Alan Greenspan has a piece in the Wall Street Journal today which essentially casts him as the Pontius Pilate of the financial crisis. Or, to sum it up rather sucinctly, “it wasn’t my fault”. You’re welcome to read through it and agree or disagree. However, the imporant point I think that should be taken from the Greenspan piece are the last two paragraphs:
Any new regulations should improve the ability of financial institutions to effectively direct a nation’s savings into the most productive capital investments. Much regulation fails that test, and is often costly and counterproductive. Adequate capital and collateral requirements can address the weaknesses that the crisis has unearthed. Such requirements will not be overly intrusive, and thus will not interfere unduly in private-sector business decisions.
If we are to retain a dynamic world economy capable of producing prosperity and future sustainable growth, we cannot rely on governments to intermediate saving and investment flows. Our challenge in the months ahead will be to install a regulatory regime that will ensure responsible risk management on the part of financial institutions, while encouraging them to continue taking the risks necessary and inherent in any successful market economy.
Those words reminded me of the quote I saw in business columnist Tom Oliver’s piece today in the Atlanta Journal Constitution:
“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” — F.A. Hayek
Any columnist who starts with a Hayek quote is guaranteed to get my attention. And I’ve come to enjoy Oliver’s columns. However, reviewing Greenspan’s advice and admonitions in those two paragraphs, juxtaposed against the simple and elegant truth of Hayek’s statement you find yourself back in the outback watching that big red kangaroo headed for a collision with the car. It is inevitable, there’s nothing you can do about it, they can’t or won’t hear your warnings and all you can do is watch – and cringe.
Frankly, as we watch the machinations of government and listen to their declarations, we have begun to understand that for the most part, those in charge of all of this haven’t a clue. As Oliver states:
Far from demonstrating the demise of free enterprise, this long-running, deepening recession is revealing the limitations of government.
Government, in its various yet powerful incarnations, has been offering one fix after another since August 2007.
The more the Fed and Treasury have tried, the less sure they seem and the more nervous the money makers have become.
It’s understandable that folks would look to the new administration for new ideas. So it’s harder than usual to acknowledge that the ideas are in fact pretty old and, having been tried, found wanting.
Whatever one may think about the so-called stimulus, it’s too easily deconstructed as pork and policy initiatives.
And if it’s still debatable whether to nationalize the financial industry, the move to nationalize health care, education and energy can hardly be disguised as economic recovery programs.
It is understandable that those who derive their power from government would use this recession as an excuse to further government’s reach. But they act as if government has been absent — as if they’ve been absent — from the role of regulator and legislator.
He’s precisely right – it wasn’t a problem with lack of regulation or lack of legislation. It was a lack of proper regulatory oversight and a willful decision by legislators to ignore the building crisis coupled with government distorting the market and actually incentivizing risk taking far beyond that which is prudent that led us here. And now that they have us in this position, all of them, Greenspan included, are engaged in a flurry of finger-pointing and name calling at every one but the right ones. This wasn’t a crisis which happened in just the last 6 months or 8 years. This one has been building for a while.
“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” — F.A. Hayek
We had Democrats in charge and then we had Republicans. Again and again.
Both endorsed and encouraged the subprime sleight-of-hand. Both appointed heads of the regulatory agencies that could’ve stopped the poison seeping through our banks’ balance sheets. Both allowed gamblers to hedge and swap derivatives on top of derivatives that no one can explain and that are proving far more debilitating than the debacle they were insuring against.
Freddie Mac and Fannie Mae became toxic assets of the government while doing the bidding of congressmen who now act like the piano players in a brothel.
The Federal Reserve proved to be anything but reserved, instead stoking a fire that burned us all.
These were not the result of idle hands of government, but rather deliberate deeds that created false markets with inflated credit while turning a blind eye to those who finance election results.
