The tax this year will increase by two percentage points, to 6.2 percent from 4.2 percent, on all earned income up to $113,700.
Indeed, for most lower- and middle-income households, the payroll tax increase will most likely equal or exceed the value of the income tax savings. A household earning $50,000 in 2013, roughly the national median, will avoid paying about $1,000 more in income taxes — but pay about $1,000 more in payroll taxes.
That tax rates are nominally increasing, or that effective tax rates are not decreasing, should come as no surprise. Government spending must be funded somehow, and the only three possible options for raising revenue are taxation, inflation, and borrowing. The federal government must have money in order to do what it does, and that money must come from somewhere. To think that the federal government can spend close to $4 trillion without imposing any costs on anyone except “the rich”—itself a nebulous, ill-defied concept—is simply ludicrous. And to those who complain about the tax burden they must inevitably bear, I simply ask: what government services do you no longer want provided for you? If you want the government to do something for you, you must—you will—pay for it. Thus, any complaints about taxes, if they are serious, must be accompanied with complaints about spending.
So minting the [$1 trillion] coin would be undignified, but so what? At the same time, it would be economically harmless — and would both avoid catastrophic economic developments and help head off government by blackmail.
What we all hope, of course, is that the prospect of the coin or some equivalent strategy will simply take the debt ceiling off the table. But if not, mint the darn coin. [Emphasis added.]
Here’s how you can tell that Krugman is peddling nonsense: he doesn’t take his argument to its logical conclusion. If minting a $1 trillion coin is so harmless, why not mint a $16.4 trillion coin and pay off the entire federal debt in fell swoop? Why not mint $84 trillion coin and cover unfunded liabilities? Why not mint one platinum coin annually to cover each year’s budgetary deficit instead of going into debt? I mean, if $1 trillion dollar coins are so harmless, why not mint enough of them to completely solve the problem instead of minting one or two and just sort of half-assing it?
In many ways, Krugman’s argument is similar to the arguments made by proponents of the minimum wage. If minimum wage is so good and has no drawbacks, only benefits, why not mandate that minimum wage is $50 per hour? Or $100? Of course, that proponents of minimum wage don’t take their arguments this far suggests one of two things: either most proponents of minimum wage are unthinking idiots who simply parrot the talking points spouted off by people they deem intelligent, or proponents of minimum wage recognize the flaws inherent to their argument and are simply lying misrepresenting the reasons why they desire minimum wage.
The same, of course, is true for Krugman in his defense of minting the $1 trillion coin. If it is indeed so harmless, why not go ahead and mint all the money we need? To ask the question is to answer it. The reason why it’s so bad to mint $1 trillion coins is because they are inflationary, and would jack up ordinary citizens’ cost of living while enabling the wealthy and politically connected to profit at the middle class’s expense. Of course, this effect happens whether inflation occurs monetarily or by credit expansion, but if you admit that one type of inflation has negative consequences—and Krugman is implicitly admitting that monetary inflation is a bad thing, else he would pursue it to its logical end—then you must admit that any other form of inflation has the exact same type of negative consequences, even though the timing of their appearance may differ.
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Thus, it is apparent that Krugman is either a fool or a liar. Given that he constantly reverses himself about every major belief he’s ever had or any opinion he’s ever voiced, one might reasonably conclude that he’s a liar. Unfortunately, though, this would be a foolish conclusion, as the above-referenced post indicates that Krugman has no imagination, which would generally preclude him from being a liar. However, this does make him an idiot and, judging by the scope of his influence, a rather useful idiot at that. And since his devotees and followers are apparently not smart enough to see through him, it would appear that Krugman is nothing more than a blind leader of the blind. Too bad his leadership will drag blind and sighted alike down into a pit.
The Seattle Times:
If President Obama wants to avoid an economic calamity next year, he could always show up at a news conference bearing two shiny platinum coins, each worth … $1 trillion.
That sounds wacky, but some economists and legal scholars have suggested that the “platinum coin option” is one way to defuse a crisis if Congress cannot or will not lift the debt ceiling soon. In theory.
The U.S. government is facing a real problem. The Treasury Department will hit its $16.4 trillion borrowing limit by February at the latest. Unless Congress reaches an agreement to lift the debt ceiling, the government will no longer be able to borrow enough money to pay all its bills.
Last year, Republicans in Congress resisted raising the debt ceiling until the last minute — and then only in exchange for spending cuts. Panic ensued.
What happens if there is another showdown this year?
Enter the platinum coins. Under current law, the Treasury is technically allowed to mint as many coins made of platinum as it wants and can assign them whatever value it pleases.
