Trickle Down (part 1)

Here is my take on trickle down economics. In part two, I will examine whether these assumptions have played out in the real world.

The concept of trickle-down economics holds that higher taxation rates reduce the value of the marginal dollar (the last dollar earned) to the point that they reduce the propensity to work since reward for working additional hours is diminished.

Concomitant with this is the assumption that those at the top of the income stream are responsible for a higher net impact on the economy than those at the lower end, through a combination of investment and consumption (which is a form of investment as well).

It follows therefore that trickle-down proponents believe that reducing tax rates at the top of the income spectrum will increase the incentive to work by increasing the value of the marginally earned dollar. It further follows that this increase will benefit the economy to a relatively larger degree than would a reduction on taxes on someone at the bottom of the income spectrum.

Logically following from this are the following assumptions:

1. Those who earn more contribute more, relatively, to the overall economic well-being of the society than those who earn less.

2. The more that a high earner makes, the more they can contribute – this is independent of the rate of wage gain of the lower wage earner.

3. Therefore, it is to the benefit of society to maximize the gains of the earners at the top of the income spectrum without regard to gains at the lower end of the spectrum – this is especially true given the assumption that the high income earner will contribute to overall societal well-being and therefore will be responsible – through job creation or wage growth – for benefits that fall on the those at the bottom of the income spectrum.

4. In a rising economy, significant reductions in upper tier marginal tax rates should lead to more rapid growth of incomes among those at the top of the earning spectrum than at the bottom since a rising economy is generally indicative of increased earnings and investment by businesses (business owners). I.E. Incomes in general will rise in a growing economy but growth disparity should increase in a rising economy in favor of the high earner.

5. The incentive to work hard being analogous to the incentive to reach the top of the income spectrum (or the highest level attainable given one’s education, etc.), greater reductions in tax rates at the top – which would result per force, in an increase in income wage growth disparities (see point 4) – should result in a more rapid increase in growth and income disparity

Times of increasing income growth disparity should indicate that those at the top are earning more, faster than those at the bottom. This greater and faster income growth should lead to a “trickle down” effect in good times and bad.

Dead On!

From Naked Capitalism:

The trouble with the economy is that the banks aren't lending. The reality: The economy is in trouble because American consumers and businesses took on way too much debt and are now collapsing under the weight of it. As consumers retrench, companies that sell to them are retrenching, thus exacerbating the problem. The banks, meanwhile, are lending. They just aren't lending as much as they used to. Also the shadow banking system (securitization markets), which actually provided more funding to the economy than the banks, has collapsed.

The banks aren't lending because their balance sheets are loaded with "bad assets" that the market has temporarily mispriced. The reality: The banks aren't lending (much) because they have decided to stop making loans to people and companies who can't pay them back. And because the banks are scared that future writedowns on their old loans will lead to future losses that will wipe out their equity.

Bad assets are "bad" because the market doesn't understand how much they are really worth. The reality: The bad assets are bad because they are worth less than the banks say they are. House prices have dropped by nearly 30% nationwide. That has created something in the neighborhood of $5+ trillion of losses in residential real estate alone (off a peak market value of housing about $20+ trillion). The banks don't want to take their share of those losses because doing so will wipe them out. So they, and Geithner, are doing everything they can to pawn the losses off on the taxpayer.

Once we get the "bad assets" off bank balance sheets, the banks will start lending again. The reality: The banks will remain cautious about lending, because the housing market and economy are still deteriorating. So they'll sit there and say they are lending while waiting for the economy to bottom.

Once the banks start lending, the economy will recover. The reality: American consumers still have debt coming out of their ears, and they'll be working it off for years. House prices are still falling. Retirement savings have been crushed. Americans need to increase their savings rate from today's 5% (a vast improvement from the 0% rate of two years ago) to the 10% long-term average. Consumers don't have room to take on more debt, even if the banks are willing to give it to them.

Off to Seattle

In Seattle for a few days.
For economic fun, visit my favorite site:
http://www.nakedcapitalism.com
For political fun, well, it seems Jon Stewart is the best thing going these days.

Have a nice week. 

Sunday links

You never see lawyers doing this in the US.

Click here for the background story.

For those who complain about how much Obama is putting us in debt:

Looting

A great article today in the NYTimes. The assertion, in short, is that the system of institutionalized bailouts creates a perverse incentive to continue to engage in the behavior they are trying to avoid. The term of art, Moral Hazard, is most commonly heard in discussions of health care. More on that later.

Thursday and the stock market's hiiiiiiigh. Plus, some links.

Dead cat bounce? Bear market rally. Yellow socks express? 

That last one was made up, but I probably could have fooled people.

My question is: will conservatives credit Obama for the market rise as quickly as they blamed him for the market decline? I think, ummm, no.

