Tag Archives: Public Finances


Bush Plan Could Imperil Tax Write-Off for New York,” by Ian Urbina, New York Times, http://www.nytimes.com/2004/12/27/nyregion/27taxes.html?oref=login, 27 December 2004 (from Democratic Underground).

A dish, best served cold.

As the Bush administration looks to revamp the tax code, New York officials say they are particularly worried about one idea being considered: eliminating the federal deduction for state and local taxes.

If the president pursues this plan, New York State would lose about $37 billion per year in federal tax deductions, more than almost any other state, according to Internal Revenue Service data. The change would affect about 3.2 million households in New York, three-quarters of which are middle- and low-income, tax records indicate.

This change would be one of the worst things for New York to came out of Washington in a long time,” said Senator Charles E. Schumer. “But if they take this route they can expect a serious fight.”

But there’s more to this than financially punishing blue-staters.

Weirdly, the U.S. tax system encourages states to adopt income tax, by making money individuals pay to states in income taxes deductable from their national income tax debt. Why the government would wish to depress the marginal willingness to work of Americans is a question best left behind in the dark FDR error. Happily, the Bush administration is looking to modernize this. President Bush is promising to push a simpler, pro-growth tax code, and removing the income tax deduction would be a great first step.

Strategic Despair

From the terrorists: We are not feeling any strategic despair in Iraq—you are,” by Thomas P.M. Barnett, Thompas P.M. Barnett :: weblog, http://www.thomaspmbarnett.com/weblog/archives2/001067.html, 27 October 2004.

Proof of the Ideological Coalition Shift,” by Chris Bowers, MyDD, http://www.mydd.com/story/2004/12/21/152556/76, 21 December 2004.

This would…,” by “Jas1001,” Daily Kos, http://dailykos.com/comments/2004/12/21/193313/66/28#28, 21 December 2004.

To take Dr. Barnett wildly out of context:

My point is this: the strategic despair is on our side (our troops decry: “My God, there’s too many of them to kill, we’ll never get the job done!”), when it should be on our opponents’ side (“My Allah, there’s too many of them to kill, we’ll never get the job done!”). So guess who’s talking about pullout and who’s talking about jacking up the effort?

Strategic despair is both a symptom and cause of defeat. It is a sympton because defeats generate it. It is a cause because it creates a culture of defeat. If you’re going to lose anyway, why not take the easy route? Its so much simpler to become anti-social, blame every setbacks on some conspiracy, and continue to be destroyed in peace.

Unrelated but almost simultaneously works on MyDD and Daily Kos indicate liberate Democrats are feeling it in the worst way. Discussing the long-term inability to find liberal voters, Mr. Bowers writes

Now, no one can dispute that there are more self-identifying conservatives than there are self-identifying liberals, but I admit that my entire argument is based on the assumption that the two coalitions are now primarily ideological rather than regional and ethnic. To date, I have not had the hard evidence to back this assumption up, and instead I have attempted to infer it from my studies on the partisan index. However, today I finally came across exit polls for every presidential election since 1976. Looking at these polls leads me to believe that I now have the proof of this ideological coalition shift that I always desired.

In other words, the conservative southern shift into an ideological coalition only slightly preceded the non-southern liberal shift into an ideological coalition. The two coalitions, which had been primarily ideological for several decades, became almost entirely ideological as 85% of liberals and conservatives now vote for the coalition that supports their ideology. In 1976, that number was around 70%. Half of the non-ideological partisans abandoned their party, and because there are more conservatives than liberals, Republicans benefited greatly from such a shift.

We are living an ideological age. We need to recognize this, and be willing to fight an ideological war. If liberals remain significantly outnumbered by conservatives, Republicans will remain the “natural” ruling party for two generations.

Strategic despair in the long term situation. The editorial’s admirably couched a call to action, but if Republicans may remain as a “natural” ruling party for two generations, it can’t be good.

On the rumor of a much more tactical move to make generally Kerry-supporting income-tax states to pay more in federal taxes — which would “punish” states that vote wrong and retard the long-term growth of states that “govern” wrong, a very elite Daily Kos follower frets

This would…

redraw the economic landscape in America to crush remaining Democrat bases of fundraising while encouraging business and wealthy individuals to move to red states.

