Monday, August 31, 2009

You know your government is too big when... 

Its rules will put a legitimate business that has been in business for 99 years out of business for providing its customers with free coffee.

Ted Kennedy remembrance of the day... 

Ted Kennedy had a great sense of humor, his biographer, Ed Klein, says.

"One of his favorite topics of humor was indeed Chappaquiddick itself," Klein, former editor of the New York Times Sunday Magazine, said on WAMU 88.5 FM in Washington, DC.

"He'd ask people, 'Have you heard any new jokes about Chappaquiddick?' ... Not that he didn't feel remorse over the death of Mary Jo Kopechne, but that he still always saw the other side of everything, and the ridiculous side of things." [Page Six]

Sunday, August 30, 2009

Obama's time off 


Saturday, August 29, 2009

Krugman versus Krugman on deficits and debt -- who can you believe? 

Government deficits totaling $9 trillion over the next ten years are coming, the Obama administration now projects. (Up from its prior projection of $7 trillion. For perspective, $9 trillion is over 20% more than the entire national debt accumulated from George Washington's inauguration until today: $7.4 trillion).

Many commentators are alarmed. Prof Hamilton at Econbrowser illustrates alarm with a nifty chart showing the difference for the worse between now and the last time such debt levels were reached, during World War II, and draws Paul Krugman's attention.

Krugman's response: Good God! He's "terrified"! This is a "looming threat to the federal government's solvency"!! No less than that. Brace yourself for the horrors he predicts, quoting here ...

...last week I switched to a fixed-rate mortgage. It means higher monthly payments, but I'm terrified about what will happen to interest rates once financial markets wake up to the implications of skyrocketing budget deficits... we're looking at a fiscal crisis that will drive interest rates sky-high.

A leading economist recently summed up one reason why: "When the government reduces saving by running a budget deficit, the interest rate rises." Yes, that's from a textbook by the chief administration economist, Gregory Mankiw.

But what's really scary, what makes a fixed-rate mortgage seem like such a good idea, is the looming threat to the federal government's solvency.

That may sound alarmist: right now the deficit, while huge in absolute terms, is only 2 , make that 3, O.K., maybe 4 percent of G.D.P.

But that misses the point ... because of the future liabilities of Social Security and Medicare, the true budget picture is much worse than the conventional deficit numbers suggest.

... the conclusion is inescapable. Without the Bush tax cuts, it would have been difficult to cope with the fiscal implications of an aging population. With those tax cuts, the task is simply impossible. The accident, the fiscal train wreck, is already under way.

How will the train wreck play itself out? ... my prediction is that politicians will eventually be tempted to resolve the crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt. And as that temptation becomes obvious, interest rates will soar.

... investors still can't believe that the leaders of the United States are acting like the rulers of a banana republic. But I've done the math, and reached my own conclusions -- and I've locked in my rate.
No. Wait ... wait. Sorry. Wrong column, my bad.

That was Krugman back when Bush was president, when CBO had projected 10-year deficits of $1.8 trillion, rather less than $9 trillion.

Krugman's response yesterday to Professor Hamilton was entirely different: Why worry? Be happy!

I respect Jim Hamilton a lot, [but] I think that he and others are quite wrong, on several counts.

... let’s take a slightly later start date: in 1950, federal debt in the hands of the public was 80 percent of GDP, which is in the ballpark of what we’re looking at for 2019. By 1960 it was down to 46 percent — and I haven’t heard that anyone considered America a debt-crippled nation when JFK took office.

So how was that possible? ... How, then, did America pay down its debt? Actually, it didn’t: federal debt rose from $219 billion in 1950 to $237 billion in 1960. But the economy grew, so the ratio of debt to GDP fell, and everything worked out fiscally.

... the lesson of the 1950s — or, if you like, the lesson of Belgium and Italy, which brought their debt-GDP ratios down from early 90s levels — is that you need to stabilize debt, not pay it off; economic growth will do the rest....

So, to review: to make the debt look scary, you have to dismiss the post-World -War II experience, even though it turns out that the 50s offer a quite good lesson...
So which Krugman are we supposed to believe?

[] Krugman 2003 [deficit at 3% of GDP, 10-year deficit projection $1.8 trillion]: "I'm terrified ... we're looking at a fiscal crisis that will drive interest rates sky-high ... the conclusion is inescapable ... the task is simply impossible ... the fiscal train wreck, is already under way." Or,

[] Krugman 2009 [deficit at 11% of GDP, 10-year deficit projection $9 trillion]: What's to worry? The Ozzie & Harriet era of government finance will be easy enough to bring back. Just stabilize the debt in terms of GDP and be happy!

Well, to decide, let's look at the data. Krugman today is saying the years 2019 to 2029, after the projected run-up, can easily be just like the years 1950 to 1960 -- with the debt stabilized in terms of GDP from an earlier big run-up.

Here are the actual percentage changes in real-dollar debt and GDP for 1950-1960, and the projected changes on current policy for 2019-2029*

_____1950-1960 ___ 2019-2029

debt .. -13.5% .... +103.4%
GDP ... +41.1% .... + 23.9%

Hello? That's a rather big difference in the direction "debt" moves between the two decades. What's the source of the difference?

The minor source is that Krugman was being a bit disingenuous when he said the US "didn't" pay down its debt in the 1950s. The gov't ran multiple surpluses during the decade and did reduce the debt in real-dollar terms. (No such surpluses are planned in our future.)

But the huge reason is the approximately $62 trillion at present value in unfunded obligations that the government owes for Medicare, Social Security, Medicaid and federal-military pensions. This $62 trillion did not exist in 1950. As the baby boomers sail into retirement, to pay for them this $62 trillion of "implicit debt" rolls into cash-interest-paying Treasury debt annually at an ever-accelerating rate. This cost over time piles up to a staggering, unsustainable amount, detailed previously. (As Krugman 2003 knew!)

Krugman now says we "merely" have to stabilize the debt. Let's look at what that will take.

CBO says spending on Medicare, Social Security and Medicaid alone, will increase by 6 points of GDP by 2030. Being that government expenditures have been around 20% of GDP in recent decades, just this alone requires a 30% real increase in revenue by 2030 to "stabilize" deficits.

That requires tax increases. (You know Krugman doesn't want to slash social insurance spending.) How much in tax increases?

CBO has provided numbers: A 50% across-the-board income tax increase on everyone, both individuals and businesses (or an equivalent revenue raiser) by 2030 -- just for starters, as spending rises on ever after. (Here are details, with comparisons to past fiscal events, such as World War II.) In the alternative, both Moody's and Standard and Poor's have projected the credit rating of the US will start falling in 2017, with S&P projecting Treasury bonds will be "junk" by 2027. (And those projections were made before the effects of the current recession and Obama's policies)

Does Krugman have any proposal for tax increases on such a scale? Nope. He ignores the issue.

Hey, but does Krugman somehow not know about the $62 trillion of "implicit" debt that will be turning into real, explicit debt in coming years? Of course he knows all about it -- when it's politically convenient.

Remember Krugman 2003 knew all about it when writing: "because of the future liabilities of Social Security and Medicare, the true budget picture is much worse than the conventional deficit numbers suggest. ... the conclusion is inescapable. Without the Bush tax cuts, it would have been difficult to cope with the fiscal implications of an aging population. With those tax cuts, the task is simply impossible ... the fiscal train wreck, is already under way".

But now Krugman 2009 has forgotten all about it.

The Bush tax cuts haven't been repealed, right? And Obama says he's not going to repeal the bulk of them -- $2 trillion worth (over 10 years) on persons with incomes under $250,000. In fact, he's explicitly promised further net tax cuts.

So how has the "simply impossible" of 2003 become so trivially easy in 2009, even as the fiscal situation has gotten much worse? The answer is trivially obvious:

Krugman, like every other strident political hack advocate, follows this rule in evaluating deficits:

[] When out of power, so I'm not getting the political benefit of deficit spending, my opponents are getting the benefit, deficits are so wantonly irresponsible as to threaten the solvency of the government itself!

[] When in power, so I am getting the political benefit of deficit spending, and my enlightened spending is beneficial to all, all those modest deficits of history never hurt Ozzie and Harriet, so what's to worry?

Thus it has been in politics, and so it shall always be -- until the cash bill for $69 trillion-plus in total explicit-and-implicit debt starts seriously arriving around 10 years from now ... and 10 years after that either we are up to our eyeballs in tax increases or the government is broke. Or both.

* Data from 2009 US Budget Historical Tables [.pdf], and CBO Long-Term Budget Outlook [.pdf]

Friday, August 28, 2009

If you care about the public schools in America's cities... 

... read this story in The New Yorker.

No digest from me -- just read the article.

(It's something of a follow up on this report from a NYC public school teacher of some years ago. Things change slowly, very slowly ...)

Wednesday, August 26, 2009

Obama "uh ohs"... 

