And we were giving these Bozos big tax breaks too.

Some say the top US federal income tax rate of 35% is too high and makes U.S. companies uncompetitive in the world market. In fact, because of abundant exceptions, credits, deductions, accelerated depreciation and amortization, lawful and unlawful income shifting, and tax havens and shelters, the effective rate paid by corporations in the US (13.4%) was below the average (16.1%) for the 19 OECD nations in 2000-05.

As a result of these and other characteristics of the corporate income tax, the U.S. is generally considered a tax haven for corporations, and not a jurisdiction to be escaped to other more corporate-tax-friendly ones, especially in the case of some industries, such as the financial services sector.

--according to Linda Beale (emphasis added), who goes on to explain that—

[T]ax breaks lead to very low tax rates on certain types of investments — even negative rates in some cases. For example, a 2005 Congressional Budget Office study found that the effective marginal corporate rate — the rate paid on the last dollar of income earned and arguably the tax rate most relevant for investment decisions — on debt-financed investment in machinery was negative, estimated at -46 percent. This means that the total value of the deductions that companies may claim for such investment is much larger than the tax they pay. (Put another way, it means that other taxpayers effectively subsidize the investment.)

As others have pointed out, it isn't the US-based multinational companies that are disadvantaged by our tax code. It's the ordinary Main Street, plain vanilla, cash cow, purely US companies that are most likely to pay the highest tax rates. Guess which group has better relationships with the House Ways and Means and Senate Finance committees.

Update on Friday, November 14, 2008 at 03:05PM by Skeptic

Matt Yglegias has this post with the following chart showing corporate tax revenues as a percent of GDP. The US is certainly no outlier.

States not waiting for feds to save the planet.

In the US, State law initiatives have been very effective in reducing greenhouse gas emissions compared to the business-as-usual States. Here is an interactive map showing CO2 emissions per capita in each State and the District of Columbia in 2005. Center for American Progress created it combining the latest available data from the Energy Information Agency with Bureau of Census data.

CO2 emissions for the whole US averaged 20.7 metric tonnes per capita. Nine of the 10 lowest emitting States (includes DC), emitting from 6.77 to 13.36 tonnes per capita, all had in place aggressive state law programs mandating energy efficiency and/or renewable energy mandates, and all have greenhouse gas emission targets. (Idaho didn't but made the clean 10 because of the preponderance of hydroelectric power.) As a consequence, their per-capita emissions are roughly half those of comparable States that do not have such programs.

In all, 36 States had emissions less than 25 tonnes per capita. Eleven higher emitting States ranged from 26.54 to 40.72 tonnes per capita, and then there were four very high emitters, West Virginia (63.3), Alaska (71.8), North Dakota (83.1), and Wyoming (124.21).

Plus pay for plus performance

Palin's traveling stylist is paid almost twice as much as McCain's chief foreign policy advisor, according to this report today. Well that's fair. Palin looks pretty good. McCain's foreign policy looks terrible.

Two economists’ views on what’s wrong with their profession

When asked yesterday by a Congressional committee why he had not understood a dangerous housing price bubble was building, former Fed chairman and economist Alan Greenspan said, "[W]e're not smart enough as people. We just cannot see events that far in advance."

Economist Dean Baker disagrees.

In fact, the problem is not that "we" cannot see events that far in advance. The problem is that the Federal Reserve Board and the economics profession as a whole functions more like a fraternity than a real forum for debate and truth seeking. Those whose views are taken seriously mimic the views of those with status and power within the profession, they do not think independently.

The failure of the economics profession to recognize the bubble and the harm that it would cause was due to the sociology of the profession. For any competent economist, the bubble was easy to see and the damage that its collapse would cause was entirely predictable.

Baker also points out that there is neither "market discipline" nor other accountability in the profession.

Unlike custodians, cab drivers, or dishwashers, economists are not held accountable for their job performance. They can be wrong on everything they do every day of the week, and still be viewed as respected authorities by the Washington Post, and other media outlets, as well as members of Congress and others in policy positions.

Baker is by no means alone in his assessment of the profession. The real-world economics review (fka post-autistic economic review) was started to circumvent the established journals which would not publish work that was outside of or inconsistent with the dominant economic paradigm.

