Monday, April 8, 2013

And the 20-Year Treasury Goes Negative

Below is the inflation-adjusted Treasury yields, courtesy of the Treasury Department.

The world would like to lend us money, and is willing to pay us for the privilege. We should take it.

Thursday, March 28, 2013

Wars and the Deficit

The Iraq and Afghanistan conflicts, taken together, will be the most expensive wars in US history – totaling somewhere between $4 to $6 trillion. This includes long-term medical care and disability compensation for service members, veterans and families, military replenishment and social and economic costs. The largest portion of that bill is yet to be paid. Since 2001, the US has expanded the quality, quantity, availability and eligibility of benefits for military personnel and veterans. This has led to unprecedented growth in the Department of Veterans Affairs and the Department of Defense budgets. These benefits will increase further over the next 40 years. Additional funds are committed to replacing large quantities of basic equipment used in the wars and to support ongoing diplomatic presence and military assistance in the Iraq and Afghanistan region. 
The Financial Legacy of Iraq and Afghanistan: How Wartime Spending Decisions Will Constrain Future National Security Budgets, by Linda Blime.

Current US debt:  $16 - 17 trillion dollars.

Sunday, March 24, 2013

Could America Become Cyprus?

One of the problem with Cyprus is that its banking sector is just too big. GDP is variously reported as rangin from $20 billion to $23 billion, with total deposits being anywhere from 240% of GDP all the way up to 500%. What this means is that Cyprus just isn't big enough to bail out the financial sector.

So what about us? The 2012 GDP was estimated to be about $15.8 trillion. And deposits? A bit under $11 trillion, if this web site is to be trusted. So we're at roughly 70% of GDP.

We have a different problem, with too many deposits being concentrated among the top four banks. Here's a list of the top twenty.
Total Deposits
Bank Name
Each of JPMorgan and Bank of America have more than 10% of the total deposit base, and Wells Fargo and Citibank aren't far behind. Then there's a $700 billion drop down to U.S. Bank, and a tapering off from there.

To put this into perspective, if the roughly $4 trillion -- roughy 40% of all deposits -- held by the top four banks were transferred to banks no bigger than U.S. Bank, you would need at least sixteen of them, of four per bank.

Friday, March 22, 2013

The Greatest Retirement Crisis in the History of the World

From noted pinko rag Forbes:
We are on the precipice of the greatest retirement crisis in the history of the world. In the decades to come, we will witness millions of elderly Americans, the Baby Boomers and others, slipping into poverty. Too frail to work, too poor to retire will become the “new normal” for many elderly Americans.
That dire prediction, which I wrote two years ago, is already coming true. Our national demographics, coupled with indisputable glaringly insufficient retirement savings and human physiology, suggest that a catastrophic outcome for at least a significant percentage of our elderly population is inevitable. With the average 401(k) balance for 65 year olds estimated at $25,000 by independent experts – $100,000 if you believe the retirement planning industry - the decades many elders will spend in forced or elected “retirement” will be grim.  (Update: In response to readers’ questions about the lower number, Teresa Ghilarducci, a professor of economics at the New School for Social Research, estimates that 75% of Americans nearing retirement in 2010 had less than $30,000 in their retirement accounts.)
Americans today are aware that corporate pensions have been virtually eliminated and that the few remaining private, as well as the nation’s public pensions, are in jeopardy. Even if you are among the lucky few that have a pension, you cannot rest assured that it will be there for all the years you’ll need it. Whether you know it or not, someone is busy trying to figure how to screw you out of your pension.
Americans also know the great 401k experiment of the past 30 years has been a disaster. It is now apparent that 401ks will not provide the retirement security promised to workers. As a former mutual fund legal counsel, when I recall some of the outrageous sales materials the industry came up with to peddle funds to workers, particularly in the 1980s, it’s almost laughable—if the results weren’t so tragic.
All of which is why we need to increase Social Security benefits, starting now.

Saturday, March 9, 2013

More on Social Security and 401(k)s

Ryan Cooper at Political Animal is another person who wants to increase Social Security benefits, and suggests a different way of financing them.
There is another source of funding we could tap for a Social Security increase before we talk about raiding other pots of money [such as Medicare, as per Josh Barro]: the 401k tax exemption. Originally this was supposed to usher in the neoliberal free market retirement utopia. It failed (instead we’ve created yet another set of rent-seeking parasites, this time in the form of objectively useless mutual funds).  
The 401k exemption costs somewhere around $200 billion per year (depending on the estimation), and it doesn’t work. That money could be plowed into Social Security right away, and if that’s still not enough to keep most seniors out of poverty, we can talk other funding sources. Because as [Duncan] Black says, lots of people are set to retire right now without nearly enough to make it. Regardless of whose fault that is, shall we let them starve? 
I say no.
Hmmm. As 401(k)s cap out at $17,000 (for 2012), I don't think they're the worse thing in the world. Basically, they offer a nice opportunity to the higher reaches of the middle as well as the upper class. But they offer no benefit to the median American household, which only made $50,500 (in 2011).