Oliver’s characterizations are dead on – and he’s nailed both the fed and the Congress. The most irritating thing to me about this whole mess, other than the obvious huge loss of wealth, is the success those who were responsible for writing the rules, laying out the playing field and calling the game are escaping both blame and punishment for what they’ve brought about. That toad Barney Frank having the chutzpa to talk about prosecuting those who were guilty of getting us in this mess still astounds me. If anyone should be undergoing such prosecution right now, it is he and numerous other congressmen and women, both past and present.
Oliver concludes as follows and I can’t help but say a hearty “amen” to what he has to say:
We periodically recoil in horror at government’s failure to protect foster children or care for veterans or the mentally ill. But then we turn around and assume government will perform better in areas more complicated.
Why does the failure of government so often lead so many to believe we need more government?
Like the hair of the dog for the alcoholic, it may calm the trembling hands for a moment but it inevitably leads to another spree and another hangover.
We’re headed into a “or worse” moment. No one in government is going to listen to Alan Greenspan’s admonitions or believe Tom Oliver’s brief accounting of the history of this crisis. Instead we’re going to see precisely the opposite happen – more regulation, more strings, more intrusion, more control. And, as Hayek said, we’ll again see “how little [men] really know about what they imagine they can design.”
Both Camille Paglia and Howard Fineman give an assessement (although not presented as a 50 day assessment).
Paglia says, “free Obama from his advisors“:
Yes, free the president from his flacks, fixers and goons — his posse of smirky smart alecks and provincial rubes, who were shrewd enough to beat the slow, pompous Clintons in the mano-a-mano primaries but who seem like dazed lost lambs in the brave new world of federal legislation and global statesmanship.
Heads should be rolling at the White House for the embarrassing series of flubs that have overshadowed President Obama’s first seven weeks in office and given the scattered, demoralized Republicans a huge boost toward regrouping and resurrection.
The advice he has received certainly hasn’t been the best, and Paglia makes the point eloquently. She primarily goes off on two things that have hurt the administration’s reputation – the “stimulus” bill and the mishandling of the Gordon Brown visit. Both poorly done. And she’s not at all impressed with, nor does she think anyone else has confidence in what she calls “a shrill duo of slick geeks (Timothy Geithner and Peter Orszag) as the administration’s weirdly adolescent spokesmen on economics” .
President Obama — in whom I still have great hope and confidence — has been ill-served by his advisors and staff. Yes, they have all been blindsided and overwhelmed by the crushing demands of the presidency. But I continue to believe in citizen presidents, who must learn by doing, even in a perilous age of terrorism. Though every novice administration makes blunders and bloopers, its modus operandi should not be a conspiratorial reflex cynicism.
Notice another assessment that uses “overwhelmed”. Paglia charitably tries to write it off as something “every novice administrations” goes though. But is it really?
Paglia interestingly uses the Limbaugh kerfuffle as the ultimate case in point of how his staff has let him down. But she notes he wasn’t particularly smart about it either:
This entire fracas was set off by the president himself, who lowered his office by targeting a private citizen by name. Limbaugh had every right to counterattack, which he did with gusto. Why have so many Democrats abandoned the hallowed principle of free speech? Limbaugh, like our own liberal culture hero Lenny Bruce, is a professional commentator who can be as rude and crude as he wants.
Another bit of grumbling is being heard from Howard Fineman. In an article entitled “The Turning Tide“, Fineman notes “Obama still has the approval of the people, but the establishment is beginning to mumble that the president may not have what it takes.”
Not just the establishment -many in the big mushy middle who became enthralled with the cult of Obama without understanding the Obama agenda are now displaying a little buyer’s remorse.
But Fineman’s critique has to do with how the “establishment”, which he contends still holds enormous power, views the Obama presidency to this point. As with most of the elite media, he waves off the popular sentiment which is, for the most part favorable, and essentially claims it is the “establishment” which will make or break this president. By that, of course, he means the elite media, the money men and politicos. However, that said, his assessment is interesting:
They have some reasons to be concerned. I trace them to a central trait of the president’s character: he’s not really an in-your-face guy. By recent standards—and that includes Bill Clinton as well as George Bush—Obama for the most part is seeking to govern from the left, looking to solidify and rely on his own party more than woo Republicans. And yet he is by temperament judicious, even judicial. He’d have made a fine judge. But we don’t need a judge. We need a blunt-spoken coach.
