Frankenblog

Via Mark Thoma:

Lane Kenworthy has an excellent post on the effects of tax progressivity vs. transfers in reducing inequality:

Reducing Inequality: How to Pay for It

The Labour Party returned to power in the U.K. in 1997 based in part on a pledge by Tony Blair and Gordon Brown not to raise taxes’ share of the British economy. In his 2008 presidential campaign, Barack Obama promised to reduce taxes for the bottom 95% of Americans. In both instances this commitment succeeded in insulating the progressive candidate from what had become the right’s most powerful electoral club: stoking fear of tax increases by the left.

But while it may be smart electoral politics, committing not to increase taxes’ share of GDP, as Blair did, or to lower taxes for most of the population, as Obama has done, makes it difficult for a government to make much headway in addressing income inequality. Obama has some leeway; the economic crisis has necessitated increases in government spending that can justifiably excuse some backtracking on his campaign pledge. Fully consistent with his promise, he should increase the tax rate on high-end incomes (beyond simply letting the Bush reductions expire). Two other progressive tax reforms are worth pursuing, though they would affect some in the bottom 95%. One is to reduce or end the homeownership subsidy. More than 80% of the $160 billion in foregone revenues from the deduction for mortgage interest and property tax payments goes to households in the top income quintile. The other is to introduce a modest tax on financial transactions.

But should the focus be confined to steps that make the tax system more progressive? Many on the left view heightened progressivity as the key to inequality reduction. Yet in the United States and other rich countries the tax system overall, including taxes of all types and at all levels of government, is essentially flat; households throughout the income distribution pay roughly similar shares of their market income in taxes. As the following chart shows, inequality reduction is achieved not through taxation but with government transfers (and services).

Taxes help to reduce inequality mainly via their quantity rather than their progressivity. The greater the tax revenues, the more government is able to boost incomes and living standards of those in the lower half of the distribution with transfers and services.

Moderate or high levels of tax revenue can’t come solely from higher rates or new taxes on the rich; the math simply doesn’t work. To significantly increase spending on transfers and/or services, President Obama and/or his successors will need to increase taxes on the middle class. One way to do this would be via a federal consumption tax, such as a value-added tax (VAT). We have state and local consumption (sales) taxes, but we raise less money from consumption taxes than any other rich country. Consumption taxes are regressive, and for that reason they’re often dismissed by the American left. But they can be tweaked to limit the degree of regressivity. And if the money is put to progressive use, the benefits may outweigh this drawback.

(cross posted from Angry Bear)

Granite Illinois Meets Globalization

By Stormy

Citizens in Granite, Ill noticed a flatbed train, loaded with steel pipes labeled “Made in India.” All might have been well if not for the fact that Granite’s 140-year-old steel mill had closed in December for lack of orders. Cries of unfair foreign subsidies both in developing countries such as India and China filled the air. (See here for one study.)

Foreign subsidies are only part of the problem. Equally important are cheap overseas labor and weak environmental regulations. In 2005, for example, the Attorney General brought suit against the Granite mill for air pollution. Developing countries have used weak environmental standards and weak labor laws to leverage rapidly their own industrial base.

Whenever I complain about tax, labor, or environmental arbitrage in developing countries and subsidies–direct or indirect–for cheap imported goods, someone will usually remind me that cheap, imported goods, however or wherever they originate are really a boon to someone in the U.S. economy.

This is quite true, undeniably so. Someone in the U.S. or Canada has purchased those pipes, saving money.

The problem is: We have a dog chasing its tail problem, an ever-downward spiral of wages, living conditions, and standard of living. The downward spiral of wages affects everyone, here and abroad, collecting everyone in its vortex.

When developing nations run out of cash—or credit–, everyone everywhere suffers.

Developing nations, anxious to have their share of the pie, will resort to more extreme measures: More subsidies, greater downward pressure on their own meager pay scales, a tighter grip on currency exchanges. Citizens in mature economies must compete with impossibly cheap labor abroad while living in an expensive environment. The middle class, once touted as the crowning jewel of mature economies, is now seriously in peril.

Escaping this downward spiral is very difficult. Rich individuals at the top, of course, have benefited handsomely. Whether these individuals will continue to benefit should give them second thoughts. Deeper levels of poverty and the thickening stench of a decaying environment will surround them, not exactly a recipe for raising shiny, bright-eyed pampered children ready to learn at prestigious private schools either here or in Asia.

Sometimes, I wonder if a vast scam has been played. At first, economists and global leaders told us that globalization as structured was a win-win game.