It’s so… wonderfully brutal, ruthless and efficient, in an evil sort of way.

If there is no left, the center cannot hold.

To summarize these: the long term hopes for the left are very bleak. They will become bleaker. Without a left for balance, all political debate will be within the right. America will be as rightist as France is leftist.

It is hard for me to believe the titanic impact President Bush has had. Under him America has gone from a Clintonite nation with an ascendant New Democratic ethos and tenuous Republican Congressional majorities to having the GOP as a radical, progressive, structural, governing party.


A Trojan Horse?

A Response to Kinsley,” by Ramesh Ponnuru, The Corner, http://www.nationalreview.com/thecorner/04_12_20_corner-archive.asp#048523, 20 December 2004.

Is Social Security reform a Trojan horse for switching from wage-indexing to price-indexing of benefits? Ramesh quotes a reader who writes

3.) Personal accounts are a sweetner/smokescreen necessary to do what really needs to be done, which is reduce benefits via price indexation (or increasing the retirement age). In an ideal world, policymakers could just reduce benefits without resorting to such tactics, but democracy is messy and we let too many people vote and so such tactics have to be adopted from time to time to get the right policy. Reducing benefits will not only increase national saving by increasing government saving; it will increase personal saving as individuals try to offset the reduction in benefits.”

Interesting. I’m so happily astounded by how informative and intelligent the social security debate has been.

Discordantly, my thoughts: The system is a joke. With every paycheck, I’m subsidizing the lifestyles of people who either could work or who could have saved but chose to not. Yes, there are exceptions, and yes the federal government bares some responsibility for this, but it still grates. Even if we aren’t going to reduce real benefits (instead just make benefits constant in price-adjusted dollars) it’s a great move.

FDR Says: Reform Social Security Now

FDR is Dead: Time to Move On,” by Jonah Goldberg, National Review, http://www.nationalreview.com/goldberg/goldberg200412170916.asp, 17 December 2004.

FDR, Destroyer of the American Economy and negligent to the loss of million of lives worldwide, might be on President Bush’s side in the pension wars:

Of course, liberal mythology about the New Deal legend is, uh, legendary. Still, it’s worth noting that the New Deal surely prolonged the Depression and did far less for poverty than the textbooks claim. The first point is not even particularly controversial. The second is debatable. But what isn’t in dispute among scholars is that it was World War II, not the New Deal, that served to pull America out of its economic doldrums.

But in all the propaganda about FDR, a more salient point has been conveniently lost. It would be entirely in keeping with FDR’s legacy to rip apart the Social Security system if there was even a chance that it could be improved. The overarching theme of FDR’s entire governing philosophy, constantly touted by virtually his entire Brain Trust, was “experimentalism.”

When Raymond Moley, a leading early Brain Truster, was asked to provide a philosophical justification for FDR’s approach to government, he — along with nearly all of the New Dealers — cited Pragmatism. Moley even noted that FDR had studied under William James, the founder of Pragmatism, at Harvard. The historian Eric Goldman wrote of FDR, “he trusted no system except the system of endless experimentation.” FDR himself made this point time and time again. “I have no expectation of making a hit every time I come to bat,” he explained in a fireside chat. At Oglethorpe University, FDR declared, “this country needs bold, persistent experimentation. It is common sense to take a method and try it: If it fails, admit it frankly and try another. But above all, try something.” And always and everywhere, FDR emphasized the important thing was to take action first, and fix the problems later.

First, we might only save a trillion or so, and now President Roosevelt is on board. SS Reform is looking worse and worse all the time…

Only a Trillion

Bush Says Social Security Accounts to Ease Deficits (Update2),” Bloomberg, http://www.bloomberg.com/apps/news?pid=10000087&sid=af_7nCvb9Rm4&refer=top_world_news, 16 December 2004 (from Daily Kos)

The net savings of around $10 trillian (about $12 trillian saved, $2 trillian borrowed) may be based on suspect math

Bush’s contention that spending $1 trillion to $2 trillion now to establish the accounts is better than dealing with a $10.4 trillion shortfall in the future is misleading, said Jason Furman, former economic policy director for Democratic Senator John Kerry’s presidential campaign.

