Sunday, December 19, 2010

Today’s gag-me MSM tidbit

Richard Thaler in the NYT business section with the stated-as-gospel-truth chestnut that “high tax rates distort incentives” (read: I’m a capital fund manager now so I represent the wealthy, and I stand with N. Gregory Mankiw, that Big Establishment Mouthpiece, in defending the wealthy) that completely misses the Big Picture that America is falling apart, turning into a feudal society with attendant loss of productivity and distortions of aggregate demand.  Just for fun I got the top marginal tax rates from the Tax Foundation for married filing joint (here) and plotted them against real GDP growth, smoothed and with postwar trend:


So if correlation were causation, we’d want to raise top marginal tax rates!  But of course the hidden variable causing both is a (disintegrating) social contract.

That these mainstream guys can stare at the Big Picture—gigantic debt-to-GDP ratio, extreme concentration of wealth and income, banana republic national economic management—the biggest transfer of wealth from the middle class to the wealthy in history—all historical precursors of depression—and continue to spout the same of principles of macroeconomics platitudes indicates severe brain damage to me.  Or just possibly an intellect compromised by where the corpus is getting its bread and butter.

The failure of our political system to make an intelligent choice on the tax deal (CBO estimates $900 billion added to deficit over five years) almost guarantees that there will be a credit markets catastrophe within a few years and a further collapse of U.S. domestic effective demand.  Is this evidence of a higher intelligence at work in our social dynamics?  Suggestive that only in the most extreme crisis will people become mobilized enough to attempt truly rational and just solutions to what ails us?  And are the forces of the status quo ready to throw the U.S. economy down the drain to preserve, for some interval, their relative position?  Because if the happiness literature has taught us anything, it is that relative position drives us human monkeys, and that all that stuff about “growth is good” has merely put us on a hedonic treadmill that goes nowhere fast.  Above a certain level of real income, happiness appears to depend mostly on relative position and relative “socioeconomic status.”

Until the American people demand that sacrifice be shared the country will continue to split apart, methinks, into the lords and the serfs… or something we can hardly imagine.

Selected references

Getting off the hedonic treadmill, one step at a time

Beyond the hedonic treadmill

Does relative income matter?

Building a better America, one wealth quintile at a time

Monday, December 13, 2010

America, the barbaric

Here is a cogent exposé of America’s bankrupt value system.  And even America’s poor have been taught to blame themselves (Low incomes make poor more conservative, study finds - physorg).  It is instructive that it is the “liberal”—and often bellicose—Paul Krugman gets the honor of being shredded here.

Via:  Truthout

Reconsidering Japan and Reconsidering Paul Krugman

Sunday 12 December 2010

by: Steven Hill, t r u t h o u t | News Analysis

Reconsidering Japan and Reconsidering Paul Krugman
Shibuya, Tokyo. (Photo: - reuben -)

The New York Times is doing a series on Japan, which the Times describes as an examination of "the effects on Japanese society of two decades of economic stagnation and declining prices." Reading the series is about as cheery a task as rubbernecking at a car wreck on I-95, but, unfortunately, the Times series simply repeats the "conventional wisdom" about Japan put out by the same economic experts who missed an $8 trillion housing bubble in the United States, and, in fact, have been wrong on most of the big economic issues over the past two decades.

Look at it this way: In the midst of the Great Recession, the United States is suffering through nearly 10 percent unemployment and 50 million people without health insurance. A new report has found over 14 percent of Americans living below the poverty line, including 20 percent of children and 23 percent of seniors, the highest numbers since President Lyndon Johnson's War on Poverty. That's in addition to declining prospects for the middle class and a general increase in economic insecurity.

How, then, should we regard a country that has 5 percent unemployment, health care for all of its people, the lowest income inequality and is one of the world's leading exporters? This country also scores high on life expectancy, low on infant mortality, at the top in literacy, and low on crime, incarceration, homicides, mental illness and drug abuse. It also has a low rate of carbon emissions and is doing its part to reduce global warming. In all of these categories, this particular country beats both the US and China by a country mile.

Doesn't that sound like a country from which Americans might learn a thing or two about how to get out of the mud hole in which we are stuck?

Not if that place is Japan. During and before the current economic crisis, few countries have been vilified as an economic basket case as much as the Land of the Rising Sun. Google "Japan and its economy" and you will get numerous hits about Japan's allegedly sclerotic economy, its zombie banks, its deflation and slow economic growth. This malaise has even been called "Japan syndrome," a monicker that sounds like a disease to warn policymakers - as in, "You don't want to end up like Japan."

No one has been more influential in defining this narrative than New York Times columnist and Nobel-Prize-winning economist Paul Krugman. Throughout the 1990s, and still occasionally today, Krugman has skewered Japan's economy and its leaders. In the late 1990s, Krugman wrote a series of gloom-and-doom articles, complete with equations, theories and titles like "Japan's Trap" and "Setting Sun," bluntly stating: "The state of Japan is a scandal, an outrage, a reproach. It is operating far below its productive capacity, simply because its consumers and investors do not spend enough."

Krugman was commenting on Japan's so-called "lost decade" of the 1990s, when the Japanese economy was considered sluggish and underperforming. But let's look at some of the Japanese metrics during that time. Throughout the 1990s, the Japanese unemployment rate was - ready for this? - about three percent. Not 30 percent, that's three percent: about half the US unemployment rate at the time. During that allegedly "lost decade," the Japanese also had universal health care, less inequality, the highest life expectancy and low rates of infant mortality, crime and incarceration. Americans should be so lucky as to experience a Japanese-style lost decade.

Reopening the case of Japan raises some important questions. How do economists such as Krugman decide what to value and prioritize, or what to measure? What is an economy for? To produce the prosperity, security and services that people need? Or to satisfy economists and their equations, theories and models? For too many economic Cassandras, if their spreadsheet columns don't add up, if the surplus nations don't balance the deficit nations and the supply doesn't meet the demand, then disaster surely awaits.

Krugman has gone on the attack again recently, this time in a debate over fiscal stimulus versus deficit reduction as a strategy toward economic recovery. As a stimulus hawk, he has written that the Germans - one of the few economic bright spots in a struggling global economy - "seem to be getting their talking points from the collected speeches of Herbert Hoover." He is criticizing Germany for the same reason he criticizes Japan; he says the country is not spending or consuming enough to stimulate its economy.

But what exactly are the Germans or the Japanese supposed to buy more of? Surely Krugman has visited both countries, and it's plainly evident that neither are lacking in any material goods or modern trinkets to speak of. Americans are the only ones who seem to think they need three refrigerators, four televisions and a car for everyone in the household. Too many economists have yet to figure out that it is this consumer-driven economic model that has crashed and burned.

Japan's economy has been and remains successful. Germany's is thriving as well. Unlike the trickle-down US economy, Japan and Germany have reached an economic steady state in which they don't need roaring growth rates to provide for their people, and here's why: they are better at sharing the wealth produced by their economies to foster a more broadly shared prosperity among their populaces.

But for the economic experts, apparently, it doesn't matter if people's needs are being met; what matters is whether their theories and equations balance. It's no different with media outlets such as The New York Times, which has been getting it wrong for years – they also missed an $8 trillion housing bubble, as well as the lie on weapons of mass destruction in Iraq (prompting the Times to issue an unprecedented mea culpa to their readers). In the same way, the Times and the rest of the media have been missing the real story about what is occurring in Japan and Europe.

As a result, there is a commonsense aspect to this story that gets lost amid the rhetoric and the headlines. Two lessons of our times are that economic bubbles eventually burst, and that the environmental consequences of unbridled growth in this age of global warming are severe. The world needs to figure out how advanced economies can provide for their people without relying on roaring growth rates driven by asset bubbles. If consumer-driven growth was the order of the day in the post-World War II era, going forward it is going to be steady-state economic growth - growing not too fast, but not too slowly - and learning to do more with less. Yet stimulus hawks like Krugman don't seem to get this; they want to crank the "growth machine" into full gear with huge government stimulus spending.