Here's the first time I've seen this said about Obama's effect on other candidates...
[N.J. Democratic governor] Corzine's support continues to slip, with just 36 percent in the latest polls saying that they'd vote for him ... National pundits and GOP leaders see Corzine's woes as a sign that voters are growing discontented with Obama's policies... [NY Post]
Mickey Kaus says that leaving Obamacare twisting in the wind helps Democrats by keeping the rest of their agenda out of the public debate [emphasis in original]...
... the issues waiting in the wings -- should health care leave the stage -- are even worse, from the Democrats' political perspective. Cap and trade, immigration legalization, "card check"--these are not what you'd call confidence building appetizers leading up to the main course of Obama's presidency. Plus the Afghan War!...

It's easy to forget that, even if Obama's health care effort is bogging down, the effort itself still serves his presidency as a crucial time-waster, tying up Congress and giving him a reason to postpone (or the public a reason to ignore) those other divisive, presidency-killers. Obama needs some excuse for putting off unpopular Democratic demands; health care's a good one....
Richard Cohen says Obama needs a "teachable moment" as a student ... Paul Krugman shows that the endorphin-driven happy effects from having Obama give him that dinner are beginning to wear off: "Obama’s Trust Problem -- There’s a growing sense among progressives that they have been duped by President Obama..." ... and these are all pundits who voted for Obama.

Poll-wise, Obama's approval rating is down to 51% from 70% six months ago. And his good news/bad news is: "good news", he's leading his hypothetical leading Republican challengers in 2012; "bad news" he's pulling less than 50% against them and they won't start campaigning for another two years.

All quite a change from just months ago, when Obama and his Democratic minions had ushered in America the Liberal, the new Permanent Democratic Majority, and so cut off the Republicans at the knees that conservative pundits could only discouragedly ponder their dismal future and wonder how they could ever learn to walk again.

A short time is a long time in politics.

The Krugman Konundrum rears its head again 

Paul Krugman, looking for reasons why Obamacare seems to be going nowhere in spite of Democrats having 60% majorities in both Senate and House, finds that it's because, for some bad reason, the American people are biased against big government [emphasis in original]....

The debate over the "public option" in health care has been dismaying in many ways. Perhaps the most depressing aspect for progressives, however, has been the extent to which opponents of greater choice in health care have gained traction ... simply by repeating, over and over again, that the public option would be, horrors, a government program.
Now recall that for a full eight-straight years Krugman lectured the American people relentlessly that the US government and its leaders were stupid, venal, dishonest, and corrupt. Today he's shocked to find ... they believe it!

In his columns, Krugman used the word "liar" about the government and the people in it so often that NY Times editor Howell Raines ordered him to stop.

Then, for health care...
"Above all, we need to put aside our anti-government prejudices."
Cognitive dissonance?

The Krugman Konundrum of course is closely related to DeLong's Dilemma:
The Key Problem of Modern Liberalism

How can one support the idea of an activist government when half the time that government will be run by malevolent or incompetent Republicans?
The fact that people who believe in small government take Krugman's and DeLong's complaints about lying, malevolent, incompetent government much more seriously than Krugman and DeLong do is an irony that Krugman and DeLong will never appreciate.

Tuesday, August 25, 2009

Six ways the U.S. won't escape its national debt. 

The US national debt -- including its "implicit debt", unfunded liabilities for promised Medicare, Social Security, and Medicaid benefits and federal employee/military pensions -- is staggeringly, unsustainably large: $64 trillion at the end of 2008. And since then it's grown to about $69 trillion (after adding the 2009 fiscal deficit of near $2 trillion and a year's interest to the implicit debt.)

How unsustainable it? Even if never paid off the government still will have to pay interest on it. At the 6% long-term rate estimated by the Trustees of Social Security, interest on $ 69 trillion is $4.14 trillion a year. Interest on US debt is financed with income taxes. There are 80 million payers of income tax in the US. Dividing $4.14 trillion by 80 million taxpayers gives $51,750 per taxpayer annually. Meanwhile, average household income in the US is about $50,000.

An average tax bill per taxpayer larger than median household income, just for interest on the debt, seems a pretty good working definition of "unsustainable".

Of course, taxpayers aren't paying all this yet. At this writing the "debt held by the public" upon which cash interest is paid (the "explicit debt") is $7.4 trillion. But over coming years it is going to grow fast as the "baby boomers" sail into retirement and the implicit debt turns explicit to pay for it.

During the next 10 years the debt held by the public is projected to grow by another $9 trillion -- 20% more than the total accumulated since George Washington's inauguration in 1789 until today. After that it is "off to the races." Standard and Poor's projected in 2005 that on then current policy the credit rating of the United States would be "junk" by 2027 -- and Obama's policies and the recession have since accelerated that debt accumulation by a good half dozen years ... but enough of the bad news.

There's an old saying in economics that "if something is unsustainable it will not be sustained". So in the end the U.S. will escape the unsustainable portion of its debt, one way or another. The question is "how?"

Arnold Kling has suggested seven possibilities. In my opinion there is only one. His possibilities are in italics below, my opinion on each follows.

1. Muddle through. No major change in policy...

Zero chance by arithmetic. As more than $50 trillion of "implicit debt" is converted to cash-interest paying explicit debt, the government is not going to be able to pay the interest owed on $50 trillion with "no change in policy".

2. Technology to the rescue. Some major technologies, probably either wet or dry nanotech, produce so much economic growth that the ratio of debt to GDP stays under control ...

Dreams are nice. But when per capita GDP has been increasing 2% a year for near 200 years at a remarkably steady rate, why would it explode upward now? Why not 50 years ago? Or 50 years from now, when it will be far too late?

Moreover, even a surge in the growth rate large enough to be deemed "huge, unprecedented" by historical standards still won't work, because Social Security benefits are tied to wages which rise with the growth rate, and demand for health benefits rises faster than income, which rises with the growth rate.

This possibility has been considered here in more depth with real numbers previously.

3. Policy changes. Congress increases taxes ... and/or takes steps to rein in Medicare and Social Security spending.

Nothing else is possible by process of elimination. There's an easy way (Congress responsibly does this in advance to head off calamity) and a hard way (Congress irresponsibly delays until calamity arrives and then does it to avoid worse calamity) and I certainly more expect the latter. But this is going to happen, because in the end there are no other options.

And to paraphrase Sherlock, when you eliminate everything that won't work...

4. Inflate away the debt with moderate inflation (between 5 and 10 percent per year)...

Zero chance. Impossible for two reasons:

First, it won't work even for the explicit Treasury debt because "inflating away" debt only works if the debt is actually paid off.

Lenders aren't dummies. If a government continues running deficits and thus has to roll over its debt after it starts inflating, lenders charge it enough interest to cover the inflation and more (an "inflation premium" in case the government inflates further). The government gets clobbered with skyrocketing interest rates, is still borrowing, and has more problems than ever.

Nations "inflating away debt" as some sort of easy way out of it is largely an economic urban legend. To eliminate debt (even with inflated dollars) the government must stop borrowing, which requires a massive change in real fiscal policy -- it has to push revenue above spending. Which gets us back to the only option, "policy changes".

Second, inflation very clearly can't eliminate the >$50 trillion of "implicit debt" because Social Security benefits and federal/military pensions are inflation-indexed, while Medicare and Medicaid are paid in "real service" terms, the cost of which rises even faster than inflation.

5. Wealth tax. The government takes, say, 5 percent of everyone's personal assets above $100,000...

Zero chance. A one-time fix won't work. Future expenditures rise above revenues forever at an accelerating rate -- literally exponentially as interest on the debt compounds. No one-time fix will do. There's just not enough wealth to seize to pay down the bulk of $69 trillion.

6. Hyperinflation....

Won't work for the same reason as "inflation". That's the "beauty" of owing all your big debts in inflation-adjusted and real terms, regardless of nominal dollar cost.

7. Default. The U.S. simply refuses to pay some or all of its debt...

Even if it happens it doesn't give the funds needed to pay Medicare, Social Security, Medicaid, and unfunded federal-military pension obligations. So it is no solution.

Remember, the fiscal killer is not the $7.4 trillion of Treasury debt or whatever amount the Treasury debt is projected to reach in the next few years, but the >$50 trillion present value liability for Medicare, Social Security, Medicaid, & unfunded federal and military pensions. Walking away from $7.4 trillion you owe now doesn't give you the money to pay >$50 trillion you'll owe soon.

The ONLY solution for financing this >$50 trillion is increasing taxes to pay promised benefits or cutting the amount of them that gets paid, or -- in reality -- both. It must happen, by arithmetic nothing else is possible, so it will happen. Though the politics of it happening is going to be interesting to watch (in the sense of the old Chinese saying, "May you live in interesting times.")

To see the rough size of tax increases/benefit cuts needed to keep the government solvent, and for perspective on them compared to past budget events (such as World War II) here are some numbers.

Sunday, August 23, 2009

Stoking the "Hands off My Medicare" movement -- a dangerous game for Republicans. 

How much do seniors pay towards their own Medicare benefits?

