Who Needs a Tax Cut?

Who Needs a Tax Cut? – Leaving aside the politics of the Bush tax cuts for a moment, let’s return to the economics. Below you’ll see charts showing what has happened both to pretax income for different groups and to total federal tax rates since 1980. Here’s the income data, courtesy of the Census Bureau (the median) and the economists Emmanuel Saez and Thomas Piketty (the high end). All the numbers here are adjusted for inflation: The chart shows the change in the various groups’ pretax income since 1980. A household that has been at the 99.99th percentile of the distribution over this period — that is, making more money than 9,998 out of 10,000 other households and less money than one out of 10,000 — has more than quadrupled its pretax income. Today, this household is making $9.1 million. Income for a household at the median has risen only 13 percent since 1980.  And what about tax rates? They have aggravated the trends in pretax incomes. Not only have affluent households received the largest pretax raises, but they’ve also benefited from a much larger cut in their tax rates.
 
Explaining last Month’s Jobs Upside Surprise and this Month’s Downside Surprise – One reason economists are frequently surprise is they have a tendency to extrapolate every economic uptick perpetually into the future yet they seldom do the same for negative news. I have no idea why this is so, but history certainly suggests that it is so. Last month, economists were giddy over retail hiring but I commented several times that I did not think it was sustainable. Today Calculated Risk has a very nice chart that shows that to be the case. It’s easier to see what is happening if you unstack the chart. I did not go back to the actual data but I did move the bars around. Looked this way, last months seasonal hiring was not that great.
Bernanke Won’t Rule Out More Bond Buys – Federal Reserve Chairman Ben Bernanke told CBS in an interview to be aired Sunday that he’s not ruling out purchasing more bonds to aid the U.S. economy, the network said in a release Friday. In an interview taped Tuesday in Columbus, Ohio, Bernanke defended the central bank’s program to buy $600 billion in U.S. Treasury notes, which was attacked by senior politicians in the U.S. and abroad. Top Republicans charge the bond purchases, due to end in June, could bring high inflation and may weaken the U.S. dollar excessively. Like he did in 2009 to defend the government’s actions to fight the financial crisis, Bernanke is going to appear for the second time on “60 Minutes,” the CBS News show, this Sunday to discuss the most pressing issues facing the U.S. economy.

Social Security Fix Is To Raise Cap. Former Clinton Secretary of Labor, Prof. Robert Reich, makes quick work of dispensing with the phony ‘problem’ with Social Security.  Reich writes here. “Let’s be clear about the long-term deficit problem. It’s not Social Security. Social Security’s shortfall is modest. It arises because so much income has gone to top earners in recent years that the payroll tax covers a smaller percentage of overall income than was planned for. I should know. I used to be a trustee of the Social Security trust fund. The obvious answer is to lift the cap on income subject to Social Security payroll taxes, now $106,800, to about $150,000.”

Save Our World, Create Chinese Consumer Culture – So the post title is a bit hyperbolic, but not much. If global economic imbalances imperil the existence of the contemporary trade and globalization, then job#1 is alleviating them. In case you missed it, the New York Times Magazine had a very interesting article over the weekend on the challenges of getting China to move towards a consumer culture. While the US has swung too far in that direction, China is arguably at the opposite extreme. Both must change. There are certainly many examples of PRC noveau riche splurging (see the accompanying photo essay), but that’s not what will get consumption up in China but Jiang average opening up his or her wallet. I have actually written an academic piece that makes similar points–it’s in China’s best interest to become less manufacturing intensive on environmental grounds, revaluation of the renminbi will encourage domestic consumption by increasing local purchasing power, etc.–but I’ll save that for a later day. In the meantime, the NYT article gets the general outlines of this story right, although I have more to say about the marketing aspects of creating Chinese consumer culture:
I Didn’t Realize How Influential I Was 🙂 – I noticed this chart in David Beckworth’s blog. Here’s what I see. On June 16, I warned of the danger of deflation. The expected inflation rate immediately began to fall, and it fell by a total of about 50 basis points over the next two-and-a-half months. Then on September 1 (with the expected inflation rate near its low), I urged the Fed to take quick action as bond yields were getting dangerously low, leaving increasingly little margin for the potential effectiveness of monetary policy. The Fed then began hinting at policy changes (partly realized in the QE2 announcement), largely as a result of which the expected inflation rate has since risen by about 40 basis points.  OK, I can see I’m going to have to start writing some more blog posts, so you all will know what to do next. (By the way, Mr. Bernanke, I second what David Beckworth said in the post where the chart appeared.)
 