Here is Treasury Secretary Summers in 2000 on the brink of China’s entry into the WTO:

The agreement with China is a one-way street,” Summers said.
“China opens its markets to an unprecedented degree, while in return the United States simply maintains its current market access policies,” he said.
It is difficult, Summers added, “to discern any disadvantage to the United States in passing this legislation.”

Here is Summers in 2006. (Note: He makes no mention of the impending credit crash.)

it has been a golden age for those who already own valuable assets. Owners of scarce commodities have seen their returns rise prodigiously. People running businesses that can take advantage of globalisation to source labour less expensively and sell to larger markets have seen their incomes rise far faster than incomes generally. Certainly those in the financial sector in a position to benefit from the asset revaluations associated with globalisation have prospered.
Everyone else has not fared nearly as well.

As the great corporate engines of efficiency succeed by using cutting-edge technology with low-cost labour, ordinary, middle-class workers and their employers – whether they live in the American midwest, the Ruhr valley, Latin America or eastern Europe – are left out. This is the essential reason why median family incomes lag far behind productivity growth in the US, why average family incomes in Mexico have barely grown in the 13 years since the North American Free Trade Agreement passed, and why middle-income countries without natural resources struggle to define an area of comparative advantage.

In 2006, he started to pull back the curtain on this sorry drama, a bit late, alas.

I do not mean to pick on Summers; he has certainly not been alone in promoting the present structure of globalization. Many economists have been part of the celebratory chorus. He just happens to be leading our economic recovery team.

Escaping from this downward spiral will be, as I said, very, very difficult. I have listened closely to remarks in the present administration. I have not heard a real answer. Most are simply Clinton hangovers or hand-me-downs. The Bush administration was all too eager push the game even further.

The Nature of the Problem

This kind of dangerous spiral is avoided when economies are closely matched, when nations are at a relatively equal level of development. Currency exchange rates, along with carefully monitored rules, often solve the problem, a bumpy arrangement, but it works.

The problem is similarly manageable if a small, impoverished nation tries to play industrial catch-up among a cluster of more mature economies. The cost of its rapid industrialization can be absorbed.

But now we have two huge underdeveloped nations (one democratic, the other repressively autocratic)—along with an ever-growing flotilla of smaller impoverished nations—suddenly and energetically entering global commerce. Among the leading economists in the Clinton and Bush administration, I never heard any cautionary mention of this kind of problem. Free trade was the mantra; fast tracked trade agreements were the candles to light the way.

The latest pitch is that the mature economies must now invest in and create new technologies.

That is easier said then done.

What, for example, is to stop nascent industries in mature economies from chasing cheaper labor abroad? What is to stop them from seeking benefits from currency exchanges or better subsidies? Already, many multinationals are setting up Research and Development centers third world countries—cheaper labor, cheaper hidden costs such as environmental and energy.

For these reasons, I have to grimace at this latest bromide. To many, it seems such a marvelous answer is simple, direct, and understandable. Politicians and economists who tout it are praised for their insight and acumen. The public buys it; the press celebrates it. All those who utter it are clearly wise beyond their years. Some of us in the balcony sits know it for what it is.

The fact is: Given the way commerce has been structured, developing nations offer inducements that are simply irresistible. If energy can be made cheaper at cost to the environment, what factory in China does not benefit? Granite, Ill, had to pay those costs. Granite, Ill, had no hope of ever being competitive given the rules governing globalization. It’s fate was sealed a decade ago.

The Solution?

Going forward, I can see only one path. And, honestly, I do not think it will happen.

First, labor rights to bargain collectively must be enforced globally. Doing so will of course raise the price of all those cheap imports. But, it will also more rapidly diminish the vast pay scale differences between impoverished and mature economies. Additionally, it will force rich corporations to release a greater share of the pie to all the have-nots.

If a country refuses to enforce labor standards or it refuses to allow grass roots bargaining, then it should be a pariah among nations.

Second, environmental standards must be global. Cap and trade will not do it. Cap and trade is designed to placate environmental concerns and climate change within a free market context. It does not address the kind of problem I have outlined: The downward spiral of wages and standard of living. Simply put, we must accept the full cost of all production everywhere–here and abroad.

In the West, we have air standards that significantly raise the cost of production of such items as steel. (Those standards have been under increasing pressure.)

Additionally, those air and other environmental standards affect the cost of energy. Simply passing off these kinds of concerns as extraneous variables does not past muster. Environmental standards affect the cost of every good that is produced. Those countries that leverage environmental costs for commercial advantage should be considered pariahs. Environmental standards have to be global.