And 401(k)s also require some sophistication, especially around balancing the portfolio (and moving more and more to bonds as the investor ages). And most people, God love 'em, don't have it. So I wouldn't mind see this replaced by pensions (which we don't have anymore) or increased Social Security benefits.

Another big source for new Social Security funding would be to have FICA taxes apply to income, period. Not just earned income, but investment income as well. As we wrote a while back:
The magic words are “unearned income.” The 1% have pulled off a brilliant con over last 30 years, where they’ve been able to convince the government that unearned income – the kind that comes from capital gains, dividends and interest – should not be subject to the kind of taxation that the rest of us face. In terms of income tax, long term capital gains are taxed at 15%, far below the current maximum marginal rate of 35%
But it gets worse in terms of Social Security, because these things have ... never been taxed at all. 
In 2009, the IRS reported that there was nearly $7.7 trillion in income, $5.7 of which was salaries and wages. Now, just because something isn't salaries and wages does not necessarily mean it would qualify as "unearned income," but it does give us a sense of scale. If only half of it was -- $1 trillion -- then applying the 2009 employee Social Security rate of 6.2% would yield an additional $62 billion in revenue. 
And all of this increase would be on income -- literally -- that no one worked for.
$62 billion —which is just a guesstimate —is a lot less than the $200 billion Cooper's talking about. So maybe it's time to talk about scaling back the 401(k) — that's a conversation I'd be willing to have.

To put things into perspective, in January 2013, Social Security paid 46 million people $55 bilion dollars in old-age benefits. Annualized, this works out to be $660 billion a year. So what Cooper is talking about is a 30% increase in retirement benefits. As the average monthly benefit was $1200, we're talking about how giving old folk (on average) a whopping $1560 a month, or $18,720 a year.

So I think we're in agreement with Cooper on the amount, and now it's just a question of paying for it. Fortunately, we now have a couple of good ideas on the table.

Friday, March 8, 2013

Amen, Part 2

Josh Barro at Bloomberg:
Back in December, I wrote that applying chained CPI to Social Security is the wrong solution to our budget problems: It’s just a way of dressing up a cut to retirement benefits at a time when retirement insecurity is rising. Despite its problems, Social Security is the best-functioning component of the U.S.'s retirement-saving system. Instead of cutting, the federal government should be expanding its role in retirement saving.
I'm always struck when people talk about Social Security as "just" an insurance program, when it's in fact the most important retirement-saving vehicle. The chart below, adapted from a 2012 paper by Boston College Professor Alicia Munnell, shows the financial situation of a "typical" pre-retirement household. These are the mean holdings of a household in the middle net worth decile among households headed by people age 55 to 64. 
Source: Center for Retirement Research at Boston College 
Social Security is dominant: Forty-nine percent of this household’s wealth is in the form of the expectation of drawing government benefits in the future. The next largest slice, 23 percent, is accrued benefits in traditional pension plans. But that figure is skewed by a handful of workers who are lucky enough to participate in such plans; as of 2010, only 14 percent of U.S. workers were earning benefits in such a plan.
We're not psyched about how Barro wants to finance this (Medicare cuts), but at least he's identified an important issue.

Amen, Part 1


A big point I'm trying to make on Social Security is that the 401K experiment has been a failure. We have a set of policies - including big tax expenditures for tax deductible employer/employee retirement benefit contributions - which are supposed to lead to the majority of seniors being able to retire in relative comfort and security. And what we're seeing now, decades later, is that experiment is a failure. 
All this gets beaten back by the glibertarian crowd as "people should just save and invest, blah blah blah." Well, fine, but they aren't. Not enough. For whatever reason. So we're going to have a bunch of seniors in poverty and near poverty. What are we going to do about it, now and for the future?