Andrew Biggs answers the question for the average 65-year-old retiring today, at the AEI blog ...
The typical 21-year-old as of 1965 would have paid around $62,290 in Medicare taxes ... while receiving around $140,346 in benefits.
That's 44%. So the average senior retiring today pays for less than half the Medicare benefits to be received. And the percentage is declining, because Medicare expenditures grow faster than the economy.
The Medicare Trustees project that health costs will grow around 1 percentage point faster than the growth of per capita GDP, which in turn they project will grow around 1.3 percent faster than inflation over the next 15 years. So I assume that real Medicare benefits will increase by 2.3 percent each year.
OK, it's obvious that this has big political implications both long-term and short-term, but let's consider them explicitly for a moment.

Right now to fight the Democrats' national health care plan, the Republicans are fueling a "Hands off My Medicare" movement organizing protests at political town meetings and elsewhere. It's certainly proving an effective ploy against the Democrats, hoisting them on their own petard, as the Democrats have so often used seniors rabidly defending their retiree benefits against Republicans in the past (see the 2005 protests against Social Security Reform).

It's also an honest ploy if looked at in the narrow focus of the immediate debate over Obamacare. The Democrats have plainly said they are going to cut medical costs. Obama has explicitly said, emphasized, they must cut the cost of Medicare to save the nation from future bankruptcy. But neither Obama nor the Congressional Democrats have any plan at all to actually measurably cut costs with efficiency improvements.

By arithmetic, that leaves the only option to be cutting benefits -- rationing to control costs, such as the Britain's National Health Service not paying for more than £30,000 of treatment per “quality adjusted” year of life. As one of Obama's top health care advisors, Ezekiel Emanuel (Rahm’s brother), has put it outright...
“Vague promises of savings from cutting waste, enhancing prevention and wellness, installing electronic medical records and improving quality are merely 'lipstick' cost control, more for show and public relations than for true change”... [medical care should be reserved for the non-disabled, not given to those] “who are irreversibly prevented from being or becoming participating citizens ... An obvious example is not guaranteeing health services to patients with dementia” [NYP]
The Democrats have put themselves in a box. They've committed themselves to a "reform" that must logically result in cutting Medicare benefits, but are denying it will cut Medicare benefits. Seniors, not being entirely stupid about the processes of government, don't believe them. In the game of hardball politics it's entirely fair and honest for Republicans to point out the Democrats' problem and exploit it.

But it is also a dangerous game in the longer run, for both Republicans and the nation.

Because the fact of the matter is, those Medicare benefits that are already only 44% paid for by recipients, are growing by 2.3 percent a year and are indeed on course to bankrupt the nation if nothing is done about them.

Fundamentally, it is just plain wrong for any senior to think in terms of "hands off my Medicare benefits" when other people are paying the majority of their cost -- and rising. To encourage wrong belief among the masses for partisan short-term gain is itself wrong, and in this not just wrong in principle but likely to prove damn cosltly and painfully wrong, self-defeatingly wrong, in the long run.

Because in the end, to a greater or lesser degree, those Medicare benefits are going to have to be cut.

Moreover, if the Republicans at the end of the game want to attain their purported goals of low taxes, smaller government, and economic efficiency, those Medicare benefits are going to have to be cut to the greater degree.

And whipping up seniors to believe, "those Medicare benefits are yours, they are uncuttable, no matter how little you paid towards them", just does not square with that objective at all.

Friday, August 21, 2009

NFL Football Friday -- the season approaches... 

Finally, something worth $39.99 from! For your dog!

The NY Daily News tells us...

What's next, a Donte Stallworth beer koozie?

If you own a dog and a twisted sense of humor, the NFL is ready and willing to help turn your four-legged friend into a Michael Vick fan for the small fee of $39.99 plus tax and shipping.

That's the price you'll pay for the "custom pet jersey" selling on the NFL's Web site at, where a Daily News reporter placed an order Wednesday for a Philadelphia Eagles dog jersey, size large, with the No. 7 and the name "VICK" on the back.

At the NFL, that's business as usual.

"Like any other player, (customers) can obtain that name and that jersey if they wish," league spokesman Greg Aiello said. "As far as putting it on the dog product, he's working with humane societies, working to educate others on this issue, so we don't see a problem."

The NFL keeps a surreal list of more than 1,100 words and names that shoppers cannot use when customizing their jerseys ... an attempt to order an Eagles No. 7 dog jersey with the banned name 'MEXICO' -- as in Ron Mexico, Vick's alias in a 2005 lawsuit alleging that he knowingly infected a woman with herpes (the suit was settled out of court) -- was denied.
As someone who watched Favre play for the Jets last year, maybe Obama's old age commissions have a point...


Thursday, August 20, 2009

OK, there's plenty of reason to hate Bernie Madoff, but this is just mean... 

“Bernie had a very small penis. Not only was it on the short side, it was small in circumference..."

-- Madoff's mistress Sheryl Weinstein in her new tell-all book, via Bloomberg.

"Car Dealers In 'Clunk' Funk" 


Car dealers are mutinying over the popular Cash for Clunkers program.

Hundreds of frustrated dealers around the city have pulled out of the program because the feds are holding up their reimbursements, the Greater New York Automobile Association said yesterday.

About half the 425 association members say they've dropped out because they've gotten only 2 percent of the millions of dollars owed them by Washington.

"It's an administrative nightmare," said association president Mark Schienberg.

New York dealers aren't the only ones being told the check is in the mail. Nationally, only about 2 percent of dealers have gotten reimbursed for the $3,500 to $4,500 they shelled out for each car to make the program work, according to Rep. Joe Sestak (D-Pa.), who complained to President Obama this week.

About half of Pennsylvania's 950 dealerships have halted clunker deals, said a spokeswoman for the state's automotive association...

Under federal regulations, they are supposed to be reimbursed by Washington within 10 days for the $3,500 to $4,500...

"Their [computer system] crashes all the time and you can't talk to anyone. It's extremely frustrating," said Schienberg.

He said some local dealers are owed up to $1 million from the program.

"Cash flow is extremely important," Schienberg said. "Dealers are throwing up their hands and saying it's time to pull out of the program."

US Transportation Secretary Ray LaHood tried to head off the mutiny. "I know dealers are frustrated. They're going to get their money," he told reporters in Washington...LaHood also blamed some dealers for submitting inaccurate forms.

"Many of the applications are faulty and we have to send them back," he said. "As soon as we get a good application, we send the check out."

But when dealers are told there's a mistake in the forms, Schienberg said, "they're not told what was wrong. They have to resubmit the application. And in the meantime they're out the money."

Schienberg said Cash for Clunkers is "a great program" that's been placed "in the hands of this enormous bureaucracy and regulatory agency...." [NY Post]
Well, "Cash for Clunkers" is a complicated program.

Reorganizing 16% of the economy through national health care will be simple. Such things as "federal regulations requiring repayment from Washington in 10 days" under it will be enforced to the letter, you can bet! After all, if not you can sue!

Tuesday, August 18, 2009

This 'n that 

What do women want? The men other women already have.

Real reality television:

Sao Paulo, Brazil -- In one murder after another, the "Canal Livre" TV show had an uncanny knack for being first on the scene, gathering graphic footage of the victim.

Too uncanny, say police ... who are investigating the show's host ... on suspicion of commissioning at least five of the murders... [AP]

"Cash for Clunkers Pays Ten Times Market Rate for Greenhouse Gas Reduction" -- (ht:Viking Pundit.)

Hotels, like airlines, have always been big into price discrimination -- finding ways to learn exactly how much people will pay for what. But are things getting a little extreme?

For their one-and-only family getaway this year, the Billingtons checked in to an upscale San Diego resort on Sunday with many of the usual vacation accessories ... they also brought flashlights, sleeping bags and an inflatable mattress because the pool-side room they booked for just $19 comes with a tent where the beds normally would be. They even had to pack their own toilet paper.

... the hotel's deeply discounted promotion lets patrons trim its standard $219-per-night rate on a sliding scale of deprivation, lowering charges with each amenity stripped from the room.

The most basic version: a room for $19 with no bed, toilet paper, towels, air-conditioning or "honor bar," and only a single light bulb in the bathroom for safety. The next level up adds in a bed -- sans sheets -- for $39 a night. For a bed plus toiletries and toilet paper, the rate is $59 ...

Herman Billington, 39, a personal trainer who owns his own business, says it's the only vacation he, his wife and their two sons, aged 9 and 10, plan to take this year as they concentrate on "keeping it lean."

"The boys get to feel like they're camping, and I get to go to the spa," said their mother, Erica Billington... [Reuters]

Don't be an "angry protester" about health care reform. Upbeat signs for town hall meetings...


... from Angry Drunk Bureaucrat

Monday, August 17, 2009

IRS scorched by Court of Appeals -- billions more in telephone tax refunds coming? 

Sometimes the IRS runs into a judge who it seems must've had a bad experience with one of its auditors.

A case like that came down last week -- and very unpleasantly for the IRS it came from the second-highest court in the land to open the possibility of $4 billion more in tax refunds coming to all us telephone users.

An open-hand smacking like this is rarely administered by a court to anybody -- and to the federal government itself, less often than that. So I've quoted some paragraphs from it below to enjoy.