Bush tax cuts: Past and future – EPI has produced extensive research and commentary about the Bush-era tax cuts, the impact they have had and the likely outcome of extending some or all of them. Attached are some highlights
 
U.S., Korea Agree on Free-Trade Pact – The U.S. and South Korea struck a deal to revive a broad pact that could drop barriers on a wide array of goods and services, setting the stage for what would be the biggest nation-to-nation trade deal since the 1994 North American Free Trade Agreement. Negotiators for the U.S. and South Korea—the world’s No. 1 and No. 12 economy, respectively—broke a three-year impasse over the bilateral agreement early Friday by reaching accord on a deal to gradually lower U.S. tariffs on Korean automobiles.  President Barack Obama now faces a difficult final push to bring the pact into force. The deal will have to win ratification from the incoming Congress in January, in what promises to be a pitched battle amid eroding public support for free-trade agreements of any kind.
 
 ISM Non-Manufacturing index showed expansion in November -The November ISM Non-manufacturing index was at 55.0%, up from 54.3% in October – and slightly above expectations of 54.7%. The employment index showed expansion in November at 52.7%, up from 50.9% in October. Note: Above 50 indicates expansion, below 50 contraction. This graph shows the ISM non-manufacturing index (started in January 2008) and the ISM non-manufacturing employment diffusion index. From the Institute for Supply Management: October 2010 Non-Manufacturing ISM Report On Business®  Economic activity in the non-manufacturing sector grew in November for the 11th consecutive month, say the nation’s purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business
Big Banks as Bootleggers — Here is a post on how the actions of the Fed and Treasury in the last few years have benefited the large banks and eroded the advantages of the smaller banks. Wouldn’t surprise me–it’s a perfect bootleggers and baptists scenario. But it’s not just that politics make strange bedfellows (government actions that supposedly reduce systemic risk are favored by many for altruistic reasons and the banks like it because it increases their profits. The nature of the intervention is what is key–it is always skewed toward cronies–the political powerful. My version take on Bruce Yandle’s deep idea is here.
 
Where the Black Swan Dwells – Elsewhere, Ireland and the rest of Europe wore themselves out with soul-searching all week over how to handle national bankruptcy within a currency system that bears only a schematic relation to reality. Does the bankruptee go broke all at once, or is she recruited into permanent debt slavery so that the bond-holders of various banks can keep their loved ones in marzipan and Fauchon’s wonderful marrons glacés for one more holiday season? As of Monday morning, Ireland has been commanded to, er, bend over and pick up the soap, shall we say, for about a hundred billion euros in loans that will not be paid back until a mile-high ice-sheet covers Dublin (something that might happen sooner rather than later if the climate mavens are right).      We’ll see how this bail-out goes down with the French and German voters, too, who have to pay for it, after all, especially as Portugal, Spain, and Italy line up at the cash cage for their cheques (and bars of soap). Of course, a few more basis points in the interest rate spreads could prang the whole Euro soap opera – does anybody really believe this game of kick-the-can will go on after New Years? I’m not even sure it goes on past this Friday, but I am a notoriously nervous fellow.
 
Disclosure of chemicals in gas fracking advances Interior Secretary Ken Salazar strongly suggested that a policy overhaul at his department would include new requirements for public disclosure of  chemicals used on federal lands that contain 11% of U.S. natural gas reserves. And three energy industry trade groups announced they will support efforts to create a registry where oil and gas companies can voluntarily post – well by well – what chemicals they use. Despite the continuing shift toward disclosure by the very industry they purport to protect, key GOP members of Congress engaged in some predictable caterwauling about how transparency will kill jobs and hurt an industry they laughably maintain is sufficiently regulated by the states. In essence, two lawmakers who will have a big say over public land management come January said: “over our (brain) dead bodies.” Hydraulic fracturing, commonly called fracking, is a widely-used process to stimulate production from oil and gas wells.  As its use has grown in combination with horizontal drilling, and as huge new natural gas fields have been developed to exploit shale gas formations from the northeast to Texas, public concerns have mushroomed about the chemicals being used and the possibilities of contamination of water supplies if fracturing fluid is spilled or escapes underground.

U.S. Halts Plan to Drill in Eastern Gulf – The Obama administration announced on Wednesday that it had rescinded its decision to expand offshore oil exploration into the eastern Gulf of Mexico and along the Atlantic Coast because of weaknesses in federal regulation revealed by the BP oil spill. Interior Secretary Ken Salazar said that a moratorium on drilling would be in force in those areas for at least seven years, until stronger safety and environmental standards were in place. The move puts off limits millions of acres of the Outer Continental Shelf that hold potentially billions of barrels of oil and trillions of cubic feet of natural gas. The decision essentially reverses the much-disputed drilling plan announced in March, which would have initiated environmental studies and exploration activity in previously untouched areas off the Gulf Coast of Florida and along the East Coast from Florida to Delaware.

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