Archive for October, 2011

Occupy Chicago

So I finally got a chance to check out the Occupy movement firsthand.

Two years ago, I heard media outlets first ignore, then report various contradictory and often denigrating stories about Tea Party gatherings. I made it a point to withhold judgment until I could go see one in person. So when I saw similar patterns in the reporting of OWS, I tried to do the same. Here, in somewhat random order, are my thoughts now that I’ve seen it up close.

First of all, I need to be completely up front about the fact that I didn’t have time to really get a good picture of what was going on. I walked through the Occupy Chicago headquarters on Jackson and LaSalle at around 4pm on Monday, and only had about 20 minutes before I had to be on my way for greedy capitalist purposes.

There were around 50 protesters (if you include the drum circle and those asleep on the sidewalk). They consisted of around 20 people lining the street with signs, another 20 or so sitting in small groups on the sidewalk or taking part in the drum circle, and maybe 10 people wandering around distributing flyers. And yeah, two people asleep in a pile of coats and assorted protesty folderol (signs, guitars, blankets, bikes, etc).

I’m not sure how representative this picture is of Occupy Chicago as a whole. I realize this was just a random point in the day, there was no General Assembly scheduled for another several hours, and there was no march that day. According to their website (occupychi.org), their marches consist of “thousands,” and as a matter of public record, there have been multiple arrests of between 100-200 for refusing to leave Grant Park after the park is closed.

A couple of differences struck me between this and the Tea Party rally I attended last year.

One was the signs. I took notes at the TP rally and wrote down every sign I saw. It was easy because they were simple. Things like “Taxed Enough Already” and “Obama Is Bankrupting Our Grandkids” are easy to read from across the park and write down quickly. This protest had a few like that–“Need $$$ To Buy a Congressman, Please Help” was one of my favorites. A few of the signs held by the people pictured to the right were short and sweet, things like “Honk If You Are The 99%”. But most of the signs were half a book, and frankly, I didn’t have time. I wrote down the first one (“Distrusting unregulated capitalism is not treason. Exporting trillions of American dollars in bad loans, ‘Free Trade,’ and outsourcing sound much more traitorous to me!”) before realizing I would not be able to write down everything and keep the use of my hand. Signs like that were not only being carried, but were posted all over the police barricades that had been put up–as it turned out, I didn’t even have time to walk through and take pictures of each sign.

There was also a clear difference in organization. The Tea Party, love it or hate it, quickly became very good at setting up events and getting out a message. TP rally at X time and Y place. A thousand people show up, speeches are given, everybody cheers, everybody goes home. Message distributed.

This was disappointing. The instructions on their website consist of the following: “There is someone in front of the Federal Reserve Bank building at Jackson and LaSalle 24/7. Come out and join us.” I did, and found a few people playing drums, holding long-winded signs, and basically blocking foot traffic in a public place. Message not distributed.

No, I didn’t attend a General Assembly. If it’s anything like what was recorded in Atlanta, I want nothing to do with it. At first I wondered why, since they actually had a megaphone there, they were still using the “human microphone” technique. The poster of that video, however, put it best: “People abandoned their individuality and liberty to be absorbed into a hypnotizing collective.” The short repetitive chanting eliminates individual thought. It’s a tool for fostering and enforcing groupthink. You say not what you’re thinking–you say what they say, literally. Count me out.

I didn’t see any evidence of cleanliness or public health issues here, besides simply being in the way and sleeping in public. There were rules posted concerning keeping the place looking nice, and I did witness a couple of protesters running up to stop another sign-toting protester that had a dog with her, when the dog looked like it was getting ready to express its feelings for Wall Street right there on the sidewalk.

As for the recent arrests, here’s what I told a good friend I was debating recently. It’s not a first amendment issue. Constitutional rights have boundaries. Just like free speech doesn’t allow you to shout “fire” in a crowded theater, freedom of assembly doesn’t allow you to take over public land and live there. It’s perfectly proper for the police to kick people out of a park when the park closes. If you’re trying to set up a semi-permanent camp in a public park, it’s no longer the public’s park–you’re trying to make it YOUR park. I can’t go pitch a tent on the tennis courts down the street either.