Under this scenario, the U.S. Mint would make a pair of trillion-dollar platinum coins. The president orders the coins to be deposited at the Federal Reserve. The Fed moves this money into Treasury’s accounts. And just like that, Treasury suddenly has an extra $2 trillion to pay off its obligations for the next two years — without needing to issue new debt. The ceiling is no longer an issue.
Obviously, the only downside to this plan is the inflation, but it’s not like the government is serious about that, seeing as how the dollar has lost over 95% of its value in the last 99 years. I suppose it would be technically better to use the trillion dollar coins to buy back US debt and retire it, thereby monetizing the debt-inflation that has already occurred. However, in the grand scheme of things, it doesn’t really matter. What matters is that we extend and pretend for another year until Krugman and the Neo-Keynesians finally Figure Out How To Solve The Economy For Good This Time (We Really Really Mean It)™.
So the CP daily blogh points to some recent reporting from PublicSource here in town on the impact of bid rigging in some municipal bonds for local school districts and the Port Authority. I am unclear what the new news is. Some may recall a few old posts on this here. August 2011: Monty Hall Meets Public Finance
or these posts on another whole Port Authority financial miasma that almost went a whole lot worse in the end.
Feb 2011: Bad bonds, bad bonds, watcha gonna do
Nov 2008: More Port Authority financial problems?
the bid rigging issue was in the end just a matter of whether borrowers paid a slightly non-competitive price (i.e. rate) for some debt. A marginal issue by definition. The variable rate bond issue that nobody ever poked at up front really could have been bad financially.
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Here’s something that I would normally call irony if it weren’t so evil:
Wells Fargo Home Mortgage (WFC) has fired a Des Moines worker over a 1963 incident at a Laundromat involving a fake dime in the wake of new employment guidelines.
Richard Eggers, 68, was fired in July from his job as a customer service representative for putting a cardboard cutout of a dime in a washing machine nearly 50 years ago in Carlisle, the Des Moines Register reported Monday.
Warren County court records show Eggers was convicted of operating a coin-changing machine by false means. Eggers called it a “stupid stunt,” but questions his firing.
Big banks have been firing low-level employees like Eggers since new federal banking employment guidelines were enacted in May 2011 and new mortgage employment guidelines took hold in February, the newspaper said. The tougher standards are meant to clear out executives and mid-level bank employees guilty of transactional crimes — such as identity theft and money laundering — but are being applied across the board because of possible fines for noncompliance.
If using a fake dime is worthy of firing, then what penalty should await those who launder* billions of fake dollars on behalf of the Federal Reserve? It is simply reprehensible that Wells Fargo would fire a man for using a fake dime yet not dismantle their own company for laundering at least $2 billion* of fictitious money. This goes beyond mere irony, and even beyond hypocrisy. This is pure evil, and all those who work at Wells Fargo should lose their jobs, while those who are/were the heads of the company should go to jail for defrauding the American people, and the company should have its corporate status revoked and be disbanded.
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* Wells Fargo received about $25 billion from TARP. The federal budget for 2008 was $2.9 trillion, while the deficit was $240 billion. This means that, proportionally, at least $2 billion of the $25 billion that Wells Fargo received from TARP was from the deficit. The federal deficit is nothing more than monetized debt, since federal services are paid for, but not always by the money from tax receipts. To make up the deficit, the federal treasury sells debt (issues bonds), which are then bought by investors, foreign nations, and the federal reserve. The federal reserve is the largest holder of US bonds, and the sale of US bonds to the federal reserve is referred to as monetizing the debt, because federal debt is converted into money, and the money is created out of thin air. Therefore, a significant portion of the federal debt is actually realized as inflation. And therefore it can be accurately claimed that Wells Fargo launders fictitious money because it receives funds that are nothing more than monetized debt, which is really money created out of thin air.
So here is an issue a lot of us have been kvetching about for a long time. Bloomberg has this today on the vast unknown of how all the thousands of municipal pension funds in Pennsylvania spend to administer their pension plans: Pennsylvania Pays Pension Penalty as Bond Costs Climb. It may be the single biggest black hole in Pennsylvania public finance. and the administration costs probably are just the part of the iceberg you can see. Nobody really can tell you whether the investments all those micro-plans are making really make sense. Even the big plans that have lots of eyes on them do some really bizarre things that lose $millions. Imagine what we don’t know about the investment decisions of the other 3,000 or so pension plans in Pennsylvania. Locally I can’t read the pension news any longer since it all makes so little sense to me. Today: City Pension Board Rejects Studying ‘Realistic’ Returns. Pension doing well, pension doing poorly? Who knows really? The latest update on the status of the Pittsburgh pension fund is that it’s funding ratio went down by 1.7%. OK what does that mean?
