tax rate (percentage):  * Top
1 percent
Top
5 percent
Top
10 percent
Top
25 percent
Top
50 percent
Bottom 50 percent All Taxpayers
               
2008 21 18.84 17.33 14.92 13.23 2.59 11.91
               
* The average tax rate was computed by dividing total income tax (see footnote 3) by (positive) adjusted gross income.
Source: IRS, Statistics of Income Division, July 2010    

Mr. Buffett includes payroll taxes in his numbers.  In fact, he includes the portion of payroll taxes paid by his employer on his behalf.  This is interesting because liberals usually ignore the payroll taxes your employer pays on your behalf, in order to show Americans paying lower-income tax rates.  Still, let’s use his numbers.  Social Security and Medicare taxes were set up to loosely match a person’s contributions with the expected benefits.  As a result, both the benefit and tax are capped.  In 2010, the Social Security (6.2%) tax is accessed on the first $106,800 of income and Medicare (1.45%) taxes have no limit.  Your employer pays a matching tax. [3] 

Consider the income tax tables:

FIG. 2 [4] If your filing status is Married filing jointly:
       
If your taxable income is:  
       
Over- But not over- The tax is: of the amount over-
 $             –  $  16,750 10%  $                        –
     16,750       68,000 $1,675 + 15%                 16,750
     68,000    137,300 $9,362.50 + 25%                 68,000
   137,300    209,250 $26,687.50 + 28%               137,300
   209,250    373,650 $46,833.50 + 33%               209,250
   373,650   $101,085.50 + 35%               373,650

I won’t bore you with technicalities, but the term “income” refers to Adjusted Gross Income (“AGI”), which takes out exemptions for individual and dependents and credits such as student loans, 401(k) deductions and pre-tax expenses for health insurance.  Mr. Buffett is misleading by ignoring these credits (he uses “taxable income” which ignores the non-taxable income received by lower and middle-income taxpayers). [5]

Mr. Buffett’s other 20 people in his office are said to pay an average 36% in income taxes.  His office mates cannot be middle class as he portrays them.  The top marginal income tax rate is 35% and the average rate actually paid is always lower because tax rates work like a step-ladder.  The first $16,750 we earn is at a 10% income tax rate, then we pay 15% up to $68,000 and so on.   Taxpayers also take deductions for mortgage interest, state and property taxes, and charitable contributions, which reduces the average income tax rate paid.  We can say conclusively that none of Mr. Buffett’s office workers earn less than $68,000 AGI and appear to be well into the six-figures. 

Here’s the math.  Let’s assume Mr. Buffett’s co-worker has an AGI of $373,650 (actual income would be more because AGI is lowered by 401(k) and pre-tax deductions).  The income tax is $101,085 (27.1%). 

The maximum Social Security tax, including what your employer pays on your behalf, is $13,243.  The Medicare tax on $373,650 is $10,836.  When we add these three taxes together, the average tax rate is 33.5% of AGI.  Do the math on an earner at $209,250 and obtain an average tax rate of 31.6%.  AGI of $137,243 yields 31.9%.  AGI of $68,000 works to 30.8%.

All taxpayers take deductions which reduce “AGI”.  There are itemized deductions for state income taxes, property taxes, mortgage interest, childcare and charitable deductions.  Or you receive a standard deduction if you do not itemize.  These deductions lower the income tax percentages shown above.

Another way of checking Mr. Buffett’s high numbers for his employee tax rates is to use the IRS data above.  A taxpayer in the middle (50th percentile) is paying 13.2% of income in taxes.  Even adding Social Security and Medicare taxes paid by the employee and employer, the percentage is below 30%.

The figures Buffett provides for his 20 office mates are questionable; they do not mesh well with actual IRS data as I just showed above.  Certainly a Buffett employee who is earning $400,000 AGI and paying about 35% in taxes hardly counts as “middle class”.  The IRS data show the middle class is paying much lower rates.

Mr. Buffett is only tracking taxes, but it is worth noting the poor and middle class receive the greatest government benefits as a percentage of their salary.  School lunches, food stamps, financial aid for college and the like logically go primarily to those at the bottom of the tax scale.  The rich pay for private schools while the poor and middle class generally attend public schools. 

What about Warren Buffett himself?

Because of the wage cap on Social Security, Mr.  Buffett’s payroll tax drops as a proportion of his income grows.  The maximum social security and Medicare tax on $373,650 works out to 6.4% of income.  For Mr. Buffett to pay 17.7%, we may safely assume most of his income is in the form of capital gains and that income is very substantial.