For all his rhetorical skill, that’s something Obama can’t pull off. He comes off as preachy, and with his lack of experience, no one with any sense would accept him as a coach who’s been there, done that and is now helping the rest of us achieve certain results. He just doesn’t have the authority of experience to sell that. And what is going on around him, such as the poorly handled nomination process, makes any attempt by him to assume that role even less authoritative. Even those he does have on board, such as the “shrill duo of slick geeks” as Paglia calls them, do more to hurt his image than help it.
Fineman goes on implicitly giving credibility to the belief that Obama may not be up to the job:
Obama may be mistaking motion for progress, calling signals for a game plan. A busy, industrious overachiever, he likes to check off boxes on a long to-do list. A genial, amenable guy, he likes to appeal to every constituency, or at least not write off any. A beau ideal of Harvard Law, he can’t wait to tackle extra-credit answers on the exam.
In the meantime events pop up and multiply, issues expand and reality barrels on. And the “establishment” is getting antsy. Because what the establishment isn’t seeing from their chosen son is something he’s never had reason or cause to display – leadership. What Fineman dances around with this “beau ideal of Harvard Law” and “blunt coach” characterizations is Obama doesn’t seem to understand the basic tenets of leadership. It has nothing to do with jetting around the country on the perpetual campaign, or excellent but basically empty speeches. It means taking charge of the process and spending less time in Columbus, OH and more time leading Congress and his cabinet heads in the direction he wants to see things go.
Instead he’s essentially turned foreign policy over to Hillary Clinton and his domestic agenda over to a Congress which simply cannot control itself while he and his staff pick rhetorical fights with talk-show hosts.
Fineman lays out a list of things to this point which aren’t playing particularly well among the “establishment”. Again, these are Fineman’s list:
-The $787 billion stimulus, gargantuan as it was, was in fact too small and not aimed clearly enough at only immediate job-creation.
-The $275 billion home-mortgage-refinancing plan, assembled by Treasury Secretary Tim Geithner, is too complex and indirect.
-The president gave up the moral high ground on spending not so much with the “stim” but with the $400 billion supplemental spending bill, larded as it was with 9,000 earmarks.
-The administration is throwing good money after bad in at least two cases—the sinkhole that is Citigroup (there are many healthy banks) and General Motors (they deserve what they get).
-The failure to call for genuine sacrifice on the part of all Americans, despite the rhetorical claim that everyone would have to “give up” something.
-A willingness to give too much leeway to Congress to handle crucial details, from the stim to the vague promise to “reform” medical care without stating what costs could be cut.
-A 2010 budget that tries to do far too much, with way too rosy predictions on future revenues and growth of the economy. This led those who fear we are about to go over Niagara Falls to deride Obama as a paddler who’d rather redesign the canoe.
-A treasury secretary who has been ridiculed on “Saturday Night Live” and compared to Doogie Howser, Barney Fife and Macaulay Culkin in “Home Alone”—and those are the nice ones.
-A seeming paralysis in the face of the banking crisis: unwilling to nationalize banks, yet unable to figure out how to handle toxic assets in another way—by, say, setting up a “bad bank” catch basin.
-A seeming reluctance to seek punishing prosecutions of the malefactors of the last 15 years—and even considering a plea bargain for Bernie Madoff, the poster thief who stole from charities and Nobel laureates and all the grandparents of Boca. Yes, prosecutors are in charge, but the president is entitled—some would say required—to demand harsh justice.
-The president, known for his eloquence and attention to detail, seemingly unwilling or unable to patiently, carefully explain how the world works—or more important, how it failed. Using FDR’s fireside chats as a model, Obama needs to explain the banking system in laymen’s terms. An ongoing seminar would be great.
-Obama is no socialist, but critics argue that now is not the time for costly, upfront spending on social engineering in health care, energy or education.
