Category Archives: Economics

The Old Fashion Way

Economics, Politics

 

What does it say about the American economy when our memory of iconic businesses is shorter than their advertising campaigns?  Such is the case with Smith Barney.  In a September 25, 2012 press release, Morgan Stanley Wealth Management announced it would cease using the “Smith Barney” moniker even though Morgan Stanley CEO James Gorman conceded, “The Smith Barney name stood for investment excellence for three quarters of a century.”  So much for standing on the shoulders of giants.  Edward Smith and Charles Barney became an inconvenient reminder of the days when clients’ interests came before executive compensation and golden parachutes.

Historical Footnote:  Morgan Stanley reached a $3.2 billion settlement for misrepresenting the risks of mortgage backed securities during the 2008 housing and financial crisis.  On second thought, maybe James Gorman had a midnight visit from the ghosts of Smith and Barney demanding he take their good name off Morgan Stanley’s label.

Image result for smith barneyYet, it is next to impossible to erase Smith Barney spokesperson John Houseman’s voice reminding us, “We make money the old fashion way,  we earn it.”  I thought about the commercial when I read Washington Post writer Petula Dvorak’s article about, “…the middle-finger salute seen around the world.”  The story chronicled how an employee Juli Briskman of Akima, a government contracting firm, had been fired after admitting she was the unidentified cyclist who, when biking past Donald Trump’s motorcade, visually expressed her displeasure with Trump’s policies and behavior.  As one would expect, the alt-right propaganda machine became more hysterical than Gone with the Wind’s Aunt PittyPat during the burning of Atlanta.  “My, my, how awful.  Such disrespect.  Is chivalry and honor dead?  Whatever will become of us?”

Now there are many issues associated with Ms. Briskman’s termination which deserve our attention.  She was not representing her employer or even on Akima’s premises at the time she exercised her First Amendment rights.  What does that say about an employer’s control over one’s private life?  How about the double standard?  When another Akima employee called a colleague “a fucking Libtard asshole” on a Facebook conversation about Black Lives Matter, he was allowed to delete the comment and remains in his senior director position at the company.  In contrast to Ms. Briskman, the poster’s Facebook page clearly identified him as an Akima employee.

But today I want to focus on the “supposed victim,” the entitled-in-chief Donald J. Trump.  His defenders were quick to point out the office of the president deserves respect regardless of the occupant.  (On yesterday’s episode of the new PBS program Mr. Obama’s Neighborhood, children are being asked “Can you say hypocrisy?”) But an office is an intangible concept.  And individuals who are respected come to that status, as Smith Barney used to claim, “…the old fashion way, they earn it.”  Something Donald Trump clearly does not understand.  Remember, he…

  • Accepted a Purple Heart he did not earn.
  • Constantly references the Super Bowl Ring he received from Patriots’ owner Robert Kraft which he did not earn.
  • Claimed to understand the dangers of going to Vietnam by comparing it to his not contracting STDs.
  • Takes credit for an American economic revival by promising everything and accomplishing nothing.
  • Brags about his net worth even though he inherited $200 million from his father.  And, if he had invested it in an indexed stock fund, would be richer than he is today without multiple bankruptcies, bilking employees and subcontractors, laundering money and playing footsie with organized crime and America’s adversaries.

You want respect Donald?  Take your own advice from your October 29, 2017 Twitter meltdown about the failure of Republican members of Congress to save you from Robert Mueller.  “DO SOMETHING!”

For what it’s worth.
Dr. ESP

 

Biting the Hand That Feeds You

Economics

 

Following the release of the Republican tax plan, much is being made of the extent to which the proposal violates the long-held GOP and Tea Party (is there a difference?) concern about the growing federal deficit.  Much like the failed attempts at ACA repeal and replace, this legislation is not based on long-held Republican or even conservative principles, but rather a desire to do anything, regardless of the consequences, for the sole sake of doing something.  To remind you of what some of these principles are, I’ll let Republican representatives of the executive and legislative branches speak for themselves.

We want to get the federal government out of the business of subsidizing states./Treasury Secretary Steve Mnuchin, October 1, 2017

Is it fair that other states subsidize states that have high state taxes?/House Majority Leader Kevin McCarthy, September 29, 2017

If I live in a high tax state and you live in a low tax state, you actually pay more towards the federal government than I do. And that’s just not fair. It’s not right./White House Budget Director Mike Mulvaney, September 29, 2017

Makes sense except for one thing.  It only looks at contributions to the federal treasury, not receipts.  So the next logical step would be to see where the disparities exist and address them in a so-called comprehensive tax reform bill.  Let’s do that.  The following graphic (based on research by WalletHub) shows which states are most dependent on federal spending.  In other words, they receive more than they contribute to the treasury in the form of federal taxes.  The darker the color the more dependent the state.

