Thursday, October 27, 2011

The CBO Report on Inequality Should have Gone Back Further than 1979

There is a lot being written about the CBO report, even though there is nothing really new in it.  I do consider it a pity though that they didn't take the analysis back further, you can't really get a grip on what has changed without that information.

The big missing piece is that growth previous to 1979 occurred at a faster rate and was more even distributed across income categories, post WWII income growth was somewhat faster for the 99% than it was for the 1%.  Also, the share the 1% paid in taxes relative to their share of income was larger before the 80s, the 99% has seen their share of income decline faster than their share of taxes.  This would be far clearer if the CBO report had gone back further.  Data sets like those of Saez do this, however, to my knowledge, all of these are behind paywalls which leads to the annoying obstacle of not being able to reproduce them to share.

The exact same arguments above could be made about international data, other countries have seen similar growth rates without the concentration of income.  Where the American middle class has seen their share of the pie shrink faster than their share of the tax burden, in most other developed nations the share of both the pie and the tax burden have remained mostly constant.  It's hard to identify a structural reason for this, leaving policy or perhaps elite culture.  Likely a mix of the two.

The comparative data is also necessary to refute spurious claims, such as the changing age ratio being the cause, as this has not happened to similar countries undergoing demographic transition.  Still, what data is presented is excellent, even if the necessary historical and comparative evidence to grapple with the policy implications are lacking.

Wednesday, October 26, 2011

The Personhood Amendment Really Bothers Me

Amendment 26 in Mississippi would declare a fertilized human egg to be a legal person.  This really bothers me.  People talk a lot about liberty in this country but few seem to have any real understanding what it means or what the basic roots of our rights are.  Fundamentally, liberty begins with our spiritual and moral autonomy.  We each have an intrinsic right to discover for ourselves what is moral and decide on fundamental questions such as when life begins, what is our purpose here, what happens when we die, etc.  Freedom of conscience, freedom to decide for ourselves moral and religious truth, is the wellspring from which all other rights flow.  Seeking to define the fundamental questions through law cuts off liberty and autonomy at its source.  That anyone would seek to cut off one of the central mysteries that defines moral and spiritual liberty in the country that first instituted political liberty is something that I find absolutely appalling.

While it is true that questions like this do need to be decided by law, the only way to do this that does not infringe on extent rights and liberty is to allow traditional norms to persist unaltered, in this case, life begins at birth.  An individual is of course free to decide for themselves that this is wrong, but seeking to change the legal status is a sin of commission rather than omission.  Tradition must hold on these matters because there is no alternative, the question must be decided but no human being has sufficient spiritual and moral insight to decide these questions for another.  To me, this is as much a violation of intrinsic liberty as banning all faiths in favor of one and the establishment of a national church would be.  Deciding impossible questions such as one life begins is the root of moral and spiritual maturity, having someone else decide these things for us condemns us to being children.

This may sound strong, but I see this as evil.  There's simply no other word for it.  This would get me out in the streets if this were proposed here.  It's vile, it's a threat to intrinsic liberty and rights, and it threatens the very foundation of an individual's right to seek to live a moral and spiritual life.  These questions are part of the fundamental journey towards enlightenment we are all on, no one has the right or insight to impose answers to these questions on another, much less the state.

If someone wants to ban abortion, ban abortion.  Don't tell me that I don't have the right to decide basic spiritual and moral questions for myself though, I find it deeply insulting, tyrannical, and a violation of the basic principles of liberty, democracy, and religious faith.

Tuesday, October 25, 2011

What to do about the Debt Overhang

I've been reading a bit about the expansion of the mortgage program.  We definitely need to do something about debt, but the resistance to lowering principle makes little sense to me.

What keeps nagging me though, is that while mortgage debt is the biggest problem it's also the most costly and at the lowest interest rate.  What about people that have racked up large credit card balances?  Especially people that also have mortgages, they need the credit card paid down more than they need the mortgage.

What I'd like to see, though there isn't a snowball's chance in hell of this even getting proposed, is a plan that would tackle all kinds of debt but that would include some sticks as well.  What I've got in mind is a low interest government loan as a one shot deal for debt consolidation.  The stick would be that these loans carry the same kind of provisions student loans do, once you have them, there's no way out.  But if this could slash your 12% a year credit card debt down to something like the prime rate (variable so real value doesn't decrease do to inflation, but prime is still always going to be a big step up) this would help a lot of people out, but doesn't exactly reward people for bad behavior (which is an overblown risk, the behavioral response to bailing people out isn't nonexistent but neither is it large as long as it's not frequent) because there's a downside.

This would also make some long term profit for the government, since it is still above the government's long term interest rate, though some may see this as a negative.

Haven't seen anyone even suggest this, but I couldn't help mentioning it when I see the kind of contortions going on with the loan program.  Obviously there would have to be limits on the program, like limited to debts incurred before 2010, maximum limit that can be refinanced, perhaps an asset ceiling (while I normally don't like means testing, due to the short term, non safety net nature of this suggestion I don't see most of my usual objections applying), etc.  Anyway, I just felt like dreaming out loud.

Wednesday, October 19, 2011

The CLASS Act and the Individual Mandate

The CLASS Act failure displays all of the main reasons that the individual mandate is necessary.  The problems with providing long term care and the difficulty of convincing currently healthy people to sign up for the plans are the exact same problems the individual mandate is needed to solve.  Long term care, like most conditions you need health insurance for, is simply beyond the ability of most people to pay for.  Under current legislation, private plans are often ineffective at dealing with these problems, too many people have insurance with payout limits or that might be terminated if they lose their job due to their illness.  Many conditions that afflict young people, such as certain cancers or mental illness such as schizophrenia, are chronic and require long term treatment.  How can anything but a mandate bring in enough money to pay for the long term costs of the costliest patients, those who were young and healthy but unexpectedly acquired a long term illness that will impact the rest of their lives?