Of course on the other side of these points are those that argue that the stimulus bill was poorly designed and will do nothing to stimulate the economy while ballooning the debt and inviting hyper-inflation as a result. They’d also argue that $275 home-mortgage-bailout rewards bad behavior and that when Obama claimed the pork laden, 9,000 earmark omnibus spending bill was the “last administration’s business” he gave up any hope of being in the same county as the “moral high ground”. Etc., etc.
In essence, the first fifty days can be summed up fairly easily in three words: lack of leadership. And leadership ability isn’t something the tooth fairy delivers one night along with the quarter for your tooth. That is what has the “establishment” mumbling in their martinis.
I had to laugh, however, at how Fineman ended his piece:
Other than all that, in the eyes of the big shots, he is doing fine. The American people remain on his side, but he has to be careful that the gathering judgment of the Bigs doesn’t trickle down to the rest of us.
Talk about “side-steppin’” and damning with faint praise.
But I have to wonder if Fineman’s title, “The Turning Tide” isn’t somewhat of a threat to the Obama administration if it doesn’t get its act together and do so quickly. As in-the-tank as the media was for Obama, they’re now realizing that it was their credibility they sold short if he isn’t successful. But there is only so much, in this era of the new media, they can do to spin what is happening positively. Fineman is issuing a warning of sorts – we can do this for a little while longer, but at some point it is going to turn, and it won’t be pretty.
The narrative that is now building is one of an administration overwhelmed, still in a campaign mode and rudderless. It began with the UK’s Telegraph last week and it seems to be gaining momentum. Unless Obama and the administration can do some pretty fancy work over the next 50 days, he may emerge from his first 100 days with that being the conventional wisdom. If so, he’s going to have a long 4 years ahead of him.
UPDATE: Interesting Gallup Poll – totally average:
Honduras is going through a rather large spike in kidnappings. From 5 in 2005 to 121 in 2008. In an attempt to understand this rise in kidnappings, The Overseas Security Advisory Council (OSAC), part of the Bureau of Diplomatic Security of the U.S. Department of State, was sure that economic conditions had most likely driven the spike. But what specifically was likely to have caused it? Apparently an increase in the minimum wage:
In January, Honduran President Manuel Zelaya increased the minimum wage 60 percent, raising monthly wages from US$ 181 to $289. As a result, an estimated 15,000 people have been laid off in urban areas. This number is expected to steadily increase as businesses cannot afford the new mandatory wages. Remittances from Hondurans in the U.S. have also decreased throughout 2008.
Some analysts predict increased crime in Honduras due to citizens unable to find legitimate sources of income. Many unemployed Hondurans could look to kidnapping for ransom in order to obtain large sums of money for a small amount of planning and effort. As the disparity between economic classes continues, wealthy Hondurans or foreigners of affluent appearance conducting business in Honduras could continue to be targeted at a higher rate.
Of course everytime increases are argued against here, those in favor of them tend to wave off the point that raising the wage will cause unemployment among those who can least afford it. Obviously I’m not contending that if we do so here, those laid off will take up kidnapping, but to pretend such rises in minimum wage don’t have any detrimental effect is simply not true – and Honduras provides the case study.
The NYT’s White House reporters got an exclusive interview with Pres. Obama, and one of the pressing questions on their minds was what his ideology is. They asked if, given his spending priorities, he is a socialist, to which he said no, and when they asked if he was a “liberal” or a “progressive” or any other one-word answer, he declined to comment. I can understand him saying that.
But then, after the interview, the president called the reporters back, like he’d thought up a really good zinger after the fact:
It was hard for me to believe you were entirely serious about that socialist question. I did think it might be useful to point out that it wasn’t under me that we started buying a whole bunch of shares of banks. It wasn’t on my watch. And it wasn’t on my watch that we passed a massive new entitlement – the prescription drug plan – without a source of funding. And so I think it’s important just to note when you start hearing folks thro[w] these words around that we’ve actually been operating in a way that is entirely consistent with free-market principles and that some of the same folks who are throwing the word ‘socialist’ around can’t say the same.