It doesn’t take a rocket scientist to recognize the more dependent states generally have three things in common.  One, they tend to have lower state and local tax rates: two, they have higher rates of poverty than the national average; and three, they voted for (drum roll) Donald J. Trump.

There certainly must be a logical reason for this.  And there is.  HIGH STATE AND LOCAL TAX STATES USE THEIR OWN REVENUES TO MEET THEIR NEEDS.  In other words, they need less federal money because they “take personal responsibility” for themselves.  Sound familiar?  Maybe because the 1994 “Contract with America,” which led to the Republican revolution, was partially implemented via legislation titled (and I’m not making this up), “The Personal Responsibility Act.”  It cut cash welfare and related programs.

Logic suggests Republicans would applaud examples of personal responsibility.  Not only have they not acknowledged the value of state and local taxes on keeping federal spending lower than it might otherwise be, they have chosen to punish these states by eliminating the deduction for payment of state and local taxes.

Here is one more reason why this provision rises to the status of being the most hypocritical action in political history.  It further violates every justification any Republican has ever used to argue against double taxation.  Even within the proposed bill, the GOP screams that estate taxes are “double taxation.”  Lower rates for capital gains and dividends are justified in the name of “double taxation.”  LLCs and S-Corporations were created to avoid “double taxation.”  Yet they have NO problem when it comes to ignoring the fact taxing state and local tax payments equals (let’s say it in unison), “DOUBLE TAXATION.”

I could go on and on.  Doubling the standard deduction removes an incentive for lower and middle income family to make charitable donations.  So much for encouraging people to take care of each other so the federal government doesn’t have to.  In the Republican mantra, every life is precious until it includes a $4,000 personal exemption needed to underwrite major reductions in corporate taxes and fund the elimination of estate taxes and the alternative minimal tax (AMT).

NOTE:  Remember, the leaked 2005 Trump IRS return in which he bragged about paying $31 million in income taxes.  Without the AMT slated for elimination in the current bill, his tax bill would have been reduced by $26.7 million.  Yet, on September 27, 2017, the liar-in-chief told reporters, “No, I don’t benefit. I don’t benefit.  I’m doing the right thing and it’s not good for me, (here comes the famous Trump poker tell) BELIEVE ME.”

I am sure you saw the anecdote how House Speaker Paul Ryan kissed up to Trump by suggesting Trump name the bill “because he’s a branding genius.”  Trump’s genius response, “The Cut, Cut, Cut Bill.”  Well, I’m no marketing genius, but I do believe in truth in advertising.  Therefore, may I suggest an alternate title (Are you listening, Kellyanne?).  Let’s call it what it is, “The Cut the GOP Bullshit Bill.”

For what it’s worth.
Dr. ESP

 

Tax Reform for Dummies

Economics

 

So you want to give middle income American’s a tax break which also simplifies the voluminous tax laws and regulations. Or at least make the tax system less tilted in favor of the richest Americans.  Yet, there are elements of the current code which incent people to do things in the country’s best interest.  I can think of three.

  • Home ownership tax breaks (deductions of mortgage interest and property taxes) prop up an industry on which a growing U.S. economy depends.
  • Charity as a major source of funding for the arts and those in need is unique to the American experience.
  • To support a system of government services based on federalism, citizens pay taxes to multiple jurisdictions.  Consistent with the finding in McCullough vs. Maryland, “The power to tax is the power to destroy.”  Therefore, revenues paid to state and local governments should never be subject to federal taxation.

My point?  Any tax reform proposal promising to eliminate deductions should consider three things sacred.

  • Mortgage interest
  • Charitable contributions
  • State and local taxes

In fact they should increase the benefits for these items for the middle and lower class by converting these deductions to a 20 percent tax credit.  In other words, regardless of your wealth or tax bracket any money used for the purpose of mortgage interest, charitable giving or state and local taxes would be subsidized by the federal government at a 20 percent rate.  Consider the following examples.

  • A family or four with taxable income of $10,000 that pays $5,000 in mortgage interest currently receives a $500 tax break (10 marginal rate times $5,000).  Under this proposal, the same family would receive a $1000 tax break (20 percent credit against $5,000).
  • In contrast, a family with taxable income of $400,000 that pays $50,000 in mortgage interest currently receives a $19,800 subsidy (39.6 marginal rate times $50,000).  Under this proposal, the same family would receive a $10,000 tax break (20 percent credit against $50,000).