Speaking of Obama, they certainly do seem to have problems with their nominees. Though the latest scuttlebutt says that the CIO wasn't actually a target of the sting.

I wonder if Madoff will be put in general population. Will they attach his soap to a bungie cord tied to his ankle? I'm sorry that visual was uncalled for. 

Everyone seems to be hip to the trouble brewing south of the border

Links

Moody's to issue a list of companies most likely to default on their debt. Yipes. That's gonna piss off a few people.

Liberals should stop bashing Rush This is worth clicking - it isn't what you think.

Bushvilles are the new Hoovervilles. Looks like the tent city is coming back in vogue.

People are starting to get a little pissed about increased tax rates (hat tip: Financial Armageddon). Also, thanks to Financial Armageddon, I now know that this woman:
















Was Florence Thompson. She was 32 at the time of this photo being taken. Holy crap!

Nouriel Roubini predicts the recession could go 36 months and put the DJIA at 5000. Whither the S+P?

Was it something I did? Michael Vick's mansion failed to sell

Beware protectionism when it comes disguised (even if only partially cloaked) as a means to tackle "social issues". That's like using "we're doing this for the children" to justify all manner of pet intrusions on civil liberties.

From NakedCapitalism...

"Policy-makers not only misunderstand the economic crisis, they continue to underestimate it. Consequently, solutions to date have not only failed to "fix" anything, they have made the problem worse. The problem isn't falling asset prices, it's not rising foreclosures, it's too much debt." (Rolfe Winkler writing for NakedCapitalism)

A great point is made here. Watching Chris Matthews, it was interesting to hear Newt Gingrich explain how extending more credit will make our current problems disappear.

On NPR last week, Richard Koo, an analyst of Asian economics was discussing the Japanese "Lost Decade". The interesting points can be summed up thusly:

1. The Lost Decade wasn't one long recession. It was actually a period of low growth.
2. When people's balance sheets are wrecked due to purchases made on credit, they tend to eschew credit (often for a decade or longer).
3. In Japan, the means that the government used to keep the economy going was public infrastructure spending.
4. The biggest error the Japanese government made was to begin trying to deal with the deficit prior to their being a clear end to the economic malaise.

Food for thought.

A couple of random thoughts (edit: a couple more while watching MTP)

First, Thorium Nuclear Reactors are interesting. Learn more about them here . (hat tip of sorts to Reddit)  Essentially, thorium is cheaper and generally safer than Uranium.  An interesting alternative to existing technology and maybe part of the answer to "oil independence" 

Second, what does a trillion dollars look like? For perspective, here's a billion dollars:

Now, here's what one trillion dollars looks like:

I think they're gonna need a bigger boat.

Edit: Newt Gingrich on Meet the Press feels that the cause of falling markets is largely rhetoric. Mort Zuckerman points out the Gingrich is wrong - it is a matter of fundamentals. 

Delusional People

A lot of my conservative friends complain about the upcoming Obama "tax increase" (which is, of course, not an increase really since the tax cuts enacted by Bush were set to expire. In fact, this should be dubbed the Bush tax increase since it's not Obama's responsibility to continue Bush's legacy). Let's re-iterate. With respect to taxation, IT IS NOT OBAMA'S RESPONSIBILITY TO CORRECT BUSH'S TAXATION MISTAKE! Obama is merely allowing events to unfold as they would have anyway.

Moving on.

Here's the thing. I don't personally know anyone other than the CEO of my company who makes more than $200,000. Nor do I know any families who make more than $250,000 combined. I think that you would be hard pressed to find anyone who makes that kind of money. 

You know what else?

You aren't ever, ever going to make that kind of money most likely.

Ever.

Somehow, Americans got it into their head that their all gonna strike it rich and conservatives have gotten it into their heads that tax increases on the top 1/2 of one percent are going to personally hit them square in the pocket book.

In a comment to my fellow blogger John Phipps, I pointed out that when tax rates were higher, there wasn't a problem. And, since tax rates have been lowered, the overall wage rate and affluence of the middle class has been very negatively impacted. Causality? I don't know.

I do know this: the illusion that many middle class people labor under that they will strike it rich is almost always very misplaced.

Read more from MediaMatters.org

Do you know the difference between U3 and U6? Or, what a birth/death model is?

Unemployment was reported at 8.1% this week.

That doesn't tell the whole story , though. There are many measures of unemployment.

The commonly reported number - the one everyone waits breathlessly for every month - is referred to as U3 by the Department of Labor. Besides U3, there are U4, U5 and U6.

The refrain regarding unemployment typically goes something like this "sure, unemployment is up, but we are still a long way from the levels seen in the Great Depression, so let's not get too worried".

Again, that's not the whole story.

