Let's Fix This Country

Does Anyone Know What To Do About Jobs?

Screenwriter William Goldman (“Butch Cassidy and the Sundance Kid”, etc.) is often quoted for saying about Hollywood, “No one knows anything”. The comment was wasted on Hollywood. He should have said it about government and its notions of how to cure unemployment.

The desultory jobs numbers paint a grim picture of the American economy and diminish Barack Obama’s prospects for re-election. Mitt Romney, who has pulled ahead in recent polls, believes his experience at Bain Capital gives him a better understanding of what is needed to restore the nation to prosperity, and voters may turn to him for answers. Barack Obama’s answer to Romney: “If your main argument for how to grow the economy is ‘I knew how to make a lot of money for investors’, then you’re missing what this job is about”.

The fact is, neither has the answer. Presidents have a limited role in creating jobs, and we are foolish to give them credit for the good times and blame them for the bad. The roots of today’s problem lie much deeper. But in-depth analysis is not how we pick our presidents.

The Republican leadership calls every action by the Obama administration “job killing”, especially any proposal to tax “job creators” (both phrases apparently must be inserted into every sentence), and the President tours the country railing at the obstructionist Congress. Nothing goes forward.

The Republican strategy has been to throttle every attempt by Obama to produce jobs, and then to blame him for causing persistent high unemployment. They have successfully portrayed the 2009 stimulus as a failure and for the most part have stifled any job program in the three years since. Obama went before a joint session of Congress last September to propose his American Jobs Act, repeatedly exhorting its members to “pass this bill”, but it would be pronounced “dead” by Republican Majority Leader Eric Cantor just weeks later. Blocking Obama is in keeping with Senate Minority Leader Mitch McConnell’s crusade that “the single most important thing we want to achieve is for President Obama to be a one-term president.”

It is remarkable how well the strategy of casting blame on the Obama administration seems to be working. All the while, a budget passed by the Republican-controlled House with deep cuts guaranteed to cost jobs in the hundreds of thousands goes unnoticed.

For his part, Obama has always played small ball, scaling back his initiatives so as hopefully to get Republicans to go along. He has tried for singles while his believers have wanted him to swing for the fences. Had he done so, he would at least have been on record for thinking big. Inside the Beltway, defeat at the hands of Congress is thought to make a president look weak. Outside, it is the reverse. For not challenging Congress, however unyielding; for tailoring bills to Republican likes in the hopes of winning their cooperation; for not making the more sweeping proposals for change that his followers had expected, he has made himself look timid.

Also weighing somewhat unfairly against Obama is that so much of job loss is the relentless decline in public sector jobs at the state level (chart below).

What would Mitt Romney do? Asked in a Time magazine interview what would lead to “a lot of new jobs”, he evaded with “there’s not just one element that makes the whole economy turn around” and “for someone who spent their life in the economy, they understand how that works” and “[Obama] doesn’t have a clue what to do to get this economy going. I do”. There is a plan, though. It is more tax cuts.

Tax cuts being the be all and end all of job creation for Republicans, Romney would cut corporate taxes from 35% to 25% and individual tax rates 20% across the board. And he wants to make the Bush tax cuts permanent. As it stands, all revenue collected by the federal government totals just 14.8% of our gross domestic product, the lowest in some 50 years and a shortfall that is a huge contributor to the deficit. Romney’s added tax cut would add another $150 billion a year to the problem according to the Tax Policy Center.

But Romney would recover the revenue lost by eliminating deductions. He would eliminate the second home mortgage deduction for high income people, those earning above $250,000 a year. Also the state and local tax deduction, but again only for the top tiers. The former would be a revenue gain of a mere $2 billion — and that’s if the second mortgage deduction were eliminated for everyone, not just the wealthy. The latter would offset his tax cut by only $25 billion. Pressed on the point, he answers only that other deductions “will be something we’ll work out with Congress”.

Obama’s stimulus was a dog’s breakfast of scraps, and a third less than Keynesian economists thought would be effective. Much of it was unemployment benefits and life support to states with money for Medicaid and to keep public service workers (police, fire, teachers) on the job for a time. It was poorly designed to create new jobs. Adding up the detail at the government website, one finds only a minuscule portion — perhaps $60 billion — that can be called true “Contracts, Grants and Loans”, the labeling notwithstanding. Had the stimulus been massively for infrastructure, we would at least have seen some return for our money.