Good But Not Good Enough for Social Security

Tom Edsall has a good piece in the New York Times:
Currently, earned income in excess of $113,700 is entirely exempt from the 6.2 percent payroll tax that funds Social Security benefits (employers pay a matching 6.2 percent). 5.2 percent of working Americans make more than $113,700 a year. Simply by eliminating the payroll tax earnings cap — and thus ending this regressive exemption for the top 5.2 percent of earners — would, according to the Congressional Budget Office, solve the financial crisis facing the Social Security system. 
So why don’t we talk about raising or eliminating the cap – a measure that has strong popular, though not elite, support? 
When asked by the National Academy of Social Insurance whether Social Security taxes for better-off Americans should be increased, 71 percent of Republicans and 97 percent of Democrats agreed. In a 2012 Gallup Poll, 62 percent of respondents thought upper-income Americans paid too little in taxes.
The Medicare and Social Security taxes are jointly known as FICA (for Federal Insurance Contributions Act) — or payroll — taxes. The combined FICA taxes are highly regressive. The non-partisan Tax Policy Center found that the poorest quintile pays a 7.3 percent FICA rate, while the top quintile pays 6.8 percent. The top 1 percent of the income distribution pays a 2 percent rate, and the top 0.1 percent pays just 0.9 percent. In other words, the rate paid by the poorest quintile is 8.1 times as high as the rate paid by the top 0.1 percent. 
But he doesn't explain why this is, or what should be done about it. Fortunately, we do.
The magic words are “unearned income.” The 1% have pulled off a brilliant con over last 30 years, where they’ve been able to convince the government that unearned income – the kind that comes from capital gains, dividends and interest – should not be subject to the kind of taxation that the rest of us face. In terms of income tax, long term capital gains are taxed at 15%, far below the current maximum marginal rate of 35%.
But it gets worse in terms of Social Security, because these things have ... never been taxed at all.  
In 2009, the IRS reported that there was nearly $7.7 trillion in income, $5.7 of which was salaries and wages. Now, just because something isn't salaries and wages does not necessarily mean it would qualify as "unearned income," but it does give us a sense of scale. If only half of it was -- $1 trillion -- then applying the 2009 employee Social Security rate of 6.2% would yield an additional $60.2 billion in revenue.
And all of this increase would be on income -- literally -- that no one worked for. 
Remember that Romney guy and his taxes?
Mitt Romney offered a partial snapshot of his vast personal fortune late Monday, disclosing income of $21.7 million in 2010 and $20.9 million last year — virtually all of it profits, dividends or interest from investments.  
None came from wages, the primary source of income for most Americans. Instead, Romney and his wife, Ann, collected millions in capital gains from a profusion of investments, as well as stock dividends and interest payments.
The New York Times did end up finding about $710,000 in earned income. So Romney ended up paying $42,000 in FICA taxes on income of $42 million, or about 0.1%. If there were no cap and all income were taxes, he would have paid out about $6.1 million. Which he can afford.

Monday, March 4, 2013

How Rich are The Really Rich?

Forbes has published its lists of the richest folk in the world, and below are the Americans who made the Global Top 100.

Hmmm. Where to start.

There are 36 names on the list, and 12 of them are heirs: Wal-Mart (four times), Mars, Inc. (three times) and Koch Industries (twice). When one-third of the richest people in your country have inherited their wealth, it is safe to say your estate laws are fucked up.

Collectively, these 36 people are worth just north of ¾ of a trillion dollars. Since annual GDP is about $15 trillion, that means this crew — 30 friggin' 6 people — is worth 5% of GDP. Now this is impressive, but it's not an apples-to-apples comparison. So let's do one of those as well.

Credit Suisse estimates that the privately-held wealth in America at $62 trillion. (See page 46 of the PDF at the link.) That means that the folk listed above have 1.2% of the country's total wealth. Not bad for a group that represents 0.00000012 of the American population, or approximately one tenth millionth of the citizenry. 

Credit Suisse (in that same report) sets the median American wealth at a bit below $38,800. The median wealth for the group above is about $21.4 billion, or about 550,000 times the median amount for all us folk. That strikes us as just a bit unreasonable.

So we have a proposal for all the Americans fortunate enough to be among the world's 100 richest people. Take $1 billion each and put is aside. Then take whatever's left over and donate it to charity. Do some good with it. Right now, you're just running up the score. But if you guys could put $736 billion into play, odd are you could make a lot of people's lives a lot better. 

If you're one of the older-than-80-crowd (Buffet, Soros, Mars, Bren, Chambers,  Murdoch and Taylor), think of this a fuck-you to the government. You can keep your money out of their hands. If you're one of the younger group (Bezos, Page, Brin, Dell, Zuckerberg, Jobs), you're likely to live long enough to see your efforts achieve some real and substantial good. Not many people can do that.

And, at the end of the day, you'd still be billionaires. 