U3 includes workers who are "unemployed". This "includes anyone age 16 or older who is not institutionalized and is not currently employed, but able to work, available for work, and actively seeking work" (courtesy of the BLS).

What U3 doesn't include is those who are "marginally attached" or employed part time due to economic reasons. Put more simply: if you were a Director of Operations at Anytech earning $75,000 and you got canned and are now earning $6.25 an hour 10 hours per week at Walmart, you are considered employed for the purposes of calculating U3.

Clearly, this measurement doesn't accurately reflect efficient utilization of labor. This is where U6 comes in. According to the BLS, here is what U6 includes:

"Marginally attached workers are persons who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past.  Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not looking currently for a job.  Persons employed part time for economic reasons are those who want and are available for full time work but have had to settle for a part-time schedule."

So, why report U3?

Optics.

It looks better. The number has been defined down to include fewer and fewer people over the years to make the unemployment numbers look better (some people argue this was an part of a PR battle with Soviet Russia waged by Reagan. Who knows)?

At any rate, you may now wonder what U6 is today?

16.0%

Care to guess how they calculated unemployment estimates in the Depression? I think you know the answer.

Next time, I will explain why the unemployment number is even more inaccurate thanks to something called a "Birth/Death" model.

In the meantime, here's a link to the Dept. of Labor stats.

Is Obama making the market go down?

In a word? No.

CNBC "pundits" (read: idiots) including Larry Kudlow, Jim Kramer, Rick Santelli, et al would like everyone to think that the market is declining largely because Obama isn't saying the right things. Markets do not enter cyclical, systemic downturns and stay there because the president says "boo".

In fact, the vast majority of the drop in both the DJIA and the S+P 500 occurred during Bush's tenure (and most of that prior to the election).

Second, keep in mind that the Nikkei, the Hang Seng, The FTSE, the Dax and nearly every other bourse in the world has been on a sustained suicide power dive for the past year+.

The problem we are facing is that people are not yet comfortable recognizing and acknowledging the following:

• The fundamentals of the economy are NOT sound. Despite what Cramer or Kudlow tell you, there is a good reason that DJIA components are falling - because nobody is buying the things which the companies on the Dow make.
• Wage growth has been quite low in the past 9 years and people have no cushion or purchasing power

The graph below shows the DJIA's performance over the past year. Enjoy.

A loooooooong way to go yet.

If you use the 1929 crash as a metric, we are barely halfway to the worst market in history. Some people think this will be as bad or worse. Who knows. I think that's probably a bit much, but it ain't gonna be pretty.

How's that working out for ya?

Here's the graphic of the day. I frequently find myself in discussions where someone brings up fiscal responsibility of the two parties. Typically, Republicans tell me they vote Republican because they are the party of fiscal restraint. My response usually goes like this "how's that workin' out for ya?" To that end, the graphic below puts a nice exclamation point on it.

This speaks soooo loudly.

Geithner Says Administration Will Ensure Bank Access to Funding
Tim Geithner says that the United States Government will absolutely lend help to avoid the collapse of any major United States bank.

Put differently: when the SecTreas says something like this loudly from the top of a soapbox, he isn't testing out his vocal chords. He is clearly saying "look, I know many of you think that at least on US bank will collapse and maybe more. That isn't going to happen".

Put more differently, Geithner wouldn't typically speak this explicitly unless faced with information that indicated it was very necessary to do so. Why? Because as the heisenberg uncertainty principle indicates that observing something changes it, the political heisenberg uncertainty principle indicates that bringing up bad things tends to make them more likely to happen. Thus, Geithner is willing to bring something up which generally isn't brought up. Ergo, somebody is freaking out enough to warrant strong words now, rather than tears later.

No atheists in foxholes.

Watchmen is coming soon. In the event that someone slipped you a mickey in mid 2008, the graphic novel Watchmen has been translated for the big screen and millions of fanboys and fangirls sit in breathless anticipation for the first screenings (presumably tonight at midnight).

Truth be told, I never read Watchmen. I have flipped through it a lot and I am enchanted by the themes I am told it contains and the taboos it broaches. I did read Frank Miller's Dark Knight series which followed closely on the heels of Alan Moore's first couple of efforts. Dark Knight is in many ways far more iconoclastic than Watchmen, largely because it tears down not the shibboleth of the super hero in general (a type of character who was fast becoming tired and stale by the late 1970's anyway) but a specific super hero - Batman.