As I said, I have few hopes that any of these changes will happen until our collective backs are truly against the wall.

Nothing focuses the mind better than looking over the precipice. We are not there yet. The present system will be band aided, patched, and protected until the very last minute. Too many scholarly careers are at stake; too much wealth and power is at risk; too many countries—in the East and the West—have placed their bets on the present global arrangement. The old bugaboo, protectionism, will be trotted forth to scare those without the sophistication to know that protectionism was never the issue. Rules of the road were the issues.

We will hear more and more disclosures similar to the one Summers made in 2006. Well, NAFTA did not turn out so well. Hmmm…cheap labor is a problem with no easy solution…and on it will go. But remember: These are the same people that said the road to the now looming precipice was strewn with flowers and quick wealth, a “one-way” street to global prosperity. There will be no winners. This has been a lose-lose proposition.

The right often complain of the inordinate tax burden borne by this country’s rich, and even that income taxes are too progressive. Cathleen Rampell addresses this nonsense:

Not as much as you might think. So says Citizens for Tax Justice, which today released an updated analysis of the effective tax rates for Americans at different income levels.

Data released last week by the Congressional Budget Office underscored the progressive nature of the federal tax system. And in an op-ed article today in The Wall Street Journal, Ari Fleischer, who served as President George W. Bush’s press secretary, used that data — in particular, the income tax numbers — to argue that the wealthiest Americans bear an unfair share of the tax burden. Other research has found that many states and local governments have more regressive tax systems, though, that might offset the progressiveness of federal tax rates.

The research from Citizens for Tax Justice — a liberal organization that advocates “fair taxes for middle and low-income families” — uses 2008 data for all federal, state and local taxes combined. It found that the average effective tax rate is 29.8 percent, and that including state and local taxes makes the tax curve look much less steep:

Source: Citizens for Tax Justice Horizontal axis shows the income group. Vertical axis shows the percentage of income that the average member of that group pays in taxes. Taxes include all federal, state and local taxes (personal and corporate income, payroll, property, sales, excise, estate, etc.). Incomes include cash income, employer-paid FICA taxes and corporate profits net of taxable dividends.

The group also finds that in 2008 the share of total federal, state and local taxes paid by each income group was relatively close to the share of income that that group brings in, at least as compared to comparable 2006 numbers for effective federal tax rates:

Source: Citizens for Tax Justice Horizontal axis shows the income group. Taxes include all federal, state and local taxes (personal and corporate income, payroll, property, sales, excise, estate, etc.). Incomes include cash income, employer-paid FICA taxes and corporate profits net of taxable dividends.

K Street is the best investment a firm can make:

In a remarkable illustration of the power of lobbying in Washington, a study released last week found that a single tax break in 2004 earned companies $220 for every dollar they spent on the issue — a 22,000 percent rate of return on their investment.

The study by researchers at the University of Kansas underscores the central reason that lobbying has become a $3 billion-a-year industry in Washington: It pays. The $787 billion stimulus act and major spending proposals have ratcheted up the lobbying frenzy further this year, even as President Obama and public-interest groups press for sharper restrictions on the practice.

The paper by three Kansas professors examined the impact of a one-time tax break approved by Congress in 2004 that allowed multinational corporations to “repatriate” profits earned overseas, effectively reducing their tax rate on the money from 35 percent to 5.25 percent. More than 800 companies took advantage of the legislation, saving an estimated $100 billion in the process, according to the study.

The largest recipients of tax breaks were concentrated in the pharmaceutical and technology fields, including Pfizer, Merck, Hewlett Packard, Johnson & Johnson and IBM. Pfizer alone repatriated $37 billion, representing 70 percent of its revenue in 2004, the study found. The now-beleaguered financial industry also benefited from the provision, including Citigroup, J.P. Morgan Chase, Morgan Stanley and Merrill Lynch, all of which have since received tens of billions of dollars in federal bailout money.

The researchers calculated an average rate of return of 22,000 percent for those companies that helped lobby for the tax break. Eli Lilly, for example, reported in disclosure documents that it spent $8.5 million in 2003 and 2004 to lobby for the provision — and eventually gained tax savings of more than $2 billion.

But that isn’t the best part:

The tax break in question was included as part of the American Jobs Creation Act of 2004, and was billed as a way to create jobs in the United States by requiring companies to use the money for specific purposes.