If the stimulus didn’t do much to create jobs, would more tax cuts have been the answer? But 39% of the stimulus — $245 billion of the original $757 billion — was tax cuts. The purpose was to win Republican votes in Congress, but not a single member broke ranks. And in Obama’s follow-up, the “dead” American Jobs Act, which had to be broken into pieces in the hopes of getting something through Congress, the half that made it through was — once again — a tax cut:  the continued reduction in the payroll tax. Along with the lesser reduction of last year, that put another $245 billion of tax savings into consumers’ pockets.

So we’ve seen almost half a trillion dollars in special tax cuts across the last three years, which, combined with the prolongation of the Bush tax cuts at about $115 billion a year, have left $850 billion or so in the economy, which, according to Republican theology, should have created a lot of jobs. Yet the job numbers are weak and unemployment just rose a 10th of a percent to 8.2%.

Republicans had to explain away the failure of these tax cuts to produce jobs. They were the wrong sort of tax cuts in the stimulus, we are told, and temporary tax cuts such as the two-year trimming of the payroll tax do not work; only cuts that are “broad-based, immediate and permanent” said Republican House Leader Eric Cantor. The two-year extension of the Bush tax cuts were somehow exempt from this logic.

Poor job creation was also the case during the George W. Bush years. His tax cuts were estimated to have increased the national debt by $1.8

Bush and Obama Job Creation: At this point in either president’s term, public sector jobs
had continually risen under Bush while private sector jobs were
still dropping, whereas
under Obama, it is the continuing decline in public sector jobs that is keeping the
unemployment rate at 8% and above.
trillion in their first 10 years, yet over his eight years in the White House, job growth was only 2% (versus population growth of 7.5%), the most tepid decade of job increases since before World War II. And that does not count against his term the huge plunge in jobs of the first few months of the Obama administration before the actions of a new president could have had any effect.

So it should not be surprising that the public greets proposals for still more tax cuts with cynicism, finding all the talk of “job creators” just a ruse for rewarding wealthy campaign contributors. The Tax Policy Center says that under Romney’s tax plan, those earning more than $1 million a year would get to keep an average of an extra $295,874 every year.

Jun 28 2012 | Posted in Economy | Read More »

Will Obama’s Health Care Victory Cost Him His Job?

It would be his signature accomplishment, whether or not he serves a second term, yet President Obama is widely criticized for not selling his Affordable Care Act to the public in the two years since its passage. The result is that, while people like its individual features, once explained, two-thirds of Americans are against the mandate requiring them to come together as a nation and pay for those features.

So we now may see independent and undecided voters shift to Romney and to Republicans in Congress in tight races because the latter have vowed to repeal the entire law. Indeed, the moment the Supreme Court announced that it upheld the ACA, House Majority Leader Eric Cantor proposed a symbolic repeal vote against the Act, scheduled in just two weeks.

So as the drama plays out, we may see Obama not only lose his job but Congress taking away that signature accomplishment as well.

But, democratic majority rule having been abolished in the Senate, how would Republicans assemble the 60 votes needed to overcome filibuster?

The answer is that there is another way: because the Court has ruled the mandate a “tax”, the mandate is subject to what is called “budget reconciliation”, a tactic that requires only a 51-vote majority. Indeed, that was the same tactic that was used to pass the ACA in the first place.

Jun 28 2012 | Posted in Reform | Read More »

As Deadline Approaches, Congress Holds Students Hostage

On July 1st the interest rate on certain classes of government loans to students will double to 6.8%. After months of acrimonious stalemate that shows why
Graduates’ prospects: This says it all
Congress is held in such contempt by the American public, the Senate had still not resolved the issue a week before the rate ratchets upward, although a deal is reportedly close at hand.

On July 1 the moratorium expires that reduced the rate to 3.4% since 2007 to help students with what has become crushing debt. The unending recession, helped along by the irresponsible yearly rise in college tuition that far outstrips inflation, rising even faster than health care costs, has combined to cause student borrowing to cross the $1 trillion mark, more than the nation’s credit card debt. In 1993, 45% of students borrowed toward earning a bachelor’s degree. Now, 94% are forced to borrow, Department of Education statistics say.