But the real game is no longer strictly about economic growth; it's also about sustainability. The era of US-style trickle-down economies is over for wealthy countries because trickle-down is neither economically sound nor ecologically sustainable. The developed nations must lead the way towards a different path of development. This is not an easy challenge, yet it is the course that Japan and Germany have chosen. If the US didn't have such a trickle-down economy that has produced so much inequality - if it was better at sharing its wealth - perhaps it wouldn't need so much fiscal stimulus and growth.

At the recent G-20 meeting in Seoul, South Korea, German Chancellor Angela Merkel rebuffed President Barack Obama and Treasury Secretary Timothy Geithner's appeals to go back to the toxic economics of Wall Street capitalism. Said Merkel, "It is essential to return to a sustainable growth path." One cause of the crisis, she said, was that "we did not have sustainable growth. In many countries growth was built on debt and [speculative] bubbles."

Her finance minister, Wolfgang Schauble, was even more blunt. He described American policy as "clueless" and said the American growth model is stuck in a deep crisis. "The USA lived off credit for too long, inflated its financial sector massively and neglected its industrial base." Catch the irony: Germany - previously sneered at by US pundits for its "weak and sclerotic" economy - is lecturing America about how to grow our economy. Given Germany's 6.7 percent unemployment (compared to 9.6 percent in the US) and an impressive record at manufacturing things that the rest of the world wants to buy, the Obama administration, as well as Paul Krugman, should be listening attentively.

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Sunday, December 12, 2010

Ron Paul on WikiLeaks

Congressman Paul is 75, but in great shape.  I would vote for him for President. 

Saturday, December 11, 2010

Free speech under attack

Joe Lieberman wants to be able to shut down the Internet.  The most recent canard from the State Department is that Julian Assange is not a journalist because he has a political agenda (is there a journalist anymore who doesn’t have a political agenda?).

It’s important to remember that the police are on the government payroll and will do whatever they are asked to do to “preserve order.”  The Espionage Act criminalizes thought crimes.  The American ruling class has hardened their hearts to the crimes of their empire and to the suffering of their fellow citizens.  The Republican Party has taken the lead in hard heartedness but it is a bipartisan effort.  Already it is a crime to electronically record the police.  I am concerned that the jack boot of fascism will come down hard in the next collapse of "animal spirits.”  The ruling class clings greedily to its spoils, and is willing to take the country down to do so, since there are more attractive investment opportunities abroad….

The New McCarthyism – Gonzalo Lira.  Detailed deconstruction of the mind-f**k that the MSM media have done to you in the past few weeks.  Extremely refreshing and alarming.  We have a lynch mob mentality forming in America.  A must read.

Naomi Wolfe on the Espionage Act – Any indictments based on this act should be met with horror.

This week, Senators Joe Lieberman and Dianne Feinstein engaged in acts of serious aggression against their own constituents, and the American people in general. They both invoked the 1917 Espionage Act and urged its use in going after Julian Assange. For good measure, Lieberman extended his invocation of the Espionage Act to include a call to use it to investigate the New York Times, which published WikiLeaks' diplomatic cables. Reports yesterday suggest that U.S. Attorney General Eric Holder may seek to invoke the Espionage Act against Assange.

These two Senators, and the rest of the Congressional and White House leadership who are coming forward in support of this appalling development, are cynically counting on Americans' ignorance of their own history -- an ignorance that is stoked and manipulated by those who wish to strip rights and freedoms from the American people. They are manipulatively counting on Americans to have no knowledge or memory of the dark history of the Espionage Act -- a history that should alert us all at once to the fact that this Act has only ever been used -- was designed deliberately to be used -- specifically and viciously to silence people like you and me.

The Espionage Act was crafted in 1917 -- because President Woodrow Wilson wanted a war and, faced with the troublesome First Amendment, wished to criminalize speech critical of his war. In the run-up to World War One, there were many ordinary citizens -- educators, journalists, publishers, civil rights leaders, union activists -- who were speaking out against US involvement in the war. The Espionage Act was used to round these citizens by the thousands for the newly minted 'crime' of their exercising their First Amendment Rights. A movie producer who showed British cruelty in a film about the Revolutionary War (since the British were our allies in World War I) got a ten-year sentence under the Espionage act in 1917, and the film was seized; poet E.E. Cummings spent three and a half months in a military detention camp under the Espionage Act for the 'crime' of saying that he did not hate Germans. Esteemed Judge Learned Hand wrote that the wording of the Espionage Act was so vague that it would threaten the American tradition of freedom itself. Many were held in prison for weeks in brutal conditions without due process; some, in Connecticut -- Lieberman's home state -- were severely beaten while they were held in prison. The arrests and beatings were widely publicized and had a profound effect, terrorizing those who would otherwise speak out.

Presidential candidate Eugene Debs received a ten-year prison sentence in 1918 under the Espionage Act for daring to read the First Amendment in public. The roundup of ordinary citizens -- charged with the Espionage Act -- who were jailed for daring to criticize the government was so effective in deterring others from speaking up that the Act silenced dissent in this country for a decade. In the wake of this traumatic history, it was left untouched -- until those who wish the same outcome began to try to reanimate it again starting five years ago, and once again, now. Seeing the Espionage Act rise up again is, for anyone who knows a thing about it, like seeing the end of a horror movie in which the zombie that has enslaved the village just won't die.

I predicted in 2006 that the forces that wish to strip American citizens of their freedoms, so as to benefit from a profitable and endless state of war -- forces that are still powerful in the Obama years, and even more powerful now that the Supreme Court decision striking down limits on corporate contributions to our leaders has taken effect -- would pressure Congress and the White House to try to breathe new life yet again into the terrifying Espionage Act in order to silence dissent. In 2005, Bush tried this when the New York Times ran its exposé of Bush's illegal surveillance of banking records -- the SWIFT program. This report was based, as is the WikiLeaks publication, on classified information. Then, as now, White House officials tried to invoke the Espionage Act against the New York Times. Talking heads on the right used language such as 'espioinage' and 'treason' to describe the Times' release of the story, and urged that Bill Keller be tried for treason and, if found guilty, executed. It didn't stick the first time; but, as I warned, since this tactic is such a standard part of the tool-kit for closing an open society -- 'Step Ten' of the 'Ten Steps' to a closed society: 'Rename Dissent 'Espionage' and Criticism of Government, 'Treason' -- I knew, based on my study of closing societies, that this tactic would resurface.

Let me explain clearly why activating -- rather than abolishing -- the Espionage Act is an act of profound aggression against the American people. We are all Julian Assange. Serious reporters discuss classified information every day -- go to any Washington or New York dinner party where real journalists are present, and you will hear discussion of leaked or classified information. That is journalists' job in a free society. The White House, too, is continually classifying and declassifying information.

As I noted in The End of America, if you prosecute journalists -- and Assange, let us remember, is the New York Times in the parallel case of the Pentagon Papers, not Daniel Ellsberg; he is the publisher, not the one who revealed the classified information -- then any outlet, any citizen, who discusses or addresses 'classified' information can be arrested on 'national security' grounds. If Assange can be prosecuted under the Espionage Act, then so can the New York Times; and the producers of Parker Spitzer, who discussed the WikiLeaks material two nights ago; and the people who posted a mirror WikiLeaks site on my Facebook 'fan' page; and Fox News producers, who addressed the leak and summarized the content of the classified information; and every one of you who may have downloaded information about it; and so on. That is why prosecution via the Espionage Act is so dangerous -- not for Assange alone, but for every one of us, regardless of our political views.

This is far from a feverish projection: if you study the history of closing societies, as I have, you see that every closing society creates a kind of 'third rail' of material, with legislation that proliferates around it. The goal of the legislation is to call those who criticize the government 'spies', 'traitors', enemies of the state' and so on. Always the issue of national security is invoked as the reason for this proliferating legislation. The outcome? A hydra that breeds fear. Under similar laws in Germany in the early thirties, it became a form of 'espionage' and 'treason' to criticize the Nazi party, to listen to British radio programs, to joke about the fuhrer, or to read cartoons that mocked the government. Communist Russia in the 30's, East Germany in the 50's, and China today all use parallel legislation to call criticism of the government -- or whistleblowing -- 'espionage' and 'treason', and 'legally' imprison or even execute journalists, editors, and human rights activists accordingly.