Now, as a separate issue, we definitely need some form of long term care plans in the US.  Home health aids are generally far more efficient than nursing home care, altering Medicare and Medicaid rules to help people stay in their own homes would be a good first step forward (this isn't to ignore scandals like home health aide programs in NYC, even with these problems this approach is more cost-effective in aggregate).  More comprehensive long term care would probably be easier to get off the ground once existing programs are altered to support it, CLASS was getting ahead of itself.  It's also notable that most long term care plans offered in the private sector fail for the same reasons the government plan did.

Tuesday, October 18, 2011

Americans Have an Unfortunate Tendency to Mistake Disagreements about Policy for Disagreements about Principles

The title is simply a paraphrase of a line in Gordon S. Wood's Empire of Liberty, which was a good book about the early republic.  He was mainly referring to a tendency that both the Federalists and Democrat-Republicans shared in lifting their disputes over policy matters into Constitutional disputes, even when the still living writers of that document were on both sides of the debate.

While this tendency has a long history in the US, it is a history marred by its emphasis in the periods of our greatest polarization and the damage this polarization did to our country in these times.

It's important to remember that it is very rare that anyone in our national dialogue is actually going outside of what at least some of the Constitution's writers believed was a reasonable interpretation.  Almost all disputes are about policy, not principle.  History also shows that human beings virtually never follow a line of thought to its ultimate conclusion, while sophists delight in this form of argumentation, actual human polities seem to adhere closer to Aristotle's Golden Mean.  Since policy is generally evolutionary, barring cases where an ideologue gains power, such as the Russian Revolution or Hitler (and universally these societies suffer disastrous collapses), societies are punished for tending towards any extreme interpretation and revert back to a more centrist policy (though sometimes this takes decades).

This post is just a reminder to be sceptical of any claims that a given policy is either necessary or contrary to political principle.  Americans have historically been suckers for appeal to political principle, absolutist interpretations, and slippery slope arguments.  We should be self-aware of this flaw in our political culture which I have no doubt will be exploited mercilessly by both parties as the Presidential campaign heats up.  Real political change has almost always been evolutionary in nature, barring the odd armed rebellion, so we should keep in mind what a partial, imperfectly executed policy would look like when assessing political claims.  The pure, absolute expression of starting political principles taken to their logical extreme bears greater resemblance to a child's fear of a monster under the bed than it does political action in the real world.

Monday, October 17, 2011

Why Americans Don't Work and Mexicans and Chinese Do

I'm going to try to keep this short.  I get annoyed with the meme that Americans have lost their work ethic and that other countries have developed or retained some kind of amazing cultural affinity for work.  The difference observed in these cases has basically nothing to do with culture, to the extent that culture has does influence this America has an amazingly pro-work culture and has higher than expected labor force participation, hours worked, and entrepreneurship, and a lot to do with economic opportunity.

The problem is the belief that people should work hard, just because well, people should work hard.  The corollary of this is often that people should damn well do what they're told for what I want to pay them or go to work for themselves (which ain't easy, even if you're sitting on your rear sending article after article to publishers).  I could present this view more sympathetically, but I find it elitist and classist with no real supporting evidence so won't bother (the most recent article to make me think about this was in the Economist, which discusses immigration and the difficulty of finding Americans willing to do the work immigrants did).

The real reason people work is that they aspire to something better.  People generally have a pretty good idea of what their opportunities are and will generally act on them.  If people aren't taking jobs like vegetable picking in Alabama it's probably because they have a good idea that they won't get anywhere by doing it.  Even poor people realize that spending a summer picking veggies in a scorching field won't do much to bolster their resume to get a better job later one, they're not stupid.*  There's no upward potential, so they won't do the work.

Now, of course, many of my educated fellows can share stories about how they did unpleasant or backbreaking work to get through college or in between jobs.  Hell, I can share a few of my own.

But there's usually a difference here, almost all of us with these stories were young, most often single, and had some kind of in kind supports that allowed us to save from these jobs.  In these circumstances, most people can and do work.  They do this because they know it's a stepping stone to somewhere better.  I used to spend 8 hours a day getting yelled at in a call center to save for graduate school, while perhaps not as bad as working in an Alabama field it's pretty depressing and I got through it by telling myself I'd never have to do that kind of work again.

But for your average down on their luck unemployed person, this work doesn't look so good.  That time in the fields means not applying to jobs that might get you out of your situation, people don't do this kind of work to simply tread water.  At one point in time there may have been a path up the ladder, do good, get recognized, become a foreman.  There's probably still some cases like this, but these days you're more likely to be passed over in favor of someone with a 2 year business or 4 year agriculture degree.  You don't suffer through a crummy job with no prospects for another year at a crummy job with no prospects.

Looking at countries like Mexico or China, the situation is different.  The Chinese maintain, at considerable expense both in terms of state dollars and economic distortion, a range of state owned companies that give vastly inflated wages and benefits.  People swarm into their cities and take crummy jobs in hopes of eventually being able to qualify for one of these posts.  Without them, it's unlikely that people would work for the wages and conditions they are given in Chinese factories, but people have a rational expectation of being able to move up and out.  This won't come true for many, but it comes true for enough to keep the dream alive.  Mexicans immigrating here have similar ideas, they may eventually learn English and move up, or at least their children will.

This simply isn't the case in the US right now, most low wage jobs are insecure, often seasonal.  You don't move up the ranks if turnover is less than 3 years or so, which is the reality for most low wage employment.  Unions once made up for this by negotiating scheduled wages, this had its downside but people will put up with a lot if they know things are getting better every year.  But we've gutted unions, we demand degrees for most positions of responsibility, and wages are too low to save for school if you either have dependents or can't rely on family or a buddy to let you sleep on their couch and save for school.  In this situation, why bother with a crummy job?  It gets you nowhere, doesn't build a resume for a more responsible position, and barely covers a subsistence level of income.

Of course people don't do these jobs.  Society is never, and will never be, set up in a way that people will work hard without prospects.  When people did back-breaking farm work it was because they knew the economy was growing and more responsible, better paying positions were opening up.  People will work for that hope, even if it doesn't come true for everyone doing it.  But that isn't our modern economy, it's very rare that someone can take a labor or retail job and move up.  Who would spend their lives stuck in a low wage, insecure job?  No one would, surveys taken show that both the poor and middle class have remarkably identical opinions on what they consider the minimum wage they'd work, the same could likely be said of opportunities.  This is simply a reality that we'll have to deal with, people won't stand for the scraps thrown to them by the rich and the only solution is to create better expectations, not to lecture people to become resigned to having none.