More Reasons to Hate Big Banks

From the New York Times:

The nation’s biggest banks wrongfully foreclosed on more than 700 military members during the housing crisis and seized homes from roughly two dozen other borrowers who were current on their mortgage payments, findings that eclipse earlier estimates of the improper evictions. 
Bank of America, Citigroup, JPMorgan Chase and Wells Fargo uncovered the foreclosures while analyzing mortgages as part of a multibillion-dollar settlement deal with federal authorities, according to people with direct knowledge of the findings. In January, regulators ordered the banks to identify military members and other borrowers who were evicted in violation of federal law. 
The banks uncovered about 20 borrowers who never missed a single mortgage payment, but lost their homes nonetheless. The properties, according to the people with direct knowledge of the findings, have since been sold.

The Exciting World of Bank Capital

Rarely do we agree with folk from the (Herbert) Hoover Institute, but we like what John Cochrane has to say in the Wall Street Journal:
The central problem, at the core of Anat Admati and Martin Hellwig's "The Bankers' New Clothes," is capital. In order to make $100 of loans, a typical bank borrows $97—from depositors, from money-market funds, from other banks, or from bondholders—and sells $3 of stock, its "capital." So if only 4% of the bank's loans fail, the shareholders are wiped out, and the bank cannot pay its debts. Worse, if there is a rumor that some loans are in trouble, creditors may "run," each trying to get his money out first, and force a needless bankruptcy. Think of Jimmy Stewart in "It's a Wonderful Life."
The solution seems pretty obvious, no? Banks should fund their investments by selling a heck of a lot more stock and borrowing a heck of a lot less, especially in the form of run-prone short-term debt, as most other companies do. Far more value was lost in the 2000 tech bust, for instance, than in the subprime mortgages that sparked the 2008 crisis, but the tech bust did not cause a financial crisis. Why? Tech companies were funded by stocks, not short-term debt. 
OK — we've got a quibble here. Those tech companies weren't financed through the sale of stock. Instead, issuing stock was a way for them to cash in. But Cochrane is correct that the impact of the tech bust was not wide felt, as people who had no money became paper billionaires and then people with no money. It may have sucked to own, but they didn't leave a trail of unpaid creditors the way Lehman Brothers has. 

Back to the story:
More capital and less debt would stabilize the financial system in many ways. If a bank wants to rebuild its ratio of capital to assets from 1% to 2% by selling assets, it has to sell half of its assets. Doing so can spark a fire sale, especially if all the other banks are doing the same thing. If the same bank wants to rebuild capital from 49% to 50% of assets, it only has to sell 2% of its assets. That bank will also have a far easier time issuing more stock, rather than selling assets, which is a better way to build equity in the first place.
The U.S. government has instead addressed the risks of banking crises by guaranteeing bank debt. Guaranteeing debts creates perverse incentives, so our government tries to regulate the banks from taking excessive risks: "OK, cousin Louie, I'll cosign the loan for your Las Vegas trip, but no poker this time, and be in bed by 10."
Now pretty much all of the big banks' debt is guaranteed, explicitly or implicitly through the widely held expectation that a big bank's creditors will be bailed out. But our regulators promise that next time, trust them, they really will spot trouble ahead and do something to stop it—even though our massive bank-regulation machinery failed to notice that subprime mortgages might be a bit risky in 2006 and even though, as Ms. Admati and Mr. Hellwig note, Europe's regulators still consider Greek government bonds to be risk-free assets.
Not only that, but the implicit guarantee behind the too-big-too-fail banks means they have artificially low borrowing costs, which encourages more borrowing. We now switch you to a Bloomberg article.
Lately, economists have tried to pin down exactly how much the [implicit government guarantese] lowers big banks’ borrowing costs. In one relatively thorough effort, two researchers -- Kenichi Ueda of the International Monetary Fund and Beatrice Weder di Mauro of the University of Mainz -- put the number at about 0.8 percentage point. The discount applies to all their liabilities, including bonds and customer deposits. 
Small as it might sound, 0.8 percentage point makes a big difference. Multiplied by the total liabilities of the 10 largest U.S. banks by assets, it amounts to a taxpayer subsidy of $83 billion a year. To put the figure in perspective, it’s tantamount to the government giving the banks about 3 cents of every tax dollar collected. 
Let's try that one more time.
To put the figure in perspective, it’s tantamount to the government giving the banks about 3 cents of every tax dollar collected.  
The top five banks -- JPMorgan, Bank of America Corp., Citigroup Inc., Wells Fargo & Co. and Goldman Sachs Group Inc. - - account for $64 billion of the total subsidy, an amount roughly equal to their typical annual profits (see tables for data on individual banks). 
In other words, the banks occupying the commanding heights of the U.S. financial industry -- with almost $9 trillion in assets, more than half the size of the U.S. economy -- would just about break even in the absence of corporate welfare. In large part, the profits they report are essentially transfers from taxpayers to their shareholders. 
Let's do that one again, too.
In large part, the profits they report are essentially transfers from taxpayers to their shareholders. 
Enjoy that while you mull on the sequester.
Regulators can change the game by paring down the subsidy. One option is to make banks fund their activities with more equity from shareholders, a measure that would make them less likely to need bailouts (we recommend $1 of equity for each $5 of assets, far more than the 1-to-33 ratio that new global rules require). Another idea is to shock creditors out of complacency by making some of them take losses when banks run into trouble. 
Hold on — who is that magisterial "we" who recommends a 5:1 ratio?