Thursday, December 9, 2010

10 reasons to shun stocks

The inestimable Paul Farrell.  A must read. 

10 reasons to shun stocks till banks crash – Paul Farrell

Alfred McCoy, Taking Down America

A very thoughtful piece from on where the world may be going in several different scenarios.  It points out that if the international corporate elite indeed trumps the nation state in power and influence, that the next period may be international feudalism, with the pattern of extreme inequality seen in the U.S. under corporate hegemony spreading across the rest of the world.  Serfs of the world, unite!  One of the best reads I’ve come across for Big Picture.  And indirectly highlights the need to keep the Internet open—and speech free—as at least a possible countervailing force against the sheer dead weight of money.

Alfred McCoy, Taking Down America

Tuesday, December 7, 2010

Boomer bust has a nice write-up of the demographic nightmare facing the stock market.  As has been reporting for a while, the insider sell-to-buy ratio has been exploding recently, as insiders read Rosie.  So to counter the funny-money Santa Claus rally that’s popping on the Street today, take a read of what the Age Wave suggests for the future.  When contemplating the miserable yields available under ZIRP (though surfing the yield curve can be fun in a tax-deferred way), remember that some coke head somewhere once wrote a book titled “Less Than Zero,” which probably summed up his knowledge of mathematics, but also sums up what might be expected from equity returns over the next decade….  My question:  will the Big Bottom, when it finally arrives, be a buying opportunity?  It has to be, doesn’t it, by the iron laws of behavioral overshooting…?

Just Where Is The Equity In All Of This? –

Sunday, December 5, 2010

Will 2012 be as critical as 1860?

Jim Quinn’s The Burning Platform has a nice summary with topical speculations on where we’re at in the fourth turning.  Strauss and Howe’s The Fourth Turning is put down by Amazon’s own reviewer as a “pseudo-scholarly tract,” which is a misnomer (it is a tract, and it is scholarly).  Since it was written in the mid-1990s as a professed work of prophesy, the authors have gotten the tone of unfolding events pitch perfect.  They really seem to have their finger on the pulse of American history.

The presidential election of 2012 may or may not elect the leader around which the “regeneracy” phase of the Crisis can proceed.  Of the crop of potential candidates identified in Quinn’s article only Ron Paul has the dedication to the principles of the Constitution that might truly restore the “spirit of America,” in my humble opinion. 

Quinn doesn’t discuss what really brought us out of the Depression, in my view (and implicitly, Robert Reich’s)—the equalization of incomes in World War II that restored balance to domestic aggregate demand (see Saez reference embedded here). 


It remains to be seen if aggregate demand will be rebalanced in this Crisis turning.  Strauss and Howe identify four possible resolutions:

1.  The end of humankind
2.  The end of modernity
3.  The end of “America”
4.  The end of the seventh modern saeculum

Might also be worth reviewing Johansen and Sornette on the end of humankind’s growth era.

Quinn’s article is worth reading.

Have a great week!

Friday, December 3, 2010

Animal spirits: collapse not imminent

With the unemployment rate at 9.8 percent, confidence continues to chug upward in what I’m afraid will be a vain attempt to regain positive territory, speaking in terms of the relationship of the unemployment rate to adaptation level.  I continue to expect the next collapse of animal spirits—the defining characteristic of a recession—to occur in about 2013.  This assumes no significant improvement in the unemployment rate.  The hopeless political situation in the United States implies that no matter who wins the next presidential election, it will be considered a defeat by the people.  Continued debt defaults, banking problems and contractionary policy will probably be thrown into the mix.  Here are the charts:


For confidence to collapse in 2013 it is sufficient that unemployment begin trending up again, regardless of any (negligible) improvement between now and then.

The yield curve plus animal spirits recession probability forecasting model continues to show no hint of a collapse of confidence in the next year (the NYFRB’s model agrees):


I have written about effect of ZIRP, Zero Interest Rate Policy, on ability of the yield curve to forecast recession.  It may be true as John Hussman points out that it might be more difficult for the curve to invert, but there is no evidence that the relationship between short and long rates has fundamentally changed in magnitude.  If we see the 10-year yield in the neighborhood of one percent, watch out.  It would take only relatively mild pressure at the short end to tip things over (yes, I am expecting deflation of many asset classes in the intermediate term):


Thursday, December 2, 2010

The big economic story, and why Obama isn’t telling it

A Democratic clear thinker on the essential worthlessness of the President to his party or to his professed beliefs.  The Plutocracy (aka the Kleptocracy) rules!  Blame Government!  Cut your own benefits so the rich can have more! 

The only weakness of the article is that Reich doesn’t recognize the (in my estimation) primary cause of the increasing inequality, namely the glorification of greed that has consumed the national psyche since Reagan.  This represents the opportunistic streak in the genetics of the mostly self-selected American people run amok.  Why should a CEO of an American corporation today be worth 400 times the median income when thirty years ago he or she worked for 30 times it?  No reason other than the winner-take-all economy we’ve developed, a reflection of our social values.  The depression will in all likelihood deepen until the distribution is flattened out.

Via:  Robert Reich

Quiz: What’s responsible for the lousy economy most Americans continue to wallow in?

A. Big government, bureaucrats, and the cultural and intellectual elites who back them.

B. Big business, Wall Street, and the powerful and privileged who represent them.

These are the two competing stories Americans are telling one another.

Yes, I know: It’s more complicated than this. In reality, the lousy economy is due to insufficient demand – the result of the nation’s almost unprecedented concentration of income at the top. The very rich don’t spend as much of their income as the middle. And since the housing bubble burst, the middle class hasn’t had the buying power to keep the economy going. That concentration of income, in turn, is due to globalization and technological change – along with unprecedented campaign contributions and lobbying designed to make the rich even richer and do nothing to help average Americans, insider trading, and political bribery.

So B is closer to the truth.

But A is the story Republicans and right-wingers tell. It’s a dangerous story because it deflects attention from the real problem and makes it harder for America to focus on the real solution – which is more widely shared prosperity. (I get into how we might do this in my new book, Aftershock.)

A is also the story President Obama is telling, indirectly, through his deficit commission, his freeze on federal pay, his freeze on discretionary spending, and his waivering on extending the Bush tax cuts for the rich.

Most other Washington Democrats are falling into the same trap.

If Obama and the Democrats were serious about story B they’d at least mention it. They’d tell the nation that income and wealth haven’t been this concentrated at the top since 1928, the year before the Great Crash. They’d be indignant about the secret money funneled into midterm campaigns. They’d demand Congress pass the Disclose Act so the public would know where the money comes from.

They’d introduce legislation to curb Wall Street bonuses – exactly what European leaders are doing with their financial firms. They’d demand that the big banks, now profitable after taxpayer bailouts, reorganize the mortgage debt of distressed homeowners. They’d call for a new WPA to put the unemployed back to work, and pay for it with a tax surcharge on incomes over $1 million.

They’d insist on extended unemployment benefits for long-term jobless who are now exhausting their benefits. And they’d hang tough on the Bush tax cuts for the wealthy – daring Republicans to vote against extending the cuts for everyone else.

But Obama is doing none of this. Instead, he’s telling story A.

Making a big deal out of the deficit – appointing a deficit commission and letting them grandstand with a plan to cut $4 trillion out of the projected deficit over the next ten years — $3 of government spending for every $1 of tax increase – is telling story A.

What the public hears is that our economic problems stem from too much government and that if we reduce government spending we’ll be fine.

Announcing a two-year freeze on federal salaries – explaining that “I did not reach this decision easily… these are people’s lives” – is also telling story A.