Update on Saturday, November 1, 2008 at 04:14PM by Skeptic

Economist Robert Shiller, who was an advisor to the New York Fed, engages in self-criticism and says the competition for stature causes normal people like himself to downplay contrary opinions. 

More evidence of middle class economic pain

Wal-Mart shoppers, a category that includes 90% of Americans, are increasingly living paycheck to paycheck. Spikes in sales just after paydays are growing more pronounced and now, for the first time, are showing up in sales of baby formula. The information is in a speech by a senior Wal-Mart executive to be given today at Town Hall Los Angeles, as reported by Reuters and picked up by Mark Thoma here.

Do we really want a socialist for President?

Sarah Palin says Obama's proposed tax cuts for 95 percent of Americans sounds like socialism to her. She should know. She's governor of a State in which 99 percent of the land is owned by governments, and the Alaska State Permanent Fund sends exactly the same size welfare payment to every Alaskan every year ($3,269 in 2008) whether they are productive or idle. Or is that communism?

A “cap and trade” approach to greenhouse gases shrinks from the real issue.

A fundamental problem with "cap and trade" is that environmentalists hear "CAP and trade" and businesses hear "cap and TRADE" and/or "cap and EVADE." Trying to design a system that manipulates market forces to achieve indirectly what some are afraid to talk about directly will not achieve the necessary reductions of greenhouse gases. For example, those who mine, transport, and burn coal are going to fight just as fiercely against a market manipulation system that eliminates coal combustion as they would against a regulation directly banning it. If we want the burning of coal to stop--and we should absent carbon capture and sequestration--we need to confront the issue directly and pay the politically necessary compensation.

Update on Friday, November 28, 2008 at 04:12PM by Skeptic

Getting Real on Climate Change by Nordhaus and Shellenberger: 

For 20 years the green climate change agenda has embraced two insidious orthodoxies that are rooted in market fundamentalism:  Deficit spending is always bad for the economy, and we should "let the market decide" our energy future.  The result has been serial political failure, skyrocketing emissions, and stagnation of energy technology.  Now is the time to let go of the pollution-pricing paradigm, along with a zero-sum dificit mentality, and embrace an agenda squarely focused on public investment, building the enabling infrastructure, and making clean energy cheap.

Joe Romm (Climate Progress) seems to hate these guys and the horse they rode in on, but I wonder if he wouldn't agree with that quotation.  The article has much information about the declining fortunes of "cap and trade" in Congress and failures in practice where it has been tried. 

Afghanistan is an even worse quagmire.

The top KGB official in Afghanistan during the Soviet occupation says US and NATO officials "listen, but they do not hear" when he describes his experience there, according to this long interview by John Burns in The New York Times today. The Soviets had 140,000 troops in Afghanistan and extensive education, welfare, and public works programs but could not pacify the place. Here's how that compares to Iraq and Afghanistan today.

According to the CIA factbook, Afghanistan is 48% larger than Iraq and has 16% more people. Afghanistan is "mostly rugged mountains" with only 12% arable land. The labor force is 80% in agriculture, and the population is not highly concentrated in cities. It seems to me this would be a much more difficult place to control with conventional military forces than Iraq. As Rumsfeld famously said, after a few air raids there was nothing left to bomb. And rugged mountains are not the preferred terrain for armored vehicles.

In comparison to the 140,000 troops the Soviets deployed, there are now about 65,000 US and coalition forces in Afghanistan. The Bush Administration and both Presidential candidates support sending more US troops to Afghanistan, starting with 8,000 "early next year." In the counterinsurgency field manual authored by Gen. David Petraeus, it is estimated at 1-67 that an occupying force needs a minimum of 2% as many troops as the population to be controlled. That would mean at least 650,000 troops to defeat an insurgency among all of the nearly 33 million Afghanis.

It appears our "mission" is to stay in Afghanistan, our main goal is to kill or capture Osama bin Laden in neighboring Pakistan, and that determination is our only strategy. To the extent our forces go after bin Laden in Pakistan, how might we actually accomplish that, and don't the risks include civil war, rampant terrorism, coup d'états, and/or a failed state in the only Islamic nation with nuclear weapons?