Mr. Buffett’s company, Berkshire Hathaway, must file annual proxy statements with the SEC.  We learn Warren Buffett was awarded total compensation of about $519,490 in 2009 to run Berkshire Hathaway.  His salary was “just” $100,000, he received $75,000 in fees for serving as a director of Berkshire investment Washington Post Co., and he received taxable wages in the form of free personal security provided by the company. [6]  His average tax rate on that income would be about 34.9%.  Mr. Buffett tells us the bulk of his income comes from capital gains, which are taxed at a 15% rate. 

A capital gain is derived from the increase in value in a qualified investment (e.g. a stock or business) over time.  An important fact that Mr. Buffett and many liberals ignore is that capital gains are not indexed for inflation.  If your investment only grows at the rate of inflation, you actually pay income taxes on income that is not “real”.

Capital gains enjoy preferred taxation because you are using your own money to make an investment and the money was already taxed before as income.  Secondly, it serves a societal purpose of encouraging people who can to save and invest rather than spending it on caviar and yachts. 

It would seem reasonable to assume Mr.  Buffett maximizes his eligible charitable contributions since  he is a noted philanthropist.  Charitable tax deductions exist to encourage a societal goal.

It is worth noting a “C” corporation already paid high corporate income tax rates on its income before you, I or Mr. Buffett take any capital gains on that income.  The capital gains rate is lower partly in recognition of this fact.

Mr. Buffett is highly unusual in that his personal investment in Berkshire Hathaway has been stunningly successful; he may be the most successful investor of all time.  Most of us who buy a stock or invest “angel” capital in a friend’s start-up are happy if we might double our money in 5 years (unadjusted for inflation).  Only a precious few are able to parlay a modest investment into massive riches the way Mr. Buffet or Bill Gates have.  They are amongst the world’s richest people and biggest philanthropists.  Personally, I bet their charitable contributions are more cost-effective than funneling the same money through Washington D.C.

According to the IRS, the top 1% of earners accounted for 20% of all income but paid 38% of total income taxes. [7]  Mr. Buffett believes the top earners are not paying enough.  That is a matter of opinion and my purpose here is not to debate the proper tax structure or rate [8].  I have instead shown Mr. Buffett’s statistics for his office staff’s average tax rates are misleading and quite possibly wrong.

###

[1] http://www.nytimes.com/2011/08/15/opinion/stop-coddling-the-super-rich.html?_r=1

[2] Tax Chart by author, source: http://www.irs.gov/taxstats/indtaxstats/article/0,,id=129270,00.html

[3] http://www.ssa.gov/OACT/ProgData/taxRates.html and pg. 19 of http://www.irs.gov/pub/irs-pdf/p15.pdf.   Note the individual rate was lowered by 2.0% to 5.65% for 2011 as a temporary stimulative measure.  

[4] IRS tax table chart by author, source: http://www.irs.gov/pub/irs-pdf/i1040tt.pdf

[5] http://www.irs.gov/pub/irs-pdf/f1040.pdf

[6] http://www.reuters.com/article/2010/03/11/us-berkshire-buffett-compensation-idUSTRE62A5SH20100311  Mr. Buffett runs Berkshire; since he believes his taxes are too low, he could adjust his compensation mix to more salary.  

[7] http://www.irs.gov/pub/irs-soi/08inratesharesnap.pdf

[8] One option that would accomplish what Mr. Buffett wants (and some liberals have advocated) is uncapping Social Security.  Ironically, though, uncapping would crimp people earning $106,800 and above.  While $106,800 is hardly pauper territory, President Obama has exempted people under $250,000  from his proposed income tax hikes as “middle class”.  If liberals were unsuccessful in uncapping Social Security, it will be hitting many people earning $125,000 and $175,000 – people who see themselves as upper “middle class” as does Mr. Obama. 

Social Security payroll taxes were not intended to be used to fund defense, NASA or the TSA, which is what would happen if it were uncapped and the new revenues from the rich were used to fund general government operations.

Pictures from Wikipedia Commons.

Dislosure: the author owns stock in Berkshire Hathaway.

Long-Term Downgrade for a Short-Term “Problem”?

In Debt Ceiling, Economy, Federal Deficit, Standard & Poor's USA Downgrade on August 9, 2011 at 11:56 pm

Eugene Robinson happens to be one of my favorite liberal columnists because he writes with flair and tends to be ideologically consistent.  Whereas many writers are predictably partisan hacks, Mr. Robinson is willing to take on President Obama and the Democrat Party when he believes they are wrong. 