What the public hears is government bureaucrats are being paid too much, and that if we get the federal payroll under control we’ll all be better off.

Proposing a freeze on discretionary (non-defense) spending is telling story A. So is signaling a willingness to extend the Bush tax cuts to the top. So is appointing his top economic advisor from Wall Street (as apparently he’s about to do).

In fact, the unwillingness of the President and Washinton Democrats to tell story B itself promotes story A, because in the absence of an alternative narrative the Republican story is the only one the public hears.

Obama’s advisors explain the President’s moves are designed to “preempt” the resurgent Republicans – just like Bill Clinton preempted the Gingrich crowd by announcing “the era of big government is over” and then tacking right.

They’re wrong. By telling story A and burying story B, the President legitimizes everything the right has been saying. He doesn’t preempt them; he fuels them. He gives them more grounds for voting against raising the debt ceiling in a few weeks. He strengthens their argument against additional spending for extended unemployment benefits. He legitimizes their argument against additional stimulus spending.

Bill Clinton had a rapidly expanding economy to fall back on, so his appeasement of Republicans didn’t legitimize the Republican world view. Obama doesn’t have that luxury. The American public is still hurting and they want to know why.

Unless the President and Democrats explain why the economy still stinks for most Americans and offer a plan to fix it, the Republican explanation and solution – it’s big government’s fault, and all we need do is shrink it – will prevail.

That will mean more hardship for tens of millions of Americans. It will make it harder to remedy the bad economy. And it will set Republicans up for bigger wins in the future.

Wednesday, December 1, 2010

Sunspots and stock market returns

Data monthly on sunspots is available from NASA here.  The history of the Dow Jones Industrial average can be downloaded from   The chart below shows the sunspot cycle and and rolling 66 month price-only returns to the Dow, representing half of the approximately 11 year length of the solar cycle.  The trend lines are both over 132 months, the length of the solar cycle.


It is evident that there is some correlation with the solar cycle appearing to lead (I’m sorry, I’m just having fun).  The biggest 5.5 year blow off was in 1987, with the secondary blow off occurring in 2000.  Sunspot activity has been very low recently, although the next cycle is poised to peak in 2012 or 2013.  This site provides some interesting historical correlations.  Charles Nenner believes the cycle, along with other factors, forecasts a major war beginning in about 2013 (link), and a Dow going to 5000 in the next several years.

What is supportive of the hypothesis of a major slowdown of human activity in general (“the change”) in the future, however, is the NASA forecast for the next solar cycle, which is very, very low.


Source: NASA


The climate of the early nineteenth century was notably cool (source), with the winter of 1810 being described as “arctic.”  The winters of 2032 and succeeding ones might be similar if it takes a low cycle to really cool off.  Or, at least, global warming might be mitigated.

Wednesday, November 17, 2010

What’s wrong with a VAT?

Even good liberals like Alice Rivlin are now on board with a VAT (reference).  It’s the stylish thing to do.  It’s clean, it taxes Consumption, and leaves all that money not spent free for Investment….  It’s regressive, but we can overlook that, can’t we, like we’ve been doing with all other major tax changes for the past 30 years?

But—Investment where?  Unless the government wants to also get into the dicey game of capital controls—which would almost certainly plunge the world into the Greatest Depression post haste—the money will likely flow overseas, to economies where growth is high and returns are saucy.

And the dying middle class gets one last wallop before going extinct, transmogrifying into a serf class.  The rich are laughing all the way to the bank….

Friday, November 5, 2010

The continuing collapse of effective demand

The inequality of wealth and income are strangling the economy.  There is no healthy circular flow of income and product.  The failure of demand will increase as the households back down from the unsustainable and historically anomalous 70 percent of GDP consumption levels financed by home equity lending.  Forty-one percent of the unemployed have been out of work six months or more.


Final sales to domestic purchasers continue to slump.  The wealthy will invest overseas, where rates of return are higher, especially if the dollar weakens.  Domestic demand is at 2007 levels in nominal terms, as the dollars buy less due to


Industrial production is at decade ago levels.


Risk aversion as proxied by the Baa minus 3-month T-bill spread remains at Great Depression levels.  This probably reflects the presence of “Knightian uncertainty,” the term that economists use to describe levels of uncertainty deriving from agents not having any probability distributions they believe in because they are confronting problems of a nature and on a scale they have never experienced in their lifetimes.  It is the limitations of living human memory that drive many long-cycle models.


The Fed may lower short-term rates, but if the spread doesn’t narrow, the market hasn’t bought into it, in other words, and Investment will be majorly impaired. 

Animal spirits or confidence levels are struggling to get back to positive.  Assuming a flat unemployment rate until the Presidential election, a collapse of confidence in 2013 seems assured, as continued political dysfunction dispirit the American people. 


The animal spirits + yield curve model shows no collapse of confidence in the next 12 months, qualifying this to mean no negatively skewed change in our current situation of depressed output levels and about zero to two percent real growth rates.


My judgment is that we will have a deflationary collapse within the next five years as the debt overhang overwhelms consumers and the federal government.  After that, the risks of war increase exponentially, as history shows that the quickest way to get an inflation going is to start (or expand) a war(s). 

As Paul Farrell points out (here) The American people have no one to blame but themselves.  They would rather defend their right to be pigs than accept that everyone needs to share the burden of sacrifice for this nation—if there still is an American nation at all. 

The American people have bought into the wrong dream at this moment in history.  The collapse is coming. 


Thursday, November 4, 2010

The D.C. pledge of allegiance

Reading Joseph Stiglitz over at Washington’s blog (link--read) who’s now talking about the unraveling of the social contract and the rule of law made me think of a bit of foolscap I’ve had on my computer for a few weeks.  I offer it without apology, insisting that I wish the real pledge were more accurate at this historical juncture:

I pledge allegiance to the law, and to the ruling class for which it serves,

our people, above the others—infinitely divisible—with sham democracy and breadcrumbs for all.

Wednesday, November 3, 2010

Monday, October 25, 2010

Inequality links 10/25/2010

Income Inequality Linked to Senate Standoffs – Miller McCune
The United States of Inequality – really nice series from Slate available as a downloadable pdf.
Rich Mom, Poor Mom – Economix
15 Mind-Blowing Facts About Wealth And Inequality In America – businessinsider

Compassion makes for good macroeconomics today, even as the Republicans and Tea Partiers harden their hearts to the damage being done to the poor and unemployed.  Raising marginal tax rates on the rich (top 1 percent) and “stinking rich” (as the Slate author terms the top 0.1 percent)—that is, taxing only the portion of their incomes over, say, $300,000 a year—and using the money to fund humanitarian income assistance to the unemployed and their children would put more money into the spending stream than any other fiscal policy measure, as our economy sinks into depression.

Some would say America is already a hollowed-out state, gutted by money interests, powerless to effect such a social contract.  I hope they are wrong.

Wednesday, October 20, 2010

The perfect banana republic

Thanks, Supremes!  You’ve broken our democratic system!  You’ve created the perfect banana republic! 

The “two party system” is a complete sham, as Carol Quigley pointed out fifty years ago.  Republican, Democrat or Tea Party candidates all represent one party, the Money Party. 

The most important fiscal policy measure needed today is to raise marginal tax rates on incomes over $1 million to 90 percent, the way they were under Eisenhower.  We need to bring our shameless ruling class down to Earth before they decide to start a world war to send our children off to.

Via:  Robert Reich

The Perfect Storm

Monday, October 18, 2010

It’s a perfect storm. And I’m not talking about the impending dangers facing Democrats. I’m talking about the dangers facing our democracy.

First, income in America is now more concentrated in fewer hands than it’s been in 80 years. Almost a quarter of total income generated in the United States is going to the top 1 percent of Americans.

The top one-tenth of one percent of Americans now earn as much as the bottom 120 million of us.
Who are these people? With the exception of a few entrepreneurs like Bill Gates, they’re top executives of big corporations and Wall Street, hedge-fund managers, and private equity managers. They include the Koch brothers, whose wealth increased by billions last year, and who are now funding tea party candidates across the nation.