It's the Bloomberg editors! Not Occupy Wall Street, not Michael Moore, but the editors of America's premier business magazine!

Hello! Is this thing on?

Now, there are a couple of ways out of this problem, which is good — because the banks are going to scream about implementing each one of them. With luck, they'll get hoarse.

First, and most directly would be to require banks to hold more capital. A second method would be to make debt less attractive. As discussed here, debt is deductible from taxes, while equity is not. This means there is a built-in tax preference for using debt (and getting all leveraged up.) Reducing (if not eliminating) the deductibility of debt would help level the playing the field, and make it less expensive for banks to add more capital.

For the third option, we turn to Kevin Drum at Mother Jones:
Split up the banks. If they're too big to fail, and everyone knows it, the only real answer is to make them small enough that they can fail. Creditors would then take care of all the rest.
Splitting up the banks would remove the implicit government guarantee associated with too-big-to-fail. The banks would be small enough to fail without jeopardizing the global financial system, and life would go on.

And that's what one senator proposed last year with the Safe, Accountable, Fair, and Efficient Banking Act of 2012.
Introduced by Senator Sherrod Brown on May 9, 2012, the following bill would place size and leverage limits on big banks.  Specifically it would:
  • Impose a 10 percent cap on the share of U.S. deposits that any one bank could hold. This would eliminate loopholes in the existing federal deposit share cap
  • Impose a 10 percent cap on the liabilities that any one financial company can take on, relative to the U.S. financial sector. Like the deposit concentration limit, this closes loopholes in existing law.
  • Impose a limit on the non-deposit liabilities (including off-balance-sheet exposure) of a bank holding company of 2 percent of GDP.
  • Impose a limit on the non-deposit liabilities (including off-balance-sheet exposure) of any non-bank financial institution of 3 percent of GDP.
  • Codifies a 10 percent leverage limit for large bank holding companies and selected nonbank financial institutions into law. 
Under the measure, no bank holding company could exceed a size of $1.3 trillion in assets (at current GDP).  If enacted, Bank of America ($2.2 trillion as of 3/31/2012), JP Morgan Chase ($2.3 trillion),  Citigroup ($1.9 trillion), and Wells Fargo ($1.3 trillion) would all have to downsize.

Unfortunately, the bill was never referred out of sub-committee.

Friday, February 8, 2013

Excerpts from Chris Dorner's Manifesto

 All of these can be found in the last four pages.
It's kind of sad I won't be around to view and enjoy The Hangover Ill. What an awesome trilogy. 
World War Z looks good and The Walking Dead season 3 (second half) looked intriguing. 
Damn, gonna miss shark week. 
Hillary Clinton. You'll make one hell of a president in 2016. Much like your husband, Bill, you will be one the greatest. Look at Castro in San Antonio as a running mate or possible secretary of state. 
Gov.  Chris  Christie. What  can  I  say?  You’re  the  only  person  I  would  like  to  see  in  the  White  House in the White House in 2016 other than Hillary….  Do one thing for your wife, kids, and supporters. Start walking at night and eat a little less, not a lot less, just a little. 
Revoke the citizenship of Fareed Zakaria and deport him. I've never heard a positive word about America or its interest from his mouth, ever. On the same day, give Piers Morgan an indefinite resident alien and Visa card. 
Ellen Degeneres, continue your excellent contribution to entertaining America and bringing the human factor to entertainment. You changed the perception of your gay community and how we as Americans view the LGBT community. 
Tebow, I really wanted to see you take charge of an offense again. 
Christopher Walz, you impressed me in Inglorious Basterds. 
Dave Brubeck's "Takel Five" is the greatest piece of music ever, period. 
Anthony Bourdain, you're a modern renaissance man who epitomizes the saying "too cool for school". 
Larry David, I agree. 72-82 degrees is way to hot in a residence. 68 degrees is perfect. 
Anonymous, you are hated, vilified, and considered an enemy to the state. I personally view you as a culture and a necessity that brings truth to a  cloaked Forge ahead! 
Charlie Sheen, you're effin awesome.