Interest rates set by the Federal Reserve have enabled banks to borrow at near 0% (which the banks then use to make money from the government by buying Treasury notes paying 2% or so). Yet, despite the radical drop in interest rates, Congress has so far insisted that our students, struggling to get a leg up in a disastrous economy in which half of recent graduates can’t find a job, must pay the exorbitant 6.8%.

The hang-up is that Republican dogma insists that a reduction in the interest rate be paid for with offsetting savings elsewhere. Somehow they were apparently counting on making money from students over the coming years to fund the government.

With the help of Democrat crossovers, the House passed a bill that would compensate the lost interest by eliminating the fund for preventive care in the Obama administration’s health care law. Republicans in the Senate pin the blame for not resolving the interest rate deadlock on Democrats for not accepting the House deal. Knowing that they must offer some offset for student relief to pass, knowing that their preference to simply do away with interest on student debt will not fly, Democrats want to offset the lost interest by classifying certain forms of income as pay to make it subject to Social Security and Medicare withholding. Republicans have blocked this from consideration with their 21st filibuster since January. With neither side yielding in all the months since President Obama alerted Congress to the July 1 deadline in January’s State of the Union address, the Senate has apparently come up with entirely different means to “pay for” the lost interest.

While the Senate dithered, the crisis in student loans (which this page began covering last September) grows worse. Education Sector, a Washington research outfit, published this study earlier the year which found that the default rate on loans to students who drop out is four times higher than those who stay for a degree. They leave themselves strapped with a loan to repay with less of a chance to find a job, or a job that pays enough to cover the debt.

The most notorious contributor to that category is the plague of for-profit colleges that aggressively lure our youth into expensive courses of a quality looked upon with scorn by employers and for which certificates of completion are usually not even accepted elsewhere, should the students ever want to transfer to a four-year college for a more reputable degree. And very few do complete. Phoenix, the biggest of the non-profits, which is advertising its success stories on television, graduates less than 9% of its bachelor degree candidates, even allowing six years before taking the measure.

It is as if the for-profits learned from subprime mortgage lenders, signing up students who they know will not be able to repay their loans. But no matter. The colleges collect from the government, which guaranteed $24 billion of such loans in the 2010-11 academic year in addition to almost $9 billion in outright grants. The money keeps on flowing even as the national scandal metastasizes.

For profit colleges now account for 12% of all college students (up from 3% just a decade ago), yet they account for fully half of loan defaults. Meanwhile, four-year private and state colleges, and two-year community colleges, are starving for funds in the economic downturn.

The Department of Education is working on a rating scheme to expose those colleges which fail to deliver, hopefully revealing which have the poorest job outcomes, not just feeblest graduation rates. But how have they been so slow off the mark? And any action will be slower still. The plan is that none of the 2,000 boiler-plate, for-profit schools will lose taxpayer financing before 2014.

Jun 20 2012 | Posted in Education | Read More »

A Touch of Remorse About Citizens United?

Wishful thinking: June 25: The Supreme Court showed it has no intention of modifying its Citizens United decision, today rejecting Montana’s law by the usual 5-4 vote with the usual partisan split.

Almost half the states had laws restricting corporations from campaign spending when the Supreme Court handed down its Citizens United decision. It may be one of the most reviled rulings in Supreme Court history, but those states went along, abandoning their laws.

All but one — Montana. It has had its Corrupt Practices Act for a hundred years and isn’t about to discard it. The law came into being because corporations with mining interests were literally buying votes in the state back then. Montana’s attorney general has fought to preserve the law and his state’s supreme court has backed him.

But American Tradition Partnership, a well to the right outfit in Virginia (“Crush Gang Green and their Anti-Business Allies!” reads a banner on its website) doesn’t think much of Montana’s tradition. It asked the U.S. Supreme Court to reverse the state court’s decision without even a hearing as being in direct conflict with the Citizens United ruling.

Montana claims a state needs such laws, at least for state and local elections, which are highly vulnerable to outside influences. One need only look a couple of states away at the brutal battle to recall Governor Scott Walker in retaliation principally for his eliminating virtually all collective bargaining rights by the state’s public employee unions. Walker’s campaign attracted sizable financial support from out of state. Kansas’ David Koch gave $1 million to the Republican Governors Association, much of which went for ads supporting Walker. His Democratic opponent, Milwaukee Mayor Tom Barrett, raised under $1 million. Walker’s campaign raised $25 million — 60% of it flowing in from out of state.