Which gets us to the second part of the perfect storm. A relatively few Americans are buying our democracy as never before. And they’re doing it completely in secret.

Hundreds of millions of dollars are pouring into advertisements for and against candidates  — without a trace of where the dollars are coming from. They’re laundered through a handful of groups. Fred Malek, whom you may remember as deputy director of Richard Nixon’s notorious Committee to Reelect the President (dubbed Creep in the Watergate scandal), is running one of them. Republican operative Karl Rove runs another. The U.S. Chamber of Commerce, a third.

The Supreme Court’s Citizens United vs. the Federal Election Commission made it possible. The Federal Election Commission says only 32 percent of groups paying for election ads are disclosing the names of their donors. By comparison, in the 2006 midterm, 97 percent disclosed; in 2008, almost half disclosed.
We’re back to the late 19th century when the lackeys of robber barons literally deposited sacks of cash on the desks of friendly legislators. The public never knew who was bribing whom.

Just before it recessed the House passed a bill that would require that the names of all such donors be publicly disclosed. But it couldn’t get through the Senate. Every Republican voted against it. (To see how far the GOP has come, nearly ten years ago campaign disclosure was supported by 48 of 54 Republican senators.)

Here’s the third part of the perfect storm. Most Americans are in trouble. Their jobs, incomes, savings, and even homes are on the line. They need a government that’s working for them, not for the privileged and the powerful.

Yet their state and local taxes are rising. And their services are being cut. Teachers and firefighters are being laid off. The roads and bridges they count on are crumbling, pipelines are leaking, schools are dilapidated, and public libraries are being shut.

There’s no jobs bill to speak of. No WPA to hire those who can’t find jobs in the private sector. Unemployment insurance doesn’t reach half of the unemployed. 

Washington says nothing can be done. There’s no money left.

No money? The marginal income tax rate on the very rich is the lowest it’s been in more than 80 years. Under President Dwight Eisenhower (who no one would have accused of being a radical) it was 91 percent. Now it’s 36 percent. Congress is even fighting over whether to end the temporary Bush tax cut for the rich and return them to the Clinton top tax of 39 percent.

Much of the income of the highest earners is treated as capital gains, anyway — subject to a 15 percent tax. The typical hedge-fund and private-equity manager paid only 17 percent last year. Their earnings were not exactly modest. The top 15 hedge-fund managers earned an average of $1 billion.
Congress won’t even return to the estate tax in place during the Clinton administration – which applied only to those in the top 2 percent of incomes.

It won’t limit the tax deductions of the very rich, which include interest payments on multi-million dollar mortgages. (Yet Wall Street refuses to allow homeowners who can’t meet mortgage payments to include their primary residence in personal bankruptcy.)

There’s plenty of money to help stranded Americans, just not the political will to raise it. And at the rate secret money is flooding our political system, even less political will in the future.

The perfect storm: An unprecedented concentration of income and wealth at the top; a record amount of secret money flooding our democracy; and a public becoming increasingly angry and cynical about a government that’s raising its taxes, reducing its services, and unable to get it back to work.

We’re losing our democracy to a different system.  It’s called plutocracy.

Oldie but goodie: 

The Animal Spirits Page: On the coming neo-feudalism

Tuesday, October 12, 2010

When will “animal spirits” fail?

Assuming that the unemployment rate does not materially improve over the next two years, “animal spirits” or confidence levels will fail in about 2013, after the next Presidential election.  I premise the lack of improvement in the labor market on the extreme dysfunctionality of the American political system at this historical juncture.  At a time when unemployment shows a persistence unprecedented in the postwar business cycle, the Tea Party and Republicans are snookering Americans into seeing government as their “enemy,” which in many ways it may be; but not in the respect that a humane and macro-economically sound government response to human suffering caused by unemployment would be a sensible redistribution of income—now at multigenerational levels of inequality—to those most damaged by the macro economy. 

As I have written, the macro economy would be better off if the Bush tax break on households with over $250,000 incomes—some 3 percent of Americans or about 9 million “souls”—were to lapse and the estimated $70 billion annual run rate given to the 15 million officially unemployed person, or less than $5,000 each.  The unemployed would spend the money, every penny, and would do more to boost the macro economy than letting the rich keep it.


It is a characteristic of human nature that we get used to things, and judge accordingly.  Hence, we speak of “the new normal.”  My model suggests that we will forbear the new normal for another couple of years, after which any deterioration in the economy will sink “animal spirits” again.  The same qualitative result holds if we see some intermediate improvement in unemployment. 

My yield curve plus “animal spirits” recession forecasting model shows virtually no potential for a new collapse in the year ahead (this is not to say the economy is healthy, just that there is little chance of an NBER-type recession ahead, which I identify with a failure of confidence).


The Great Depression saw its financial panic in 1929, its economic bottom in 1933, followed by about seven years of depressed output and employment, followed by war.  I do not think we have seen the economic bottom of this cycle, and I believe the financial problems are worse than in the ‘Thirties, when America was the world’s greatest creditor nation.  Today we are the world’s greatest debtor nation.

The next great failure of American confidence is likely to be more challenging to the already stretched social fabric than the last one, or the one before it, the Civil War.

Friday, October 8, 2010

Thomas Jefferson on wealth inequality

Letter from Thomas Jefferson to James Madison a few years before the French Revolution

Via:  University of Chicago Press  h/t 

28 Oct. 1785

Seven o'clock, and retired to my fireside, I have determined to enter into conversation with you; this [Fontainebleau] is a village of about 5,000 inhabitants when the court is not here and 20,000 when they are, occupying a valley thro' which runs a brook, and on each side of it a ridge of small mountains most of which are naked rock. The king comes here in the fall always, to hunt. His court attend him, as do also the foreign diplomatic corps. But as this is not indispensably required, and my finances do not admit the expence of a continued residence here, I propose to come occasionally to attend the king's levees, returning again to Paris, distant 40 miles. This being the first trip, I set out yesterday morning to take a view of the place. For this purpose I shaped my course towards the highest of the mountains in sight, to the top of which was about a league. As soon as I had got clear of the town I fell in with a poor woman walking at the same rate with myself and going the same course. Wishing to know the condition of the labouring poor I entered into conversation with her, which I began by enquiries for the path which would lead me into the mountain: and thence proceeded to enquiries into her vocation, condition and circumstance. She told me she was a day labourer, at 8. sous or 4 d. sterling the day; that she had two children to maintain, and to pay a rent of 30 livres for her house (which would consume the hire of 75 days), that often she could get no emploiment, and of course was without bread. As we had walked together near a mile and she had so far served me as a guide, I gave her, on parting 24 sous. She burst into tears of a gratitude which I could perceive was unfeigned, because she was unable to utter a word. She had probably never before received so great an aid. This little attendrissement, with the solitude of my walk led me into a train of reflections on that unequal division of property which occasions the numberless instances of wretchedness which I had observed in this country and is to be observed all over Europe. The property of this country is absolutely concentered in a very few hands, having revenues of from half a million of guineas a year downwards. These employ the flower of the country as servants, some of them having as many as 200 domestics, not labouring. They employ also a great number of manufacturers, and tradesmen, and lastly the class of labouring husbandmen. But after all these comes the most numerous of all the classes, that is, the poor who cannot find work. I asked myself what could be the reason that so many should be permitted to beg who are willing to work, in a country where there is a very considerable proportion of uncultivated lands? These lands are kept idle mostly for the aske of game. It should seem then that it must be because of the enormous wealth of the proprietors which places them above attention to the increase of their revenues by permitting these lands to be laboured. I am conscious that an equal division of property is impracticable. But the consequences of this enormous inequality producing so much misery to the bulk of mankind, legislators cannot invent too many devices for subdividing property, only taking care to let their subdivisions go hand in hand with the natural affections of the human mind. The descent of property of every kind therefore to all the children, or to all the brothers and sisters, or other relations in equal degree is a politic measure, and a practicable one. Another means of silently lessening the inequality of property is to exempt all from taxation below a certain point, and to tax the higher portions of property in geometrical progression as they rise. Whenever there is in any country, uncultivated lands and unemployed poor, it is clear that the laws of property have been so far extended as to violate natural right. The earth is given as a common stock for man to labour and live on. If, for the encouragement of industry we allow it to be appropriated, we must take care that other employment be furnished to those excluded from the appropriation. If we do not the fundamental right to labour the earth returns to the unemployed. It is too soon yet in our country to say that every man who cannot find employment but who can find uncultivated land, shall be at liberty to cultivate it, paying a moderate rent. But it is not too soon to provide by every possible means that as few as possible shall be without a little portion of land. The small landholders are the most precious part of a state.

