Tuesday, October 21, 2014

Catch-44: Janet Yellen, Inequality, Fiscal Policy, and Monetary Policy

On October 16, 2014, Howard Gleckman of the Tax Policy Center posted an insightful commentary on the declining budget deficit  ($483 billion, the smallest since 2009) for Fiscal Year 2014, which ended on September 30, 2014.

An improving economy, expiration of the Bush tax cuts, and expiration of the Social Security tax cuts all contributed to rising revenue.  One sentence especially stood out for your friendly proprietor:  "Revenues also rose because a growing share of income went to the rich, who pay higher tax rates.”  To repeat, the richer the rich get, the more revenue the government gets, hence a smaller deficit.  The path to a balanced budget, which some economists and politicians advocate, lies in the rich collecting a steadily rising share of income.

But in the eyes of many prominent economists, shrinking deficits are a problem.  In a world of zero interest rates, which means private sector spending and investment are not crowded out, deficits are constructive.  They can increase aggregate demand, which helps create jobs and halts stagnant or falling real wages for lower- and middle-income households.  Austere fiscal policy, declining deficits due to lower public spending (e.g., the sequester) and/or higher revenue, reduces aggregate demand, retards job creation, and suppresses wages.  Cost-imposed supply-side restrictions also retard growth.

Not only do smaller deficits suppress demand, the growing share of income going to the rich is increasing inequality.  This is incompatible with America’s core values, so said Fed Chair Janet Yellen on October 17, 2014.  In the second paragraph of a speech given at the Conference on Economic Opportunity and Inequality at the Federal Reserve Bank of Boston, she writes:

“The extent of and continuing increase in inequality in the United States greatly concern me.  The past several decades have seen the most sustained rise in inequality since the 19th century after more than 40 years of narrowing inequality following the Great Depression.  By some estimates, income and wealth inequality are near their highest levels in the past hundred years, much higher than the average during that time span and probably higher than for much of American history before then.   It is no secret that the past few decades of widening inequality can be summed up as significant income and wealth gains for those at the very top and stagnant living standards for the majority.  I think it is appropriate to ask whether this trend is compatible with values rooted in our nation's history, among them the high value Americans have traditionally placed on equality of opportunity.”

Paradoxically, it is Janet Yellen’s monetary policy of massive quantitative easing (QE), injecting new funds into financial markets by purchasing federal and mortgage backed securities, and low interest rates for those able to borrow (especially the already rich and wealthy), that has increased inequality.  QE boosts financial assets.  The DJIA nearly tripled from its bottom of March 6, 2009, through September 30, 2014.  Those with equities saw a huge rise in their wealth as new money fueled buying of equities.  Meanwhile, many in the middle- and lower- income brackets lost their homes (their chief source of wealth) and their jobs.

QE and zero interest rates may have helped the economy gradually recover from its deep hole caused by the financial crisis.  However, the chief beneficiaries have been the top 10%, 1%, and especially 0.1%.  Monetary policy has been the principle source of rising inequality of wealth and partly of income, with the highly educated and skilled earning an increasing share of income in the innovating economy.

Yellen’s monetary policy appears to be self-defeating when it comes to improving wealth and income equality

Yellen’s monetary policy appears to be self-defeating as rising tax collections reduce aggregate demand.

Is there an end to this Catch-44 circularity any time in her future?  Jobs remain a high priority in her conduct of monetary policy.  Yellen believes that QE and low rates help create jobs (trickle-down economics?) even though shrinking deficits may have the opposite effect.

Some 400 books have been written on the causes and consequences of the Great Financial Crisis, with little consensus on how to move ahead with growth, jobs, higher wages, greater equality, and, above all, prevent another crisis.  What’s Janet Yellen to do?  Pray for Congress to undertake an orgy of new spending, which is not in the cards, or that more money finally stimulates demand, growth, jobs, higher wages, and more equitable distribution of income and wealth.

I’m sure she would appreciate any good, non-ideological ideas you can send her.

Thursday, October 2, 2014

Tuesday, September 16, 2014

Memo to Condi Rice re: The National Football League

Should you be appointed Commissioner of the National Football League to clean up the problem of violence against women and children, you might wish to take a page from the playbook of Baseball Commissioner Judge Kenesaw Mountain Landis.

At the press conference following your assuming the office, you may consider making the following statement.

Regardless of the verdict of juries, as of now, no player who commits an act of violence against any women or child, no player that conspires to commit an act of violence against any woman or child, no player that sits in conference with other players where the ways and means of committing an act of violence against any woman or child and does not promptly tell his club about it, will ever play professional football in the National Football League.  Nor will such player have a professional association with any team in the National Football League.  The Commissioner shall be the sole judge of each case brought forward or unearthed during its own investigation.

Monday, September 15, 2014

How to Live in High-Tax Sweden Almost Tax-Free

This post is directed largely at American men aged 50-65 who were enthralled with NBC’s summer 2014 hit mini-series “Welcome to Sweden.”