I take exception, however, with two points in today’s column. [1]   

Mr. Robinson says the downgrade has Republican “footprints” because he thinks S&P is afraid the GOP will force a default.  He says, “This isn’t the rationale that S&P gave, but it’s the only one that makes sense”.  Many on the Left are trying to blame the downgrade not on the party in power but on Republicans (see: https://econscius.wordpress.com/2011/08/07/jay-carneys-4-trillion-lie/).  Never mind S&P’s own words about the growing debt or their repeated warnings in recent years, warnings issued before there even was a Tea Party (see https://econscius.wordpress.com/2011/07/28/us-aaa-credit-rating-downgrade-was-expected/).

If Mr. Robinson believes S&P based – or should have based – its decision not on the growing US debt but on a near-term Republican “threat” to default, then why downgrade the long-term debt to “AA+” and keep the short-term debt at “AAA”?  Isn’t it the shorter term debt supposedly at risk of Eric Cantor?  Why worry about the 30 year T-bond and not the one year T-bill?  Mr. Robinson quotes S&P, “A new political consensus might (or might not) emerge after the 2012 elections.”  True; so why worry more about who will be in Congress 20 or 30 years from now?  

We do not know how fast the deficit will grow; we might bump up against the Debt Ceiling faster than expected, possibly before the 2012 elections if the economy dips into another recession.  Many financial commentators are predicting a new recession. [2] [3]   S&P specifically says, “we believe [the Debt Ceiling] act provides sufficient clarity to allow us to evaluate the likely course of US fiscal policy for the next few years.” [4]   The short-term “AAA” rating was affirmed even with John Boehner on the loose in the Capitol?  Wow.

Secondly, Mr. Robinson disputes the merit of any downgrade, saying:

“There is no plausible scenario under which the United States would be unable to service its debt. If political gridlock were to persist, our government would be able to pay bondholders with a combination of tax revenues and funds raised by selling more Treasury bills. And in the final analysis, as Alan Greenspan noted Sunday on “Meet the Press,” the United States “can pay any debt it has because we can always print money to do that.” [1]

Yes, it is true the US can pay bonds out of current tax receipts or just “print money”. [5]  But there is a massive risk to printing money.  Firing up the government printing press debases the currency a la Weimar Germany.  

Running the printing press would be a short-term solution.  US government debt is a series of hundreds of outstanding debt issues.  Approximately every week, a series of Treasury debt matures and needs to be replaced with a new issue.  Treasury bills mature in less than one year. [6]  As of 7/31/11, the public held $1.5 Trillion of T-bills. [7]  All mature in the next 12 months and needs to be rolled over into new Treasury debts.  Other, older series of Treasury notes and long-term Treasury bonds mature regularly throughout each year, too.  For example, 30 year Treasury bonds issued in fall 1981 mature in coming months. 

If the US government decided to inflate away debt obligations by printing money, the US Dollar would decline in value.   That would lose investor confidence.  This would precipitate a crisis:  investors would soon enough refuse to buy new issues of Treasury debt at anything like current low rates, if at all.  Imagine yourself as China, lending to the US in the expectation of receiving US Dollars for your debt upon maturity.  If your interest and principal started being paid with rapidly depreciating Dollars created out of thin air, would you want to keep lending?  You’d demand higher interest rates, if you lent at all.  Alternatively, you might be willing to lend, but only in bonds denominated in Chinese Yuan.  You know the US government cannot inflate the Yuan, because the US printing press cannot print Yuan.  Amusing as it would be, I cannot picture Timothy Geithner changing out the US Mint’s printing blocks with Chinese characters.

Running the printing press is not a feasible bond payment option. 

[1] http://www.realclearpolitics.com/articles/2011/08/09/a_downgrades_gop_fingerprints_110861.html

[2] http://www.marketwatch.com/story/get-ready-for-great-recession-20-2011-08-08?link=home_carousel

[3] http://www.marketwatch.com/story/how-to-brace-your-portfolio-for-another-recession-2011-08-05?link=kiosk

[4] http://www.standardandpoors.com/servlet/BlobServer?blobheadername3=MDT-Type&blobcol=urldata&blobtable=MungoBlobs&blobheadervalue2=inline%3B+filename%3DUS_Downgraded_AA%2B.pdf&blobheadername2=Content-Disposition&blobheadervalue1=application%2Fpdf&blobkey=id&blobheadername1=content-type&blobwhere=1243942957443&blobheadervalue3=UTF-8

[5] Note that Mr. Robinson is actually stating one reason a “default” was unlikely no matter what happened in the recent Debt Ceiling controversy:  the government could have paid bond interest first out of tax revenues.  