The $10.4 trillion is an estimate over the infinite life of Social Security, he said on a conference call with reporters earlier this week. A more realistic assessment of the system’s deficit is $3.7 trillion over 75 years, the conventional time span for Social Security estimates, he said. Reducing the figure is a “manageable challenge,” Furman said.

So, the majority of Bush’s savings come in the distant future. It’s nice to see some long-rang planning in Washington. But the ex-Kerry staffer’s comments are revealing. There are a lot of numbers flying around, but assuming the very best about the current system, and the very worst about Bush’s plan, the savings are only a trillion dollars.

Only a trillion.

FDR Made the Depression Worse

FDR Responsible for Prolonging – Not Ending – Great Depression, Say UCLA Researchers: 1933 recovery package delayed upturn by 7 years,” UCLA, http://www.econ.ucla.edu/whatsbruin/news/FDRarticle.htm.

How FDR Made the Depression Worse,” by Robert Higgs, The Free Market: Misses Institute Monthly, Volume 13 Number 2, http://www.mises.org/freemarket_detail.asp?control=258&sortorder=subject, February 1995.

Bad Deal:How FDR Made Life Worse for African Americans,” by Damon W. Root, Reason, http://www.findarticles.com/p/articles/mi_m1568/is_5_36/ai_n6203221, October 2004.

Tough Questions for Defenders of the New Deal,” by Jim Powell, Wall Street Journal, http://www.lewrockwell.com/orig4/powell-jim1.html, 15 November 2003.

UCLA’s press release opens with a startling revelation

Two UCLA economists say they have figured out why the Great Depression dragged on for almost 15 years, and they blame a suspect previously thought to be beyond reproach: President Franklin D. Roosevelt.

After scrutinizing Roosevelt’s record for four years, Harold L. Cole and Lee E. Ohanian conclude in a new study that New Deal policies signed into law 71 years ago thwarted economic recovery for seven long years.

“Why the Great Depression lasted so long has always been a great mystery, and because we never really knew the reason, we have always worried whether we would have another 10- to 15-year economic slump,” said Ohanian, vice chair of UCLA s Department of Economics. “We found that a relapse isn’t likely unless lawmakers gum up a recovery with ill-conceived stimulus policies.”

While in fairness the authors criticize only the short-lived National Recovery Administration…

Using data collected in 1929 by the Conference Board and the Bureau of Labor Statistics, Cole and Ohanian were able to establish average wages and prices across a range of industries just prior to the Depression. By adjusting for annual increases in productivity, they were able to use the 1929 benchmark to figure out what prices and wages would have been during every year of the Depression had Roosevelt’s policies not gone into effect. They then compared those figures with actual prices and wages as reflected in the Conference Board data.

In the three years following the implementation of Roosevelt’s policies, wages in 11 key industries averaged 25 percent higher than they otherwise would have done, the economists calculate. But unemployment was also 25 percent higher than it should have been, given gains in productivity.

Meanwhile, prices across 19 industries averaged 23 percent above where they should have been, given the state of the economy. With goods and services that much harder for consumers to afford, demand stalled and the gross national product floundered at 27 percent below where it otherwise might have been.

“High wages and high prices in an economic slump run contrary to everything we know about market forces in economic downturns,” Ohanian said. “As we’ve seen in the past several years, salaries and prices fall when unemployment is high. By artificially inflating both, the New Deal policies short-circuited the market’s self-correcting forces.”

The policies were contained in the National Industrial Recovery Act (NIRA), which exempted industries from antitrust prosecution if they agreed to enter into collective bargaining agreements that significantly raised wages. Because protection from antitrust prosecution all but ensured higher prices for goods and services, a wide range of industries took the bait, Cole and Ohanian found. By 1934 more than 500 industries, which accounted for nearly 80 percent of private, non-agricultural employment, had entered into the collective bargaining agreements called for under NIRA.

Cole and Ohanian calculate that NIRA and its aftermath account for 60 percent of the weak recovery. Without the policies, they contend that the Depression would have ended in 1936 instead of the year when they believe the slump actually ended: 1943.