Of course, I understand that most of the arrests are sought out on purpose. Much the better to get media attention, and who doesn’t love to be a martyr when you get to go home in the morning? Chicks dig guys that are willing to sacrifice for a cause they’re passionate about.

Moving on to bigger issues. On one level, I understand the anger and frustration of the protesters. No really, I do. Things are bad out there. 16% real unemployment with no recovery in sight. Record profits but little hiring. I even get on board with a couple of specifics–I do want to see the ratings agencies investigated for their role in the housing collapse. Nobody was forced to take out loans they couldn’t afford, but something’s wonky when S & P looks at that bad loan on an overvalued house and calls it a AAA-safe investment.

That said, I think the protests are deeply misguided. Much of the protests center around income inequality. I see charts tossed around like the one at right. This is from a hot-off-the-presses CBO report looking at peoples’ changes in income, inflation-adjusted, from 1979 to 2007. The top 1% is making a lot more than they used to, and this is one of the things getting the OWS crowd all riled up. I heard Representative Sandy Levin (D-MI) on the radio today claim, based on these numbers, that the rich have gained and the middle class have just been “treading water” for 30 years.

But this all ignores the fact that every bar on that graph is positive. The fact that the most productive and successful people are making a buttload of money has not taken anything away from anyone else. Just the opposite. The lowest quintile, the poorest of the poor in America–their inflation-adjusted income grew by 18% according to this report. The middle class, far from “treading water,” saw their income grow by 40%. [1] The rising tide really lifted all boats. We can all win together. OWS, your own figures betray you. It’s not a zero-sum system. Those 1%ers don’t make anybody poor. Their success breeds our success.

Furthermore, in a free market, you don’t have to support anyone you don’t want to. If you don’t like Bank of America, fine, don’t do business with them. Tell me who you think I should support instead. But as a general rule, success is good. Let’s not protest success.

This is where the Occupy movement is misguided. The 1% aren’t the problem. You’re mad that there’s too much money in politics? I have bad news for you. There will always be rich people trying to influence leaders. So vote for freedom from their influence. Vote for smaller government. The less power the government has, the less it matters who owns what politician. So many conservatives today are rallying for smaller, less powerful government. If you don’t like the influence of the 1%, you should be thrilled to hear the ideas coming from the right. We might not wear cool Guy Fawkes masks [2], but we’ve got real solutions.


[1] http://cboblog.cbo.gov/?p=2909
[2] No violence in OWS? Really? Besides the fact that nearly a third polled said they would support violence to advance their agenda (http://on.wsj.com/oGGhy2), a common symbol of the movement is a mask worn in a graphic novel by a violent anarchist that blew up buildings, tortured and/or murdered hundreds of people? The mask based on a real-life man that attempted to blow up the British House of Lords with the King and the entire nobility and aristocracy inside? That’s your best nonviolent symbol?

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Should We Raise Taxes?

The Historical Record

During a recent debate with some friends, I was presented with a very intelligent challenge:

How do you explain the 1990s — as a fluke due to the internet boom? Weren’t there more regulations and higher taxes on the wealthy and corporations then? Can you really just say “but that was a different time!”
I don’t understand the logic behind saying that IF we raise taxes back to that level everyone will suffer. Data that shows this has historically been true may exist, but I’m just not aware of it. Please let me know if there is anything except what you consider common sense telling you that’s the case.

This led me on a fascinating flurry of research about the modern history of taxes in the U.S. But before we dive in to that, there’s a direct response on the issue of regulations.

Regulations

The question refers to both taxes and regulations in the 90s. There’s no question that both will have an impact on the business environment (see also: Why Government Decisions Matter).