The numbers mean very little. Skipping the long story, the pension ‘fund’ includes in its valuation a notional asset made up of a semi-codified promise of future parking tax revenue. It is said the promise of future revenues have increased the funding ratio of the pension fund by 29%. We will skip the fact that law and contracts all effectively mean that the city has promised to pay the pension fund anyway. If the promise gets to be valued as an asset, then there isn’t any real need to be quantifying how funded the system is in the first place OK, that is almost philosophical. Skip the big picture question, but the real question is how well funded is Pittsburgh’s pension system?
So think about it. If the pension fund had zero liquid or semi-liquid assets then it would still have this promise of future payments that kind of exists no matter. If there were no liquid assets then you can’t spend the future promise of payments unless you borrow against them. So if consistent with the regular reporting on this, the official calculation would be that the pension fund would be funded at a 29% funding ratio. No cash to send out checks, but no matter. In other words 29 is the new zero.
So even if the news is minimal, the issue won’t go away even if the city wants it to. For the microscopic % out there who might be able to read this past the paywall, but Bondbuyer recently covered us: Pittsburgh Wants toEnd Oversight, But Pensions Present Problems. PBT earlier in the month if you missed it: Pittsburgh’s pension-fund projections met with skepticism
and as mentioned here in the past.. there are some more interesting things coming down the road with regards to public pension accounting nationally.
Foseti provides one for “austerity”:
I’ve complained a few times that opponents of austerity refuse to define what they’re opposed to.
Naively, I’d assumed that austerity meant that governments were cutting spending. Actually, it turns out governments continue to spend more money during period of austerity and even periods of “crippling austerity.”
I’ve done some investigation and I now believe I can define “austerity.” Here goes:
Austerity is when more than half of a country’s working age population has to . . . wait for it . . . seriously, I hope you’re sitting down for this . . . go to work at an actual job every day.*
One way to tell that Krugman et al are big-government socialist shills is simply by noting that they use the word “austerity” in a rather vague manner to refer to countries that are apparently not Keynesian enough in their approach to dealing with the current economic crisis. Basically, Krugman’s version of austerity is not spending cuts or tax increases, but rather deficit spending that doesn’t incur a large enough deficit. I don’t see how this is austerity as much as a milder form of irresponsibility, but then I’ve never won any prizes in economics, let alone one in honor of Alfred Nobel. So what do I know about austerity?
So here is one of those factoids that may confuse those who read too much news.
So what do we know about the City of Pittsburgh’s pension system? Officially it was funded at around 56%, but that really is an old number. It also is a number that is more than double what it would be if you took out the notional ‘asset’ that I still find hard to talk about seriously. No matter. Pretend it really is 60% for sake of argument. Only in Pittsburgh logic is that a ’success’ when the rest of the world would call it abysmal. We also know that the Pennsylvania school pension system (PSERS) is better funded ataround 75%, all real assets by the way. Some consider that low, but still a lot better than a lot of municipalities. Could be better. Now all propblems at the Port Authority are being laid at the feet of escalating pension costs. Sure must be that the Port Authority’s pension system is in far worse shape than the city of PSERS right? Just must be. And like all common wisdom, it is far more common than wise. Here is the time series (page 25) up to the latest public info on the funding ratio for the Port Authority drivers pension system. Is this what you expected given what is in the headlines?
Seriously.. what number would you have guessed? It turns out a lot of pension math is misconstrued in public.