[6] T-bills mature in less than one year.  Notes mature in 1-10 years and T-bonds mature in more than 10 years.

[7] http://www.treasurydirect.gov/govt/reports/pd/mspd/2011/opds072011.pdf

Picture from Wikipedia commons.

Paul Krugman, Can You Spare the Chutzpah?

In American Recovery & Reinvestment Act (Stimulus), Federal Deficit, Government Spending, Obama Administration, Standard & Poor's USA Downgrade on August 8, 2011 at 9:42 pm

Paul Krugman today mocks Standard & Poor’s downgrade of the United States credit rating and accesses blame for the rating cut. [1]   Mr. Krugman says, “And please, let’s not have the usual declarations that both sides are at fault.  Our problems are almost entirely one-sided.” 

I held my breath a moment… wouldn’t this be the perfect place for Mr. Krugman to own up to his long advocacy of even larger deficit spending?  Alas, there’s no humility from Mr. Krugman, only chutzpah. [2]

Mr. Krugman predictably blames the “extremist right” and goes about making light of S&P.  Apparently it was the “extremist right” that demanded a trillion-dollar Stimulus program, Obama’s payroll tax cuts and the creation and continuous expansion of myriad other government spending programs the past 70 years?  Even the most cursory look at the history of the Public Debt shows neither party is blameless, but Mr. Krugman is too partisan.

Be that as it may, it is true S&P was too generous with ratings in the run-up to the financial crisis of 2008 and there is an argument S&P was late to drop the USA’s rating in 2011.  But Mr. Krugman shows chutzpah in making light of the rating drop to “AA-“.  I assume Mr. Krugman understands what rating systems are all about.  The top rating of “AAA” is intended for only the most pristine credits.  “AA+” is a good rating, just not as good as “AAA”.  The USA would have to drop another nine notches to “BB+” to be in speculative (so-called “junk”) territory.  The ratings scale works down to “C” and “D” (default).   Any honest person will admit the financial position of the United States has weakened and the country is not as creditworthy as it once was.  An “AA+” credit is still expected to repay the debt but is a bit riskier than an “AAA” credit.

Mr. Krugman is intelligent but occasionally careless.  Consider his statement: “It’s true that we’re building up debt, on which we’ll eventually have to pay interest.”  Eventually?  While rates are low today, we are paying plenty of interest.   US government interest expense was $414 billion in Fiscal 2010. [3]  Then again, this is the same Paul Krugman who also writes of “a trillion here or a trillion there” like a trillion is inconsequential.  In the rarefied spending air of a massive deficit advocate like Mr. Krugman, perhaps $414 billion is hardly anything at all.  After all, it rounds down to $0 Trillion.

Mr. Krugman said the 2009 Stimulus program was too small and he actually criticized the Obama Administration for its supposedly punctilious policies.  In his own words:

“The good news is that the American Recovery and Reinvestment Act, a k a the Obama stimulus plan, is working just about the way textbook macroeconomics said it would …  The truth, which is that the stimulus was too little of a good thing.” [4]

“it was obvious from the beginning [Obama’s Stimulus] was too small.” [5]

“Those of us who say that the stimulus was too small are often accused of after-the-fact rationalization: you said this would work, but now that it hasn’t, you’re just saying it wasn’t big enough. The quick answer to that accusation is that people like me said that the stimulus was too small in advance” [6]

“myself included, actually argued that the plan was too small and too cautious …. for the inadequate size of the stimulus plan” [7]

“[the Obama Stimulus] wouldn’t have been enough to fill the looming hole in the U.S. economy” [8]

Mr. Krugman got less deficit “Stimulus” spending than he had demanded, meaning he favored even greater debts than we actually have now.  But he has the chutzpah to ignore his own culpability and instead blames the messenger (S&P) and then blames the downgrade on, of all people, the Tea Party Republicans!  This is the same Tea Party caucus who has held partial power in the US House for a mere seven months and actually advocates cutting the deficit more than either Democrats or traditional Republicans.  Such chutzpah, Mr. Krugman!