Q. So who[se] watch are we talking about here?
A. [*Chuckle*] Well, I just think it’s clear by the time we got here, there already had been an enormous infusion of taxpayer money into the financial system. And the thing I constantly try to emphasize to people is that if, coming in, the market was doing fine, nobody would be happier than me to stay out of it. I have more than enough to do without having to worry the financial system. And the fact that we’ve had to take these extraordinary measures and intervene is not an indication of my ideological preferences, but an indication of the degree to which lax regulation and extravagant risk-taking has precipitated a crisis.
This is bittersweet, because on the one hand, he clears up any misconception that Bush was effectively conservative (or as John Kerry claimed, extreme libertarian). He says, to his credit, that buying up shares of banks and passing a massive new entitlement (or at least one financed by borrowing) are inconsistent with free-market principles.
I like how Obama says that the financial bailout wasn’t on his watch, when he voted for it as a Senator. But he’s right about Bush. With Obama’s help, a Republican president did dump mountains of wealth into the thermal boreholes of the most heavily regulated sector of the economy–that’s the financial sector, dear reader, although health care is way up there. And afterward, Bush was frank enough to admit that he had “abandoned free-market principles,” although he had the monumental cheek to say he had done so “to save the free-market system.”
But on the other hand, Obama claims that his team’s been operating in a way that is “entirely consistent with free-market principles“! I feel like launching into one of those “Really!?!” segments from SNL, only less funny and more desperate.
Really, Mr. President? And you’re not shoveling piles of taxpayer money into the financial system? You’re not planning any massive expansions of entitlement spending? Really? And you’re going to come up with a source of funding for all of this? Without taxing anyone but the top two five percent? Really.
Really, Mr. President, all you’ve talked about since this crisis started is how everyone in the private sector needs a regulatory cavity search deep enough to do a ventriloquist act. As if what we really need is more Sarbanes-Oxley, SEC and FASB rule changes – because it was our lax regulation that all those businesses ran overseas to escape.
And if I’m putting together a line-up of who caused the “extravagant risk-taking” like the massive overborrowing that inflated the residential real estate bubble, shouldn’t my first suspects be Fannie & Freddie, the Fed and government subsidies?
Your response to this crisis is to borrow more money to subsidize energy, public transportation, public education and state-mandated health care, and really, isn’t that what the free market is all about? Thanks for the assurances that you’re not in favor of bigger government.
Your budget, the stimulus, that second stimulus you hinted at, and rescuing all those giant institutions, some of them for the second and third time: these are all entirely consistent with free-market principles? I mean, really.
Someone help me out. Exactly which free-market principles has the president adhered to, either in his campaign promises or in his actions in office? Tell me why Obama is not mistaken or lying.
Apparently Timothy Geithner isn’t the financial “rock star” he was touted to be if his handling of the Asian crisis 10 years ago is any indication.
While Obama may have “inherited” the financial problems, the bear market is all his.
Speaking of lay-offs, this isn’t going to make our jet jocks feel very secure.
The new slogan of the Democrats – never let a good crisis go to waste. So this is a “good” crisis?
Take a look at this page and tell me where are the promised tax money from rich folks is going to come from.
If you don’t believe government is contemplating some pretty heavy care rationing when and if they get control, read this little beauty carefully.
Even George McGovern finds the pending card check legislation desired by unions to be “fundamentally wrong” and undemocratic.
Grey wolves “delisted” from endangered species list.
No time for Gordon Brown, but plenty of time for Brad Pitt. Wonder if Pitt got a 25 volume DVD set too?
Is Obama preparing the way for a massive defense spending cut?
Even Paul Krugman is getting a little antsy about the apparent lack of focus of the Obama administration on the financial crisis.
It appears Hugo Chavez recognizes a kindred spirit when he sees one.
The Senate is one vote short of passing the omnibus spending bill with 9,000 earmarks. All I wonder is which Republican will cave first?
I don’t want to get off on a rant here, but…*
I don’t mind people protesting against massive government expansion and taxation. But do they have to call their protests “tea parties”?