In 2005, Sweden abolished inheritance and gift taxes.  This opens the door to the possibility of almost tax-free living in Sweden.  But it’s not quite so simple as it sounds.

Swedish Inheritance Law is complex.  For an American man to fully realize its benefits, he should be (1) single (divorced, widowed, or never-married), (2) preferably childless, (3) willing to live a good part of the year in a cold, dark climate, (4) prepared to learn Swedish, (5) become a Swedish citizen, and (6) adjust himself to some peculiar Swedish norms and behaviors.  It would help to have excellent social media skills.

He should plan to arrive in Sweden by early June, when the weather warms and the foliage bursts into green, and be prepared to stay for the summer.  He should seek out Swedish women aged late 40s to mid-60s.  To minimize the pitfalls of Swedish Inheritance Law, he should look for Swedish women who are: (1) single (divorced, widowed, or never-married), (2) childless, (3) an only child, (4) the child of married parents who have no other children from other relationships, and (5) have wealthy parents.

Local and expat social media can provide information on where he is most likely to meet such a woman.  If he hits it off with her, he should state that wants a lifelong marriage, not cohabitation or a summer of “love.”  He should get to know her parents, who will be happy to see her married before they pass away.

Getting married to a Swede in Sweden is not too difficult.  Thereafter getting Swedish citizenship is straightforward.  While these processes are underway, her mom and dad can provide tax-free gifts to support the starry-eyed couple.

When mom and dad pass away, his new wife will inherit tax-free the assets of her late parents.  These are likely to include a fully-furnished house or apartment in Stockholm, country and/or island houses, several cars, plus financial assets on which they can draw for living expenses.   Since he will retain his U.S. citizenship, it is important that income from the estate flows largely to her to avoid his being subject to US personal income tax.

All that’s left is to minimize taxes on consumption.  Swedes face a staggering 25% value-added tax on most purchases (VAT is equivalent to a sales tax).  Since the happy couple will already own all the big-ticket items, they will be spared the 25% sales tax on cars, consumer durables and other household items.  They will benefit from reduced 12% rates on food and restaurant dining (excluding alcohol), and a 6% rates on cultural events.

It’s really important for him to love his wife since the money is hers, and to love living in Sweden.  If she loves him, given the fact that she has been single for a long time, their remaining years will be truly golden.

(Caveat: The reader is advised to study Swedish norms and behaviors before embarking on his possible new life.  He can learn a lot reading English-language blogs about life in Sweden and talking with American men who live with Swedish women in Sweden.)

Sunday, September 14, 2014

Swedes Vote for Higher Taxes, More Government Spending

On September 14, 2014, Swedes voted to replace their center-right government led by Prime Minister Fredrik Reinfeldt with a center-left government led by union leader Stefan Loefven. The era of Fredrik Reinfelt (2006-14) is over!

Bloomberg News on January 21, 2014, summarized Reinfeldt's achievements:

“Prime Minister Fredrik Reinfeldt, whose main policy thrust over the past eight years has been to let voters take home more of their pay....Reinfeldt has prioritized tax cuts as a path to job creation....To help pay for five rounds of income tax cuts since 2006, Reinfeldt has reduced unemployment and sickness benefits. His government has also lowered corporate taxes by 6 percentage points to 22 percent, below the EU average of 22.85 percent....Sweden’s tax revenue has dropped to 44.3 percent of GDP, from a peak of 51.5 percent in 1999, when the Social Democrats were in office.”  Reinfeldt also abolished a tax on wealth.

Reinfeldt has been widely credited with steering Sweden through the global financial crisis at the end of the last decade, consolidating its position as perhaps the healthiest economy in Europe.  After 8 years of lower taxes and more economic freedom, Swedes could not resist the siren song of more government spending for political handouts.  The center-left Social Democrats based their campaign on increasing government spending by 40 billion crowns ($5.6 billion) on job schemes, education and healthcare to be financed by raising personal income taxes from a maximum rate of 57% to 60% as well as company taxes.

Welcome to Sweden!

Saturday, September 13, 2014

Drip, Drip, Drip: US Troops in Iraq Number Over 1600

A post of August 13, 2014, counted 875 U.S. Security Forces in Iraq.  In early September, another 350 were dispatched to Iraq, followed by an announcement of another 475 at the end of the second week in September.  During the third week of September, total "boots on the ground" will exceed 1,600.

The Pentagon denies "mission creep."  Each additional block of troops has been assigned well-defined objectives.

Any guesses on the number by election day (November 4) or at year's end?

Nobel Peace Prize anyone?

Saturday, August 23, 2014

Racial Classification: Politics of the Future?

Written in 1980 with the late L.H. Gann, a prophetic warning that ethnic politics would transform the U.S. from a nation of individual rights into group rights, with all its destructive consequences.