There is nothing about this situation that makes a favorable outcome seem plausible, and the commander of British forces in Afghanistan agrees. We need to rethink this from bottom to top, and then we probably need to disengage militarily and plan to pursue realistic regional goals diplomatically and economically.

Update on Sunday, November 23, 2008 at 09:40AM by Skeptic

A retired Russian Lt. General who served 5 years in Afghanistan during the Soviet occupation says the US is repeating the mistakes the Soviets made, in this interview by Megan Stack of the Los Angeles Times. 

Update on Tuesday, December 2, 2008 at 06:17AM by Skeptic

Half the population of Afghanistan lives in villages of fewer than 300 persons, and the insurgency is based in these rural areas, not the cities, according to this report by Michael Gordon in NYT. If counterinsurgency troops were disseminated in proportion to the population, half of them would be in outposts of fewer than 6 soldiers.  That would seem to make them extraordinarily vulnerable.  Yet, if they are not that close, how can they protect the population from the insurgents?  "Afghanistan may be the 'good war,' but it is also the harder war," according to David Kilcullen, former advisor to Secretary of State Rice, quoted in the linked article. The article also describes other ways in which Afghanistan is a different and more difficult challenge compared to Iraq.

Update on Saturday, December 6, 2008 at 05:31PM by Skeptic

Andrew Bacevich agrees.

Time to sell the beach house

The defenders of the status quo against legislation to ameliorate global climate change include 16 moderate Senate Democrats, according to this post at Breakthrough. It appears they will not propose their own legislation but will oppose anything, like a carbon cap and trade regime, that imposes substantial new costs on their constituencies.

Harmful books or harmful people?

I would never have guessed that anybody in America would set out to compile and then to publish a list of the "ten most harmful books of the 19th and 20th centuries," but clearly I lack imagination. That is exactly what Human Events ("Leading the Conservative Movement Since 1944") did in the spring of 2005. The Top Ten, the "Honorable Mentions," and the list of "15 conservative scholars and public policy leaders" who made the selections are here. See for yourself. Words fail me.

US financial rescue Plans A through G

This short essay by Brad DeLong in the Guardian summarizes in very accessible fashion the six strategies that the US government has so far used to try to stabilize the financial system and the real economy. The first five failed, and the sixth has just been put in motion. Brad thinks #6 will work but describes #7 in case it doesn't.

Update on Thursday, November 13, 2008 at 09:47PM by Skeptic

Plan G is an "enormous government infrastructure building programme."  We're hearing calls for that in recent weeks.  Because confidence in Plan F is fading?

Crude oil prices have fallen by half but are still too high, and Skeptic brags, “I told you so.”

On May 6, 2008, NYMEX crude oil futures were trading at $122.49 per barrel, and Goldman Sachs was predicting prices between $150 and $200 per barrel within 2 years. I pronounced it a speculative bubble and predicted crude oil would trade below $100 by the end of 2008 and below $70 before the end of 2009. The price topped out at $147.27 on July 11 and today traded as low as $68.57.

Experts were saying burgeoning demand in China would drive prices higher even if demand in the developed world were stable. I thought crude oil prices in this range would not only destroy US gasoline demand but would throw the whole US economy into a tail spin, and that that would drag down the worldwide economy. The situation reminded me of 1981. Then, crude oil prices spiked to about $90 (in 2007 dollars), the economy collapsed, and crude oil prices quickly followed. I recognized that the US economy is only about half as energy intensive now as in 1981 and that the US economy is a smaller fraction of the world economy now. Still, I felt pulling over $0.5 trillion out of the US economy every year to pay for imported oil would severely injure other parts of our $14 trillion GDP.

I was also persuaded that the high prices were not being driven by supply/demand fundamentals so much as by speculators piling into commodities as a hedge against the falling dollar and as a pure gamble. Finally, I felt the Saudis and some other Gulf States were worried about short-term demand destruction and in the longer term actions by their customers to use oil more efficiently and substitute other energy sources.

I think I was right about all those factors, but I did not anticipate the financial system meltdown, which I think has probably been a very big factor as investors have scrambled out of commodities futures to reduce leverage and to try to get ahead of a deep worldwide decline in the prices of all asset classes.