The same principle would be applied to the other two sacred categories: charitable giving and state/local taxes.

Next, a standard deduction (currently $12,700 for a married couple) and personal exemptions (currently $4,050) would apply to ALL taxpayers.  Rather than doubling the standard deductions as suggested in the GOP framework, all tax payers would still be eligible for mortgage interest, charitable giving and state/local tax credits.  In other words, all taxpayers would be rewarded for investing in America and Americans.

That only leaves the issue of tax rates and taxable income levels.  To ensure any tax reform proposal is revenue neutral and does not accelerate growth of the national debt (as has been empirically proven of the George W. Bush tax cuts), I will leave the exact number to the Congressional Budget Office.  But something in the range of five brackets seems to make sense.  For illustrative purposes, it might look like this for a married couple filing jointly.

Taxable Income/Marginal Tax Rate
$0-$20,000/10 percent
$20,001-$80,000/15 percent
$80,001-$1500,000/20 percent
$150,001-$300,000/25 percent
$300-001+/30 percent

The decreased rates at the highest brackets would be offset by limiting tax deductions and converting any remaining tax incentives from deductions to credits.

And for you rich folks who still think this is unfair, just remember.  You’ll also be saving a wad of cash due to the lower cost of accounting and legal services.  Maybe you could give that extra cash to real charities (not conservative think tanks) or give your business and household employees a living wage.  Just saying!

For what it’s worth.
Dr. ESP

 

Random Thoughts 9/16/2017

Economics, Politics, Random Thoughts

 

In the continuing search for a happy medium between the demands of other projects–business, writing a novel and cleaning up after hurricanes–I have decided to move to a weekly post of random thoughts.

Today, I begin with two topics which were overshadowed by concern for the residents of SE Texas, the lower Atlantic coast and the Caribbean islands.  They are both related to the worn out mantra, “We need to run government like a business.”  It assumes businesses are all the same.  What if we ran government like a bait and switch scam?  Well, we are currently putting that to the test and how is that going?  Instead, what if we looked at specific business practices which might be adapted because they make the same sense in the public sector as they do for private enterprises.

Spousal Travel

I used to work for a major public interest group in Washington, D.C. which required almost weekly travel to meet with our clients.  I was allowed to take my wife on these trips under the following conditions.

  • I paid for her airfare.
  • Any expense which represented a cost above the travel reimbursement to which I was normally entitled came out of my own pocket.

For example, if there was no price differential between one or two people staying in the same hotel room, that was okay.  But if there was an additional charge for the second person in a cab or shuttle, that was my responsibility.  Of course, her meals and entertainment could not be charged back to the organization.

Now consider the recent efforts of Secretary of Creative Accounting Steven Mnuchin to bilk American taxpayers for his honeymoon and his optimal viewing of last month’s solar eclipse.  In both cases the use of a private government plane (at a cost of $25,000/hr) was dubious.  In the case of his European honeymoon there was no official business associated with this travel.  His excuse? As a member of the National Security Council (NSC) he needed to have encrypted access to the White House in case of an emergency.

But here’s the rub.  There are five categories of members/participants on the NSC in order of importance.

  1. Chairman (aka President)
  2. Statutory Attendees
  3. Military, Intelligence and Drug Policy Advisers
  4. Regular Attendees
  5. Additional Participants

Care to guess into which category the Treasury Secretary falls?  If you chose #5, give yourself a prize.

Image result for mnuchin and wife at ft. knoxAs for the trip to Ft. Knox, Kentucky, there was no scheduled event which required Mr. Mnuchin’s presence.  And he later claimed he had no interest at all in the solar eclipse. In an interview with Vanity Fair,  Mnuchin said, “You know, people in Kentucky took this stuff very serious.  Being a New Yorker and [living for a time in] California, I was like, the eclipse? Really? I don’t have any interest in watching the eclipse.”  So much for Republican claims it’s the Democrats who are coastal elites.

The solution.  Follow the same rules as my former DC employer.  Public officials (elected and administrative) should be required to reimburse the federal government for family members’ or friends’ airfare when using government transportation.  Use the standard already contained in Federal Elections Commission regulations.  If a candidate is offered space on a private or corporate plane, the campaign must reimburse the host individual or company the equivalent of an average first class airfare for a similar flight.  And unless the spouse is on official public business (one can imagine both Senator Mitch McConnell and his wife Transportation Secretary Elaine Choi having a role at an international event), all discretionary costs associated with companion travel should not be covered with government funds.