But the Congressional Research Service and others have since found that many companies cut jobs in the wake of the tax break and that nearly all the money was used for stock buybacks or dividends.

In a post at Angry Bear, Stormy lays out in great detail that we have the fox guarding the financial henhouse in Washington.

Personally, I believe that there has been (and continues to be) a deliberate attempt to obfuscate the value of the toxic derivatives.  Hernando de Soto is correct, however, that we cannot move forward without taking a close look at these ‘assets’.

We can’t start fixing things until we can get a handle on the toxic assets behind the financial crisis.

As a Peruvian educated by British and American teachers, I learned never to embark on a major task without first “doing the math.” No more of that Latino “happy go lucky, trust your gut and say three Hail Marys” approach to life.

Without measurement, my teachers advised, I wouldn’t be able to identify and disentangle the very reality before my eyes. By doing the math, I would see order and coherence, the way things were organized; invisible relationships would come into view, and right behind order would come meaning, followed by confidence. Thanks to my Anglo-Saxon education, I learned the lesson: You cannot manage what you have not previously measured.

So imagine how I have felt watching my role models go to war over weapons of mass destruction that they never actually assessed, or now, watching them wage a losing war against derivatives — which both Warren Buffet and George Soros have called “financial weapons of mass destruction” — without locating or counting them either.

And, man, do those financial instruments need measuring: pooled, packaged and traded around the world, they are now the principal reason for today’s massive credit contraction. The fear among financial institutions that potential borrowers and users of credit and capital could be burdened with so many nonperforming derivatives that they would be unable to repay their loans and protect their investments has plunged the global economy into a recession.

The Securities and Exchange Commission estimates that derivative paper is worth $596 trillion (10 times the value of total world production), while studies at the Bank for International Settlements in Basel, Switzerland, conclude that it could be twice as much — $1.2 quadrillion. And exactly how many of those derivatives are actually nonperforming and would have to be surgically removed to stop their toxicity from spreading and destroying trust among creditors and investors? Nobody knows that for sure either. U.S. Treasury Secretary Timothy F. Geithner has set aside $1 trillion to assist in buying those toxic assets, but the SEC has guesstimated that there might be upward of $3 trillion worth.

With so much at stake, clearly an accurate accounting is in order. Once this paper is brought “into the sunshine,” as former SEC Chairman Christopher Cox said at the beginning of the crisis, “money and credit will begin to flow again.” Government has to assure that it is located, quantified and usefully categorized so that the market can again gauge risks and restore trust by isolating the toxic from the healthy paper.

So what are we waiting for? Many worry about government meddling in the affairs of financial institutions. Some contend that Wall Street has Washington in its pocket; others suspect that the bankers are afraid that the numbers will be so high as to spark a run on their banks. And then there are those who still believe that the market will be able to sort it all out — if we would just stand back and let the vulture capitalists dispose of the toxic stuff in their discreet and profitable ways.

Let me offer just four of the many good reasons I could give for why “doing the math” — right now — is still the best strategy for halting the global economic meltdown threatening us.

First, the vultures I’ve talked to tell me that buying a significant amount of paper in the dark will take years. With information about derivatives not standardized and thousands of idiosyncratic bonds sold, resold and scattered helter-skelter all over the market, it will be difficult for any individual vulture to calculate their worth until someone locates and categorizes them. In fact, some derivative paper is so sloppily structured that banks have been unable to figure out the contents of their own portfolios, and U.S. courts continue to reject many foreclosures that are based on this kind of paper. So before we could really hand over the solution to the vultures, someone still would have to do the math.

And even while the vultures are, minimally, at work, the contamination will continue as this huge shadow economy of derivative paper infects everything it touches. Consider that a mere 7% default on subprime paper — equivalent to maybe $1 trillion or $2 trillion — quickly contaminated other paper, creating a $50-trillion hole in the U.S. economy from losses in stocks, home values and revenues in less than one year. By not counting and identifying derivatives one by one and drawing a legal boundary around each by means of the rules of property law (things such as registration, traceability and standardized identification), we are unable to protect every asset and every particular interest on that asset from contamination. The longer we wait to do the math, the worse it will get. And the more likely the anarchy of this shadow economy will spread.

In the world where I come from, it is the typical state of affairs. In fact, apart from the elite Westernized minority, most people’s assets are covered by paper that is endemically toxic: not recorded, not standardized, difficult to identify, hard to locate, its real value so opaque that ordinary people cannot build trust in each other or be trusted in global markets. In short, for shadow economies outside the U.S. and Europe, “credit crunch” and “meltdown” are chronic conditions. You don’t want to go there: It will wipe out your middle class, nurturing radical politics, class confrontation, violence, crime and massive drug production and narco-trafficking. (North Americans only know drug consumption; just wait until you see the supply side of the deal.)