Macro snapshots

A sick labor market:



Percentage of consumption out of disposable income falling:


Collapsing domestic demand:


Industrial production making giant head-and-shoulders pattern, maybe:


Risk aversion as measured by the Moody’s BAA minus the 3-month T-bill rate at multi-generational highs (if ZIRP really worked, it wouldn’t be this way):


Friday, September 24, 2010

Clusterf**k nation

Following absolutely true to the script of The Fourth Turning (see, namely that we are at the end of the saeculum, and the social contract is breaking totally apart, the Democrats have shown stupidity and cowardice in not framing the debate about the Bush tax cuts in terms of what really ails America, that it has become a banana republic run by and for the rich ruling class, who have looted American corporations and manipulated the tax system to their express benefit lo these thirty years—no, the Democrats have backed off having a vote before the elections on Obama’s eminently reasonable proposal to keep the middle class tax cuts and let those on the  rich expire.

At a $70 billion annual run rate, the tax increase on the rich amounts to less than $5,000 per each of the 15 million officially unemployed persons in America.  As I have suggested, the economy would get the most benefit if the increased taxes on the rich were simply transferred to the unemployed, so that they and their children do not suffer further damage. 

Obama has ignored the lessons of recent electoral history, that it is the independents who decide presidential elections.  He lost the independents with Afghanistan and his sycophantic bailouts of the Wall Street banks.  The independents are leaning toward the Republicans, the party of keeping tax rates low on the rich, in the probably mistaken belief that the Republicans represent fiscal sanity, which Republican incumbents in the White House since Reagan most certainly have not. 

Reagan sold a bill of goods to the public, who got happy on tax cuts, insisting that the tax cuts would be self-financing via “supply side economics,” which they were not.  The Bushes were both budget busters, although Bush I at least tried to pay his own way.  Only a Republican Congress with Clinton in the White House achieved anything resembling fiscal sanity, which is why the independents are lurching right.

The billionaire Koch brothers are bankrolling the Tea Party movement, which is likely exploit the public’s desire for fiscal sanity by cutting programs that are actuarially solvent for years to come, like Social Security (see reference, for example).

It’s a cluster, the makings of highly nonlinear adjustments in the near future.


This excellent BBC series traces the rise of public relations and how the independents now decide presidential elections.  This is the first episode; links to succeeding episodes appear at the end.

Added 10/1:

Monday, September 20, 2010

Krugman the social critic

Via:  Like Marx, Krugman is at his best when he leaves macroeconomics behind and just lets his good liberal heart speak its mind.  Next I’d like to hear him on the connection between war and inflation.

The Angry Rich


Anger is sweeping America. True, this white-hot rage is a minority phenomenon, not something that characterizes most of our fellow citizens. But the angry minority is angry indeed, consisting of people who feel that things to which they are entitled are being taken away. And they’re out for revenge.

No, I’m not talking about the Tea Partiers. I’m talking about the rich.

These are terrible times for many people in this country. Poverty, especially acute poverty, has soared in the economic slump; millions of people have lost their homes. Young people can’t find jobs; laid-off 50-somethings fear that they’ll never work again.

Yet if you want to find real political rage — the kind of rage that makes people compare President Obama to Hitler, or accuse him of treason — you won’t find it among these suffering Americans. You’ll find it instead among the very privileged, people who don’t have to worry about losing their jobs, their homes, or their health insurance, but who are outraged, outraged, at the thought of paying modestly higher taxes.

The rage of the rich has been building ever since Mr. Obama took office. At first, however, it was largely confined to Wall Street. Thus when New York magazine published an article titled “The Wail Of the 1%,” it was talking about financial wheeler-dealers whose firms had been bailed out with taxpayer funds, but were furious at suggestions that the price of these bailouts should include temporary limits on bonuses. When the billionaire Stephen Schwarzman compared an Obama proposal to the Nazi invasion of Poland, the proposal in question would have closed a tax loophole that specifically benefits fund managers like him.

Now, however, as decision time looms for the fate of the Bush tax cuts — will top tax rates go back to Clinton-era levels? — the rage of the rich has broadened, and also in some ways changed its character.

For one thing, craziness has gone mainstream. It’s one thing when a billionaire rants at a dinner event. It’s another when Forbes magazine runs a cover story alleging that the president of the United States is deliberately trying to bring America down as part of his Kenyan, “anticolonialist” agenda, that “the U.S. is being ruled according to the dreams of a Luo tribesman of the 1950s.” When it comes to defending the interests of the rich, it seems, the normal rules of civilized (and rational) discourse no longer apply.

At the same time, self-pity among the privileged has become acceptable, even fashionable.

Tax-cut advocates used to pretend that they were mainly concerned about helping typical American families. Even tax breaks for the rich were justified in terms of trickle-down economics, the claim that lower taxes at the top would make the economy stronger for everyone.

These days, however, tax-cutters are hardly even trying to make the trickle-down case. Yes, Republicans are pushing the line that raising taxes at the top would hurt small businesses, but their hearts don’t really seem in it. Instead, it has become common to hear vehement denials that people making $400,000 or $500,000 a year are rich. I mean, look at the expenses of people in that income class — the property taxes they have to pay on their expensive houses, the cost of sending their kids to elite private schools, and so on. Why, they can barely make ends meet.

And among the undeniably rich, a belligerent sense of entitlement has taken hold: it’s their money, and they have the right to keep it. “Taxes are what we pay for civilized society,” said Oliver Wendell Holmes — but that was a long time ago.

The spectacle of high-income Americans, the world’s luckiest people, wallowing in self-pity and self-righteousness would be funny, except for one thing: they may well get their way. Never mind the $700 billion price tag for extending the high-end tax breaks: virtually all Republicans and some Democrats are rushing to the aid of the oppressed affluent.

You see, the rich are different from you and me: they have more influence. It’s partly a matter of campaign contributions, but it’s also a matter of social pressure, since politicians spend a lot of time hanging out with the wealthy. So when the rich face the prospect of paying an extra 3 or 4 percent of their income in taxes, politicians feel their pain — feel it much more acutely, it’s clear, than they feel the pain of families who are losing their jobs, their houses, and their hopes.

And when the tax fight is over, one way or another, you can be sure that the people currently defending the incomes of the elite will go back to demanding cuts in Social Security and aid to the unemployed. America must make hard choices, they’ll say; we all have to be willing to make sacrifices.

But when they say “we,” they mean “you.” Sacrifice is for the little people.

Thursday, September 16, 2010

The Sun with a cold?

Via:  Science

Say Goodbye to Sunspots?

by Phil Berardelli on 14 September 2010, 2:41 PM | Permanent Link | 15 Comments


Weaklings. Without penumbrae, which can be seen in the yellow image, today's sunspots are weakening magnetically.

Credit: William Livingston/NSO

Scientists studying sunspots for the past 2 decades have concluded that the magnetic field that triggers their formation has been steadily declining. If the current trend continues, by 2016 the sun's face may become spotless and remain that way for decades—a phenomenon that in the 17th century coincided with a prolonged period of cooling on Earth.

Sunspots appear when upwellings of the sun's magnetic field trap ionized plasma—or electrically charged, superheated gas—on the surface. Normally, the gas would release its heat and sink back below the surface, but the magnetic field inhibits this process. From Earth, the relatively cool surface gas looks like a dark blemish on the sun.