* The exception to this is the recent graduate who has never held a full-time job.  Most managers have dealt with enough bozos that skipped shifts and called in "sick" (hungover) to be somewhat leery of taking a chance on a middle of the road student with 0 work experience.  In this case, an entry level crummy job is pretty much a prerequisite for something better later on.  It's always been thus, and recent graduates have always moaned about it.  This, however, doesn't seem to be the case with much of the unemployed, particularly in the low wage sector.

Friday, October 14, 2011

Why Small Business Always Loses in the US: A Two Stage Approach

I thought of what is perhaps a better way of explaining why small businesses are consistently betrayed by both parties in our political system.

Think of passing a bill as consisting of two stages.  Stage one is deciding whether or not we'll enact a policy and its overall cost.

Stage two is apportioning that cost, whether by linking it explicitly to taxes or by indirect factors such as compliance costs.

In stage one, there is a natural alliance among business interests, they want spending to be as low as possible because they know that costs will fall disproportionally on them, for the simple fact that the money is there.  Other welfare state beneficiaries will benefit more relative to the cost of an intervention than a business owner will so they are united in their opposition to spending.

In stage two however, big business has a number of advantages over small business.  Small business knows that historically they have consistently had more of the costs fall on them, they will try to force policy to stay at stage one as long as possible in hopes of lowering the total cost of welfare state policies.  There is also a substantial coordination problem in that small business is unlikely to be able to carve out specific exceptions for its interests, they're optimal outcome is evenly distributed costs.

Big business however is in a very different situation in stage two.  They know that they have consistently been able to shift costs away from them, once they know a welfare state policy will be instituted they have every incentive to accelerate its passage in return for shifting compliance costs away from themselves and onto either small business or consumers.  Having fewer individual corporations involved makes it easier to negotiate carve-outs with welfare state supporters.  They can consistently apportion costs to other actors, so they will always defect to side with welfare state supporters in stage two.

Our political institutions serve to create substantial opportunities for these behaviors.  Civilians tend to be quite committed at stage one, they'll write their Congressmen and tend to be moderately well informed about the basics of major legislation.  However, once a bill gets into committee and reconciliation between the two chambers we tend to see policy drift away from universal provisions, which would lower the relative costs for individuals and small businesses, in favor of more specific provisions that exempt certain favored entities though tax breaks or through moving away from general provisions such as a simple auction for cap and trade in favor of giving out limited numbers of permits to key industries.  At this stage the public is uninvolved and small business rarely is able to get away from calling for lower costs overall to instead shift to bargaining in favor of equal costs for all, resulting in small business getting nothing and bearing a disproportionate share of costs since big business got its carve outs.

For small business to become more competitive those that represent it in Washington will have to realize that they need to preempt big business by defecting first in favor of universal provision.  Small businesses don't have the political weight to seek business specific carve-outs, the best they can hope for is equal costs.  The incentives in favor of this are weaker on individual issues, however consistently losing in these bargains is very costly over time even if it is not in regards to specific policy losses.  This displays the limits of self-interest, however, since it is very difficult to act on long run systemic disadvantages when the relative gains/losses from individual interactions are so small.

But they add up.

[Edit: I realize this is very similar to a typical collective action problem.  The main difference I'm observing is that small business can overcome the collective action problem to oppose welfare state policies but it can't overcome the problem to negotiate welfare policies more favorable to their interests once the passage of these policies becomes inevitable.  Small business certainly does effectively organize itself to oppose laws such as the ACA and to pressure their legislators to oppose the passage of these bills, the government as a whole seems quite responsive to this particular income bracket and its interests.  However, once the horse-trading starts happening, costs are almost always shifted away from big business to fall most strongly on this group.  This corollary of the standard collective action problem is what I'm trying to tackle with these posts.]

Obama and Taxes

I thought I'd share something I wrote for other purposes on Obama's initial tax proposals.  As you are no doubt aware, I thought the original plan was somewhat flawed but vastly better than Reid's alterations.  I also continue to think it was really shady how quickly the media shifted the dialogue to average tax rates which had nothing to do with what Obama was trying to say, which I think I make clear below.

The speed with which stories appeared in many news sources that sought to obscure the focus of Obama's September 19th speech and deficit reduction plan from his own focus on how his plan “eliminates tax loopholes that primarily go to the wealthiest taxpayers and biggest corporations – tax breaks that small businesses and middle-class families don’t get” with irrelevant details about how the “average” millionaire in the top 1% of income pays somewhere around 29% of their income in taxes has been troubling. It is quite clear from Obama's speech, as well as the actual Office of Management and Budget report on the plan, that there was never any intention to focus on raising revenue from the “average” wealthy individual but rather to focus on the “companies that get out of paying a lot of taxes,” and the millionaires and billionaires who “get a better deal than ordinary families get” and not the corporations who end up footing the bill for those that avoid taxes through loopholes or the wealthy individuals who pay their “fair share in taxes to contribute to the nation that made our success possible.”

The theme of the problems that loopholes create to fair taxation is struck throughout both the President's speech and the deficit reduction plan, the intent of the tax policies in Obama's plan is to close the loopholes that allow a minority of the top 1% to pay taxes at a rate below that of most of the middle class. The “average” wealthy individual who isn't getting rock bottom tax rates through exploiting tax loopholes is likely to see less change in their tax rate; what change they will see will mainly result from not extending the Bush tax cuts for high earners. To give an example of the variation in tax rates based on Obama's speech, looking just at effective income and payroll taxes, which would include deductions and credits but not income from sources such as capital gains, using data from the Tax Policy Center [there was an error in initial estimates, I've been checking for revisions and will hopefully remember to correct this piece when they are published, I can't imagine the errors are large enough to change the general point made below] the teacher mentioned in Obama's speech making $50,000 paid an effective median tax rate of 15.1% for the $50,000 to $75,000 bracket, among those making $1,000,000 or more, one quarter paid effective tax rate of only 12.6% or less. While the “average” wealthy individual paid taxes at a higher rate than the schoolteacher, a quite considerable portion of the wealthy paid far less. These numbers don't even get into the complications highlighted in the Obama speech, such as the 15% capital gains rate, which is much lower than marginal taxes on most other types of income and makes up a much larger proportion of the income of most wealthy individuals than it does most schoolteachers.