Finally, you can’t continue the bailouts, monetary infusions and tax breaks because you will eventually run out of money — and still have little credit available. That is because the overwhelming amount of available credit is not made up of money but assets documented in property records such as fungible real estate titles, mortgages, bonds and derivatives, which have some of the financial attributes of money — what economists used to call “moneyness.” In fact, although there is only $13 trillion in cash notes and coins worldwide, there are hundreds of trillions of dollars in “property paper,” when moneyness is taken into account.

If you want to get credit flowing again, you must restore trust in paper as soon as possible. And that means measuring the assets, recording them, finding and purging those that are toxic and preventing future debasement of the paper — in essence, submitting it to property law just like all the other assets that we own and value.

Before we can get out of this recession, we need to concede that we just don’t have the right information. At present, the world of derivatives is devoid of useful facts and a structure from which we can extract the meaning, knowledge and confidence required to end the credit crunch.

And before anyone can get those facts, we have to do the math.

Economist Hernando de Soto is the author of the “The Other Path” and “The Mystery of Capital.” He has helped carry out property-reform programs for heads of state in about 20 countries.

A woman was rescued after climbing the fence to jump into the polar bear habitat…

during feeding time.

Zombie Survival Wiki

…make a big difference:

(CNN) — When Jon Bohmer sat down with his two little girls for a simple project they could work on together, he didn’t realize they’d hit upon a solution to one of the world’s biggest problems for just $5: A solar-powered oven.

The ingeniously simple design uses two cardboard boxes, one inside the other, and an acrylic cover that lets in the sun’s rays and traps them.

Black paint on the inner box, and silver foil on the outer one, help concentrate the heat. The trapped rays make the inside hot enough to cook casseroles, bake bread and boil water.

What the box also does is eliminate the need in developing countries for rural residents to cut down trees for firewood. About 3 billion people around the world do so, adding to deforestation and, in turn, global warming.

By allowing users to boil water, the simple device could also potentially save the millions of children who die from drinking unclean water.

Bohmer’s invention on Thursday won the FT Climate Change Challenge, which sought to find and publicize the most innovative and practical solution to climate change.

“A lot of scientists are working on ways to send people to Mars. I was looking for something a little more grassroots, a little simpler,” Bohmer said Thursday.

Bohmer’s contest win notwithstanding, solar cooking with a cardboard oven isn’t new. Two American women, Barbara Kerr and Sherry Cole, were the solar box cooker’s first serious promoters in the 1970s. They and others joined forces to create the non-profit Solar Cookers International — originally called Solar Box Cookers International — in 1987.

Further, the organization’s executive director, Patrick Widner, said that the plans for a solar box cooker were found in a book published by the Peace Corps in the 1960s.

“We are pleased that Mr. Bohmer has taken up the cause and interest of the 95 member organizations and 160 individuals of the Solar Cookers Worldwide Network,” Widner said. “It would be a pleasure to work with Mr. Bohmer in Kenya where we have been promoting the use of solar cookers for ten years.”

Bohmer, a Norwegian-born entrepreneur based in Kenya, said he also had been looking at solutions “way too complex, for way too long.”

“This took me about a weekend, and it worked on the first try,” Bohmer said. “It’s mind-boggling how simple it is.”

The contest was organized by the Forum for the Future — a sustainable development charity — and the Financial Times newspaper. Among the judges were British business magnate Richard Branson and environmentalist Rajendra Pachauri. The public also voted on the finalists.

Bohmer’s invention beat about 300 other entries, including a machine that turns wood and other organic material into charcoal, wheel covers that make trucks more fuel efficient by reducing drag, and a feed supplement for livestock that reduces the methane they emit by 15 percent.

Bohmer named his invention the Kyoto Box, after the international environmental treaty to reduce global warming.

The box can be produced in existing cardboard factories. It has gone into production in a factory in Nairobi, Kenya, that can churn out about 2.5 million boxes a month.

Bohmer has also designed a more durable version, made from recycled plastic, which can be produced just as cheaply.

He envisions such cardboard ovens being distributed throughout rural Africa.

“In the West, we cook with electricity, so it’s easy to ignore this problem,” he said. “But half the world’s population is still living in a stone age. The only way for them to cook is to make a fire.