Astronomers have been observing and counting sunspots since Galileo began the practice in the early 17th century. From those studies, scientists have long known that the sun goes through an 11-year cycle, in which the number of sunspots spikes during a period called the solar maximum and drops—sometimes to zero—during a time of inactivity called the solar minimum.

The last solar minimum should have ended last year, but something peculiar has been happening. Although solar minimums normally last about 16 months, the current one has stretched over 26 months—the longest in a century. One reason, according to a paper submitted to the International Astronomical Union Symposium No. 273, an online colloquium, is that the magnetic field strength of sunspots appears to be waning.

Since 1990, solar astronomers Matthew Penn and William Livingston of the National Solar Observatory in Tucson, Arizona, have been studying the magnetic strength of sunspots using a measurement called Zeeman splitting. Named after the Dutch physicist who discovered it, the splitting is the distance that appears between a pair of lines in a spectrograph of the light given off by iron atoms in the sun’s atmosphere. The wider the splitting, the greater the intensity of the magnetic field that created it. After examining the Zeeman splitting of 1500 sunspots, Penn and Livingston conclude that the average magnetic field strength of sunspots has declined from about 2700 gauss—the average strength of Earth's field is less than 1 gauss—to about 2000 gauss. The reasons for the decrease are not clearly understood, but if the trend continues, sunspot field strength will drop to 1500 gauss by as early as 2016. Because 1500 gauss is the minimum required to produce sunspots, Livingston says, at that level they would no longer be possible.

The phenomenon has happened before. Sunspots disappeared almost entirely between 1645 and 1715 during a period called the Maunder Minimum, which coincided with decades of lower-than-normal temperatures in Europe nicknamed the Little Ice Age. But Livingston cautions that the zero-sunspot prediction could be premature. "It may not happen," he says. "Only the passage of time will tell whether the solar cycle will pick up." Still, he adds, there's no doubt that sunspots "are not very healthy right now." Instead of the robust spots surrounded by halolike zones called penumbrae, as seen during the last solar maximum (photo), most of the current crop looks "rather peaked," with few or no penumbrae.

"It is a very interesting sequence of observations," says solar physicist Scott McIntosh of the National Center for Atmospheric Research in Boulder, Colorado. The researchers "have carefully analyzed their data and the trend appears to be real," he says.

Solar physicist David Hathaway of NASA's Marshall Space Flight Center in Huntsville, Alabama, agrees but with a caveat. "It's an important paper," he says. But the sunspot magnetic field calculations don't take into account a lot of small sunspots that appeared during the last solar maximum. Those sunspots have weaker magnetic fields, which, if not included, could make the average sunspot magnetic field strength seem higher than it really was.

Tuesday, September 14, 2010

Republican hara-kiri?

The millionaires club (the Senate) has responded quickly to John Boehner’s glimmer of sanity, suggesting he would vote for the administration’s program of tax cuts for the middle class but not for the rich, if it were the only thing on offer.

Since Reagan the Republicans have stood for not much more than keeping taxes low on rich people.  With the Bushes, they got into the business of stupid wars and criminal trespass, which was a Democratic specialty until Bush I.

The president may have found his wedge issue with his proposal to let the tax cuts expire on the top 1-2 percent, and not on the middle class.  In recent polls I’ve seen the public blames the Republicans more than the Dems for the economy’s ills. 

I urge the Dems to ride this one hard.

The public perceives accurately that America has become a banana republic, and they are mad about issues of distributional justice after the corporate fat-cats have sent their jobs overseas while paying themselves higher and higher salaries—not to mention Wall Street’s possibly fatal raping of America in the past two years.  The economy would be better off if the increased taxes on the wealthy were just given to the unemployed as transfer payments.  The ruling class has grown excessively greedy.  Where is their commitment to shared sacrifice?  Even after the proposed increases, their marginal tax rates will be some of the lowest in history.  When a member of the ruling class loses a job after ruining a company, he or she gets another one (after collecting the golden parachute). 

And so on.  Do it quietly, Republicans. 


Hari kari, also known as sepuku, is an ancient form of ritual suicide that defeated samurai, or those whose shame was 'too unbearable' would use to restore their honor in death. In sepuku, one would take a wakizashi (short sword) and dissembowel oneself. The less noise you made while doing this, the braver you were and therefore the more honorable, however this did not last long as not long after you had begun, a close friend, comrade, or enemy would put you out of your misery by cleaving your head from your shoulders in one swift blow of the katana (another japanese sword). Even though in modern times the prospect of decapitating one of your friends or relatives sounds completely against normal 'friendly' behavior, being asked to asist your friend or enemies' escape from shame was considered a great honor, as was using this as a tool to escape. This is why the in the imperialistic wars that followed Japan's modernisation post Admiral Perry's opening of it in 1853 to the west, the Japanese had no concept of the POW, as they believed that a combatant should either fight to the last breath, or if captured, die 'honorably' in ritual suicide, known as hari kari or sepuku. A good example of this ritual can be found in Tom Cruise's movie "the last samurai."  

Via:  Yahoo Finance

Senate Republicans say they'll block tax increase

Obama's plan to raise taxes on wealthiest Americans faces barricade by Senate Republicans

Andrew Taylor, Associated Press Writer, On Monday September 13, 2010, 9:27 pm EDT

WASHINGTON (AP) -- President Barack Obama's plan to raise taxes on wealthier people while preserving cuts for everyone else appears increasingly likely to founder before Election Day.

Senate GOP leaders declared on Monday that Republicans are, to a person, opposed to legislation that would extend only middle-class tax relief -- which Obama has repeatedly promised to deliver -- if Democrats follow through on plans to let tax rates rise for the wealthiest Americans. The GOP senators forcefully made their case one day after House Republican leader John Boehner suggested he might vote for Obama's plan if that ends up the only option.

Both Republicans and Democrats are using the looming expiration of Bush-era tax cuts as a defining battle in elections to determine control of Congress.

It would take numerous Democratic defectors to pass the Republicans' version -- extending all the Bush tax cuts -- or the issue could be left for a postelection congressional session if Republicans block the measure with a filibuster. Obama last week declined to say whether he would veto a bill that preserved the tax breaks for the wealthy.

On Sunday, Boehner said he would support renewing tax cuts for the middle class but not the wealthy if that was his only choice. Though Boehner was clear that he supports extending the full range of tax cuts, the White House jumped on his remarks as a possible change of heart.

But Sen. Jon Kyl of Arizona, the GOP whip, said Monday his party won't give ground.

"Just before the recess we had a meeting and we discussed this, and every Republican was absolutely supportive of the idea that there shouldn't be any increases in taxes," Kyl said.

Renewing the tax cuts for everyone would cost the government almost $4 trillion over the next decade, according to congressional analysts, who also assume that Congress won't allow the alternative minimum tax to hit millions of middle class taxpayers with eye-popping tax hikes.

With polls showing broad public anger over spiraling federal deficits, Obama wants to exclude individuals earning over $200,000 and couples making over $250,000 -- who account for $700 billion of that $4 trillion total. They represent about 3 percent of taxpayers, according to the Tax Policy Center, a Washington think tank.

"Only in Washington could someone propose a tax hike as an antidote to a recession," GOP leader Mitch McConnell of Kentucky said.

McConnell has said a bill extending the tax cuts for only low- and middle-income earners cannot pass the Senate, but he declined to reiterate that threat on Monday. Republicans control 41 seats, the minimum needed for a successful bill-killing filibuster, though McConnell spokesman Don Stewart declined to say whether all 41 Republicans would support a filibuster.

To amplify his point, McConnell on Monday introduced a bill to extend to Bush tax cuts indefinitely for all income ranges.

Some Democrats, like Sens. Kent Conrad of North Dakota, Evan Bayh of Indiana and Ben Nelson of Nebraska, are siding with Republicans against raising taxes on anyone during a fragile economic recovery.