The backstory: In 1898, Congress imposed what it described as a temporary "luxury tax" on long-distance phone service to finance the Spanish American war. The tax far outlived its stated purpose (are you surprised?) and was still being collected in 2004 (into it's third century).

But by then phone technology and telephoning practices had changed so much that people started to notice what was taxable by the terms of the tax code no longer corresponded to reality (here's a fuller explanation), and taxpayers large and small began demanding refunds. The IRS lost 10 court cases in a row and then conceded.

At that point the Treasury said that as of the start of 2007 it would refund telephone taxes paid during the prior 41 months (the legal statute of limitations). The IRS issued a formal statement, Notice 2006-50, detailing how refunds were to be claimed. Under it the IRS automatically gave sliding scale refunds by size of household, up to $60 for family of four. Anyone who wanted more than that had to file serious paperwork and produce up to 41 months of phone bills.

One Mr. Neiland Cohen -- a retired former IRS revenue agent for 35 years -- filed for a refund of $50. The IRS said that was more than he was entitled to under its formula and rejected the claim.

Mr. Cohen then sued the IRS for himself and on behalf of other taxpayers. He argued that it had had no right to collect the tax in the first place, and then in its Notice 2006-50 had set the refund formula too low and made the requirements for claiming any further refund impossibly burdensome, to make further refunds impossible and to keep the illegally collected tax money for itself.

He cited the rather persuasive point that of the $8 billion the IRS admitted it had no right to collect, it had refunded only less than half, about $3.8 billion, and kept the rest -- more than $4 billion.

The IRS responded that there was nothing really to sue about, as Notice 2006-50 wasn't any kind of formal, binding statement after all, but just a general advisory, and Mr. Cohen and all other taxpayers were thus perfectly free to request larger refunds under "normal" refund rules.

Mr. Cohen lost his case at the trial court level, then appealed. Last week, the Court of Appeals opined thusly...

Comic-strip writer Bob Thaves famously quipped, "A fool and his money are soon parted. It takes creative tax laws for the rest."

In this case it took the Internal Revenue Service’s aggressive interpretation of the tax code to part millions of Americans with billions of dollars in excise tax collections.

Even this remarkable feat did not end the IRS’s creativity. When it finally conceded defeat on the legal front, the IRS got really inventive and developed a refund scheme under which half the funds remained unclaimed.

Now the IRS seeks to avoid judicial review by insisting the notice it issued, acknowledging its error, and announcing the refund process, is not a binding rule [subject to court review] but only a general policy statement....

The IRS insists taxpayers do not need to follow the Notice in order to exercise their right to file a refund suit under § 7422. It claims, "Nothing in [the notice] prohibits taxpayers from submitting otherwise valid claims for refund under the usual statutory procedures..."

That’s just mean. To go the “statutory” route, as the IRS suggests, places taxpayers in a virtual house of mirrors.

Section 7422 ... dictates the appropriate form for the taxpayer to use. It states, in relevant part, that "all claims by taxpayers for the refunding of taxes, interest, penalties, and additions to tax shall be made on Form 843."

Form 843, however, does not permit this type of refund claim. At the top of the form, it reads, "Do not use Form 843 if your claim is for ... overpayment of excise taxes ..." Therefore, taxpayers cannot use Form 843 to file their refund claim.

The instructions for Form 843, however, suggest that taxpayers fill out Form 8849 "to claim a refund of excise taxes ..." and refers them to IRS Publication 510, Excise Taxes, "for the appropriate forms to use to claim excise tax refunds."

But IRS Publication 510 states, "Do not use Form 8849 ... to make claims for nontaxable service; the IRS will not process these claims." Even if the taxpayer ignored the reference to the IRS publication, Form 8849 itself cautions "Do not use Form 8849..."

Counsel for the IRS took the enigmatic position at oral argument that if the taxpayers had used either Form 843 or Form 8849 to file their refund claims, then IRS’s acceptance would have been mandatory ...

But these assertions directly conflict with the cautionary instructions printed in bold typeface on the front of both forms and the explicit directions given in IRS Publication 510. Furthermore, the IRS provided absolutely no authority supporting its position.

In reality, unless taxpayers follow the dictates of Notice 2006-50, they run into nothing but dead ends...

Despite the obvious infirmities of these options, the IRS still has the chutzpah to chide taxpayers for failing to intuit that neither the agency’s express instructions nor the warning on its forms should be taken seriously.

According to the IRS, taxpayers should have realized all the options the Service said were closed to them — using forms that proclaim their inapplicability in bold letter or filing informal claims that could not be perfected — were nonetheless sufficient...

Not hardly. Taxpayers bear a heavy burden when pursuing refund claims, but we have yet to demand clairvoyance...

In sum, the IRS unlawfully expropriated billions of dollars from taxpayers, conceded the illegitimacy of its actions, and developed a mandatory process as the sole avenue by which the agency would consider refunding its ill-gotten gains.

It cannot avoid judicial review of that process by simply designating it a policy statement. Notice 2006-50 constituted a final agency action that aggrieved taxpayers by hindering their access to court.

Accordingly, we reverse the district court ...

Neiland Cohen v. Commissioner [.pdf], No. 08-5088, DC Circuit.
Now this isn't a final ruling that another $4 billion in tax refunds are coming, there are other legal issues to settle -- but it's a significant step in that direction.

The story of that temporary Spanish-American war luxury tax isn't over yet.

Amateur sports 

Moving up to Division I may get pricey

Schools eyeing a jump to NCAA Division I might have to dig deeper into their pockets.

The NCAA is weighing a number of new conditions to join its richest, highest-profile division, including an application fee of as much as $1 million. Reclassifying schools now pay $15,000.

The guidelines are being hammered out by the Division I Leadership Council...

"Division I is a significant brand. There's a nice revenue-sharing pool," says Georgia athletics director Damon Evans, who heads the Leadership Council... [USA Today]

Sunday, August 16, 2009

A life worth living is worth shortening. 

Life extension through calorie restricted diet is a phenomenon that's been known for decades. Eat less than normal, a lot less, and live longer than normal, maybe a lot longer.

It's long been proven in "laboratory species" such as fruit flies, fungi and mice, but never in "higher" species -- such as primates, like humans. Until now.

For two decades now a study has been run on rhesus monkeys that have been divided into two groups, one placed for life on a 30%-below-normal calorie restricted diet, and the other feasting on "all you can eat" meal service. Now the results are coming in.

An op-ed in the New York Times reports two findings:

1) Calorie restriction works for this primate. The monkeys on the calorie-restricted diets are living significantly longer.

2) The monkeys on the restricted diet are miserable, "drawn, weary, ashen and miserable in thinness, mouth slightly agape, features pinched". The all-they-can-eaters are smiling, happy and plush.

There's a moral in there somewhere about the trade-offs we all must face in living the one life granted to us all.

I'll try to figure it out as I have another non-light beer with my bacon cheeseburger and fries.

Friday, August 14, 2009

"Stimulus" in theory versus practice in New York. (How are things going in your state?) 

How does an anti-recession government-spending stimulus program work -- in theory and practice?

Rather than trot out abstract analysis I've liked to use an illustrative example using three real-life places I know:

[] The Bronx, where I lived for a bunch of years, with its many areas that are poor, permanently de-industrializing, and so experiencing rising unemployment -- especially right now.

[] "Bullet Hole Road", an aptly named road in a moderately upstate county, within commuting distance of the city, with low state political influence and thus inadequate infrastructure.

[] "Rocky's Road to Nowhere", as it is called by the local citizenry, a four-lane, landscaped, divided highway that runs across rich and influential Westchester County to end literally at the back entrance of a hospital parking lot.

Rocky's Road was built by governor Nelson Rockefeller, and while a divided highway running into the back of a hospital parking lot was never exactly a priority for transport needs, it happily kept local contractors and unions fully employed and other politically influential interests happy. It's been very well maintained ever since! Did I mention it also runs to the Rockefeller Estate? "Politically influential interests"?

Now, here's how a government-spending stimulus works...

In theory: A recession strikes, increasing unemployment. The government then -- in a "timely, targeted and temporary" manner -- allocates money to hire newly unemployed workers from the Bronx and employ them rebuilding Bullet Hole Road and its related community infrastructure.

Stimulus result: The unemployed get productive work and money. The Bullet Hole Road community gains real physical wealth that will provide lasting benefits. Some amount is added to the national debt, but this is offset by the real wealth added to the community. The cost of adding this wealth is low because unemployed workers and contractors are used.

The world becomes a better place! Maybe some Bronxites even move to Bullet Hole Road addresses in the revitalized community and live happily ever after.

In practice: Reported data always lag reality, so the government doesn't realize there's a recession until months after it starts. Several months after that, the politicians finally agree on a deal for a spending stimulus. Several more months after that, the money starts going out. By now the recession is over or mostly over. And when the money finally begins to be actually spent it is directed by the politicians for their own benefit to the interests group that support them -- just as politicians always spend money.