Mailing bags of tea to Congress costs very little and risks nothing. It’s just one step up from sending a strongly worded email, which is only one step up from an online form letter or petition.
Do they know what the Boston Tea Party was about? And if so, what are they implying when they send tea to Congress? We have representation to go with our taxation, more direct representation than the American Revolution established. If the “tea party” protests of 2009 aren’t really related to the original Tea Party, why draw a comparison?
I’d be more impressed if they fired a shot across the bow and coordinated a national day for cranking up their withholding allowances, just as high as they can. They’re planning their next party on Tax Day, right? One might think they’d be interested in ceasing to lend their earnings interest-free to the government. They might take some satisfaction in doing something that actually shows up on the government’s ledger.
I’d be convinced of their sincerity if they subsequently considered actually not paying their taxes next year if the government didn’t change its policies. That would be civil disobedience, as opposed to loud-but-obedient. But still, hold the tea.
The “going Galt” thing has been a bit better — at least it involves refusing to produce — but “John Galt” is a rather radical standard, ladies and gentlemen. Reducing your income so that you don’t pay the higher marginal taxes in the next bracket; partially shutting down businesses and taking more leisure time; retiring early. These are nice, but it’s like “going Martin Luther King, Jr.” without risking jail or invoking the Alamo without risking death.
Galt refused to let the public seize his creations for their (immense) benefit. He led an illegal strike. He accepted nothing more than a night watchman state. He openly scorned all religion and mysticism. His opposition to government was not of the “vote the bums out 20 months from now” variety, or merely underperforming–although he did discuss underperformers in his marathon speech, much of which is dramatized here (note: videos spoil much of the book – the part about underperformers is at 7:20 or so in Part 14).
Not that radical? Not willing to take that kind of risk? Then don’t play dress-up.
Content yourself to call your actions by their proper names. If you know what the fictional character symbolizes, and that’s not a standard by which you judge yourself, it’s better that you don’t compare your actions to his.
* This isn’t a Dennis Miller-style rant. Sorry. If I tried to emulate that, I’d just pale in comparison. Speaking of which…
Thousands of patients with terminal cancer were dealt a blow last night after a decision was made to deny them life prolonging drugs.
The Government’s rationing body said two drugs for advanced breast cancer and a rare form of stomach cancer were too expensive for the NHS.
The National Institute for Health and Clinical Excellence is expected to confirm guidance in the next few weeks that will effectively ban their use.
Note the bold term. Government rationing body. Doesn’t matter what you want or need or are even willing to pay for, does it? Denied with no recourse except to get on an airplane, fly to the US and pay for it yourself … if you can afford all of that. And what if there were no US to fall back on?
When the government owns the problem, rationing will be the result. Take a look around you and tell me what you see going on economically. What do you suppose, then, will be the case if the same sort of system exists here? How can it be any different?
And a side note about unintended consequences. If you were the CEO of the drug company that developed these drugs, would such development be a priority in the future? Right now you have the relatively free market of the US to sell such products in. And as they’re used and studied, even better drugs will result. But if that market dries up because government is unwilling to pay the price for newly and expensively developed drugs, what’s the incentive for you and your company to do so?
[HT: Below The Beltway]
When it comes to military procurement, President Obama says:
“I reject the false choice between securing this nation and wasting billions of taxpayer dollars,” Obama said on a day when he signed a presidential memorandum reforming the contracting system across the entire government.
But when it comes to a spending bill with 9,000 earmarks?
Democratic Senator Evan Bayh calls it what it is – wasteful spending.
Where’s the presidential leadership on this? If there’s waste in the procurement system and that’s a target, why isn’t waste in the spending bill also a target?
Another day older and deeper in debt. Of course, that’s because you plan to spend $3.6 Trillion on budget over the next year.
WASHINGTON – President Obama laid out his first budget plan, a bold $3.6 trillion proposal that would transfer wealth from rich taxpayers to the middle class and the poor, and predicts a stunning federal deficit of $1.75 trillion this year – nearly four times last year’s record.