"I don't think it makes sense to raise any federal taxes during the uncertain economy we are struggling through," Sen. Joe Lieberman, a Connecticut independent who aligns with Democrats, said Monday. "The more money we leave in private hands, the quicker our economic recovery will be. And that means I will do everything I can to make sure Congress extends the so-called Bush tax cuts for another year."

But Lieberman said he would not vote to hold up extension of the middle-class cuts to win leverage to extend those for wealthier people as well.

At issue is a year-end deadline to renew a variety of tax cuts enacted in 2001 -- when the federal government was running a surplus. They include lower rates, a $1,000 per-child tax credit, relief for married couples, and lower taxes on investments and large estates.

On Sunday, House GOP leader John Boehner said he would support renewing tax cuts for the middle class but not the wealthy if that was his only choice. Though Boehner was clear that he supports extending the full range of tax cuts, the White House jumped on his remarks as a possible change of heart.

Boehner has proposed a two-year extension of the Bush-era tax cuts, which would push the question into the 2012 presidential election. Obama has declined to say that he'd veto such a plan.

Democrats are worried that November elections could hand the GOP control of the House and perhaps the Senate. The White House and its Democratic allies hope to use the tax-cut fight to cast themselves as defenders of the middle class and Republicans as a party eager to revive the days of a still-unpopular former president, George W. Bush.

"We're going to take the next 50-some days to convince the public that's exactly what the Republicans would do -- back to the Bush policies," said White House press secretary Robert Gibbs said on NBC's "Today" show.

"We could get (tax cuts) done this week, but we're still in this wrestling match with John Boehner and Mitch McConnell about the last 2 to 3 percent" of upper-income taxpayers, Obama said Monday during a backyard town hall in a Northern Virginia suburb.

Gibbs said the middle class should not be used as a political football by Republicans maneuvering to give tax cuts to wealthy taxpayers, who he said don't need the reductions. Republicans say paring taxes for the wealthy would encourage them and the businesses they operate to create jobs.

Republicans, for their part, say that it's not just the rich who would be hit by Obama's tax hike on upper-income people. Many small businesses -- that earn about half of all small business income -- would also face the tax hike.

"No American should face a tax increase in January ... not one," said Indiana Rep. Mike Pence, the No. 3 House Republican. "We will not compromise our economy to accommodate the class warfare rhetoric of this administration."

Friday, September 10, 2010

Fighting disinformation: the bottom half pays federal taxes

How many times have you heard the statement, “The bottom half of the US income distribution pays no federal income taxes?”  I may even have written it myself, but you hear it most from right-wingers who like to bash the lazy and stupid American worker.  (Remember, your faithful correspondent is an apostate from any and all organized political parties, and therefore totally objective… if anything, I am a classical liberal, who believes that the economy fundamentally reflects a society’s values.)

The statement is true in a narrow sense, but totally false in the context of the American tax system.

Everybody who works pays about 12.4 percent out of their paycheck to Social Security, which, as almost everybody knows, is a federal income transfer program, not a savings account.  Their employer pays part, totaling 12.4 percent.  And, mirabile dictu, even though right-wingers love to talk about the purity and justness of flat taxes—on all income, one presumes—the payroll tax has a ceiling:  income over about $106,000 is excluded!

So the main point I am making is incontrovertible:  the bottom half is taxed at a 12.4 percent rate.  The bottom half pays federal taxes.  Period.

Should we lift the ceiling?  As this piece points out, that would soak the hard-working upper middle class the most, those households between $106,000 and the top two percent level, approximately $250,000.

But that problem can be solved by lowering the rate overall and lifting the cap (and possibly lower explicit federal tax rates on the upper middle class between $106,000 and $250,000).  It’s just a matter of arithmetic.  There’s a ton of money at the top.

Thursday, September 9, 2010

Wealth effect vs. wealth illusion

With all the talk about renting vs. buying a house, I thought it might be worthwhile to examine borrowing to own vs. owning outright or paying down principal on a mortgage.

I’ve been trying to convince my brother of the wisdom of paying down his mortgage with the piles of cash he likes to sit on.

Married filing joint the interest deduction doesn’t really kick in until one’s total deductions exceed the standard deduction, which is about $11,000.  Assume a marginal tax rate of 25 percent, which covers a household income of about $68,000 to $137,000.

If the only deductions you have are your mortgage, at a rate of 6 percent you’d have to have a principal outstanding of about $183,000 before you got the first dollar of deductibility (=11,000/.06).  If you make charitable contributions or have other deductions, you will achieve deductibility with a lower principal balance.

Now that 6 percent is paid out of after-tax dollars.  The equivalent before-tax return required to match that as an “investment” would be 6/(1-.25) = 8 percent with certainty.

You can’t get 8 percent with high risk nowadays, let alone with certainty.

So if you own a home and your deductions are below the standard deduction, paying down your mortgage is probably the best financial investment you can make.  It’s also an investment in peace of mind.  After all, your property taxes should be going down, too, so your cost of home ownership should be taking a double dip.

So when my brother tells me he has some huge amount (speaking five figures here) of cash piled up and that he’d feel poor if he paid down some of the balance on his mortgage, a balance still many times his cash balance, I tell him—

“It’s an illusion.  You don’t really have that money.”

With this arithmetic and the mortgage debt of the American people—not to mention the volatility of the stock market the past couple of years—is it any wonder that funds are flowing out of retail mutual funds?

Tuesday, September 7, 2010

The tightest union

With all the union bashing going on—and as a private sector worker I am aghast at what public sector union members get in pay and benefits—still, it strikes me as misplaced.  A relatively small percentage of the work force is unionized in historical context.

The tightest union in America is the ruling class, with its lap dog politicians and captive media, all spouting about the un-Americanism of raising taxes on those highly productive rich people, even as CEOs and Wall Street executives take greater and greater multiples—hundreds of times—of the median family income home in pay each year, because they and their board friends say they’re worth it.  They weren’t worth it thirty years ago, when the spirit of shared sacrifice of World War II still lived in the hearts of the ruling class, and CEOs worked for 30 times the median family income.

And the tightest union is international.  As capital moves, so do they and their minions, ready to bash labor wherever it has the temerity to protest (except perhaps in China, where the authorities understand that in the long run, the country that coheres will ultimately win, because they can still work together productively). 

Paul Craig Roberts, who has been one of the most eloquent in upbraiding the American rich and their useless wars and idiotic policies (see this)—even Roberts cannot let go of his Reaganism (he was a Treasury official under Reagan) and admit that tax rates are too low on the ultra-rich.

The administration seems to understand all this.  Shared sacrifice has been one of their themes from the beginning.  They would like to leave the Bush tax breaks on the middle class in place and raise taxes on the top few percent.  I just don’t think the ruling class will stand for it.  And another nail will be driven into the coffin of the American social contract.

Via:  Bloomberg

Ultra-Rich in Finance Are Meaner Than Rest of Us: Matthew Lynn

By Matthew Lynn - Sep 6, 2010

Bloomberg Opinion

There is something surprising about a private banker warning his colleagues about the rich. It would be like a director of Volkswagen AG casting doubt on motorists, or the boss of McDonald’s Corp. distancing himself from people who eat fast food. Rather like valets, the main aim of the private banker is to court the wealthy.

At a conference in Zurich last week, the head of Barclays Wealth Management’s private-banking unit, Gerard Aquilina, appeared to issue a red alert about the richest of clients.

“Beware of the complexities of dealing with ultra high net worths,” Aquilina told his audience. “Demanding and often unreasonable” requests from them may create “impossible demands on the organization.”

Such as? Help with getting children into the right school, securing credit to buy property, or obtaining last-minute concert tickets, for example. Even worse, the richest of the rich turn out to be pretty stingy as well. They don’t even want to pay the full fee for all the services they demand.

It was strong stuff. But it was also an insight into the way the rich have changed over the past decade. They are, it turns out, a nasty bunch of people who are only getting nastier. And the banking industry only has itself to blame. […]