Note the latest data there is for January 1, 2010 which is still on the heels of some bad stock market losses for most funds. 2010 and then 2011 were both real good years for public pension systems in the US, so maybe they are even higher than the 87%. Think about that. The current funding ratio might be a slightly relevant number for the current public debate? The absolute numbers of relevance are that the calculated liability is $781 million and the assets available are $681 million. Compare to the City of Pittsburgh which is now over a $billion in calculated liability and an ever diminishing amount of liquid assets to cover it. I have never seen any reporting on how well funded the drivers pension plan is. In fact, I have seen no reporting of the hard data on the pension plans $$ assets at all. In fact.. I wonder a bit. That January 1, 2010 calculation for the liability value is a dynamic number as actuarial valuations too often are. The assumptions include some very steady wage increases for the Port Authority drivers.. all of them. What do we know? A lot of drivers are about to be laid off as routes are cut. Lots of that liability is about to be lopped off, maybe a lot of that liability has already been taken off the books given layoffs since that January 1, 2010 reference data now 2.5 years ago. I bet wage increases will come in a bit lower than the actuary assumes which would also lop off a big part of the liability calculation. A small change in that assumption will bring down the calculated liability a lot actually. Could it be that if there was a current actuarial valuation that the current asset values would make it fully funded? If not, it certainly may be the best funded large public pension system in Pennsylvania. You would never get that from the headlines though. Now.. the retort is that the the issue is health care costs, and in particular pension health care costs. True. But note that once you start talking about health care costs you are talking about something different from the pension discussion normally in the public debate for say the City of Pittsburgh. Lots of public institutions have a big health care liability that is completely unfunded and is basically a big train wreck going to happen. It is a nearly ubiquitous problem in both public and private sector. It just becomes an apples and oranges discussion when you talk about the pension problem at the Port Authority if there is any comparison to the pension debate for the city which mostly ignores the problem. In fact there is a really convoluted aspect to this. The Port Authority has some big pension cost problems when it comes to health care expenses now and in the future. The big reason is that the health care liability has no $$ put toward it. That is a very different problem than what I think most people assume that the pension fund itself is underfunded. Like most public institutions you can’t say it was a big secret this health care bill was coming due.
Also was no secret that most public institutions were not putting money away for the expenses they knew were coming due. In fact I think the rule that nominally is forcing public institutions to address this big looming problem, something called GASB 45, was mentioned right here years ago.. 2006 actually if you poke at that link so yes I know what the issues are. That the Port Authority is ramping up payments to fund some of the that health care liability is actually commendable for the record. But if you are are lead to believe that the Port Authority is in worse shape than the city which also clearly has several hundred $million in unfunded health care liability but is just choosing to continue without such contributions is a meaningless comparison. Also a little issue with Allegheny County as well which has seen its pension funding ratio falling behind over the last 5-10 years. Few mention that much, or talk of shutting down a third of the county. Maybe we can lop off everything north of the Allegheny River?
The market action of last week repeated a lesson that many a punter appeared to have forgotten. Never run a bearish book into a European summit and especially not one where expectations for a result are as lows as they were going into Friday’s meeting. Risk assets went up like a rocket with especially oil releasing heavily oversold momentum and you really could not do much wrong if you were running even moderately net long.
Above Expectations in Europe
Obviously, the market is buying the rumour and not the fact. In traditional summit fashion we got a lot of road maps and promises but very little concrete effort. Details were exceedingly sketchy and to talk about game changers is premature. We usually do not get game changers from the EU, but merely fudge cakes. Alpha.Sources would however like to remind investors that such fudge cakes may be enough to quell the market’s sugar addiction for several weeks.
Three points are worth making.
Firstly, the ESM appears to get the ability recapitalise banks directly and the door has also been opened up for the ESM/EFSF to buy peripheral debt without implied seniority. This is a big step in breaking the link between banks and the sovereign. Ireland and Spain in particular will be the beneficiaries of this. Alpha.Sources remain skeptical that the broadcasted notion of no conditionality will hold, but at least in principle there is a now a negotiated result which seems to allow countries to get help for their banks with little or no conditionality on the sovereign and no addition to sovereign debt to GDP. This is a significant step towards risk mutualisation through a banking union and ultimately a fiscal union. Alpha.Sources would note however that without applying haircuts to bondholders of both sovereign and private debt, One link is broken but another one is created between core Europe and the entire European banking system. While such a link may be stronger through the effective backing of the whole eurozone balance the key question is how far Germany and the EU will go. This question is particularly relevant (and binding) as it will inevitably become clear that whatever initial amount of euros ceded to the ESM/EFSF to sprinkle over Europe’s barren financial markets, it will almost surely be too low.
Secondly, the electorate and political establishment in Greece have every right to be perplexed. Greece has thus spent the past 3 months under an effective threat of being kicked out of the eurozone only to watch Spain and Italy get away with what is essentially preferential treatment. The fact that systemically important entities, sovereign as well as private, are given special treatment in this crisis is nothing new, but it remains a democratic problem in the EU. Like Portugal who remains the only country ever to get fined under the Stability and Growth Pact even as virtually every country violated the rules, Greece may rightfully feel a sense of injustice.
Alpha.Sources would then venture the claim that a Greek exit is now out of the question in the short run (i.e. in 2012). Even as Germany may still move to extract its pound of flesh from Italy and Spain, there is now little chance that Germany and the EU can play hard ball against Greece in the coming negotiations with the Troika. Greece could obviously still become the whipping boy, but the continuing argument that Greece is special is now so worn that even European politicians must be able to see that they can’t use it anymore. On this background, Alpha.Sources can’t see the ECB shutting off Greece from the ELA while the ESM/EFSF is loading up on Spanish bank equity as well as non-senior Italian and Spanish sovereign debt.