 

[1] http://www.nytimes.com/2011/08/08/opinion/credibility-chutzpah-and-debt.html?_r=2&src=me&ref=general

[2] For the benefit of those not familiar with chutzpah: “Chutzpah (pronounced /ˈhʊtspə/) is the quality of audacity, for good or for bad, but it is generally used negatively. The word derives from the Hebrew word ḥuṣpâ (חֻצְפָּה), meaning “insolence”, “audacity”, and “impertinence” http://en.wikipedia.org/wiki/Chutzpah

[3] http://treasurydirect.gov/govt/reports/ir/ir_expense.htm

[4] http://www.nytimes.com/2009/11/02/opinion/02krugman.html

[5] http://blogs.abcnews.com/george/2010/09/krugman-spend-more-tax-less-almost.html

[6]  http://krugman.blogs.nytimes.com/2010/07/28/how-did-we-know-the-stimulus-was-too-small/

[7] http://www.nytimes.com/2009/03/09/opinion/09krugman.html

[8]  http://www.nytimes.com/2009/02/09/opinion/09krugman.html?ref=paulkrugman

Pictures from wikipedia commons.

Jay Carney’s $4 Trillion Lie

In Debt Ceiling, Federal Deficit, Government Spending, Obama Administration, Political Rhetoric on August 7, 2011 at 1:20 am

Presidential Press Secretaries are paid to, shall we say, spin.  Sometimes, spin crosses the line to outright falsehood.  Let’s call a spade a spade:  Jay Carney lied Saturday:

“Over the past weeks and months the President repeatedly called for substantial deficit reduction through both long-term entitlement changes and revenues through tax reform, with additional measures to spark jobs and strengthen our recovery,” press secretary Jay Carney said in a statement. “That is why the President pushed for a grand bargain that would include all of these elements and require compromise and cooperation from all sides.” [1]

Mr. Carney must hope you weren’t paying attention to Debt Ceiling negotiations.  Just a few months ago, Mr. Carney said it is “imperative” that a debt-limit vote not be “held hostage to any other action.” [2]  As reported in April in TheHill.com, “Carney maintained that a hike to the debt ceiling and ongoing efforts to rein in the deficit are both necessary, but not connected. [emphasis added]  “These are both urgent, but they’re not linked.” [emphasis added] [2]

Back in April, it was not just Carney but Jack Lew, the director of the Office of Management and Budget, who said there was no linkage.  Mr. Lew said: “Our very strong view is that the debt limit should be passed as a clean, standalone bill.” [2]

So which was it?  The Debt Ceiling and debt reduction were to be linked or were they not linked?

The fact is the Obama Administration wanted carte blanche to raise the Debt Ceiling without even a dime of deficit reduction.  Democrats and liberal opinion writers pilloried the GOP for months for the Tea Party approach of cutting the deficit in exchange for raising the debt limit.  We were told over and over again how it was unreasonably “taking hostage” the process.  It was also pointed out this was new and unprecedented because in the past, Congresses of either party had always granted “clean” Debt Ceiling increases. 

Only when the Republican caucus appeared to be united about blocking a Debt Ceiling increase and polls showed the public was supportive of the approach of cutting spending or cutting spending/raising taxes [3] did the Administration change its tune from “do nothing” to the “grand bargain” approach.  Going further back, the President had also ignored last year’s recommendations of his Deficit Reduction Committee.

The actual timing of the “grand bargain” was around July 7, three weeks before the Debt Ceiling Deal, when it was reported by Reuters, “Obama and congressional leaders are aiming for at least $3 trillion and possibly more than $4 trillion in budget savings.” [4]  It was not something President Obama had been pushing for “months”.

For Carney to try to ignore history and pretend a $4 trillion deficit reduction Debt Ceiling deal always was Obama’s position and it was the Republicans who wanted a smaller $2 billion in cuts is a blatant distortion.  It is also unfair to claim the GOP was fully responsible a larger $4 trillion deal did not happen as it takes two sides to negotiate.  The Administration does not want to be blamed for S&P’s rating downgrade to the United States, so it is rewriting history. 

 

 

[1] http://thehill.com/homenews/administration/175763-white-house-sap-downgrade-is-why-obama-pushed-for-grand-bargain

[2] “White House officials maintained Friday that the administration wants to see a “clean” increase to the federal debt limit” in http://thehill.com/blogs/on-the-money/budget/156425-white-house-maintains-call-for-clean-debt-ceiling-hike-despite-obama-comments

 [3] http://www.gallup.com/poll/148472/Deficit-Americans-Prefer-Spending-Cuts-Open-Tax-Hikes.aspx

[4] http://www.reuters.com/article/2011/07/07/us-usa-debt-idUSTRE7646S620110707

When $3.5 Trillion was $3.5 Billion!

In Economy, Federal Deficit, Government Spending on August 6, 2011 at 12:48 am

In Fiscal 2009, the US government spent $3.52 Trillion [1].

In Fiscal 1926, the US government spent $3.58 Billion ($43 Billion in 2009 Constant Dollars). [2] 

If a picture can be worth a thousand words, perhaps there is insight available when looking at page 317 of the 1947 Statistical Abstract of the United States (pictured below). 