But it’s quickly apparent the press release was written by a journalism major. It’s just wrong. FDR’s near-complete destruction of the American economy is common knowledge. His actions ranged from Orwellion Patriot Act-like crackdowns on freedom…

Invoking the Trading with the Enemy Act of 1917, Roosevelt declared that “all banking transactions shall be suspended.” Banks were permitted to reopen only after case-by-case inspection and approval by the government, a procedure that dragged on for months. This action heightened the public’s sense of crisis and allowed him to ignore traditional restraints on the power of the central government.

FDR’s actions were made worse by their hypocrtical and larcenous nature.

The day after FDR took the oath of office, he issued a proclamation calling Congress into a special session. Before it met, he proclaimed a national banking holiday–an action he had refused to endorse when Hoover suggested it three days earlier.

In their understanding of the Depression, Roosevelt and his economic advisers had cause and effect reversed. They did not recognize that prices had fallen because of the Depression. They believed that the Depression prevailed because prices had fallen. The obvious remedy, then, was to raise prices, which they decided to do by creating artificial shortages. Hence arose a collection of crackpot policies designed to cure the Depression by cutting back on production. The scheme was so patently self-defeating that it’s hard to believe anyone seriously believed it would work.

The goofiest application of the theory had to do with the price of gold. Starting with the bank holiday and proceeding through a massive gold-buying program, Roosevelt abandoned the gold standard, the bedrock restraint on inflation and government growth. He nationalized the monetary gold stock, forbade the private ownership of gold (except for jewelry, scientific or industrial uses, and foreign payments), and nullified all contractual promises–whether public or private, past or future–to pay in gold.

Besides being theft, gold confiscation didn’t work. The price of gold was increased from $20.67 to $35.00 per ounce, a 69% increase, but the domestic price level increased only 7% between 1933 and 1934, and over rest of the decade it hardly increased at all. FDR’s devaluation provoked retaliation by other countries, further strangling international trade and throwing the world’s economies further into depression.

Just for good measure, FDR screwed the brothers too

It was New Deal labor laws that had the most pernicious impact on African Americans. The National Industrial Recovery Act (NIRA), in effect from June 2933 until a unanimous Supreme Court declared it unconstitutional in May 1933 (in Schechter Poultry Corp. v. United States), was considered the hallmark of the New Deal. In addition to creating the Works Progress Administration, the NIRA authorized the National Recovery Administration (NRA), which organized cartels, fixed wages and prices, and, under section 7(a), established the practice of collective bargaining, whereby a union selected by a majority of employees exclusively represented all employees.

While such compulsory unionism is routinely celebrated as a milestone for the American worker, many African Americans saw things differently. The NAACP’s publication The Crisis, for example, decried the monopoly powers granted to racist unions by the NRA noting in 1934 that “union labor strategy seems to be to obtain the right to bargain with the employees as the sole representative of labor, and then close the union to black workers.” Members of the black press had something of a field day attacking the NRA, rechristening it the “Negro Removal Act,” “Negroes Robbed Again,” “Negro Run Around,” and “No Roosevelt Again.”

NRA codes harmed other poor groups as well. By setting the price of food and goods above market levels, the agency’s price controls made it that much more expensive for the nation’s poor and unemployed to provide for themselves and their families. Struggling entrepreneurs also suffered. Jacob Maged, a 49-year-old immigrant dry cleaner, spent three months in jail in 1934 for charging 35 cents to press a suit, rather than the NRA-mandated 40 cents.

To meet the inflated payrolls required by New Deal minimum wage codes, employers eliminated unskilled and marginal positions, precisely the sort of jobs filled by African Americans and other disadvantaged groups. According to a Labor Department report, between 30,000 and 50,000 workers, primarily African Americans in the South, lost their jobs within just two weeks of the activation of the Fair Labor Standards Act (1938), which set a uniform minimum wage. Not surprisingly, both unions and industrialists in the North favored the minimum wage, since it undercut their competitors in the South.

In 1935 the National Labor Relations Act (or Wagner Act, after its sponsor, Democratic New York Sen. Robert Wagner) revived section 7(a) of the recently defunct NRA and granted monopoly bargaining power to unions selected by a majority of employees. Neither company-sponsored unions nor unions representing a minority of workers were permitted. The act’s original draft contained a clause forbidding discrimination against African Americans by federally recognized unions, but the clause was removed at the behest of the American Federation of Labor; a notoriously racist outfit at the time.