The next question is what is the price range the Saudis want to try to defend. My guess is $70-80, but it might be as low as $50. Others, like Russia and Venezuela, are lobbying for a $100 floor, but I don't think they'll get agreement there. At $70 and recently reduced demand levels, the US would still be transferring about $0.3 trillion per year to oil producing nations. That's like paying a 2% sales tax on all US economic activity to "people who don't like us very much" (quoting John McCain). We need to reduce that outflow substantially by reducing demand for petroleum. Bring on higher CAFE standards and electric vehicles. Please.

Update on Monday, October 20, 2008 at 03:32PM by Skeptic

The Saudis are reported to think a price of $70 per barrel is about right, according to an IMF official.  This Bloomberg report also estimates the minimum prices selected producing nations need to avoid budget deficits. 

Update on Wednesday, October 22, 2008 at 11:29AM by Skeptic

This is how cartels lose control.  Russia says it will not reduce petroleum production even if OPEC does, and that Russia will proceed to increase productive capacity.  Petro states that are highly dependent on oil revenues to balance a national budget tend not to reduce production when prices decline and to increase production when prices rise, as would be predicted by classical models of perfect markets.  In fact, they tend to do the opposite because they are not primarily profit maximizers but government budget balancers. 

Update on Friday, May 29, 2009 at 09:55AM by Skeptic

OPEC met yesterday and left output quotas unchanged, "banking on a recovery of oil demand toward the end of this year" and trying to avoid stressing the economy with higher oil prices, according to this NYT report.

“The market is oversupplied, it’s true,” Abdalla Salem el-Badri, the OPEC secretary general, told a news conference afterward, saying the group had decided against cutting output to avoid sending the “wrong signal” and disrupting an economic recovery. “If we are able to keep this $60 to $70 price for the remainder of the year, it will be fine,” he said in a Bloomberg Television interview.

There is no Bradley Effect, but there was a Field Effect when Bradley lost to Deukmejian.

The Bradley Effect is the name given to the idea that a significant number of racist voters will vote against a black candidate but be unwilling to admit that to pollsters. A narrower version of the conjecture is that they will tell a pollster they are "undecided" even though have fully decided to vote against the black guy. The eponymous effect is attributed to the fact that Tom Bradley lost the California governor's race to George Deukmejian in 1982 even though some late polls projected Bradley the winner, and the prestigious Field Poll projected a 7-point margin for Bradley.

V. Lance Tarrance, Jr., who was Deukmejian's pollster, debunks the conjecture here. (Thanks to John for the link.) Except for the Field Poll, the polls showed that the 1982 race was tight—within the margin of error. Tarrance's polling showed the Bradley margin steadily declining in the last five weeks, with Bradley ahead by a statistically insignificant 45-44 in the last pre-election poll. Other experts looking at exit polls and results in select precincts projected that Deukmejian had won. Mervin Field said after the 1982 election that "race was a factor in the Bradley loss." Thus, "Field Effect" could be an eponymous term for a humiliated researcher blaming his data.

Polling analyst, Nate Silver, points out here and here that it is impossible to measure a lying-to-the-pollster effect, but points out that there have been recent races involving an African-American candidate in which there was no significant discrepancy between late polls and outcomes.

Update on Monday, October 20, 2008 at 03:44PM by Skeptic

Bradley's campaign manager in 1982, Nelson Rising, says here that their internal polling showed Bradley's lead shrinking as election day approached, and he denies there was any "Bradley Effect."  Another Bradley campaign insider writes here that there was no "Bradley Effect."  Thanks to John for these links too. 

How to resolve the financial crisis

Policy makers and pundits are all saying that restoring trust among financial institutions is absolutely necessary, and possibly sufficient, to resolve the financial crisis. So far, the very expensive and intricate strategies for accomplishing that don't seem to be working. How about getting them all together for a week at Outward Bound running through ropes courses and rappelling down cliffs?

How inexperienced voters choose a candidate

Would people who use foolish criteria to pick a Presidential candidate pick in the same way a surgeon to cut open their chests, a pilot to fly them through a storm, or a lawyer to keep them out of jail? I had assumed the answer to that is no, but Mort convinced me the answer is probably yes. They are being consistent, not perverse.