Batman is interesting (and I know others have broached this subject before, but it bears repeating) because he is the one super hero who does not have any powers. Bruce Wayne's sole power if dogged determination and a resolute conviction in his own rightness. From the creation of the series until Frank Miller's treatment, he always seemed to derive all of his strength from his convictions. Bruce Wayne is the christian soldier, confident that God is on his side. The Dark Knight however, tore down this archetypal image of Batman as a powerful force for good in a world gone bad. Instead, he is presented as a highly flawed, vengeful near-maniac who is fightingevil by killing and destroying everything in his path (including, potentially, good people). Superman is also addressed in the series, but not as the man of steel we know. Instead, we see him as a Reagan-bot, do-gooder pain in the ass who has traded moral certainty for pragmatism in the name of upholding some nearly dead ideal of America held only by conservatives and fundamentalists.

I bring all of this up for a couple of reasons. First, super-heroes are the ultimate anti Rand-ian characters. They are selfless largely because they feel their powers must be used for good since they are so, well, powerful. Wayne is simply a rich guy who is pissed that someone killed his parents and he is determined not to let it happen to others. Where most superheroes represent some kind of idealistic notion of how the rich should dispense their wealth, Wayne represents a practical application of the no-atheists-in-foxholes concept. Wayne would have been spoiled bastard if someone hadn't gunned down his family in an alley when he was young. Wayne represents pragmatism raised to idealism.

Today, the economy lies in shambles - largely because of a failure of individuals to rise towards an idealist standard. The economy of the dot-bomb era and the Bushian years was one which celebrated not community activism or the accumulation of wealth for societal betterment. Instead, it celebrated individual attainment of personal needs and wants. The people at the top increasingly felt that not only did they not owe anything to those beneath them, they often felt owed by those same individuals.

Now, we are seeing morality plays such as Watchmen and Dark Knight (made much closer to what was originally intended) becoming popular. My opinion is that their popularity is rising largely because they reflect not an encomium for an era but instead a cold eulogy. They are flourishing as a vehicle for catharsis by the viewing public. More and more, people are rejecting the ideology of individual attainment at the sacrifice of any obstacle (financial, human or otherwise) and embracing the ideal of prudence, restraint and assistance of those around them. There are indeed no longer any atheists in foxholes.

Iraq: The biggest foreign affairs flub in US history?

What to talk about today? How about.....the Iraq War! Everyone's favorite, poorly conceived, disastrous boondoggle.

This morning on NPR, I listened to an interview with Tom Ricks a military journalist/analyst for the Washington Post (formerly of the Wall Street Journal). MR Ricks is also the author of Fiasco a handbook to the astounding pooch-screwing that was the Iraq War from 2003-2005.

Mr. Rick's primary points were as follows:

1. President Obama is being naively optimistic if he believes that we can peacefully transition our troops out of Iraq by 2011.
2. Iraq, upon the left-stage exit of the United States Military, stands a high probability of descending into either a genocidal bloodbath or a dictatorial, mini-Saddam style regime. This probability increases with each increment that our duration is shortened (for instance, staying only 19 more months will dramatically increase the odds of chaos versus staying 24 months).
3. The Iraq War is most likely the worst foreign policy disaster the United States has ever involved itself in.

With no clear ideological bent, Ricks fairly succinctly laid the blame for the current troubles mostly at the feet of the Bush administration, while simultaneously chastising the Democrats for failing to recognize the costs of exit once we had become fully entrenched there.

Ricks pointed out repeatedly that he had the impression from his travels in the United States, that the American people are simply sick of the war (particularly liberals) and that exit is worth any cost for the people in Iraq (up to, and including, Genocide there).

I think the interesting thing is to draw comparisons with Vietnam. For many people, Vietnam is the worst blunder the United States ever committed. But, it seems that view is largely based upon the number of U.S. deaths. From the standpoint of what we did to the "liberated" nation, we rarely make a qualitative comparison.

What I mean to say is that, in the end, Vietnam didn't really fare that badly. The North Vietnamese didn't rough the South up that badly (though many were indeed "re-educated" it was by no means a bloodbath) and by the early to mid 1980's, everything was getting back to a state of normalcy. By all accounts in Iraq though, the exit of US troops is going to end very, very badly. So, if you define the "disastrous-ness" of a US foreign policy adventure, Iraq seems clearly poised to become the hands-down winner in the long run as the worst fuck up every committed by the United States on foreign soil. I guess it remains to be seen, but the early indications aren't good.

Wilkommen!

Since nobody cool comes here, I will write about politics, world affairs and other matters about which I am barely (if at all) qualified to pontificate.

Recently, one of my best friends - John Phipps - created a blog to discuss his libertarian viewpoints and prescriptions for the betterment of American society. In drafting a response to one of his posts, I determined that everyone should have one of these blog things to discuss their political leanings (hey, they might even catch on). So, I have set about creating my own.

One of my rules will be to post as many links as possible to corroborative evidence, as I attempt to eschew arguments based on predilection, opinion or moral bent whenever possible.