While it’s true that tax rates were higher then, that’s not quite the case for regulations. As I pointed out to my friend, the principal achievements of this administration have been huge regulatory increases–the Affordable Care Act, Dodd-Frank, the CARD act. The EPA this year has had to roll back its own implementation of new CO2 emissions rules because, by their own estimation, they would have to hire 230,000 workers to enforce them. Rather than admitting the new regulations are absurd, they simply decided to wait until 2016 to do it. [1] The FDA recently announced that it is reinterpreting a 1994 law in such a way that will add millions to the cost of doing business for an entire industry–possibly putting smaller companies out of the market. [2] [3]

This is a drastic change in direction compared to, really, any administration in the past 30 years. Even Clinton was caught up in a decades-long deregulatory wave (see Gramm-Leach-Bliley). [4] So yes, it’s clear in hindsight that the successes of the 90s were partially due to the tech bubble, but also due to the general reduction in government interference in the economy that started under Reagan and continued until the last couple of years, where we’ve experienced a major about-face.

Taxes

This brings us to the other half of the challenge, the question of taxes. If taxes were higher in the 90s and things were okay, what’s the harm in raising them back to those levels now? Why won’t we still be okay?

Plot of top bracket from U.S. Federal Marginal Income Tax Rates for 1913 to 2009

Here’s what I found. Income taxes have only gone up a handful of times in the past century, and for various reasons. There’s a spike for WWI, one at the outset of the Great Depression, another halfway through the Great Depression, then two more in generally healthy times–the 1945/51 range and the 1991/93 range. [5]

At least on the surface, small tax increases during healthy economic times don’t seem to hurt the overall economy too much (the late 40s and the early 90s). And a temporary tax hike to pay for WWI apparently did no lasting damage.  Let’s look closer at some of those big swings.

Everybody is familiar with the Great Depression. Less familiar is the post-WWI recession of 1920-1921. Despite its lack of popular recognition today, the recession that began in 1920 was rough. Various estimates of unemployment agree that there was a rise from 3% or less to as high as 8.7-11.7% at the peak. Industrial production fell 30%. Stock prices as measured by the Dow Jones Industrial Average fell 47%. [6]

The government’s response was summed up in an article by Thomas E. Woods, Jr:

Instead of “fiscal stimulus,” Harding cut the government’s budget nearly in half between 1920 and 1922. The rest of Harding’s approach was equally laissez-faire. Tax rates were slashed for all income groups. The national debt was reduced by one-third. The Federal Reserve’s activity, moreover, was hardly noticeable. As one economic historian puts it, “Despite the severity of the contraction, the Fed did not move to use its powers to turn the money supply around and fight the contraction.” By the late summer of 1921, signs of recovery were already visible. The following year, unemployment was back down to 6.7 percent and was only 2.4 percent by 1923. [7]

Did we all catch that? This downturn was as severe as what we saw in 2007, as severe as the beginning of the Great Depression. Yet in less than two years, production had returned and unemployment was below 3%.

There was another market correction at the end of that decade. Industrial production fell. In 1930, unemployment was approaching 9% again, and this time, the government intervened. Immediately, major new tariffs were instituted to protect American jobs (sound familiar?). In 1932, taxes went up on everyone, falling largely on the top earners–top marginal rate went from 25% to 63%, the estate tax was doubled, and corporate taxes went up slightly (sound familiar?). Through the rest of the decade, taxes were raised again every year or two. The appalling lack of recovery after 6 years led to another large tax increase on the wealthy in 1935–raising the top rate from 63% to 79%. The stagnant economy responded by dipping back into recession though 1937 and 1938. [8] [9] [10]

Throughout the decade, unemployment stayed close to 15%–peaking much higher, around 25% in 1933. Despite massive government intervention and hiring, this depression simply would not end the way others did before and since.

Let me try to bring this all together. We have the following situations:

  • Raising taxes and more government involvement during good times: little immediate economic damage (late 40s, early 90s).
  • Cutting taxes and less government involvement during recession: quickly ending recessions (1920, see also early 80s and 2000-2001).
  • Raising taxes and more government involvement during recession: longer, deeper recessions (30’s).