In addition to keeping in mind the disparities of the rates of taxation between the wealthiest and the rest of us it is also important to know that the share of income going to the wealthiest has increased far more than their share of taxes. More data from the Tax Policy Center indicates that the share of income going to the top 1% has increased from 9.3% in 1979 to 19.4% in 2007 while their share of tax liabilities has only increased from 15.4% in 1979 to 28.1% in 2007. In other words, while their share of income has more than doubled their share of taxes has only increased by about 80%. Of course, this also means that for the rest of us, including many that see half or more of our income going to the basic modern necessities of food, clothing, shelter, and transportation, our share of Federal taxes has not declined nearly as much as our share of income. All the push back against Obama's tax plan appears to indicate that the rich feel that their fair share of taxes has changed quite a bit less than their share of income.

These changes are why President Obama's focus on the tax breaks that allow some wealthy people to pay far less in taxes is so important. Over the last few decades we've seen a vast increase in the share of national income going to the top 1% but their share of taxation has failed to keep pace with this increase. But this isn't universal, even at the top. Arguments about the top 1% being “producers” or needing low taxes to create jobs ignores the fact that some corporations pay no corporate income tax at all while other pay close to 35% of their net incomes in taxes or that a quarter of the nation's wealthiest individuals pay an effective rate of only 12.6% or less on income and payroll taxes while a tenth of individuals making over $1 million pay an effective rate of 31.1% or more in income and payroll taxes. There seem to be individuals and corporations just as able to create jobs and new opportunities when paying tax rates closer to 35% than 15%, why should some individuals get tax advantages when others don't seem to need it? How are these tax breaks part of anyone's fair share of taxes? Writing about “average” wealthy individuals serves to distract from Obama's central point, some people are getting breaks that others are not, which is bad for all of us. Looking at averages subtly shifts the conversation away from the point that there needs to be a very good explanation for why “somebody who's making $50 million a year in the financial markets should be paying 15 percent on their taxes, when a teacher making $50,000 a year is paying more than that ” mentioned in Obama's speech by lumping him in with the somebody not getting these breaks paying closer to 35 percent of their income in taxes. Reading Obama's speech or his deficit reduction plan makes it obvious that his intention is to close some of the loopholes allowing some wealthy “lucky duckies” (if I may borrow the Wall Street Journal's term for those lucky people too poor to pay income tax) to pay a lower percentage of their income in taxes than someone making $50,000 a year. It is essential to keep the focus on what Obama has actually said and the problem he is trying to address rather than allow the story to be spun into a different story more favorable to those that are trying to preserve their lucrative tax loopholes.

Thursday, October 13, 2011

Some Final Thoughts on Small Business (part 3)

I'm going to try to wrap up this series today.  I may in the future follow up with some evidence, it's not hard to find evidence of how small business is more reliably right leaning than big business and that entrepreneurs tend to vote more Republican.  It's somewhat harder to get firm evidence of my central claim though, that small business is being particularly badly shortchanged.  To address this, a case study of acts such as the ACA would be required as well as a somewhat trickier look at tax policy, which tends to favor small over large business.  A number of other regulatory compromises would fit the bill as well.  Probably too big of a task for a blog, but I find strange things entertaining so I may get around to doing it for kicks.

Back on topic (and apologies for possible incoherence, I'm short on sleep today), there's a few loose threads hanging I want to clear up.

First off, individual level motivations.  I don't need to say much here, just Google entrepreneurship and character traits (or qualities or whatever).  People that succeed in opening up a small business are much more likely to be self-reliant, have a strong opinion of themselves, be risk takes, and thrive under risk.  Bully for them.  However, not infrequently people with these character traits are going to be a bit less empathetic, after all if you're ignoring the risk and advice of everyone to gamble on starting your own business you probably don't spend a lot of time listening to other people.  Now, these attitudes are necessary and beneficial for entrepreneurs, it helps business to grow.

The problem is this often blinds these individuals to systemic issues.  We are all strongly impacted by things beyond our control, successful entrepreneurs will tend to ignore things they can't change to focus on things they can.  This thinking doesn't work when it comes to the systemic issues that government should focus on, these issues are very much about the things that individuals can't change but society can.  Regarding these issues, most people don't want the entrepreneur's world, more people freeze up when exposed to risk rather than thrive on it.

This gives small business owners a skewed attitude towards what works, they thrive under conditions that are bad for most people.  This doesn't create a situation where one side's loss benefits the other however, small business owners still need the great bulk of individuals as customers and workers.  Greater risk may lead to the risk loving individual having better relative prospects, but their absolute prospects have a lot to do with the general health of society.  Whatever it is that drives the entrepreneurial spirit, there aren't many people that better themselves in the face of adversity.  Far more people drop out than step up.  This makes the entrepreneur's individual self-interest self-defeating when it comes  to policy.

Ok, just realized I probably strayed into incoherence.  What I'm trying to get at is that the very character traits that makes an entrepreneur so successful in competition with others is a liability on the political stage (and probably one reason they get so angry at politics).  They tend towards being uncompromising and believing in their individual vision at the expense of shared realities.  This sets up a situation where natural character biases reinforces ideological biases and makes compromise more difficult relative to big business elites who were more likely to get their position through success in school and climbing the corporate ladder rather than the entrepreneurial risk taking of the small business owner.