Stimulus result: A year or two after the recession starts, Rocky's Road to Nowhere gets repaved and new landscaping. The people who live in the Bronx and along Bullet Hole Road get squat. Taxpayers get a bill for the high cost of the Rocky's Road redo -- the contractors hired for the work weren't unemployed and had to be bid off of other jobs -- which buys nothing for anybody except votes for politicians. And to pay for all this, the national debt goes up.

And this is why economics textbooks have uniformly warned against using government-spending stimulus policies for at least a generation -- because the stimulus is always late and politically distorted.

Well ... this tale gets smiles from people but then many say: "Yes, but it's just a story. They aren't actually re-landscaping Rocky's Road and maybe they will rebuild Bullet Hole Road. You've only told us a story, it's not real life."

OK, here's real life:

Yesterday arbitrators threw an 11% pay increase over three years to the Transit Workers Union of NYC's Metropolitan Transit Authority. Cost: $600 million, creating a $350 million hole in the MTA's budget. This is not an inflation adjustment, as there is no inflation today it is a real 11% wage increase.

(The arbitrators actually gave back to the union items they had conceded before the arbitration. One of the arbitrators was the head of the union -- let us say it was not a hostile forum for the union. Some suggest "the fix was in" from the start.)

This is the same union whose members already earn on average $64,000 a year (well above median household income for both the city and the nation) and which has work rules such as to let union members collect overtime pay literally while sleeping at home. (Did I mention that this union is a politically influential?)

Meanwhile, the employer Metropolitan Transit Authority is so busted financially that it just had to be bailed out with a fare hike and slew of new taxes imposed on the citizenry -- including a regional payroll tax that hits workers in counties located 80 miles away from the nearest NYC subway station or bus stop.

Well, how does a transit agency that is so broke, and in the midst of the worst recession in 60 years, manage to give workers who are so over generously paid an 11%, $600 million pay increase? The arbitrators said exactly how..

MTA officials warned that the ruling would raise the budget of the cash-poor agency an additional $350 million over three years, which could lead to cuts ...

The arbitration panel said the authority could use federal stimulus funds and money from its capital program to make up any shortfall in its operating budget. [NY Times]

Use the stimulus funds! They are there, so the union can take them. Money is fungible. If the stimulus is going to put money into the MTA's capital construction budget then the MTA can cut its own funding of its construction budget by like amount and send that money to the union. The "day after" budget analysis is that about $350 million of stimulus funds will go to union wages.

For this $350 million...

Stimulus result: No new hiring. No construction or purchases to add to GDP. Workers already getting above-market wages get higher above-market wages. Worst of all for the city's fare-paying transit riders and taxpayers, the new permanently increased union wage level is paid for with a temporary shot of funding. So what will happen when the stimulus funding ends?

And, for national taxpayers, the cost of the stimulus funding that pays for all these "benefits" is added to the national debt.

Government-spending stimulus in action: always late (all of 12% spent so far, with many economists calling the recession over as of the third quarter) and politically distorted.

A motorist enjoys the scenic trip to hospital parking
along Rocky's Road.

Thursday, August 13, 2009

Perhaps the US mail should be managed by the Fruit Growers of America? 

A couple days ago the ongoing near General Motors-scale financial collapse of the U.S. Postal Service was noted here.

Well, after posting that I went to the corner deli to get some lunch. There were lemons for sale, and I happened to pick one up and ask, "How much?" "For you, 35 cents". I put it on a scale, it was 5 ounces. That's 7 cents per ounce. Hmm...

That 7 cents per ounce paid for growing, picking, packing, shipping (a good long way, as few lemons are grown anywhere near Manhattan) and distributing the lemon still in fine, attractive-to-eat condition -- and for a profit for all the businesses involved along the way, from growing to final retail sale.

I looked around a bit more and found...

Oranges: 3 lbs for $5, 10.4 cents per ounce.

Grapefruit: 75 cents each, average 0.94 pounds, 5 cents per ounce.

Apples: $2.00 to @2.50 per pound, 12.5 to 15.6 cents per ounce.
Meanwhile, up the street another block is my local post office. There, sending one single ounce of paper across town costs 44 cents. (A postcard costs 28 cents.)

To create, transport, distribute and retail the lemon via private enterprise costs 35 cents -- with a profit to all involved.

To just transport the same lemon via the US Postal Service costs $1.90 (plus paying for one's own packaging material).

And the Postal Service is on its way to losing $7 billion this year.

Maybe we should have our fruit growers take over running the mail?

Landsburg versus Mankiw on cap-and-trade: CBO provides the answer 

Greg Mankiw has become a sharp critic of the Democratic "cap and trade" plan to limit carbon emissions that will give away almost all permits to emit CO2 to business interests, instead of auctioning them off -- costing the government more than $700 billion of revenue over 10 years.

In his recent NY Times column on the subject he quotes Obama himself saying: "One of the mistakes the Europeans made in setting up a cap-and-trade system was to give too many of those permits away."

And he missed an even tougher quote from Obama's budget director, Peter Orszag, who earlier this year argued against giving away the permits, saying to do so
"would represent the largest corporate welfare program that has ever been enacted in the history of the United States.

"In particular, all of the evidence suggests that what would occur is the corporate profits would increase by approximately the value of the permits. So that -- whatever that is, $600 billion, $800 billion, whatever the value is, would go in a sense almost directly into corporate profits... [WSJ]
But now Stephen Landsburg makes an agrument in defense of the "great give away" as a matter of principle -- of fundamental justice.

He writes...

as Professor Mankiw points out, that goal [reducing CO2 emissions] is served equally well whether we give the permits out for free or require firms to buy them.

But the latter option not only creates an incentive for good future behavior; it simultaneously punishes bad past behavior. The firm that recently invested in a million-dollar machine that now can't be operated without a half-million dollar permit is effectively paying a half-million dollar fine for behavior that was perfectly legal a year ago ... ought they be punished ex post facto?...

There are two competing principles here. The first principle is: Nor shall private property be taken for public use without just compensation, a principle enshrined in our Bill of Rights. Arguably, in the case of the million-dollar machine, the government has effectively taken half your machine from you for the public purpose of cleaning the air; therefore you should be entitled to just compensation. One form of compensation would be to give you your permit for free...

But here's the countervailing principle: Bad behavior -- even legal bad behavior --should be punished eventually, because that precedent deters future bad behavior...

One problem with applying this principle is that a government with the power to punish bad behavior ex post facto is also a government with the power to punish good behavior ex post facto. If today they can retroactively punish overinvestment in bad technologies by making people buy cap-and-trade permits, then perhaps tomorrow they can retroactively punish saving by taxing our 401Ks. The fact that a principle is capable of being abused does not invalidate the principle, but it does suggest we might want to be cautious about invoking it.

In this case, I'm not sure which principle should prevail. I am, however, sure that these are the principles at stake, and any useful debate will have to address them.

That's why I'm so disappointed to see am economist as smart as Professor Mankiw arguing in essence that we should sell cap-and-trade permits just because it's a good way for the government to get its hands on a big pile of money...

The real question on the table is: Do we want to empower our government to punish bad behavior that was perfectly legal when it occurred?

So which view of "principle" is correct? Is the permit give away "the largest corporate welfare program ever enacted"? Or is it just compensation to prevent ex post facto seizure of wealth by the government?

Well, it often happens that conflicts of principle dissolve pretty quickly upon examining data -- and even before this debate arose, the Congressional Budget Office conducted a quantitative examination of this very issue, reporting [.pdf]:
Free allocation is meant to compensate shareholders in those companies for any declines in stock value they might experience because of the cap.

However, available evidence indicates that only a small fraction of the CO2 allowances would be needed to provide such compensation under a U.S. cap-and-trade program.

Researchers generally conclude that less than 15 percent of the allowance value would be necessary to offset net losses in stock values in both "upstream" industries (such as suppliers of coal, natural gas, and petroleum) and energy-intensive "downstream" industries (such as electricity generators, petroleum refiners, and metal and machinery manufacturers).

The reason is that the cost of holding the allowances would generally be reflected in the prices that producers charged, regardless of whether those producers had to buy the allowances or were given them for free.
By that the score looks like: Largest corporate welfare program in history 1, Principled compensation against ex post facto taking 0.

Interestingly, Landsburg does note that giving away the emmission permits over-compensates businesses for the harm they would suffer from cap-and-trade, but only in a parenthetical...
(Actually, a free permit amounts to overcompensation, because cap-and-trade will lead to higher prices for carbon-based products, which already partly compensates the affected firms. So maybe our principle dictates that permits should be cheap but not free.)
... and doesn't mention that the overcompensation is on a scale of maybe 6- or 7-to-1 ... maybe 600% of the harm done

If he had mentioned that, he wouldn't have had so much to be disappointed about in Professior Mankiw, or such a point of justice to raise.

Footnote: As the few regular readers of this blog know, I'm no fan of finding new and easy ways to feed big piles of money to the government -- but I'm no fan of massive corporate welfare schemes either.

Wednesday, August 12, 2009

Yet another problem with American health care... 


Warning: Health news can be bad for your health.