Today, we have a choice. We see the effects already of 3-4 years of intervention since the first problems started in 2007. The lack of recovery is turning into a full-on double-dip recession right now. The President is currently asking for higher taxes and more intervention–the same policies that turned a situation like this one into the Great Depression.

I’ve presented the historical record on two general directions the government has tried. Our choice is, do we want to take a whole decade to get back to prosperity, like in 1930? Or do we want to take only a year to get back to prosperity, like in 1920?


[1] http://mediamatters.org/research/201109270014  Media Matters’ take on this is, “No, the EPA is not hiring 230,000 workers.” However, even in their own story, they can’t present any evidence that goes any farther than saying, “The EPA’s new rule would require 230,000 workers to enforce, but now they say they’re waiting until 2016 to do it.”

[2] http://thegormleyfiles.blogspot.com/2011/09/fdas-plan-to-cripple-health-food.html

[3] http://www.naturalproductsinsider.com/topics/new-dietary-ingredients.aspx

[4] http://en.wikipedia.org/wiki/Gramm%E2%80%93Leach%E2%80%93Bliley_Act For the record, I’m not intending in this article to argue the relative merits of GLB or Glass-Steagall. I’m not comfortable with anything being truly too big to fail, but there’s interesting arguments on both sides of that issue. This is just to point out that Clinton’s record during the 90s is not exactly an island of Big Government surrounded by Bushes–he was deregulating too.

[5] I’m using the top marginal income tax rate for simplicity, but corporate and capital gains taxes generally followed the same curve: http://www.ritholtz.com/blog/2011/04/us-tax-rates-1916-2010/ The capital gains tax conspicuously breaks ranks throughout the 70s, and is raised in the late 80s as well, though offset that time by dramatic income tax cuts.

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

[7] http://www.firstprinciplesjournal.com/articles.aspx?article=1322&theme=home&loc=b

[8] http://www.24hgold.com/english/contributor.aspx?article=2991697306G10020&contributor=Nathan+Lewis

[9] http://en.wikipedia.org/wiki/Great_depression

[10] http://www.infoplease.com/ipa/A0104719.html

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Why Government Decisions Matter

There’s an annoyingly common belief that taxes and regulations have no effect on what a business can and cannot do. The standard argument for increased taxes and heavy regulations on businesses is based on a premise that raising said taxes or changing regulations won’t change the business. For example, Sen. Dick Durbin (D-IL) was behind recent legislation that capped the amount that banks can charge retailers for processing debit card transactions–then, nonsensically, he flipped out on the Senate floor when banks started charging consumers for the transactions instead, as if banks ought to be able to provide their services for free.[1] One wonders where Sen. Durbin thinks Bank of America gets the money to pay their 288,000 employees (not to mention the irresponsibility of a Senator publicly calling for a run on the nation’s second-largest bank).

In some people’s heads, it seems like every business, every business owner, every CEO has millions of dollars of pure profit coming in daily, and that it can’t cost much to run a business, so this is all just going into that CEO’s bank account. So many people, when they think about business owners, picture Scrooge McDuck swimming in a pile of gold coins.[2]

The thing is, this belief comes from these media and cartoon sources, and not from reality. Businesses and CEOs live in the margin. Let’s look at numbers rather than cartoons. If a corporation takes in $50 million in a given year, and pays its workforce of a few hundred people a healthy $30 million (including payroll taxes), and spends $20 million on materials, manufacturing, and distribution of its product… this $50 million dollar company makes zero profit that year.

If that’s our starting point, then check out the effects of a new regulation on this big, evil corporation that provides millions of dollars in payroll to hundreds of workers. If the government creates a new regulation that costs this company $500K a year to comply with, the company will have to find $500K worth of expenses to cut, or raise their prices to compensate. There was no profit margin to work with.