Sunday, February 3, 2013

Hey, Atrios

From Eschaton:

I'll admit that, for the most part, during the great and glorious benevolent rule of the Kenyan Muslim Socialist, I've been a bit unsure just what I should be advocating for. 
I've found my groove. We need to increase Social Security Benefits. The Professional Left needs to sign on to this. All the oldsters need to vote for it. Congressional candidates need to get on board.
But what is we weren’t satisfied with saving Social Security. What if we … wanted to make it better.
Consider that CNN has recently reported that:
A quarter of middle-class Americans are now so pessimistic about their savings that they are planning to delay retirement until they are at least 80 years old -- two years longer than the average person is even expected to live.  
It sounds depressing, but for many it's a necessity. On average, Americans have only saved a mere 7% of the retirement nest egg they were hoping to build, according to Wells Fargo's latest retirement survey that polled 1,500 middle-class Americans. 
While respondents (whose ages ranged from 20 to 80) had median savings of only $25,000, their median retirement savings goal was $350,000. And 30% of people in their 60s -- right around the traditional retirement age of 65 -- that were surveyed had saved less than $25,000 for retirement.

For whole lot of folk, the economic stagnation, combined with the downturn in the housing market, means that retirement is looking harder and harder to achieve. Here’s the chart for the S&P 500 for the last twenty years.

Ah, the Clinton years; they were so good to us. Unfortunately, we’ve not been able to get back to those heights – even though eleven years have passed. So if you had a retirement fund keyed solely to the S&P 500 (and which included neither dividends nor additional capital contribution), your performance would be as shown below.

Since January 1, 2000, you would have experienced a negative return of $179, or about -13% over almost eleven years. That is not how to build a retirement plan.

But, perhaps you’ve got money stuck in your house, and were hoping that would play a key part in your retirement.

According to the Case-Shiler Home Price Indices, your house is now worth what it was eight years ago, in 2003.

Now the loss of a decade’s worth of growth it not something which remedied easily, or even with a lot of work. But we can do something for those people who planning to work for years after they die.

The magic words are “unearned income.” The 1% have pulled off a brilliant con over last 30 years, where they’ve been able to convince the government that unearned income – the kind that comes from capital gains, dividends and interest – should not be subject to the kind of taxation that the rest of us face. In terms of income tax, long term capital gains are taxed at 15%, far below the current maximum marginal rate of 35%.

But it gets worse in terms of Social Security, because these things have ... never been taxed at all.

In 2009, the IRS reported that there was nearly $7.7 trillion in income, $5.7 of which was salaries and wages. Now, just because something isn't salaries and wages does not necessarily mean it would qualify as "unearned income," but it does give us a sense of scale. If only half of it was -- $1 trillion -- then applying the 2009 employee Social Security rate of 6.2% would yield an additional $60.2 billion in revenue.

And all of this increase would be on income -- literally -- that no one worked for.

Fixing Social Security is easy -- just get rid of one tax break for wealthy (and well-off). Making Social Security better will take more work, but it's the kind of thing a decent country -- one which doesn't make dead people work -- should consider. And one good place to start would be re-examining the special treatment we give to "unearned income," a.k.a. money no one worked for.

Wednesday, January 30, 2013

Healthcare & the Deficit

If you're talking about the deficit, then you really need to be talking about healthcare. Here's why.

From a 2010 CBO report.
Social Security is not a problem. Other Federal Noninterest Spending is not a problem. Medicare and Medicaid is a problem. Why is that? Well, according to this chart ...

From Mother Jones.
... it's because we're getting older. Not much we can do about that. What we need to address is the pale green part of this graph — Spending in the Absence of Aging and Excess Cost Growth. And how do we do that?

From Wonkbook.

Simple — hire any other industrialized country in the world to run our health care system. The chart above is pretty damning. The US government spends more per capita on healthcare than anybody else, and our system is supposedly privately run. Now, if you'll take a look at what we spend in that sphere ...

From Wonkbook.
So, all told, we spend about $8000 per person on healthcare in this country. The second slot goes to ... bit hard to say, but each of Canada, France and England appear to spend about $4000 per person, or roughly half what we do.

If you want to reduce the deficit, reduce healthcare costs.