Many of us are frustrated that so much of many political campaigns comes down to factors that have no apparent connection to executive competence, substantive expertise, policy proposals, integrity, record of success/failure, and other evidence generally deemed indicative of future performance. Instead, factors such as likeability, shared beliefs, demographic identity, and the general feeling that the candidate is "like me" or "understands me" seem to sway the decisions of vast numbers of voters.

Perhaps that is because these people make few if any "personnel" decisions. Many people don't "select" doctors or other professionals but accept whomever is assigned to them or take the first referral. Many people never have a supervisory position in which they are called upon to choose a candidate or give a performance evaluation. If they have no experience managing people and no sense of how to go about it, picking a Presidential candidate may be more like picking a spouse than any other decision they've ever made.

Forget about the housing bubble; it’s the leverage.

Some business experts have been saying for months that, while the current financial crisis was probably triggered by the bursting of a housing bubble, there is a much more fundamental and difficult problem that must be solved—too much financial leverage. This paper (pdf, 5 pages plus graphs) posted by Paul Krugman today is significant because he has translated the problem, the implications, and the solution into econo-speak. Hopefully, this means that the herd of professional economists can begin to give it credence, and public policy changes can perhaps follow.

The fundamental problem is that very large global financial players, including especially secretive hedge funds, investment banks, and others in the "shadow banking system," have greatly increased their balance sheet leverage (i.e., debt to equity ratios) and have become very, very large, especially in the last 5 years or so. This resulted in an explosive creation of money that drove asset prices higher—not just residential real estate in the US, but most asset classes in most places. When prices started to drop, they had to sell quickly to try to avoid insolvency, and as selling pressure increased, prices dropped further and more rapidly, leading to the need for more selling. At the same time, institutions realized they needed to reduce their leverage for safety, which was an additional reason to sell. Not only do they have to absorb the air in the housing bubble, they also have to de-lever and reduce the amount of money in the global economy.

A special contribution of Krugman's paper is to make the case that deflation and de-levering is a global process because of the dramatic increase in cross-border asset ownership since 1995. He has this graph of US assets abroad (blue) and foreign assets in US (red) as a percent of GDP for the rest of the world.

 

The conventional wisdom had been (still is?) that a recession in a big economy like the US slows GDP in other nations because we import less. Krugman's thesis is that today the much more important driver of contagion is through the balance sheets of highly-leveraged global financial institutions. When one of these institutions decides it needs to de-lever, it doesn't just sell assets in its home nation or assets of a certain class—it sells whatever it can wherever it does business, and it stops making new commitments anywhere.

Krugman says simply increasing liquidity, as Paulson wants to do, "won't do the trick." Developed nations should cooperate to help de-lever in a different way—by putting more capital into overextended institutions. Krugman is not the first or only expert to say this, but phrasing it in econo-speak may help move policy makers.

Why I miss Ronald Reagan

In the words of Dean Baker, "this is the first time in the history of the United States that the president has sought to provoke a financial panic to get legislation through Congress." It's pretty shocking, but it's not surprising. Exaggeration of risk and fear mongering is how Bush promoted his war in Iraq and more domestic spying, curtailed public access to government information, and took other actions to aggrandize Executive power at home and act unilaterally abroad. And when Bush has not stoked fear, he has invariably decreed that we "must" do this, or they "must" do that. In stark contrast, while he was often wrong, Reagan was never gloomy, angry, imperious.

Is economist Dick Cheney right about deficits?

Pat Garofalo has published this chart showing US federal debt as a percent of GDP.

Dick Cheney said, "Deficits don't matter," and the Reagan, Bush, and Bush administrations certainly acted that way. Does it even matter, Mr. Cheney, if we borrow from ourselves, as we did to finance WWII, or from foreigners, as we do now?

Decision day for hedge funds

Today's the day hedge fund managers add up their withdrawal requests.  (They do this on the first day of every quarter.) Will the volume be so high as to cause many hedge funds to become big sellers and some to liquidate and go out of business?  Felix Salmon presents some hedge fund performance data and discusses the question here.  Thanks to Tim Fernholz at TAP for the link. 

Paulson’s TARP really is just a tarp.

Paul Krugman has good insights here about the motivations, methods, and flawed understandings of the Administration and the Opposition to TARP. He still thinks we should hold our noses and enact it, but it will only stabilize things until the next administration takes over.