So says University of Minnesota professor Gary Schwitzer, a longtime health journalist who sounded the alarm this week after analyzing hundreds of medical news reports from the past three years.

Schwitzer, who evaluates articles for, reserves his harshest criticism for the early-morning television news shows.

"They're all dreadful -- just dreadful, sensational, cheerleading, advocacy, and hype that doesn't evaluate cost, doesn't evaluate evidence [and] doesn't scrutinize the harms and the benefits," said Schwitzer. "This is stuff that can do harm -- that's why I really am angry." ... [NY Post]

Tuesday, August 11, 2009

The next big bailout? 

How to avoid it?

So you think your business has problems. Consider the plight of John E. Potter, the chief executive of the second-largest employer in America.

On the one hand, he has a guaranteed monopoly for much of his business. On the other hand, monopoly or not, the combination of the Internet and the recession is absolutely crushing his company, just as it is for so many other companies across the country. His last quarter’s results, which were announced on Wednesday, revealed a loss of $2.4 billion. The business is on track to lose a staggering $7 billion in 2009, on around $68 billion in revenue. That’s practically General Motors territory.

What can he do to fix the situation? Surprisingly little. His employees have clauses in their union contracts that forbid layoffs. Nor can he renegotiate their gold-plated benefits, the way, say, the auto companies did when their backs were against the wall. Political pressure makes it nearly impossible to shut down any of his company’s 34,000 facilities, no matter how outmoded or little used. He can borrow money, but under the law, he can add only $3 billion in debt a year — an amount that isn’t going to come close to covering his losses.

Oh, and get this. Every year between now and 2016, he has to put aside over $5 billion to finance health benefits for future employees. You read that right: future employees. There isn’t another business in the country that finances benefits for employees it hasn’t even hired yet ... ([The] main purpose, it would seem, is government accounting: those funds get counted against the federal deficit.)

Welcome to John Potter’s world. He’s the nation’s postmaster general ... [NY Times]

Who do you trust? 

Whom? Whatever... (Whichever?)...
When it comes to health care decisions, 51% of the nation’s voters fear the federal government more than private insurance companies. The latest Rasmussen Reports national telephone survey finds that 41% hold the opposite view...

Sunday, August 09, 2009

From around the blogroll.... 

Efficient Market Hypothesis debated, at Falkenblog. [updated]

Krugman versus reality on finance, via Economics of Contempt.

Krugman versus reality on political history, via John Henke.

Obama's health care policy versus Obama's budget policy, by Keith Hennessey.

Milton Friedman on a commonly held false belief that proved very costly in the 1930s, and apparently still is so today...
"I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die."
... via Scott Sumner

It's a myth that countries inflate their way out of their debt, so don't expect the US to do it, via Ms. McArdle.

Saturday, August 08, 2009

"Cash for Clunkers" renewed -- tallying up winners and losers, by the numbers 

The Cash for Clunkers CARS program has been renewed, with another $2 billion added to it, good enough to turn another 500,000 working cars to scrap, 750,000 total.

After previously examining the program and how it is a classic example of the Broken Window Fallacy in action in a rather long post, let's here just recap who wins and loses from it, and by how much.

The average "clunker credit" is budgeted by Congress at $4,000. The maximum trade-in value of cars under the program is $4,500, so we can guestimate the average trade-in value of a clunker brought in to get the credit at half that, $2,250.

The clunker credit is actually paid to the dealer, not the car buyer. After the buyer and dealer negotiate a price the buyer gets a credit against that invoice price in the amount of the credit. But the dealer has the opportunity during negotiations to move the price up to capture some or all of the credit for himself.

In fact, the first thing a dealer will do when negotiating such a sale is subtract from the credit and take for himself the amount of the trade-in value of the car. He must do this to keep himself whole compared to accepting a conventional trade-in for the car -- where he doesn't destroy the car the buyer brings it but sells it himself later. The remaining amount of the credit will be split between the dealer and the buyer.

Using the average numbers for the credit and the trade-in value of a clunker, an example works out this way...

The buyer wants to buy a new car with a market value of say $25,000, meaning the dealer can sell it for cash in that amount. The buyer's current clunker has a trade-in value of $2,250. With a conventional trade-in he could buy the car from the dealer for $22,750 cash. But he asks, why settle for a trade-in of just $2,250 when he can get a credit of $4,000? (Actually either $3,500 or $4,500, but we're using the average number here.) Thus, he applies for the "clunker credit".

Now the dealer isn't going to take less than the $25,000 market price he can get in cash. And with the "clunker credit" he gets $0 value from the trade-in vehicle, which must be destroyed. So to get back to "even" compared with a trade-in, he must take the first $2,250 of the credit for himself, in lieu of trade-in value, to receive $25,000 for a car with a cash sale price of $22,750. At this point most of the credit has already been consumed and neither buyer nor seller is ahead compared to a conventional trade-in.

But there is still $1,750 of the $4,000 credit left over. This will be split in the price negotiation between the dealer and the buyer. How much each gets depends on supply and demand. If the dealer ...

* Is flooded with buyers asking for clunker credits while he has only a few credit-eligible cars to sell, he can move his selling price up from $22,750 cash, by an amount approaching $1,750, to grab the bulk of the remaining credit for himself.

* Has only a few people come in asking for the credit, and he has plenty or credit-eligible cards, he'll keep his selling price near $22,750 cash to not miss any sales, and the buyers will get most of the remaining credit.

In reality, all reports are that dealers were flooded with "crediteeers" while their car inventories have been low -- but for simplicity, let's assume dealer and buyer split the $1,750 remaining credit evenly. Thus each gets $875 compared to the results of a conventional trade-in of the same clunker, the buyer saves that much off his purchase price and the seller gets that much more to pad his bottom line.

Thus we can see the results of CARS program per sale:

[] The average buyer gains $875 ... at a cost to taxpayers of $4,000.

[] The average dealer and buyer combined gain $1,750 (no matter how they divide it between them) ... at a cost to taxpayers of $4,000.

So the average car buyer and seller make several hundred dollars each, but taxpayers lose more than twice as much.

But if the dealer and buyer combined gain only $1,750, while taxpayers pay $4,000, where does the other $2,250, most of the credit, go?

It goes to pay for the destruction of a car, which was still a productive, useful economic asset with positive market value -- a trade-in value of $2,250, and a retail value no doubt a good deal higher than that.

That has independent effects. Reducing the supply of cars on the road by supply-and-demand increases the price of cars, their cost to buyers. In particular, destroying used cars before their time increases the price of used cars. So ...

[] Car dealers win again, by the resulting increase in the price of the cars they sell, and their increased margin on used cars they buy and sell.

[] Car buyers lose by the increase in the price of cars generally -- and lower-income car buyers, those who need to buy used cars, lose in particular.

[] Society overall loses by both the loss of productive assets, $2,250 per car, and the charge imposed on taxpayers to pay to produce that loss. (Nobody can say $2,250 of tax money spent to destroy a working car worth that much was used "productively".)

Final tally, per average cash-for-clunkers sale:
+ $875 for the car dealer
+ $875 for the individual car buyer
(or, if you prefer, +$1,750 divided indeterminately between dealer and buyer)
- $4,000 to taxpayers
- $2,250 to society for loss of productive assets.
-$4,500 net per transaction.
Multiply the above by the 750,000 transactions allowed by the program extension, and we get: car buyers and dealers divide gain of $1.3 billion, taxpayers pay $3 billion, the economy loses $1.7 billion of productive assets = total net cost to society $3.4 billion.

But what about gain to the environment because the new car gets at least four miles per gallon more than the destroyed one?

Well, the word "conservation" is defined as "destroying productive, useful assets with positive market value" only in the Newspeak Dictionary. Even treehuggers know that.

So much for the numbers. Now some editorial thoughts:

1) Some people who have used the clunker credit have told me, "So what if 'taxpayers lose', I'm a taxpayer, it's my tax money, and I'm entitled to win using it!"

Right -- and this perfectly exemplifies the political dynamic by which the US government has piled up a debt, explicit and implicit, of $64 trillion.

An interest group gets itself a tax subsidy of $1, for which its share of the tax cost is only 10 cents, dumping the other 90 cents on other taxpayers, and declares "We win!" Except every other interest group in the country is doing the same thing and dumping all their excess tax cost on it.

And in the end, as a taxpayer, you are liable for all of it. The coming cost of carrying $64 trillion in debt is here. That tax bill is what you are asking for when you say, "An $875 (or $1,750) benefit for a cost of $4,000 added to the national debt is a good deal!" And if you live another 20 years, you are going to get it.

2) Note that of the average $4,000 per-purchase credit, the portion that actually goes to the car buyer as an incentive to buy a new car is only about $875! That's only 22% of the tax cost of the credit! One would think even Congress could create an $875 incentive for less than $4,000 of tax cost.

Yes, this means Congress could have given consumers the same-sized financial incentive to buy just as many cars at only 22% of the tax cost -- or to buy almost five times as many cars at the same tax cost -- if it had simply sent an average "$875 new car purchase incentive check" directly to car buyers (not to dealers) upon closing a purchase, without paying to destroy 750,000 serviceable cars.