Monday, January 21, 2013

Party Up, Chuck

From Talking Points Memo:
Sen. Chuck Schumer (D-NY) said Sunday that Democrats in the Senate intend to draft a budget this year that will include revenues, regardless of House Republicans use of the debt ceiling to force the Senate to come up with a  budget. 
"We're going to do a budget this year, and it's going to have revenues in it," he said on NBC's "Meet the Press."  "And our Republican colleagues better get used to that fact."
 Chuck — we've got you covered. All you need to do is ...
  1. Expand the number of brackets to what they were during the early Reagan years, and bring the top marginal rate back to the 50% it was back then. It was good enough for St. Ronnie; it's good enough for today. 
  2. Get rid of the capital gains tax. Treat all income as ordinary income. 
  3. Junk the mortgage interest deduction. OK, just phase it out then.
  4. Set the trigger for the alternative minimum tax at $250,000 (for a household) and adjust it automatically for inflation.
A couple of other things. There's been a lot of screaming about the deficit lately, but very few people are noticing that the deficit has been getting smaller.

The graph above shows that the deficit got worse in the 70s, but got considerably worse at the same time the Reagan tax cuts were enacted. (Hint, hint). Then things got much, much better in the 90s under Clinton, and we were in a surplus at the end of his administration. (Psst -- Clinton raised taxes.) And then the bottom fell out under Bush. There's the the first big dip, which is the result of the Bush tax cuts and the wars in Afghanistan and Iraq. It improves somewhat, and then craters once the recession took hold (and tax receipts fell). (Note that the 2009 budget was created by Bush, and included a modest stimulus package. Then Obama enacted his own stimulus package. Both were the right thing to do.)

But since 2010, the deficit has been decreasing — at a pretty aggressive clip. And, if employment rates continue to rise, more people will leave government assistance and start paying taxes again. So this trend line is really, really good.

Better news still is what we're spending to service the national debt.

From the New York Times
Holy moly! As a percentage of GDP, our interest expense is the lowest it's been since the 50s! This is because the interest we're being charged is crazy.

From the Department of the Treasury
The real interest rate (e.g., the one calculated after accounting for inflation) is negative for anything with less than a 20-year maturity. So when we borrow money now, we're actually paying less back in the future! Pretty cool.

And, finally, there seems to be an idea that there are just great gobs of government waste floating around out there. Here's a breakdown of the 2011 budget by type:

From Wikipedia

Sixty-two per cent of the budget goes to defense, Social Security and health care. An additional 6% goes to servicing the national debt. So that leaves 32% open for cuts — and just 18% if you're looking solely at discretionary outlays. Sure, the budget is an eye-opening $3.6 trillion dollars, but when you put aside caring for the army, old people and the sick (and interest), you're looking at an effective budget of $1.152 trillion for a nation of 300 million people. That's about $3840 per person, or $320 per month, or $10 a day — for research on disease, air traffic control, food inspections, air quality standards, national parks, the federal highway system, NASA, the Library of Congress — everything. That strikes me as rather cheap.

We don't have a spending problem. We have a revenue problem. And some of us aren't paying our fair share.

From the New York Times.
And note that this table includes neither state income taxes or sales tax, which are very regressive in nature.
For more on how our total tax structure is basically flat (e.g., regressive), see this article from the Atlantic.

Sunday, January 20, 2013

Why Inequality Matters in a Recession

Joseph Stiglitz, writing in the New York Times:
There are four major reasons inequality is squelching our recovery. The most immediate is that our middle class is too weak to support the consumer spending that has historically driven our economic growth. While the top 1 percent of income earners took home 93 percent of the growth in incomes in 2010, the households in the middle — who are most likely to spend their incomes rather than save them and who are, in a sense, the true job creators — have lower household incomes, adjusted for inflation, than they did in 1996. The growth in the decade before the crisis was unsustainable — it was reliant on the bottom 80 percent consuming about 110 percent of their income. 
Second, the hollowing out of the middle class since the 1970s, a phenomenon interrupted only briefly in the 1990s, means that they are unable to invest in their future, by educating themselves and their children and by starting or improving businesses. 
Third, the weakness of the middle class is holding back tax receipts, especially because those at the top are so adroit in avoiding taxes and in getting Washington to give them tax breaks. The recent modest agreement to restore Clinton-level marginal income-tax rates for individuals making more than $400,000 and households making more than $450,000 did nothing to change this. Returns from Wall Street speculation are taxed at a far lower rate than other forms of income. Low tax receipts mean that the government cannot make the vital investments in infrastructure, education, research and health that are crucial for restoring long-term economic strength. 
Fourth, inequality is associated with more frequent and more severe boom-and-bust cycles that make our economy more volatile and vulnerable. Though inequality did not directly cause the crisis, it is no coincidence that the 1920s — the last time inequality of income and wealth in the United States was so high — ended with the Great Crash and the Depression. The International Monetary Fund has noted the systematic relationship between economic instability and economic inequality, but American leaders haven’t absorbed the lesson. 
Our skyrocketing inequality — so contrary to our meritocratic ideal of America as a place where anyone with hard work and talent can “make it” — means that those who are born to parents of limited means are likely never to live up to their potential. Children in other rich countries like Canada, France, Germany and Sweden have a better chance of doing better than their parents did than American kids have. More than a fifth of our children live in poverty — the second worst of all the advanced economies, putting us behind countries like Bulgaria, Latvia and Greece. 
From the Atlantic.