Note federal spending actually contracted in the Roaring Twenties, even as the economy boomed.   We tamed the severe Depression of 1920-1 not with massive deficit spending stimulus but with spending cuts. [3]

Even FDR’s 1930s federal government lived in penury compared to today.   In 1940, last year before our entry to WWII, the United States spent merely $9.1 billion ($140 billion in 2009 Constant Dollars).

I am not implying we do not get some value for the additional trillions we spend each year today, but the questions are: (1) are we getting good value for the money and (2) can we afford it?  Tonight, S&P’s ratings downgrade suggests the answer to #2 is no.

Statistical Abstract of the United States, 1947, pg. 316

[1] http://www.cbo.gov/ftpdocs/120xx/doc12039/HistoricalTables%5B1%5D.pdf

[2] A useful Constant Dollar Calculator can be found, using your tax dollars by the way, at: http://data.bls.gov/cgi-bin/cpicalc.pl?cost1=3584988&year1=1926&year2=2011

[3] http://en.wikipedia.org/wiki/Depression_of_1920%E2%80%9321

Death By A Thousand Increases: S&P Lowers USA to AA+

In Economy, Federal Deficit on August 5, 2011 at 11:45 pm

No American can be pleased with tonight’s announcement Standard & Poor’s is lowering America’s credit rating, for the first time ever, from the gold standard “AAA” to “AA+”.  I refer readers back to my July 28 post on why an S&P downgrade has been looming for years: https://econscius.wordpress.com/2011/07/28/us-aaa-credit-rating-downgrade-was-expected/.  There is no joy in being proven right.

We Americans see ourselves as a “shining city on a hill”.  We developed a continent and built an economic empire.  America quite literally saved Europe from itself in WWI and we saved the world in WWII.  American economic might powered our own military and supplied our Allies in Britain, China, the Soviet Union and de Gaulle’s Free French.  The United States bankrolled international organizations like the IMF and World Bank.  Wall Street was the center of world finance.  Hollywood was the center of entertainment.  America’s corporations ruled many industries.  So many people loved the very idea of America they crossed oceans and deserts to immigrate here.  The USA’s economic wherewithal made possible large garrisons in Europe, Japan, Korea and elsewhere to initiate Pax Americana and win the Cold War. 

This downgrade is a hit to our very self-image of America as #1.  Canada is now more highly rated than the USA.  Sure, the Canadians are really nice people, play great hockey, and provided us with cool rock bands like Rush and Night Ranger, but it is an affront to our American psyche to think of Canadians being a better credit risk.

How will the nation respond?  Will we waste our time name-calling and angling for partisan advantage?  Will Republicans only blame Obama and will Democrats only blame G.W. Bush?  Even a cursory look at the Public Debt graphs below shows the deficit grew in fits and starts since WWI, but exploded the past 12 years through two recessions and under Presidents and Congresses of each party.  I assure you arguing about Bush vs. Obama will not get us back to an “AAA” rating.

People will disagree about whether taxes should go up or spending should go down.  When asked if you support a program: ask yourself if you would personally pay more taxes for it?  In some cases, I would give an unequivocal “yes”.  In many others, it is not worth it.  The problem is how we too often have said “yes, I like high-speed rail and I like the idea so much I would be willing to spend $500 billion of SOMEONE ELSE’S MONEY for it.” 

How did we get here? 

This downgrade to AA- has been death by a thousand increases.   It is the result of literally thousands of programs – big and small – mostly well-intentioned… but not fully funded.  It seems many Americans perhaps took our nation’s greatness a bit too much to heart.  We let our seemingly ever-increasing prosperity allow us to be overly optimistic about paying for today’s bills.  We could pay it tomorrow because things always get better in America!  Or perhaps we weren’t really paying attention and our politicians skipped the tough choices and punted the costs to the future. 

America looked to Europe and copied many European social programs.  But we did not copy European levels of taxation.  We wanted to have our welfare state and eat it, too.  We spent for a War on Drugs.  We subsidized our farmers, exporters and college students and all manner of other things, some useful, some not so much.  We dipped deeply into the public till for generous mortgage interest deductions.  Some of us probably borrowed more than we otherwise would – and more than we knew we should – because Uncle Sam sent us a bigger tax refund check each spring if we borrowed more.  Besides, homes always go up in value, right?

We borrowed to cover our wars.  WWI and WWII were extremely expensive in terms of GDP.  Korea, Vietnam, Cold War, Gulf War, Iraq, Afghanistan and many lesser military adventures like Grenada, Lebanon, Panama, Kosovo, Libya all have been costly.   Military strength meant fiscal weakness.