Thirdly, the modest but clear movement towards official creditors not being considered senior could potentially go a long way to break the doomsday loop by which once a country enters bailout proceedings it will never access the market again. Alpha.Sources emphasizes potentially here however and for now, Alpha.Sources will stick to the main rule that whatever we might constitute normal market access the eurozone periphery is far from it, but there is another silver lining to this. Consequently, in Greece it will alleviate the pressure on the ECB, EU and the IMF as it is clear that the country will need a second write down of its debt which will inevitably involve its official sector creditors.
As a general conclusion, the summit results implies a very large degree of risk mutualisation which it is unclear that Germany will ultimately go for, but multiple conclusions are not possible at the same time and so far the market and punditry seem to view this, rightly or wrongly, as victory for Hollande, Monti and Rajoy. This also means that the decoupling of Bunds from US treasuries and Gilts as well as the recent steady increase in German CDS is set to continue. This is also why Alpha.Sources believes that unlike the German national team who might have to wait two years and the World Cup to redeem itself, Merkel will get her shot much sooner.
One thing Germany will push for is the fiscal compact rules to be put in motion at a fast track pace and also, if the ESM is to take direct and equal ownership of European banks Alpha.Sources feels certain that this will come with extended EU supervision of the involved banks.
Unimpressed in Japan
Another seemingly important political result this week was the approval of the increase in Japan’s consumption tax, an increase which has been debated consistently for 5 years in Japan. If the final tax bill is passed, the tax rate will increase from the current 5% to 10% in two steps from to 8% in 2014 and 10% in 2015.
While the consumption tax has long been touted as the first step to put an end to the fiscal train wreck of Japan’s public finances Alpha.Sources believes that the measure will ultimately be counter productive. Japan’s fiscal problems consequently do not stem from a lack of revenue, but rather from too much spending. Trying to extract more revenues from a domestic economy where aggregate demand is already chronically weak due to an ageing population will only steal consumption from a future which is, in an almost literal sense, not there.
In this piece written on a similar VAT hike in Germany, yours truly presented a relatively simple economic framework for what it means to increase indirect taxes in the context of a rapidly ageing economy. In a nutshell, the argument is that while there will be a pure statistical effect on inflation readings as a result of the tax hike as well as positive effect on consumption as the purchase of durables is pushed forward, the end result is likely going to be deflationary.
The following quote, while requiring a little bit of basic microeconomic intuition, presents the argument,
(…) students of applied microeconomics learn to distinguish between the point of impact and point of incidence of a tax. The former constitues the party who actually levies the tax towards the government whereas the latter denotes the party who actually supports the tax. In the case of a value-added tax (an indirect tax) the point of impact would then be the consumer who (through an intermediary; e.g. a retailer) levies the tax towards the government. However, it is much more interesting in this case to discuss the point of incidence of the tax that is who actually supports the tax. In order for us to do so we need to introduce yet another economic concept, namely supply and demand elasticities of the tax hike. Consequently, the party with the highest relative elasticity (i.e. flexibility) towards the tax will also avoid supporting the lion’s share of the tax increase. What this means in the concrete case of the German tax is of course very difficult to asses. Yet, since for example consumers’ demand elasticity in this case can be operationalized as the relative fraction of disposable income which is consumed and saved (i.e. the MPC and MPS) we might actually be able to sketch a framework which suggests why the VAT hike in fact should not have been expected to rapidly push up inflation in the first place. The point would then be that the consumers’ demand elasticity towards consumption and thus flexibility towards avoiding the tax relative to businesses would be positively correlated with the marginal propensity to save.
In a rapidly ageing society, the attempt to extract tax revenue through consumption taxes fundamentally misunderstands the consumption and saving dynamics in the context of population ageing.
Still, we should expect higher consumption in Japan and also, ironically, that inflation may nudge its way up close to the 1% mark set as the target for the BOJ. It would be tragic if this prompted the central bank to lay down its guard because the end result would almost surely be more deflation and contraction.
With that dear reader it seems that just as Italy spearheaded by the enigma that is Balotelli managed to exceed expectations against Germany (only to come crashing down in the final!), so did we also get a number of political results which, at a first glance at least, were above expectations. In Europe, Alpha.Sources harbours a scant hope that the seeds layn may provide a little calm in the coming months however fleeting this might be while in Japan, the sentiment here at this blog is decidedly unimpressed.