The Wall Street Journal printed a list of ten questions for supporters of President Roosevelt. The first five of them are…

1. Why did FDR triple federal taxes during the Great Depression? Federal tax revenues more than tripled, from $1.6 billion in 1933 to $5.3 billion in 1940. Excise taxes, personal income taxes, inheritance taxes, corporate income taxes, holding company taxes and “excess profits” taxes all went up. FDR introduced an undistributed profits tax. Consumers had less money to spend, and employers had less money for growth and jobs.

2. Why did FDR discourage investors from taking the risks of funding growth and jobs? Frequent tax hikes (1933, 1934, 1935, 1936) created uncertainty that discouraged investment, and FDR further discouraged investors by denouncing them as “economic royalists,” “economic dictators” and “privileged princes,” among other epithets. No surprise that private investment was at historically low levels during the New Deal era.

3. Why did FDR channel government spending away from the poorest people? Little New Deal spending went to the South, the poorest region; most went to political “swing” states in the West and East, where incomes were more than 60% higher. The South was already overwhelmingly on FDR’s side.

4. Why did FDR make it more expensive for employers to hire people? By enforcing above-market wages, introducing excise taxes on payrolls and promoting compulsory unionism, the New Deal increased the costs of employing people about 25% from 1933 to 1940 – a major reason why double-digit private sector unemployment persisted throughout the New Deal era.

5. Why did FDR destroy all that food when millions were hungry? FDR promoted higher food prices by paying farmers to plow under some 10 million acres of crops and slaughter and discard some six million farm animals. The food destruction program mainly benefited big farmers, since they had more food to destroy than small farmers. This policy and subsequent programs to pay farmers for not producing victimized the 100 million Americans who were consumers.

I’ll try get a more statistical criticism criticism of FDR up later, not to mention his insane pre-WWII foreign policy. He was a terrible man, a terrible President, and we would have been better off without him.

One Dollar, One Vote, For You

Ever dream of getting mad at a crazy war, and not paying in retaliation? Ever get sick of federal welfare to the poor/corporations/farmers, and stop subsidizing it? Ever not do so, because you realize the penalty for that is imprisonment?

For years, international investors have been able to punish rogue regimes by withdrawing their money. New York Times columnist Tom Friedman calls these investors “the global herd,” and the new world “One Dollar, One Vote.” The global herd played a critical role in removing the Suharto regime from Indonesia.

President Bush wants to give you that power.

Most Americans pay no income tax, and yet they still have to subsidize the government’s policies. Their social security “premiums” go straight to buying government debt. The government forces people to vote for its politics with their retirement money.

The social security reforms making their way through Congress would allow individuals to invest some of their money in private accounts. Instead of the federal government getting cheap no-choice loans from you, you could stear that money where you want. Care only about profit? Go for a high performing mutual fund. Care for social responsability? Invest in so-called green funds that support environmentally friendly organizations. Similar funds for free speech, free religion, or free software could also grow.

Social security should enable social democracy. Support social security private accounts.

No Transition Costs

On Social Security: The Washington Post Gets It
Jack Kemp

Jack Kemp reports on the growing bipartisan push for Social Security reform, from the Washington Post…

For example, on August 14th, 2004, the Post editorialized that, “Mr. Bush’s sympathizers are right that Social Security privatization could reduce long-term deficits, and right that the nation should not be deterred by the transition costs.” The Post also discarded the class-warfare mantra that has consumed Democratic candidates and party loyalists for so long by reasoning that: “Privatization could also stimulate economic growth, boosting tax revenues and so strengthening the nation’s fiscal prospects via a second route.” They continued, “Private accounts would boost national savings” thus “savings would become more plentiful,” which, in turn, would “stimulate extra corporate investment and growth.”