And that’s the concern in states like Montana. Local elections are for the likes of judges and sheriffs with little money in play. With their much deeper pockets, corporations from out of state — even other countries — could readily buy candidates who pledge to facilitate a favorable ruling or rescind an irritating regulation. The average campaign outlay for a Montana state senator runs to a mere $17,000. Much as ALEC (see related article) has inserted itself into state lawmaking throughout the country, uncontrolled out of state money can now obliterate a senate candidate who takes a position not to a corporation’s liking.

That concern has caused 22 states to reverse their acquiescence to the Supreme Court. They have come to agree with Montana’s push back and have filed amicus briefs against calling for moderation of Citizens United.

so what about remorse?

The court has complied with American Tradition Partnership ‘s request, granting a stay of the Montana law until it can perhaps consider it further. That probably will not happen until after the coming election, so no holds are barred in Montana this year. But the Court also had this to say:

“Montana’s experience, and experience elsewhere since this Court’s decision in Citizens…make it exceedingly difficult to maintain that independent expenditures by corporations ‘do not give rise to corruption or the appearance of corruption’”.

The Court was quoting from its own Citizens United opinion. Disputing the government’s argument that unlimited campaign spending could lead to corruption, the Court had said

“We now conclude that independent expenditures, including those made by corporations, do not give rise to corruption or the appearance of corruption.”

Lambasted on all sides for its flabbergasting lack of foresight, the Court may be getting the message and having second thoughts.

One can only hope — else rebel.

Jun 16 2012 | Posted in Law | Read More »

We Need More Income Inequality, Says a Bain Alumnus

Edward Conard is a former colleague of Mitt Romney at Bain and a backer of Romney’s campaign. He takes issue with the outrage over the huge imbalance of wealth that has flowed to the top 1% of Americans. In a new book, “Unintended Consequences: Why Everything You’ve Been Told About the Economy Is Wrong”, he argues that our economy should be structured so that still more wealth would go to the top tiers.

He points to the innovative advances that have enriched our lives over recent decades — personal computers, smart phones, Internet search — it’s a long list — all brought about through the daring of risk-takers. People who have taken chances with their investments rather than sit on the sidelines — “art history majors” he calls them. The super-rich don’t spend their money on themselves, he says; they invest it in productive businesses that improve life for all. His premise is that if the rewards were made even greater, more of us would be drawn into taking those risks and we would see a renewal of growth.

That last is compelling, but it relies on his belief that all or most of the wealthy pump their earnings back into nascent businesses, stoking innovation, growth and job creation. In fact, most is plowed into the stock and bonds of well-established companies or into funds of such companies or into U.S. Treasuries, and a goodly portion finds its way into investments abroad. The Wall Street Journal reported that 60% of investors worth more than $30 million place a third of their total assets in other countries, and one in five invest half their assets offshore. A joint study from Cap Gemini and Merrill Lynch found that “The wealthy have, on average, 43% of their holdings in low-risk assets…29% bonds and a thumping 14% in cash. So much for the idea that the more you have, the more risk you can take”.

Dividends and interest go overwhelmingly to the top 2% of taxpayers — that stratum of supposed risk-takers that Conard wants Americans to join. Money that earns dividends and interest is unlikely to be invested in the sort of striving, entrepreneurial businesses that Conard wants us to back; only the most mature companies pay dividends.

a tax structure that makes no sense

Conard’s book isn’t out yet as this is written, so we are unaware of whether he focuses as well on the utterly irrational tax code. If he wants to entice Americans to take risks and join the 400, he should start with a complete overhaul of tax structure as it applies to dividends, interest and capital gains.

Republicans, especially, argue for lower corporate tax rates to make American industry more competitive in the world. Wouldn’t you think that they long ago would have pressed for the dividends corporations pay to be an expense that reduces their taxable income? Much like payroll to employees, this “pay” to a company’s owners would be singly taxed only on the individual tax returns of dividend recipients. The double taxing of dividends is a perennial topic for complaint, yet nothing is ever done.

That dividends are taxed at the 15% rate (let’s ignore “qualified”) while interest income is taxed at ordinary income rates makes no sense? Why is one form of investment (stocks) favored over the other (bonds, loans, etc.)?