Looking at the $14.3 Trillion Public Debt is seeing only part of the problem.  A sobering look is provided by considering the “off the books” debt.  As discussed by bond investor Bill Gross of PIMCO, the present value of the future liabilities of the United States is a staggering $66 trillion. [1]   Divide $66 trillion by 308 million Americans and the per capita share is a sobering $214,300 per person.  Think about that!  If you have a family of four, your family’s share of the Public Debt is about $186,000 but your share of future Medicare, Medicaid and Social Security is $857,000.  That is over a million dollars per family.  We have made promises – which should be kept – to elderly Americans.  Paying for these promises is tough now and will not get any easier as more Baby Boomers retire.

It is up to you: do you want to cut spending or do you want to pay more in taxes?  Or both?  Whatever we decide, we have to decide on something.  We need big, serious changes.  We need to get our spending under control or S&P will someday lower us again… to “AA”, “AA-” and so forth.

The full text of S&P’s downgrade is available here: http://www.standardandpoors.com/servlet/BlobServer?blobheadername3=MDT-Type&blobcol=urldata&blobtable=MungoBlobs&blobheadervalue2=inline%3B+filename%3DUS_Downgraded_AA%2B.pdf&blobheadername2=Content-Disposition&blobheadervalue1=application%2Fpdf&blobkey=id&blobheadername1=content-type&blobwhere=1243942957443&blobheadervalue3=UTF-8

[1] http://www.pimco.com/EN/Insights/Pages/Kings-of-the-Wild-Frontier.aspx

Chicago & New York “Fall Behind” Shanghai & Beijing Without Amtrak?

In Amtrak, China, Federal Deficit, High Speed Rail, Obama Administration on July 30, 2011 at 2:51 am

Imagine increasing the population of the United States by fourfold.   Then squeeze these 1.3 billion imagined Americans into a smaller area:  the area east of the Missouri River south to the Gulf of Mexico.

Keep metro New York City in the same place with the same size metropolitan area but double the population of Staten Island. 

Keep Chicago where it is but increase its metro population by 2.5 times (from 9.5 million to 23.1 million).  Then squeeze this mega Chicago into a much smaller area about three times more densely populated than New York City.  No longer is Chicagoland sprawling but instead a tightly packed, vertical city. [1]

Next, remove most of the cars.  In fact, whereas the United States you know has nearly one car for every man, woman and child, our imagined United States would have only about one car per twenty people. [2] [3]  Take away America’s automotive culture, leaving a society where few drive but most aspire to someday drive.  Essentially, it is a lot like the United States automotive culture circa 1920.  Lastly, remove most of America’s passenger air travel. 

What we have imagined is a lot like China.  The New York -2.5X Chicago pairing is very close in actual distance and imagined densities and populations to the Beijing-Shanghai endpoints on the new Chinese high-speed railroad. 

We also need to imagine a feeder network of other high-speed trains in our imagined 1.3 billion person United States.  Imagine we obtain this extra population by plunking down an extra 200 metro San Antonios anywhere we can find space east of the Mississippi, keep our imagined Chicago of 23.1 million and supersize all other major American cities.  The Chinese municipality of Chongqing has 28.8 million people – about five times the population of metro Miami – so let’s substitute Chongqing for Miami and build a train there, too. [4]

Some believe higher speed Amtrak passenger trains are essential for the United States.  President Obama has repeatedly pushed for high-speed Amtrak, saying we will “fall behind” China if we do not.  Obama warned, “In the race for the future, America is in danger of falling behind. That’s just the truth.” [5]  The President said, “We should be able to agree now that it makes no sense for China to have better rail systems than us”.  On another occasion, Obama stated, “They’re [China] playing for first place, and we need to play for first place.” [6]

But the imagined America example above frames up how China is not like the United States.  Few Chinese can afford a car, China has few expressways and little air travel.  Many Chinese already use conventional passenger rail systems and are habituated to taking a (slow) train between cities.  China is arguably ideal for intercity passenger rail because it is much more populous than the United States and Chinese cities are closely packed along its eastern and southern seaboards and in the Yangtze River valley.   If you live in suburban Tampa and want to visit your parents in suburban Orlando, you can drive your car there in just over an hour, easily find free parking on your parent’s driveway and use your car around town.  If you lived in a Shenzen, a Chinese city of 10 million, and want to visit your parents in nearby Hong Kong, you and your parents are highly unlikely to own a car and most likely live in high-rise apartments lacking parking.  You’d have little choice but a bus or train. 