The program then would have been hugely more efficient per incentivized sale -- and society would be better off by having 750,000 more productive, useful vehicles on the road.

3) Curiously, the inherent regressiveness of destroying used cars to raise their price and put profits into the pocket of big business is going totally unremarked. Who needs to buy used cars? Not the rich!

I'm trying to imagine the reaction if a Republican administration had charged taxpayers to pay for destroying assets relied upon by the lower-income workers on a daily basis ... to increase the price lower-income workers had to pay for them ... to increase the profits of big business. I kind of think the howls from some liberal quarters would be unrelenting.

But today progressives are mute. Not a word about it.

Perhaps this shows that when the rubber meets the road, so to speak, real political control of the Democratic "progressive" left is firmly in the hands of an alliance of big businesses (say: "carbon permit give aways"), big unions and rich Volvo and Prius-driving Sierra Clubbers. On occasion, when convenient, they let Barbara Ehrenreich and her friends out to talk about the problems of low-income workers, for PR reasons. But not when it would affect real vote-buying policy, like this.

4) The Administration and members of Congress are loudly hailing this program as "the best stimulus ever!" ... 'nuff said.

Let's just hope that as politicians who are moving their lips they are lying as usual. Because the one redeeming trait of the clunker credit is that, relative to the size of the auto industry and economy (the same idea could be used many other placed within it!) it is tiny.

If they really believe the credit has been "the best stimulus ever", there is nothing at all to prevent them from expanding it to apply to one or two full years' worth of trade-ins ... that would ten or twenty million used vehicles bought at over-market price, at the cost of taxpayers, to be destroyed ...

Friday, August 07, 2009

To save Social Security, how much will taxes have to go up? 

"Saving" Social Security is a subject that blows very hot and then cold in politics. It's cold at the moment, eclipsed by all the argument over Obama's national health care plan. But you can bet it will blow hot again soon enough. When it does, you may want to have this data in your clipping file for reference.

How much will taxes have to go up to save Social Security? Andrew Biggs, former Deputy Commissioner for Policy at the Social Security Administration, writing at AEI tells us...
Social Security’s trustees say that to make the system “sustainably solvent” — which means, to put it on a path such that we won’t have to come back and reform the system again in the future — would require tax increases or benefit reductions equal to around 3.4 percent of taxable payroll. Raising the payroll tax by 3.4 percentage points —from 12.4 percent to 15.8 percent — would put Social Security back on a sustainable track....
True enough, but I find this figure "3.4 percent of taxable payroll" unsatisfying for a couple of reasons.

* First, the average voters I know have no idea what it means.

* Second, it counts the bonds in the Social Security trust fund as assets that help make Social Security "solvent." But whatever you think of the Trust Fund, there is no question at all that when those bonds in it are redeemed to help pay benefits, income taxes will have to go up to get the cash to redeem the bonds. That's in addition to the "3.4% of taxable payroll". So...

How much will taxes have to go up, including the cost of redeeming the bonds in the Trust Fund, to fund Social Security?

Happily, the Trustees of the Social Security Administration give us the ready answer in their Annual Report. This data chart shows by how many points of GDP promised Social Security benefits will exceed the 12.4% payroll tax that finances them in future years. This is the "financing gap" that has to be made up.

Between today and 2030, just 21 years from now, the cost of Social Security rises by 1.43 percentage points of GDP. (From payroll tax exceeding benefits by 0.13% of GDP this year to benefits exceeding payroll tax by 1.3% in 2030).

To see how much that is in terms of income taxes, we can look at tax data for 2007 (the last year in which it wasn't distorted by the recession) and see that personal and corporate income taxes combined then equaled 11.2% of GDP.

Since 1.43 divided by 11.2 equals 0.1277, we can estimate that an across-the-board income tax increase of 12.8% on both individuals and businesses will be needed to pay for Social Security 20 years from now. From that time on the cost of Social Security benefits pretty much stabilizes, so that ought to do it.

Perspective: Compared to other tax increases of the past, just how "big" and politically achievable is a 12.8% income tax increase worth 1.43% of GDP? Well ...

[] The 1983 tax increases that "saved" Social Security the first time it went broke -- and which traumatized the Washington political establishment sufficiently to paralyze it into inaction until the very last moment -- amounted to 0.24% of GDP, or only about 1/5th the size of the tax increase needed by 2030.

[] The 1993 Clinton tax increase -- which was able to pass the Democratic-controlled Senate only with vice-president Al Gore's tie breaking vote, after passing a Democratic-controlled House by only 218-216 (a single voter's difference) -- amounted to only 0.83% of GDP, and was 42% smaller than this tax increase needed by 2030.

So when people glibly tell you, "Oh, Social Security by itself isn't such a big deal, not a real problem", history tells us otherwise -- getting tax hikes through on this scale, even on much smaller than this scale, is a problem.

And, alas, of course at the same time even bigger tax increases will be arriving. The same chart tells us the cost of Medicare will increase by 2.23% of GDP, 56% more than Social Security's rise in cost. And Medicare's cost does not stabilize there, it keeps rising forever.

Combined, the revenue increase need for Social Security and Medicare is 3.66% of GDP, which equals about a 33% across-the-board income tax increase by 2030 -- 4.4 times larger than the increase Clinton managed to squeak through on a tie-breaker.

And I haven't mentioned the rising cost of Medicaid, or of unfunded federal and military pensions, or of .... but I digress.

For Social Security, now you know the answer and have the data sources to back it up.

Wednesday, August 05, 2009

Shame of the World Trade Center rebuilding project, IV 

Latest projections say completion of the Freedom Tower at the site of the former World Trade Center is expected in 2018 -- 17 years after the 9/11 attack. Other parts of the rebuilding are equally delayed.

Our mayor is not happy:
Mayor Bloomberg launched a blistering attack against the Port Authority's bungling at Ground Zero yesterday...

"This cannot continue. Last year, when the Port announced its new plan that would fix the problems at the site and lead to progress, it asked us all to hold it accountable. We are, and the results are intolerable," Bloomberg fumed.
New York State Assembly Speaker Sheldon Silver, the state's most powerful Democrat (including the governor, most assuredly), in whose district the World Trade Center site is located, takes his own slightly more diplomatic shot at the PA.

What's so very wrong with the PA?

Well, apart from it being an autonomous interstate (New York and New Jersey) agency well known in general for its bloated bureaucracy and being answerable to nobody, the particular answer was blurted out yesterday by one of its spokesmen in the current verbal to-and-fro ....

"We'd be happy to be relieved of any multimillion-dollar obligation at the site so we can utilize the money for transportation projects".... [NYDN]
The PA doesn't want to spend money on the World Trade Center rebuilding. What it wants to do is spend money instead building up its own empire of grandoise transport projects. And, boy does it ever! As noted here before in Shame, III.

(Prior posts on the WTC rebuilding getting to this situation: II., I.)

The Empire State Building was built in 470 days, from beginning of excavation work on January 22, 1930, to the grand opening on May 1, 1931.

Tuesday, August 04, 2009

Seen around and about... 

"It's good to be President!", tattletales the Secret Service. (Well, it used to be, seems like the recent guys have been a lot less fun.)

What's a seat in the European Parliament worth?

Next bailout: The Post Office. No -- the mainstream media, Dan Rather insists!

The world's highest-educated Luddites:
Impressed and alarmed by advances in artificial intelligence, a group of computer scientists is debating whether there should be limits on research that might lead to loss of human control over computer-based systems...

The researchers also discussed possible threats to human jobs, like self-driving cars, software-based personal assistants and service robots in the home...

A humorist interviewed in the Onion's A.V. Club speaks more sense on energy economics than you'll get from Washington.

@#$%^&!, that helps!

Irate citizens act to end all the excess f***king in F***king. [link fixed]

Sunday, August 02, 2009

The Cash for Clunkers "success" story: Crow about it? Or weep and cry woe over it? 

The government's "Cash for Clunkers" "Car Allowance Rebate System (CARS)" program, that provides up to $4,500 towards the purchase of a new car when trading in an old, low-gas-mileage "clunker", has proved so popular it has exhausted its $1 billion of funding in just its first week of operation.

"This is simply the most stimulative $1 billion the federal government has spent during the entire economic downturn," Rep. Candice Miller, R-Mich., Miller said Thursday. "The federal government must come up with more money, immediately, to keep this program going." [NYP]
And Congress is already is providing $2 billion more, to keep the program from being suspended.

But while the program certainly has proved popular, is it really such a simulative success to celebrate?

The gist of how it works (as per is: You bring in to your dealer a car you currently own that gets 18 miles per gallon or less, buy a new car that gets 10 miles per gallon more than yoiur old one, and receive from the government a credit of $4,500 against the price of the car you buy. Or if you buy a car that gets four-to-nine miles per gallon more, you collect a credit of $3,500. The car you brought in is then destroyed by the dealer, so it never drives around on the highway guzzling gas ever again.