Obama blamed the expected federal deficit explosion on a “deep and destructive” recession and recent efforts to battle it, including the Wall Street bailout and the $787 billion stimulus plan.
Among the budget proposals, the plan would:
extend a $400 tax credit for most workers while letting expire former President George W. Bush’s tax cuts for couples making more than $250,000 a year. The budget contains almost $1 trillion in tax hikes over 10 years on individuals making more than $200,000 and couples earning more than $250,000;
close tax loopholes for the wealthy to raise $318 billion toward a down payment on Obama’s universal health care plan;
clamp down on the Pentagon budget, which would get a 4 percent boost next year, but would then get increases of 2 percent or less over the next several years;
make permanent the expanded $2,500 tax credit for college expenses;
spend more than $6 billion on cancer research at the National Institutes of Health next year, a 15 percent hike;
spend $3.9 billion to improve the nation’s sewage treatment plants and drinking water systems; and
raise $15 billion a year, beginning in 2012, from auctioning off carbon pollution permits to help develop clean-energy and renewable-energy technologies. The administration “will work expeditiously” to get Congress to approve an 83 percent reduction in global warming emissions by mid-century. There’s also more money at NASA for space-based monitoring of greenhouse gases.
After reviewing some of the comments from those intended to be taxed, as well as some of the criticisms of those taxpayers’ intelligence [as an aside, I think the liberals denouncing both the story and the interviewees are playing a little fast and loose with the assumptions, since the taxpayers displayed no misunderstanding of marginal rates, and voiced concerns solely based on principles], I got to thinking about how much money will this proposed tax hike really raise. This seems important, not only because of the size of proposed budget, but also since a common refrain from those in favor of letting the top rate snap back to 39.6% (from the current 35%) is that it will only cost those taxpayers 5 cents on the marginal dollar, which is very little to worry about much less enough to change behavior, or so the argument goes.
Before looking at the actual numbers, let’s get something straight first. While it is accurate to say that raising the top rate only costs these taxpayers a nickel per extra dollar earned, that is not all that is being proposed. These taxpayers will also be losing deductions and credits that they would otherwise have, as well as paying extra taxes on anything subject to cap-and-trade taxes, should that lovely piece of legislation be passed. Moreover, if you truly believe Obama when he says that those with incomes less than $250,000 per year will receive a tax cut, then it seems ludicrous to pretend that at least some, if not virtually all, of those taxpayers near the margin will change their working behavior so as to be in the benefit group rather than the extra-taxed one.
Nevertheless, for purposes of calculating the expected tax revenues generated under this plan, I’m going to assume that nobody changes their behavior in the slightest (i.e. everyone earns as much taxable income as possible), and that the number of taxpayers and the amount of taxes paid largely mirrors the 2006 numbers (which is the most recent data available).
According to IRS figures [xls], about 50% of all taxable income came from the $200,000 and above earners in 2006. By my calculations that came to $2.056 Trillion dollars in taxable income from 3,847,241 taxpayers (about 9% of all returns). This cohort paid approximately $522 Billion in taxes, or about 62.4% of the total $837 Billion in tax receipts. These are the people upon whom the new burden will be placed according to President Obama.
In order to figure out how much taxable income is above $200K (there is no breakout for $250K and above), I took all of the taxpayers in the $200K to infinity range (3,847,241) and multiplied it by 200,000 (= 769,448,200,000).
I then subtracted that number from the (rounded) total of taxable income for the same range (@ $2.056 Trillion), and got $1,286,551,800,000. If I thought about it correctly, then that should be the amount of taxable income above $200K.
I then took my above-$200K number and multiplied it by 5 cents, figuring that the increase in marginal rate of 4.6% would lead to about a nickel per taxable dollar earned in new revenues, if everything were to remain static.
From all of that I figured that approximately $64.3 Billion in new taxes would be raised by the new tax hike … to cover a $3.6 Trillion budget.