From society's viewpoint, this is a very bad situation.  Policy compromises with small business owners would almost always be far more optimal than with big business, we'd all be better off if the compromise had been between the left and the Chamber of Commerce or National Small Business Association than we are with the compromises that were actually made.  Policies favorable to small businesses would take the onus for providing health care off of them and onto either the state or individuals, in either case this would move small business closer to being equally competitive with large business than they are today.  Similar things can be said regarding tax policies, cuts in the capital gains rate favors large business over corporations posting profits on individual incomes, for example.  Our tax code is riddled with these compromises, most small businesses pay something far closer to statutory marginal tax rates than do large businesses which are able to take advantage of myriad loopholes.

This tends to create a situation where small businesses find themselves in a self-reinforcing downward spiral of declining power and influence.  They are justifiably angry over taxes and regulations that erode their competitiveness and that they pay in full.  They find it difficult to sympathize with left wing criticisms of lax taxes and regulations because, for them, their taxes and regulations are anything but lax.

This tends to make them side with big business that wants both lower taxes and regulations.  However, the left is rarely sophisticated enough to note that there are wide discrepancies in how much in tax is paid by the top 1% or by corporations, the focus on the headline rates that mostly apply to small business.  This means that when it comes time to hash out a bill big business can throw small business under the bus to reach a compromise with the left that leaves current laws in place or further slants the game in their favor (CAFE rules instead of a gas tax being an excellent example).  Small business is left angry at the left for having such intransigent demands and rarely focuses its ire on the right.

The way out of this situation is difficult to see.  Small businessmen tend to be focused on their own concerns and to think of themselves as future big businessmen, they aren't interested in bringing big business down to their level, they want the taxes and relatively low regulatory costs that big business enjoys.  This isn't realistic however, the bulk of people simply don't function well under a laissez-faire system.  The only realistic compromise is one that shifts the costs from small to large business, which is a violation of both ideological principles as well as personal level characteristics common to small business owners (like anything, there is more within group than between group variation, there are of course small business owners that couldn't be more unlike what I'm describing, but, as a group, there is a tendency in this direction even if its predictive power is basically zilch for an individual).

I fear that the most likely scenario is that we'll continue on an optimally inefficient path where the compromises are between the left and big business.  It is very hard to see how small business groups can break out of their current ideological stances to build compromises over the head of big business.  Since they're such a reliable voting block defection seems impossible so their needs will rarely be heard.  It's a pity, but I just can't see what could change this.

It is peculiar to think about how a fairly powerful group pursuing its own self-interests can put itself in a perpetual equilibrium where it will lose out every single time.  That's where small business is in the US though.  Just one more driver of our current polarization.

Monday, October 10, 2011

Are Small Business Owners Getting Thrown Under the Bus by Both Parties? Part 2

To pick up where I left off last week, I'm asserting that the biggest moneyed interests have a greater natural tendency to cooperate with social reforms than do most small businessmen.  The next thing I'll take up is bargaining.  It's not essential that you agree with me on the last piece for this piece to work, bargaining dynamics are sufficient on their own to explain why compromises on policies like health care, taxation, and other taxing and spending matters will result in compromises between large, wealthy  corporations and social reformers instead of between small businesses and social reformers, despite the pro-small business rhetoric of both parties.

As a starting assumption I'll assume that social reformers will always be with us, no social and economic system is perfect and there is simply no way to grow our way out of economic and social insecurity.  Laissez-faire is never and has never been a realistic option for eliminating social concerns, we can ignore the voices of the weak (until they take up arms) but their grievances will never just go away.  Since insecurity tends to be highly politically salient except in periods of truly spectacular change and growth we can assume that there will always be a powerful, if inchoate, group in favor of some form of economic intervention to provide social and economic security.

Given that this social pressure will always exist, the question becomes how will it interact with other powerful interests in society.  We can set the broad middle aside here, while it is meaningful to write about the broad middle setting the agenda in a general sense I have the more specific policy compromises at the next stage of bargaining in mind here.  Starting positions for both parties tend to be very favorable to small businesses, however, by the time a bill is passed the systemically important issues for small businesses have almost always been eliminated.  What is retained is small business friendly policies that could fit on a bumper sticker, like tiny loan subsidies or low marginal tax rates on lower business incomes.  What is lost is systemic factors that would aid them, such as a truly universal health care system or alternately, a health care system that would be purely individual rather than mediated by corporations (health care is a big issue where small businesses have been having the worst possible policies, because of low marginal rates they don't get as much of a tax advantage relative to larger businesses, their group rate is higher because of insufficient pooling, and the penalty for not providing care is more damaging to them than it is for larger businesses).

Aside from any natural tendency towards compromise with social reformers, why is it that both parties essentially see fit to throw them under the bus whenever it comes to actually hammering out a compromise?  We know the median voter is very pro-small business, why aren't politicians responding?

I see a few reasons.  First of all, big business is less costly to compromise with.  While people favor social programs they want to keep the costs low.  If compromise involves giving handouts, as the new health care law did, the giveaways that will satisfy big pharma and big insurance are just less costly than what would have to be given to the National Small Business Association or the Chamber of Commerce to get its members on board (not necessarily more efficient but people get worked up over headline cost of government more than they do the relative efficiency of its interventions).  It's just cheaper to get big money on board than it is small business.

The second problem is coordination.  Big business trade associations tend to move a bit quicker than larger membership organizations.  It is just easier to negotiate with an association representing a few dozen firms than it is organizations with hundreds or thousands of members.  It is easier for big business to realize that a new policy is happening and to coordinate a response among its members than it is for small business.  Big business will always have a first mover advantage in realizing that a policy has become inevitable and negotiating a carve out to protect its interests.

The third problem is ideology.  Big business can generally afford to be non-ideological, while individual businessmen may be heavily invested in their political views, the businesses themselves have shareholder accountability and will be more apt towards satisficing behavior.  They'll take a deal if they can get it.  The members of small business associations are less likely to have specialists prepared to argue the business advantages of making a compromise that goes against their ideological beliefs, lacking the time to become well informed of an issue their members are more likely to see compromise as betrayal.  Big business groups will be held together by self-interest, small business associations will more often have their perceived self-interest defined by ideology since the individual businesses can't afford analysts to give them industry specific political advice.  This will cause them to miss self-interested compromises because they lack information relative to big industry.