Obviously that sounds very good to a lot of people! But after considering a few issues for a few moments, one's judgment may adjust....

1) Who gets how much credit -- and who pays what cost?

All the publicity says "you" the consumer get the $4,500 (or $3,500) credit, but it is actually paid to the dealer, not to the car purchaser. You, the purchaser, negotiate the best price you can for the new car, just as you would otherwise, then get the credit against that price.

This is important because knowing the value of the credit the dealer can raise the price to snag some or most of the credit for himself. (Just as dealers do with the hybrid car tax credit). And the dealer is dead certain to do just that.

Don't be so naive as to think that when you bring your old car into the dealer you'll get both the value of a trade in and the credit -- a mistake that many apparently are making, contributing to the flood of credit seekers. The credit replaces trade-in value (because the dealer, after destroying the car you bring in, has nothing to resell.)

Thus, in price negotiations, the first thing the dealer is going to do is subtract the full trade-in value of the car you bring in from the credit, taking all that amount for himself. Then he'll negotiate sharing the rest of the credit, if any, with you.

Example: You have an old car with a trade-in value of $4,000 -- but, you think, why settle for that when you can get a credit of $4,500? You have your eye on a new car with a market price of $25,000. With a $4,000 trade-in you could buy it for $21,000 cash. But with no trade-in, the dealer is going to charge a full $25,000 cash. To get the cash price back down to $21,000, the dealer has to take the first $4,000 of the "clunkers credit" for himself. After that, there's $500 of the credit left over. To be competitive, the dealer may give you say 60% of that, $300, keeping $200 for himself, and knocking the cash price of the car down to $20,700.

Verdict: Cash-wise, compared to a conventional trade-in, you make $300, the dealer makes $200 ... and taxpayers pay $4,500! So it's a modestly nice little deal for you as a car buyer, and for the dealer. But you, the car buyer, are a taxpayer too -- and cost-benefit wise, getting $300 (or even $500) for a cost of $4,500 is horrible.

2) How stimulative is it?

Most people who bring in a "clunker" now to get the credit for it would have traded it in during the foreseeable future for a new car anyhow. So while the "clunker credit" will produce a big surge in new car purchases for a few weeks, which looks "highly stimulative", most of those sales come at the cost of fewer new car purchases earlier and and later.

Note the bust in car sales that followed an initial boom triggered by a cash-for-clunkers program in Germany. And as to car sales here in the US: "The decline in June versus May stems from two factors. First, the passage of the CARS Act (cash for clunkers) by Congress likely kept many consumers on the sidelines..." [NADA]

This is a well known drawback of temporary "investment credits" enacted for business -- they result much more in businesses timing investments to get the credit than in making additional investments that they wouldn't have made without the credit.

Verdict: For car makers and dealers the timing shift is modestly beneficial, on the principle that getting income from car sales now, during the bottom of a recessionary sales slump, is better than getting that income later. But for taxpayers, paying a tax cost of $4,500 merely to shift the timing of a car sale that would have occurred anyhow is terrible.

3) Destroying 750,000 functioning cars -- good or bad?

The "green" selling point of the "clunker credit" is that the old cars brought in are destroyed so they won't consume gas ever again. But is this really good? To tell, one must measure the touted benefit against the social-economic cost of the destruction -- a very real cost rarely mentioned.

The "green" benefit of this program is so small (if it exists at all) that as of this writing I haven't been able to find anyone who's tried to quantify it in the US. But there are several European examples of such programs that have been examined -- and the findings are not good, to the point that even European environmentalist groups have come out against them.

For instance, Britain's Environmental Transport Association says...

“Car scrapping schemes are good for boosting new car sales – they have very little to do with the environment and to suggest otherwise is not just greenwash, it is hogwash.” [ETA]
... in urging protests against car scrapping schemes.

So the net eco-benefit is faint, if there is any at all. But the cost is very real -- the destruction of billions of dollars worth of functioning, useful automobiles.

Here there's a need to address a larger issue for a moment: It is a common, perversely seductive belief that destruction somehow can be economically beneficial. Examples abound...

[] During the Great Depression, New Deal policies forced farmers to destroy chickens and livestock and leave fields unplanted to increase farm prices. (Good if you were a farmer, but not so good for poor people who needed to buy food.)

[] Newspapers commonly report that hurricanes and earthquakes will help local economies by "boosting GDP" through the rebuilding efforts that follow.

[] Twenty years ago many American businesspeople complained that Japanese industries had an unfair competitive advantage in that their plants had been destroyed during World War II while ours hadn't, so their plants were newer.

[] Paul Krugman after the 9/11 attacks wrote: "Ghastly as it may seem to say this, the terror attack ... could do some economic good ... Now, all of a sudden, we need some new office buildings."

And so on ...

But this belief is totally false. It is the "Broken Window Fallacy", memorably illustrated by Frédéric Bastiat near 160 years ago in his parable of the broken window.

Bastiat told the tale of a shopkeeper whose window was broken by a delinquent stone-throwing youth. At first, everyone felt sorry for the shopkeeper -- but then they saw the income the glazier received for replacing the window, and how it was soon spread by the glazier to the baker, the shoemaker and the town's other shopkeepers, and through them to the entire community, making all richer. And so the boy came to be seen not as a vandal but as a benefactor of the community.

The fallacy lies, of course, in the facts that (1) the loss to the shopkeeper offsets the gain to everyone else, and (2) the money the shopkeeper spent on replacing his broken window, to merely restore its prior condition, otherwise would have spent by him anyhow on something else, improving the condition of the community. So the community is left unambiguously poorer by the destruction of the window, with no increase of income to offset it.

This all becomes self-evident if you simply scale up the window-breaking. If breaking one window makes the community a little richer, then everyone should voluntarily break all their windows to become a lot richer. And why stop there? Why not burn the entire town down to the ground, to become richer yet from rebuilding the whole place, and end up with a new and better town too?

The Cash for Clunkers CARS program is based solidly on the Broken Window Fallacy. It will destroy about 750,000 functioning cars with positive market value on the premise that this will be good for the economy.

But what will the economic effect actually be? To see, once again we can imagine doing the same thing on a much larger scale -- imagine, say, the government mandating the destruction of two years' worth of trade-in vehicles, about 20 million.

Now the effect becomes self-evident. With the nation's supply of cars reduced by 20 million the price of cars, both new and used, shoots way up. This is great for auto manufacturers and for dealers with existing stocks of used cars. But for consumers who need to buy a car it is terrible. And it is regressive -- most harmful for low-income individuals who can't afford an expensive car, and for families that need a low-cost second car for a member to drive to school or to a family's second job, and so on.

And with the government overpaying for each car above its market value by as much as it is now, the cost of the program becomes at least $80 billion -- an average of $1,000 for each of the US's 80 million taxpayers -- probably much more.

And, yes indeed, with the price of cars shooting way up due to the destruction of 20 million of them, and that entire overpayment in that $80 billion-plus footed by taxpayers forcibly being spent on the purchase of new cars, of course the Michigan Congressional delegation thinks this is even better than "the greatest stimulus ever"!

But if you ever want to buy a new car outside of this program, or you want to buy a used car, or need a low-cost clunker, or you are a taxpayer ... not so good for you!

And this effectively is exactly where we are today, except on the scale of "only" about 750,000 to-be-destroyed vehicles.

Behind a "green" fig leaf -- an embarrassingly small and thin one -- that many cars, worth perhaps $1.5 billion dollars (an average of about $2,000 each) are being removed from the market, increasing the market price of all cars for the benefit of Detroit, with Congress having taxpayers pay about twice their market value, $3 billion (an average of about $4,000 each) for them.

If those 750,000 cars had been normally traded in, they would have remained in the market, available for use by those who need them, reducing the price of all cars for all consumers, and saving taxpayers $3 billion.

Final Verdict: Now we can tally up the winners and losers of the Cash for Clunkers CARS program...

Big Winner: The auto industry, as it gets another cash subsidy from taxpayers, accelerated sales, and higher permanent prices due to the reduced supply of cars.

Small winners: Around 750,000 persons who, over the course of about one month, will buy cars using the program and obtain some modest purchase-price benefit from the credit.

Small losers: All the millions of other car buyers, now and into the future, who will pay higher prices due to reduced supply. And though their individual losses may be small, over the millions of people affected they will add up.

Big losers: All taxpayers, who get to pony up the cost of yet another multi-billion-dollar auto industry bailout.

The financial net is that taxpayers are paying $3 billion to destroy about $1.5 billion or $2 billion worth of productive assets. (Can anyone think of a better financial policy than that?)

Yes, the CARS program is a bigger success than anyone expected! Cheer or cry about it, you decide.

I'm located nearer the weep-and-woe end of the spectrum, as you may have guessed. But my consolation is that in our world of a trillion dollars spent here and another trillion spent there, a mere three billion is more baby peas than even small potatoes. (If someone were to bring up the other $784 billion of the Obama "stimulus" program I might get more upset.)

However, the Broken Windows Fallacy has once again become official national economic policy, here and throughout the Obama stimulus package, for all to see.

That may be the most important development of all.