Pay no attention to the fact that it’s a $50 million dollar company. It doesn’t matter. Here’s the real effects. This means:

  1. a few people laid off, or
  2. everyone in the company losing some benefit, or
  3. trimming overhead (i.e. salaried employees now have to work unpaid overtime, etc), or
  4. raising prices (which means inflation, which means everyone in the world is poorer).

None of these options is going to lead to increased hiring or productivity.

Or, say the company was profitable. Say they were $1 million in the black. Now, the new regulation means their planned million-dollar construction project will have to wait, or they will have to cancel plans to expand your department and hire 10 more people, or whatever they were going to do.

Now imagine that we’re not talking about one company, but about a regulation that affects every business in America–say, the Affordable Care Act. Conservatives think it’s a bad idea not because we don’t want to take care of sick people, but because we understand its effect on the rest of the economy. This new regulation and others are partly responsible for our current high unemployment and the oft-referred-to $2 trillion or so that businesses are afraid to spend at the moment.

It’s important to keep these things in mind when listening to people complain that nobody is hiring or building, and that the government ought to regulate more to make things work better. That’s like opening your fridge to cool off the kitchen. Sounds like a good idea, but it will actually make things hotter overall. [3]

But back to the hypothetical company. There’s another possible outcome. Maybe the new cost imposed means there’s simply less profit going to the shareholders. People say, so what? They’re just the rich fat cats not doing any work. Thing is, that’s not true. For one thing, shareholders often means you and me. Anyone with a 401K holds stock in dozens or hundreds or thousands of companies.

And even when we’re talking about the rich company owners, what’s happening is that they are getting properly rewarded for funding and creating productivity. That’s a good thing. Remember productivity? Productivity is critical. The more the economy produces, the more jobs are available, the cheaper goods become, the more able we all are–rich and poor–to get the things we want. You’re not going to move someone in poverty to the middle class by giving them welfare–but you might if you give them access to a job and allow them to acquire real wealth themselves. It’s productivity that does that for people. We’re going to help the poor more by growing the economy than by handing out checks.

If we want more productivity, the last thing we want to do is remove incentives to be productive. Our system ought to reward the things that move society forward. It’s good when there are incentives to innovate, to be more efficient, to lower prices and get your product to more people.

And we’re absolutely not going to create more productivity or make people wealthier by making business more expensive. Conservatives understand that it matters when the government steps in and creates new, expensive regulations and taxes. That’s never going to make business easier or get more people working. How much the government allows a company to keep obviously and directly affects that company’s ability to hire you and me. Government decisions change everything from how many employees a company can hire, to how much it costs to swipe your debit card when you buy a Big Mac. Government decisions matter.


[1] http://www.politico.com/news/stories/1011/65038.html
[2] Vaguely annoyed that I drafted this Scrooge McDuck swimming in gold coins reference a couple of weeks before it was in the recent Family Guy gag.
[3] Then you’re just running a motor in the middle of the room and making it hotter. The fridge moves heat from the inside of the box to the radiator on the back–that’s all. It doesn’t move it outside, and it certainly doesn’t create cold by magic–just like the government can’t create wealth by magic. It can just move things around.

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Do the Rich Pay?

Elizabeth Warren’s recent stump speech quote has been lighting up the internet for a couple of weeks now. If you haven’t seen it yet, she makes the following statements:

“There is nobody in this country who got rich on his own — nobody.

You built a factory out there? Good for you. But I want to be clear: you moved your goods to market on the roads the rest of us paid for; you hired workers the rest of us paid to educate; you were safe in your factory because of police forces and fire forces that the rest of us paid for. You didn’t have to worry that marauding bands would come and seize everything at your factory, and hire someone to protect against this, because of the work the rest of us did.

Now look, you built a factory and it turned into something terrific, or a great idea? God bless. Keep a big hunk of it. But part of the underlying social contract is you take a hunk of that and pay forward for the next kid who comes along.” [1]

These words are, depending on your point of view, either a clear description of a more perfect America, or complete and utter drivel. Moveon.org touts it as a quote that “Every American Needs To See.”