There are also likely some individual level characteristics, while within group variation is always larger than between group variation, entrepreneurs are likely to have some particular character traits, such as self-reliance, that will give them predispositions to political issues that big businesses will lack.  I'm going to try to wrap this up in one more post that will address some smaller issues, such as individual level differences, as well as what I see as the only way out, which is ideological change.  Since our system has so many veto points the bargaining problem means that as things stand small businesses will always be betrayed by the political system (which further radicalizes them causing a self-reinforcing spiral).  This is because the pressures for social reform are fairly constant (and growing as long as alternative systems that lack our problems exist) meaning that whoever finds a way to compromise with them most effectively will be favored (this doesn't mean that social reforms really get what they want, they'd almost always be better off if a compromise with small business could be reached, I'll try to address this briefly in the next post).  Since small business finds this compromise more difficult to make, they lose the game every time since big business has every reason to defect, every time.

Thursday, October 6, 2011

Are Small Business Owners Getting Thrown Under the Bus by Both Parties? Part 1: Setting the Stage

I learned something very interesting from Lindert's Growing Public that made me think about some modern economic and political issues in a new way.  Specifically, Lindert describes how early regimes dominated by the very wealthy, particularly in England but also in the Dutch Republic, had relatively generous social spending around the beginning of the industrial revolution.  However, as they extended the franchise their poor laws were restricted and made less generous, in England specifically by the 1834 poor laws.  This seems curious since the general story is that increasing the franchise increased the government's concern for its citizens.

Lindert explains why this story is wrong.  The early extensions of suffrage primarily extended beyond the magnates to fairly well off men who were still propertied.  These men faced a different set of incentive than the large landowners.  Large landowners were concerned primarily with retaining a large labor pool, they didn't want their seasonal labor help moving to cities in slack times.  They were willing to pay something, and have others pay even more, to help out the poor so that this labor was available when needed.

After the extension of suffrage the interests of the propertied elite changed.  They didn't have the same labor concerns and didn't want to pay for it.  They were just as likely to benefit from migration as they were to lose from it.  So they voted to restrict relief.

Now, these concerns aren't directly comparable to modern day problems, but I do think that the differences in interests between the well-off and the really well-off are still discernible.  Advance warning, the rest of this post is really speculative, I haven't hunted down much data to really back it up.

With that warning out of the way, lets reason this out.  Think of big business as market makers, they can influence labor prices and are mostly concerned with the size of the pool they can recruit from.  This makes them have a slightly more favorable attitude towards labor promoting social welfare, though on the whole they're pretty ambivalent about it if they're having to pay for it since they can always invest in capital instead.  Small business owners, however, aren't market makers.  Their wage rates will largely be set by larger industry players, if they're a small boutique they may pay wages somewhat above the big guys to attract talent, smaller players may just try to meet industry standard wages or pay below to get whatever qualified workers are left over.  They don't care much about macroeconomic factors like the size of the labor pool, their profitability is based on their relative competitiveness to the bigger guys, if industry standard wages go up or down this just doesn't matter a great deal to them since they're concerned with their costs relative to the bigger guys.  They're more concerned about factors they can control and account for, like their immediate taxes and take home, so they're opposed to social programs that cost money.

So this sets the stage.  Large companies with diversified operations will have a marginally more incentive to favor social policies than small businesses since they are more sensitive to aggregate labor market conditions while small businesses will be more focused on relative costs rather than broad aggregates.  Since small business owners get more of their income directly from their businesses profits, rather than filtered through a more complex process of stock prices and dividend decisions at the corporate board level, they have a greater sensitivity to tax rates (for much the same reason as people get more worked up by gas taxes than they do by more indirect taxes).  From a starting point, small businesses are more opposed to social programs generally than large businesses.  It may not always be the case that this perception is accurate, small businesses are less likely to have specialists that will interpret labor market forecasts for instance so may miss potential benefits I'll get into this more later, but it is a very real perception.

[This is going to be longer than I expected]

Comparing British and US Tax and Income Concentration

There's a very good short opinion piece in the NY Times written by DeAnn Julius about why she opposes the tax hike on the rich in Britain but believes the US is different.  Now, I'd like to add that with all of our loopholes marginal rate hikes are likely to be far less effective in the US than in Britain, loophole closing is what we really need to do (and why I'm currently annoyed with the Democrats for making Obama's good but imperfect plan rather worse).  Here's what happens if all tax expenditures are eliminated.

She points out that the top 1% of earners receive 11% of income and paid 21% of personal income taxes.

I'd like to add numbers for the US from the Tax Policy Center.  The top 1% receives 16.8% of income in the US and paid 25.6% of all taxes.

Of course, these figures aren't directly comparable because of differences in other taxes, such as US Social Security and Medicare taxes vs. UK National Insurance Contribution.  US payroll taxes account for 42% of US Federal revenue compared to 17% for UK's NIC (I don't really know which sources to use for UK data, it doesn't come up often).

For just US income taxes, we actually look worse for income taxes than the UK, the top 1% pays 34.3% of the individual income tax, compared to the UK's 21%.  However, they pay only 4.1% of the payroll tax which is 42% of Federal revenue compared to 44% for the income tax (I don't have figures for the UKs overall taxes or for the share the top 1% pay for NIC).

A few things to point out here.  First of all, I wish I had total tax shares for the UK.  Given the poor comparability of the data making a comparison is somewhat difficult, but given the large size of payroll taxes relative to government revenue in the US it seems the US wealthy are paying a somewhat smaller share of tax compared to their share of income in the US.

Perhaps the more important takeaway though is that while there is some concentration of income in the top 1% globally, the US is really an outlier, receiving a share of income that is 5% larger than in the UK, which is known as one of the most unequal in Europe.  As much as I dislike Occupy Wall Street for a variety of reasons their central grievance is very real, wealth concentration is occurring at unprecedented rates in the US and this is a US specific phenomenon and partially, or perhaps largely, due to policy.  Taxes are one tool to help combat this. 