Amtrak’s Acela rides the most successful of Amtrak’s routes and it is no coincidence the Acela travels through America’s densely populated Northwest Corridor between some of the few American cities where many residents do not own cars.  Wisconsin Governor Scott Walker received much grief for canceling a proposed Milwaukee to Madison high-speed rail line due to cost concerns.  Yet, metro Madison had 561,505 residents in 2010 and metro Milwaukee had 1.6 million [7], not even remotely close to the mega-cities on China’s lines. 

Should we mimic everything China does?  China imprisons those who criticise its government!  China has a fast-growing economy and many positive attributes but the idea that China’s rail system poses a ‘threat’ the United States will “fall behind” is quite a stretch.  Western Europe is also much more densely populated than the United States, meaning the European experience with high-speed trains is not instructive for America.

China’s new rail system is hardly a total success.  It suffered cost overruns, corruption in awarding of contracts [8] [9], priced out customers with higher than expected ticket prices [10], and safety lapses such as last Saturday’s train collision that killed 39 and injured 210 people [11] [12].

Even a high-speed Amtrak proponent, Robert D. Yaro, conceded, “At an estimated $500 billion, a national high-speed rail system won’t come cheap.” [13]  At a time when the nation is suffering a debt crisis with annual budget deficits north of $1 Trillion, can we afford another half trillion for Amtrak?

In a capitalist society like the United States where a number of profitable, well-run freight railroads already run networks between all the major cities, we have to ask why Union Pacific or BNSF aren’t clamoring to do their own high-speed passenger rail trains on the tracks they already own?  If you believe large corporations will always try to make a profit, why wouldn’t CSX and Norfolk Southern be planning their own passenger rail lines if they thought the usage would justify the investment?

China administrative.svg

[1] City data includes 2,812 people/sq. mile in metro NY, 3,023/sq. mile in Beijing municipality and 9,403/sq. mile in Shanghai Municipality.  Note regions like Tibet, Xinjiang and Inner Mongolia in western and northern China are sparsely populated, largely desert, arid and mountainous (e.g. Tibet 3 million people, Xinjiang 22 mil., Inner Mongolia 25 mil.)  http://en.wikipedia.org/wiki/China.  This link is also the source of the public domain map of China.  Shanghai Municipality population is 23.1 million http://en.wikipedia.org/wiki/Shanghai.  Beijing Municipality 19.6 million http://en.wikipedia.org/wiki/Beijing.  New York 18.9 million http://en.wikipedia.org/wiki/New_york . Chicago, 9.5 million http://en.wikipedia.org/wiki/Chicago

[2] The small number of cars produced in China:  http://en.wikipedia.org/wiki/Chinese_car

[3] “Overall, there were an estimated 254.4 million registered passenger vehicles in the United States according to a 2007 DOT study.” http://en.wikipedia.org/wiki/Passenger_vehicles_in_the_United_States

[4] http://en.wikipedia.org/wiki/Chongquing and http://en.wikipedia.org/wiki/Miami.

[5] http://abclocal.go.com/wtvd/story?section=news/local&id=7826410 

[6] http://www.businessweek.com/magazine/content/10_48/b4205042094905.htm

[7] http://en.wikipedia.org/wiki/Milwaukee,_Wisconsin and http://en.wikipedia.org/wiki/Madison,_Wisconsin.  These two small metros are sprawling and lack a subway to bring riders to rail hubs.

[8] “Millions of dollars in funds for China’s high-speed rail link between Beijing and Shanghai were embezzled in 2010, the state audit agency has said.  Officials said 187m yuan ($28.5m; £17.5m) had been stolen by individuals and construction companies. The judicial authorities are investigating.” http://www.bbc.co.uk/news/world-asia-pacific-12828057

 [9] “Those concerns come as Beijing is investigating corruption accusations against high-ranking railway officials and allegations that some unqualified companies may have been awarded contracts for part of the $400 billion project.” http://articles.economictimes.indiatimes.com/2011-07-27/news/29820696_1_high-speed-rail-train-collision-railway-officials

[10] http://www.infrastructurist.com/2011/01/19/is-chinas-high-speed-rail-pricing-out-passengers/

[11] http://www.telegraph.co.uk/news/worldnews/asia/china/8658959/Anger-in-China-as-bodies-fall-from-carriages-during-train-crash-clean-up.html

[12] http://www.nytimes.com/2011/07/27/world/asia/27china.html

[13] http://www.nytimes.com/roomfordebate/2010/10/13/will-we-ever-have-high-speed-trains/an-investment-we-have-to-make