If Conard wants to prod us to take risks, he should argue that dividends as well as interest should be taxed as ordinary income to steer us away from investing in established businesses. Which brings us to question of why all capital gains should qualify for the 15% rate.

What we should have said is: 15% on capital gains from the sale of a security held over one year. What’s the point of that differentiation? Long-term holding may stem volatility? Seriously? With 65% of all equities now traded in multi-millions of nanosecond algorithmic transactions every day? Can it still be the hoary shibboleth that one should be rewarded for staying loyal to a company? Nonsense. Virtually 100% of stock trades have no connection to the underlying companies. Virtually all trades of securities are between individual investors, funds, corporate portfolios, pension funds, etc. Save for the infinitesimal sliver of newly issued stock and bonds (only 125 IPOs last year), the money doesn’t go to those enterprising ventures that Conard wants us to support. The risk-taking is only that someone may not take a position off your hands for as much as you paid.

Yet for all this swapping back and forth amongst ourselves that does no good for the companies themselves (at this point we will hear bleats about “liquidity” and “capital formation”), investors are accorded a special tax rate of 15% should we sell at a profit. Successive administrations and Congress have rewarded their wealthy campaign donors with a tax policy tilted to help those who make the most money make still more. The apparent philosophy is that actual labor is what should be burdened at rates of up to 35%. Even Ronald Reagan agreed that such capital gains should be taxed as ordinary income.

Incidentally, if this form of capital gains is to be taxed as ordinary income, the quid pro quo calls for doing away with the government’s confiscatory practice of taxing profits in full while only allowing a deduction of $3,000 if a year’s net trades produce a loss — and only $3,000 a year thereafter for as long as the carry-forward produces a net loss. That amount isn’t even indexed to inflation. Incredibly, it hasn’t changed since 1978. Fully taxed profits should be matched with fully deductible losses.

To encourage risk-taking, an intelligent re-write of the tax code would differentiate between buying already issued securities traded independent of their companies, and investing in the new issues that fund those companies directly. It is these risk-takers who should be rewarded with low capital gains tax rates. Or even no capital gains tax for those with incomes of $250,000 or less as Mitt Romney has proposed — except that he means all capital gains, not restricted to those that arise from direct investment in companies.

Sorting out the two categories shouldn’t be difficult, now that the IRS requires brokerages and funds to keep track of both ends of a trade and report gains and losses. Their computers could permanently tag stock bought as part of a direct offering and, once sold, report such trades as a separate tax class.

But a fix is needed. If the best customers of an investment bank get the IPO allocations, only to buy and flip a stock, there is no justification that they should get this special tax treatment. One solution would be to restrict re-sale for a set period.

This still doesn’t fix how IPOs are rigged. Here, venality is in flagrant display, with the lead investment bank swindling the issuing company by setting a low per share price that is sure to zoom at the offering so as to lavish hugely undeserved profits on those best customers. They pocket money that should have gone to the issuing company itself. A well-remembered example was Netscape; priced at $28 a share, it zoomed to $75 as the buyers unloaded, pocketing the difference instead of Netscape. As a lonely antidote, we can savor the Facebook offering, watching investors howl — even sue — because there was no run-up in the stock’s price for the freeloaders. Facebook got the full amount of the posted offering. Unheard of.

Still another fix: If you do buy and hold, inflation will chew away at any gain — or reduce your true loss — because capital gains and losses are figured on the nominal dollars of the buy and sell. The dirty secret that the government (which, after all, is charged with controlling inflation) never mentions is that, given enough time and inflation, you could literally find yourself paying taxes on losses.

Again because brokerages and funds are now retaining cost bases, they could easily factor in the annual rate of inflation across the years that we hold an asset so that one’s cost basis is stated in current dollars.

There are still many other changes needed for a full restructuring and several thorny categories of income yet to be considered — how to treat the different types of “carried interest”, whether founders’ shares should be taxed as pay, what adjustments would be needed for stock options, etc. But short of tax reform structured so as to favor only the risk-taking that leads to new jobs and growth, the core of Mr. Conard’s thesis is hollow.

But as all of this depends on Congress, why continue? Instead of fixing the mess, the years go by with our representatives merely talking about tax reform while doing nothing.

Jun 14 2012 | Posted in Taxes | Read More »