Wednesday, October 5, 2011

Bumper Sticker Tax Reform

So, while I was writing my last post more details on the Reid proposal were announced.  As I suspected, it's far worse than Obama's original plan.  It's just a 5% surtax on incomes over $1 million.  I'm not opposed to a surtax but this is a bit steep.  I'd prefer 0.5% or 1% hikes on each order of magnitude over $1 million (so 1% on $1 million, 2% on $10, etc.).  The only advantage this plan has over Obama's is that it fits on a bumper sticker better.

The big problem with this though is that given the current number of tax expenditures in the US tax code simply imposing higher rates without closing loopholes just increases their distortionary effects.  Obama's plan did a decent job closing some of the worst incentives in our tax code, though missing the property and health deductions were problematic since this is two areas where the deduction is most likely to lead to cost inflation and resource shifting with no compensating gains.

Unless something really exciting comes up my next post is definitely on how current political dynamics screw over small business owners and possessors of high levels of human capital most of all.  This comes out particularly strongly by the Democratic party proposals.  In particular, I've got these comments in mind:

Democratic leaders said they believed that the new proposal would win support from Democratic senators like Mark Begich of Alaska and Mary L. Landrieu of Louisiana, who had expressed reservations about some of the tax changes in the president’s plan. It was not immediately clear whether the proposal would gain backing from moderate Democrats like Senators Joe Manchin III of West Virginia, Ben Nelson of Nebraska and Claire McCaskill of Missouri, who are running for re-election.

The window dressing about small business owners is BS.  If they were serious about tackling big business the carried interest deduction elimination would have been retained as would have some of the insurance company changes as well as the oil and gas tax deduction changes.  This is clearly a handout to America's biggest businesses, finance and natural resources.  Small business owners are getting screwed by this relative to Obama's plan.

Some Suggestions on Funding the Jobs Plan

Apparently Senator Reid doesn't like Obama's tax plan and wants the rich to pay for it.  Obama's plan seemed like a pretty good first cut to me, we'll have to see what Reid proposes.

I'll add my two cents:

In the United States, homeowners are afforded several generous tax preferences. Mortgage interest and local property taxes are deductible from taxable income, large exemptions are permitted for capital gains earned on the sale of a home, and imputed rental income is untaxed. According to the Office of Management and Budget, these tax expenditures are worth $167.3 billion in 2010 (Office of Management and Budget 2010), making tax expenditures for homeownership one of the largest in the tax code.

In this paper, we estimate the distributional effects of two of the three largest tax expenditures – those for deductibility of mortgage interest and state and local property taxes. Under current law, homeowners may deduct mortgage interest and property taxes on their homes even though the homes generate no taxable income. (The exemption of net equity returns on homes is also counted as a tax expenditure item by OMB, although not by JCT.) These deductions provide a substantial subsidy to owner-occupied housing to taxpayers who itemize deductions. A number of analysts have argued, however, that these tax provisions do little to increase homeownership, but instead provide an incentive for middle and upper-income taxpayers to own bigger homes (Mann 2000; Gale, Gruber, and Stephens-Davidowitz 2007; Poterba and Sinai 2008).
See pages 8 - 11 for distributional effects.

The 2010 Federal Budget lists six permanent tax expenditures for health insurance and health care expenses for individuals. These provisions (and their 2012 estimated revenue losses) are: exclusion of employer contributions for medical insurance premium and medical care ($184.9 billion)9, deduction of health insurance premiums for the self-employed ($7.5 billion), tax preferences for medical savings accounts and health savings accounts ($2.2 billion), deductibility of medical expenses ($14.8 billion), a refundable tax credit for health insurance purchased by certain displaced and retired individuals ($0.2 million)10, and exemption of distribution from retirement plans for premiums for health and long-term insurance for public safety officers ($0.4 billion).

See page 12 for distributional effects of eliminating most of these provisions.

Rather than eliminating them, I'd suggest capping the amounts that can be deducted, indexed to inflation.  This would fulfill Reid's goal of raising taxes on the rich while reducing the distortions in our tax code.  While this taxes the rich heavier, it primarily gives an advantage to wealthy individuals competing unequally with other wealthy individuals with certain consumption habits.  The current tax code tends towards disadvantaging professionals who get their high incomes through labor and small business owners.  It advantages those who get most of their income through capital.  Raising the capital gains rate and eliminating many corporate tax expenditures (while lowering marginal rates) would be another way to address this problem.

The argument for raising taxes on the rich isn't really all that good.  The argument for raising the taxes on some rich people who take the most advantage of distortionary tax incentives is, however, excellent.

Some Perspective on Federal Debt, Revenue, and Spending

I was playing around with the US Statistical Abstract and thought I'd publish this chart.  Note that there isn't any huge variations in spending or in revenue.  We get a bit of a divergence in the 1980s where both spending rises and revenue falls, this has the predictable impact on the debt.  GDP figures would have helped with this graph but I couldn't make them look good on it.  Main thing is that spending and revenue have diverged over the past 30 years which as led to a sustained debt problem.  However, this problem remains smaller than that from WWII and is likely less destructive of overall productive capacity than that war.  Raising taxes to cover the debts will likely cost some small amount of growth, but this has been done in the past with no major harm done to the economy, look at the 50s and 60s. 

This is the reason I'm not all that worried about the debt problem, but am very worried about the revenue problem.  We remain within historical ranges on these factors which gives me confidence we can overcome them.  However, over time international competitiveness has demanded increased spending on productive public goods such as health spending.  This requires more efficient, and somewhat more, taxation to pay for it.  I am worried the political consensus that allowed us to overcome our problems in the 50s and 60s is not there today.  The left-right divide then was different directions within a shared paradigm, today, the right has defected from the paradigm of Eisenhower and this makes it difficult to address these problems.

Tuesday, October 4, 2011

Just Plain Old Pound Foolishness

I just really couldn't believe this, well I could, but I wish I couldn't.