Alright, then. Let’s take a look.

She starts with her thesis–that nobody gets rich on his own. She then makes several supporting statements based on the idea that if you got rich, you did it using resources that “the rest of us paid for.” Finally, she makes a call to action–if you are one of these rich people, part of the deal is that the rest of us take some of your profits and “pay (it) forward,” presumably for more of the things she referred to earlier (roads, education, police, fire, military).

Behind these statements lies an important, unspoken assumption: namely, that the rich don’t provide anything to society. None of her statements makes sense unless you assume that the rich do not pay. It’s dumb to say that the rich use resources provided to them by everyone else if the rich are, in fact, paying for those resources. (Not to mention that these public resources aren’t built by the peasants for the benefit of the rich factory owners, but they are built by everyone, for everyone. Great response on this issue by Dale Franks here.)

And, to tell the rich that they need to pay for the common public necessities of our society as if it’s some novel idea baldly assumes that they aren’t currently doing it. The thing is, this assumption is completely false. The facts simply do not follow. She might as well have said, “It would be really great if the fish in the ocean had something to swim around in. Fish need water, right? We ought to put a bunch of water in the ocean so that the fish don’t die.” And people respond with, hey, yeah, the oceans SHOULD have water in them! She’s right! Anyone that disagrees with her on anything wants the oceans to be dry!

But the fact is, the oceans are already wet, and the rich already pay. Even the AP reports that, okay, when you go to the IRS and actually look at the numbers, households making $1 million plus will shell out an average of 29.1% of their income in federal taxes (including both income and payroll taxes), households around the national middle-class average of $50-75,000 will pay around 15%, and lower-class households making $20-30,000 will only give up around 5.7%. [2]

The numbers are even more striking if you look at how much of the government’s income comes from the various groups. According to the Tax Policy Center’s numbers for 2010, the top 20% of earners pay nearly 70% (68.6) of all federal taxes–including payroll taxes. The lowest 20% get more back in credits than they pay in–still including payroll taxes. If we just look at the federal income tax, nearly half of all Americans pay nothing at all, and the top quintile pays almost 90% of what the government takes in. [3] [4]

Yes, there are a few millionaires that manage to get out of paying any federal income taxes. But that’s less than 1% of the group. The solution to that problem will have to involve eliminating a lot of the exemptions and complications in the tax code, not raising rates for the other 99%. Eliminating dodges and loopholes is exactly what the Ryan budget and the President’s own deficit committee call for. And yet, many Democrats continue to call for simply hiking rates to “get” those rascals with the corporate jets.

We the people have responsibilities in this Republic. One of the more important ones is to call out our elected officials (and those running for office) when they look us in the eye and lie to us. When they dismiss our intelligence and integrity, they demonstrate (among other things) that they do not deserve our votes. The fact is, the rich do pay–and shame on Elizabeth Warren for implying otherwise. Frustratingly, her statement not only claims that the rich fail to pay, but by implication, that conservatives want it that way. That straw man may burn well, but it’s not an argument that conservatives are making, and it gets in the way of the real debate.

Mrs. Warren, the wealthy do pay their share for the things you’re talking about, and conservatives don’t argue that it should be any other way. Conservatives will, however, be happy to have a conversation with you about how much taxation is enough, and how the government should go about spending that money. Those are issues based in reality, and they are what we’ve been talking about all along.


[1] See the bit of the speech that went viral here: http://www.cbsnews.com/8301-503544_162-20110042-503544.html

[2] http://www.chicagotribune.com/business/breaking/chi-data-the-rich-actually-do-pay-more-taxes-20110920,0,3645513.story

[3] http://www.taxpolicycenter.org/numbers/displayatab.cfm?Docid=2994&DocTypeID=2

[4] http://www.msnbc.msn.com/id/36226444/ns/business-personal_finance/t/half-us-pays-no-federal-income-tax/#.TooQanKwXSs

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