Wednesday, January 16, 2013

A Small Act of Genius

Earlier this week, Rep. Jan Schakowsky quietly made one of the most substantive attempts to rein in healthcare costs and reduce the deficit, all in one fell swoop.
House Democrats on Tuesday introduced the “Public Option Deficit Reduction Act,” which would provide consumers the choice to opt into a government-run health insurance plan in the Obamacare exchanges. 
The bill, which almost certainly cannot pass in the Republican-controlled House, is a mostly symbolic effort meant to keep the public option alive as a policy prescription. It is sponsored by Rep. Jan Schakowsky (D-IL), who is on the Energy & Commerce health subcommittee, along with Energy & Commerce Ranking Member Henry Waxman (D-CA) and 43 other lawmakers. 
“The Public Option Deficit Reduction Act will give health care consumers more choice and lower their premiums,” said Schakowsky. “And, by providing a lower-cost alternative to private insurance, it would put pressure on all insurers to lower their premiums in order to compete.” 
Citing an earlier estimate by the nonpartisan Congressional Budget Office, Schakowsky expects it to reduce the deficit by some $100 billion over 10 years by boosting competition among insurers and paying providers at Medicare rates. The 2010 version of the public option was expected to reduce the debt by $68 billion over 10 years.
The magic comes in the form of reduced administrative costs. Paul Krugman points to a research paper by Jacob Hacker, which says:
The public Medicare plan’s administrative overhead costs (in the range of 3 percent) are well below the overhead costs of large companies that are self-insured (5 to 10 percent of premiums), companies in the small group market (25 to 27 percent of premiums), and individual insurance (40 percent of premiums). 
These administrative spending numbers have been challenged on the grounds that they exclude some aspects of Medicare’s administrative costs, such as the expenses of collecting Medicare premiums and payroll taxes, and because Medicare’s larger average claims because of its older enrollees make its administrative costs look smaller relative to private plan costs than they really are. However, the Congressional Budget Office (CBO) has found that administrative costs under the public Medicare plan are less than 2 percent of expenditures, compared with approximately 11 percent of spending by private plans under MedicareAdvantage. [See page 12.] 
This is a near-perfect “apples to apples”comparison of administrative costs, because the public Medicare plan and Medicare Advantage plans are operating under similar rules and treating the same population. 
(And even these numbers may unduly favor private plans: A recent General Accounting Office report found that in 2006 Medicare Advantage plans spent 83.3 percent of their revenue on medical expenses, with 10.1 percent going to non-medical expenses and 6.6 percent to profits—a 16.7 percent administrative share.) 
The CBO study suggests that even in the context of basic insurance reforms, such as guaranteed issue and renewability, private plans’ administrative costs are higher than the administrative costs of public insurance. The experience of private plans within FEHBP carries the same conclusion. Under FEHBP, the administrative costs of Preferred Provider Organizations (PPOs) average 7 percent, not counting the costs of federal agencies to administer enrollment of employees. Health Maintenance Organizations (HMOs) participating in FEHBP have administrative costs of 10 to 12 percent. 
In international perspective, the United States spends nearly six times as much per capita on health care administration as the average for Organization for Economic Cooperation and Development (OECD) nations. Nearly all of this discrepancy is due to the sales, marketing, and underwriting activities of our highly fragmented framework of private insurance, with its diverse billing and review practices. Indeed, according to research by the Commonwealth Fund, the United States could save up to $46 billion a year if it spent what other countries with mixed public-private insurance systems, such as Germany, spend on insurers’ administrative costs. [Footnotes omitted.]
The beauty of this is that entry into the government program is completely voluntary. If you find the whole thing to smack of socialized medicine and death panels, you're free to continue with your regular plan. If you want to save a bunch of money through reduced administrative costs, you can do that too. It's up to you.

What would be screwed up, however, is if Republicans, in the name of liberty, used the tyrannical power of the government to prevent its citizens from participating in this program by voting this down. Which they most certainly will do.