It's really amazing how we hear so much about cutting spending but when it comes to the programs that actually cost lots of money those calling for cutting deficits always oppose cutting spending.  The latest instance (the rest of the article covers about what I'd expect from a starting negotiating position, however this particular aspect should be something that any group  of rational individuals could agree on):

Federal health officials would have to curtail research comparing the effectiveness of different treatments for the same illness or injury. The Obama administration says such research can improve care. Many Republicans fear the results will be used to deny coverage of expensive treatments.
Comparative effectiveness research and associated rule-making is perhaps the single best way to save money in both the public and private sectors of health care.  If our goal is to save money and/or improve care, this research is essential.  Even if there is no concern with money having data on which treatments are more effective will help to alleviate pain and suffering.

This is just further evidence leading me to believe that there is no real intention to cut spending.  There is simply an ideological opposition to social programs.  The goal is similar to that of the Ryan plan, privatize everything despite nothing but flimsy evidence based on heroic assumptions that the policies will lead to overall savings.  Cutting spending has just become a polite term for opposition to social programs.  If they wanted to cut spending, why is there no support for more efficient alternatives or cost saving measure to existing programs?  It just doesn't make sense if the motivations are as claimed.

Pennywise, Pound Foolish

I just read one of the most disappointing stories I've read in awhile in the NY Times.  Unsurprisingly the State Department's budget is expected to be on the chopping block as we seek to trim spending.  This is a key example of something I've said frequently, the incentives involved in making immediate cuts to spending means that politicians will be prone to making cuts in ways that reduce immediate spending but raise long term costs.  It doesn't help that many of the politicians involved in deciding on these cuts have ideological beliefs regarding spending that make them blind to potential benefits.

Foreign aid is one of the most cost effective means America has in projecting its power.  It's effectiveness is difficult to assess properly, it is hard to put a concrete value on relationship building and public perception.  It can also be done sufficiently poorly as to be counter-productive, such as when US foreign aid flows through a hated regime that we become associated with through our giving.

That said, the pay-off from having foreign support is tremendous.  Contrast the cost of the war in Libya ($896 million) to the cost of the wars in Iraq and Afghanistan (~$800 billion and $460 billion respectively).  While it's hard to untangle precisely why the Libyan public had a favorable view of the US while the Iraqis and Afghans didn't have similarly positive views* it is illustrative of the kind of difference public opinion can make on achieving strategic objectives.

A country that is seeking to get its economic house in order and to reduce spending should be reallocating resources away from the military and towards economic and diplomatic means.  A shift away from foreign aid is the worst kind of thing we can do if our goal is to balance our budget.  This is just another piece of evidence that makes me believe that the deficit cutters have little concern with actually balancing the budget and far more concern about making this country fit their ideological vision.  This behavior is the exact opposite of what a country seeking a foreign policy within its means should be doing.

*It's not like we were giving a lot of aid to Libya, but we had been pressuring them diplomatically to open up for awhile.  We have also been very active in the Mideast, particularly in neighboring Egypt.  It's easy to see why Afghans weren't crazy about us since we did so little in the region, contrasting Iraq and Libya is harder.  I find it plausible that our focus on Egypt may have had something to do with it.

What really worries me is statements like this:
She recalled a State Department envoy’s informing her of $250 million in relief to Pakistan after last year’s devastating floods. “I said I think that’s bad policy and bad politics,” she said in an interview at her office on Capitol Hill. “What are you going to say to people in the United States who are having flooding?”

I get the domestic politics, but Pakistan remains one of the most likely countries where some type of intervention may be necessary in the future.  Giving aid to improve our image there is an essential component to reducing the risk of an Afghanistan or Iraq size debacle.  $250 million is small change compared to the costs of a potential intervention (I blogged about the importance of aid there at the time).  The only reason we have a perception problem is because of politicians unwilling to take necessary action domestically.   These kinds of shortsighted actions are how states decline and fall.  That isn't meant as hyperbole, I'm being completely serious.  If the deficit cutting mania continues to erode key US competencies, such as foreign policy, by cutting long range projects for short term cuts to show the electorate we may be painting ourselves into a corner we can't get out of.  If we ignore the potential benefits to government spending to avoid tax hikes we'll lose the capacities our state needs to maintain stability and prosperity.  I'm getting increasingly worried.

Monday, October 3, 2011

A Metaphor to Explain Why Tax Breaks are the Same as Spending

I've read a few articles recently mentioning the rather frequent feigned confusion about how tax breaks are different then spending.  I'll give a brief metaphor to explain why the two are identical.

Consider a club that you want to join.  The club requires payment of a fairly high entrance fee.  The club owner now decides he wants to encourage people to wear Metallica T-shirts.  The club owner knows incentive effects are powerful so decides to offer a cash bonus.  He suspects people will be upset if he simply hands $5 to everyone that walks in the door wearing a Metallica T-shirt.

Instead, he posts a sign up saying "I'm now allowing you to be a member of the club and keep more of your hard earned money for yourself, wear a Metallica T-shirt and I'll give you $5 off the entrance fee."  Then when someone wearing a Metallica T-shirt shows up they pay $5 less.  This is identical to the above scenario, but given the rhetoric surrounding this idea on tax issues you'd think there's some kind of real difference in outcomes, when such a difference is logically and mathematically impossible (ignoring timing of a discount vs. a receipt of a payment).

The club owner believes that people will be more accepting of his handing out money to people that love Metallica as much as he does if he advertises it as a discount rather than simply handing out money when people walk in the door.  On any rational level however, these two scenarios have exactly the same impact on both the club owner's budget and that of individual club members, people who love Metallica and wear their T-shirts become slightly wealthier than those that don't.  This is grossly unfair from the standpoint of anyone who thinks that club membership and fees should be completely unrelated to a member's opinion on Metallica.

The question is, how many people are suckers who will buy the difference between the discount and the handout when both have identical effects on people's income?

I'm pretty sure that everyone that reads this blog understands that spending and targeted tax breaks are identical (some tax breaks can be arguable from an efficiency perspective but they are just as defensible from a spending perspective provided that differences in administrative and oversight costs are ignored since these two factors are not identical between these two policy options), but this is a political tactic I see so often despite its transparency that I feel the need to express my exasperation over it.  Who really falls for this framing?