The Washington Post editorial writers realize that Social Security, as it currently stands, is the “risky scheme.” The government can at any time raise taxes or cut benefits. Moreover, workers born after 1960 are expected to receive a real rate of return on their payroll-tax contributions of less than two percent. Alan Greenspan stated this in 1999; his estimate likely was generous. This measly return is not a fair deal for retirees — today or in the future — and is particularly bad for low-income people of color. Even workers who put their money in standard government-insured savings accounts will earn higher returns than the current Social Security system can provide.

The Washington Post has now followed up on that original piece with an even more promising editorial this week. This week’s piece entitled, “The Cost of Reform,” observed that creating personal retirement accounts without tax increases or benefit cuts would require “issuing perhaps $2 trillion in extra bonds over the next generation or so,” but added that the creation of these accounts “would generate an equal and opposing transition benefit” thus “the net transition cost should be zero.” Ditto for the effect on interest rates and the dollar. As the editorial makes perfectly clear, “Government borrowing would increase, but private saving would increase equally.” In other words, net national savings would not suffer. In fact, net national savings can be expected to increase, especially if personal accounts are accompanied by tax reforms.

Hat tip Tech Central Station

Left, Right, Social Security

Why Are Democrats Intent on Alienating Young Workers?
James Lileks
Newhouse News Servic

Borrow, Speculate and Hope
Paul Krugman

Why the Left Should Favor Social Security Privatization (and the Right Should Oppose It)
Arnold Kling

Wall St Group Says Social Security Reform No Feast
Herbert Lash

Another right-wing rant from the Newhouse Network…

Everyone knows the system will explode in a shower of shredded promissory notes at some point. Every year the drop-dead date gets massaged and moved around, but you have a great number of people who read the new Projected Year of Doom, run the numbers in their head, and think: Well, I’ll be dead.

… except, Paul Krugman agrees

First, financial markets would, correctly, treat the reality of huge deficits today as a much more important indicator of the government’s fiscal health than the mere promise that government could save money by cutting benefits in the distant future.

After all, a government bond is a legally binding promise to pay, while a benefits formula that supposedly cuts costs 40 years from now is nothing more than a suggestion to future Congresses. Social Security rules aren’t immutable…

But then again, Krugman might not be too reliable…

Second, a system of personal accounts, even though it would mainly be an indirect way for the government to speculate in the stock market, would pay huge brokerage fees. Of course, from Wall Street’s point of view that’s a benefit, not a cost.

v. the “right wingers” at Reuters

NEW YORK (Reuters) – Plans to reform the U.S. Social Security system by allowing people to invest in stocks are unlikely to result in a feast for Wall Street if a retirement plan for federal workers is copied, a report on Thursday said.

If investment choices are limited to a small selection of index funds along the lines of the Thrift Savings Plan, those accounts will generate a modest $39 billion in fees over the first 75 years, the Securities Industry Association said in a report.

That represents just 1.2 percent of estimated revenue for the entire financial sector during that span of time, said Rob Mills, director of industry research at SIA, in the report.

Perhaps a compromise from Tech Central Station?

To be fair, Krugman and other economists on the Left would like to see Social Security paid for in part by “general revenues,” meaning income taxes. If that were done, it would serve to reduce the regressivity of Social Security.

However, there is one important difference between keeping Social Security as it is and switching to privatization. Under the current system, Social Security’s liabilities will continue to be funded by payroll taxes. However, under privatization, the transitional debt would be repaid using — guess what? General revenues! In other words, privatization is a vehicle for changing Social Security’s medium-term funding mechanism from payroll taxes to income taxes. It is exactly what the Left presumably wants, and what the Right presumably opposes.

Creating private accounts for social securities allows young workers to actually receive their benefits, protects older workers, and gives us a much more stable pension system. Nations and corporations with “defined benefit” systems, such as France, Russia, and the dying steel mills, are in terrible shape. I’m thankful we have a Ppresident like George W. Bush who is willing to take risks to give us a better way.

I told you Aaron

About three weeks ago, I was eating Chinese with Aaron when I made a breathtaking prediction.

“In about three months, people will be calling Bush a liar and Republicans will be defending him. Bush will say we need to reform taxes and social security to help our dollar. Some will call this lying, because more debt will be needed in the meantime, and the short-run effect will be to make the dollar even weaker. Bush will be telling the truth long-term, but won’t explain the difference.”

It begins.