A Specific Business Approach Toward North Korea

I have a friend who for 20 plus years owned the third largest contractor in a business sector which is historically known for safety issues.  Workers compensation and liability insurance are major cost centers in this industry.  Most of the accidents are due to human error.  In other words, it was the employee’s fault.  Therefore, the traditional approach to work safety was to punish an employee if he/she violated safety regulations or procedures.  But as my friend soon learned that only ended up costing him more.  A disciplined employee was more likely to quit than change behavior, adding the expense of hiring and training new workers.

Instead, my friend chose a counter-intuitive approach and began offering bonuses to workers based on the number of days they went without a safety violation or incident.  Within months of implementing the policy, the number of safety incidents decreased significantly leading to reduced insurance premiums.  Employees now had a financial stake in the company’s safety program.

Image result for sam kinisonWhich brings us to North Korea.  For some reason, sticky issues always come back to Sam Kinison’s controversial declaration, “I don’t condone wife-beating, but I understand it.”  That’s exactly how I feel about North Korea.  I don’t condone nuclear proliferation, but in this case, I understand it.  Put yourself in Kim Jong-un’s shoes.  You watched the United States invade the sovereign nation of Iraq and overthrow its government.  What would keep the USA from doing the same thing in North Korea?  The obvious answer is nuclear deterrence.  History suggests it works.  Nuclear capability kept the cold war from heating up.  It maintains a relative state of peace between India and Pakistan.  And it remains Israel’s wild card as a weapon of last resort in the event of a second potential holocaust.

Following my friend’s entrepreneurial approach to workplace safety, one might say, “The stick doesn’t seem to be working; maybe we should offer a carrot.” Instead of backing Pyongyang into a corner, we should ask what could we do that gives Kim Jong-un a stake in defusing an escalation of more and more destructive weapons.  Didn’t John Kennedy do exactly that during the Cuban missile crisis in October, 1962?  Like Kim Jong-un, Fidel Castro was convinced the United State wanted regime change in Cuba.  A reasonable supposition following the failed Bay of Pigs invasion. As part of the deal which resulted in the removal of Soviet offensive weapons from Cuba, Kennedy promised not to initiate or support any future attempts to overthrow Castro.

Instead of giving Kim Jong-un more reasons to expand his nuclear capabilities, maybe it’s time we give him a reason to start believing he doesn’t need them.

For what it’s worth.
Dr. ESP

 

Who Would Have Guessed

Economics, Politics

 

Greetings from Winnipeg, Canada.  No, we’re not seeking asylum.  Just trying to get away from the heat and bugs that come with summer in Florida.

Image result for north and south dakota mapBefore crossing the U.S./Canada border we spent four days in the Dakotas.  While there, we did not see one Trump sign or one Trump bumper sticker.  Strange, because we thought we assumed we would be in the heart of Trump country.  We stayed off the interstate highways and the largest city we visited was Pierre, South Dakota, population 13,000.

This was in stark contrast to our last trip through rural America last October.  Even in the most royal blue states of Oregon and Washington, there were Trump banners on literally every barn and fence.  When I thought about the voters who would stick with Trump the longest, these were the folks who came to mind.

Now I realize I may have been wrong.  There are still plenty of Trump bumper stickers on cars in my home town. a mostly upper middle class community with many retirees.  Nor have I heard many of Trump’s wealthiest supporters express a change of heart.  Then it came to me.  Deep Throat of Watergate fame was right.  “Follow the money.”

Trump supporters in urban and suburban can continue to cheer his attacks on the establishment and the media without fear of GOP policies.  Our local hospital is unlikely to close regardless whether Trump and the Republican Congress gut the Affordable Care Act.  Most, if not all, of those elder Republicans’ stock port folios are probably higher than they were on election day, even though the Republicans have made no significant changes to Obama economic policies.  And there probably isn’t much in Paul Ryan’s proposed federal budget which will affect their livelihoods.

Not so in rural America.  Farm subsidies are on the chopping block.  In many rural areas, the local hospital, which serves mostly Medicaid recipients, is one of the largest employers.  When the hospital goes away, so do many of the best paying jobs. And so do the retail and service establishments. And they know, without immigrant labor, they cannot harvest all they have grown.

So, while many of us thought the mainstream Republicans who held their noses in the voting booth when pulling the Trump lever would be the first to abandon the pretender-in-chief, they have little or nothing at stake in the immediate future.  It is those rural residents in places like the Dakotas, who believed a billionaire(?) con man unlike themselves would be their voice, are the first to understand that, under Trump, they are being corralled like their livestock and plowed under just like their crops.

One can only hope the Democrats understand the political table in rural America is set.  The question is, “Do they know how to partake of this bounty?”

For what it’s worth.
Dr. ESP