I sent my calculations to Dale, who became so engrossed in the matter that he put together an entire spreadsheet figuring the numbers in not one, not two, not three, but in six different ways. I realized later that asking Dale to check out my math was rather like standing on one foot and excitedly calling attention to my “skill” while in the midst of an acrobat convention.
After Dale played with the numbers [xls] for awhile, he arrived generally at the conclusion that the absolute most that could be raised was in the neighborhood of $85 Billion, and at worst around $55 Billion. On average, Dale calculated that approximately $65 Billion was the likely amount of new tax revenue that could be expected if all payers in the 2006 cohort behave exactly as they did then. Sticking with the metaphor, “Yes, Michael, that’s a decent one-legged stand you have there.”
In short, a complete klutz has a better chance of joining the Flying Wallendas than the bottom 95% of taxpayers do of getting a tax cut. Instead, they will all see a significant tax hike, whether in their marginal rates, in excise taxes, corporate taxes, fuel taxes, or other forms of indirect taxation. And as those taxes begin to mount up, and the national debt does it’s best imitation of the Challenger, people will work and produce less and less, and tax revenues will dry up.
That is the plan for our recovery. Read it and weep.
It is certainly worse abroad than here. As Dale pointed out, if this is a failure of the “free market” why is Europe, which is very tightly regulated, having a worse time than we are? Ambrose Evans-Pritchard has a blog post outlining the woes of Europe. First, the real possibility of repudiation of debt:
Ex-Bundesbank chief Karl Otto Pohl has just said that Ireland and Greece are in danger of defaulting on their sovereign debts and/or may be forced out of the Euro, for those who may not be aware of his Sky interview by my colleague Jeff Randall.
“I think there are countries considering the possibility. It would be very expensive,” he said. “The exchange rate would go down, 50 or 60% and then interest rates would go sky high because the markets would lose all confidence.”
Then we have the possible abandonment of the Euro in order to “re-establish economic competitiveness quickly”:
Laurence Chieze-Devivier from AXA Investment Managers — in “Leaving the Euro?” — says that the rocketing debt costs of Ireland, Greece, Spain, and Italy are taking on a life of their own. (Italy has just revised is public debt forecast from 2010 from 101pc to 111pc. That is a frightening jump. While the CDS default swaps on Irish debt is are at 376 basis pouints. Austria is at 240. This is getting serious).
It is far for clear whether all these countries will accept the sort of drastic retrenchment required to stay in EMU. “By leaving the euro, internal adjustments would become less `painful’. An independent currency would re-establish economic competitiveness quickly, not achieved by a sharp drop in employment or wage cuts”.
The possible death of the “European nation”:
Carsten Brzeski for ING in Brussels said the eurozone laggards were more likely to default than pay the punishing costs of leaving EMU.
“It is difficult to believe that Portugal, Italy, Ireland, Greece, and Spain, would be better off outside the eurozone. While a government could possibly get away with a redenomination of its debt, the private sector would still have to service its foreign debt. We believe any attempts to leave monetary union would lead to the mother of all crises, and total isolation in any future European integration”
Mr Brzeski said the bigger danger is that countries will face a buyers’ strike for their debt as a flood of bond issues across the world saturates the markets.
“A further worsening of the crisis could lead to (partial) sovereign defaults in one or several countries.”
How is that likely to happen?
The country’s parliament could pass a law redenominating debt into the new Lira, Drachma, or whatever. But there would be a pre-emptive run on bank deposits long before then. “Anyone not desirous of losing money would presumably see the writing on the wall and transfer any funds beyond the reach of the state. In other words, close down that account with Monte dei Paschi di Siena and open a new one with Commerzbank in Germany”.
Such a wholesale shift would lead to a collapse in the money supply, perhaps equal to the 38pc contraction in M3 from October 1929 to April 1933 in the US — but concentrated in a much shorter period. “Banks would be forced to call in outstanding loans, bring about a collapse in the country’s business.”
Certainly a bit of a doomsday scenario, but, unfortunately, not at all outside the realm of possibility. In fact, as they are, some are arguing it will happen in the near future. Almost every bit of it the result of market distortions implemented or enabled by government.