Archive for the ‘Finance’ Category

Know When to Hold ‘Em

Wednesday, November 28th, 2012

The fiscal cliff is the first test of Obama’s second term.

Here’s where it stands right now.

Staffs from both the White House and Republican leaders in the House and Senate have been working since the election to determine if there is any middle ground.

The problem is that Republicans appeared so confident that Romney was going to win, that they didn’t have a plan B. They were prepared to simply renew the Bush tax cuts for everyone and kick the debt can down the road with Romney in White House. Instead, they now have to deal with a newly popular President and a majority of Americans who support raising taxes on the wealthy.

The problem is that the Republican plan to limit deductions, doesn’t generate enough revenue (at least from high income tax payers) to replace what would come in just by letting the Bush tax cuts expire.  Also if deductions were limited, charities would likely be hardest hit.

As an aside, the whole concept that the economic impacts vary based on the type of tax increase is hard to swallow. If tax bills go up and that’s a bad thing, then how can there be any difference. And if the economy can survive raising tax bills from limiting deductions, why wouldn’t it also survive from a similar simpler increase in rates?

As that realization is dawning on the American people, the fundamental bargaining position of Republicans is eroding. The Republicans have said that they feel that they have leverage in these negotiations because if the country goes over the fiscal cliff and the economy suffers, Obama will be blamed.

The Obama administration, however, has positioned this differently in the minds of voters. What they have said is that Republicans would rather raise taxes on everyone in order to avoid raising taxes on the wealthy. They have already trotted out data to support the claim that a middle class tax hike will damage the economy by reducing consumer spending. They have trotted out billionaires and small business owners who have said that they are WAY more concerned about the economic impacts of middle class tax increases. The White House has also pointed out that there is a bill before the House right now which extends only middle class tax cuts. Obama challenges Republicans to pass that bill today while the rest of spending reductions are worked out. Obama only needs 17 Republican House votes to pass it. Some Republicans have already said that if Boehner brought the bill up, it would pass.

Some House Republicans are already saying that the House should give Obama the middle class tax cut that he is asking for and then hold him accountable for the economic collapse that they’ve predicted will occur.  This strategy also provides them some political cover since the only thing that they voted for was the middle class tax cut, rather than voting for a tax hike on the wealthy.

The problem that others have with this strategy, however, is that it would be perceived as a clear win for a President that they detest. It would also undermine their claim that this President can’t lead and is ineffective. And if the predicted economic collapse from raising top tax rates fails to materialize it will further weaken Republican prospects in 2014.

What is also interesting is what a low profile Paul Ryan has been keeping since the election. I believe he also knows that this is a losing proposition and would rather have it all fall on Boehner’s shoulders.

That only further confirms that a deal is going to get done. At the very least, it will involve passing the Senate resolution to extend the middle class tax cuts for another year, approving another debt ceiling raise, and kicking spending cuts down a road until the new congress is sworn in.

Everybody wins because the Republicans live to fight another day.

You gotta know when to fold ‘em.

Romney 2.0

Sunday, October 7th, 2012

A liberal, moderate, and conservative walked into bar; the bartender looked up and said, “Hello Mitt”.

This new Romney showed up at the debates.  Let’s see how he compares with the old one.

Taxes
Romney 1.0 promised to cut taxes 20% across the board in order to stimulate the economy.  Romney 2.0 said everyone’s tax bills wouldn’t change.  Rate changes will be balanced by deduction reductions.  No details yet.  When pressed on how he could keep all of these promises and also reduce the deficit, Romney 2.0 said that this revenue-neutral plan would spur economic growth just like his old plan, even though this new one is putting no more money in the hands of consumers or job creators.

Healthcare Reform
Both Romneys are going to repeal Obamacare, but Romney 2.0 claimed his plan covered popular things like pre-existing conditions.  After the debate, his campaign admitted his “plan” relied on every state passing their own version of Romneycare.

Deferred Action for Illegal Aliens
Romney 2.0 said he would support the President’s action.  The next day his campaign said the real plan was to end the program if elected and only honor those deferrals issued between now and then.

Regulation
Romney 2.0 provided a full throated endorsement of financial regulation including large parts of the Dodd Frank bill which Romney 1.0 promised to repeal.   No details on potential replacements.

Medicare
Romney 1.0 wanted to reform Medicare as part of a larger effort to reduce the deficit.  Romney 2.0 says that he plans to keep Medicare unchanged for anyone who wants to use it now and into the future.  In addition he will create an alternate voucher program in hopes that everyone will move from the guaranteed program to the program where they have to take some of the risk regarding the cost of their care once they are retired.  He hasn’t provided any details on how running two competing healthcare plans will be cheaper than running one.

 47%
Romney 1.0 claimed that Obama’s policies have created a pervasive culture of dependency and entitlement that threatens the very fabric of democracy.  Romney 2.0 apologized, “I said something that’s just completely wrong.”

Truth in Advertising
Romney’s pollster said “We are not going to let our campaign be dictated by fact-checkers”.  Romney 2.0 claimed that when “any time there’s anything that’s been amiss (in our advertising), we correct it or remove it.”  When asked for examples, his campaign couldn’t produce any.

Perhaps there isn’t as much difference between Romney 1.0 and Romney 2.0 after all.

Fact-checking the Democratic Convention

Friday, September 7th, 2012

If you take Politifact.com as any guide, the Democratic Convention that just concluded spent a lot more time discussing facts than the Republican Convention in Tampa. There were only two statements tracked by Politifact that rated a “false”. One by Delaware Governor Jack Markell who used a Romney quote out of context about firing people who provide poor healthcare as indication of how Romney would respond to a potential factory closing. The other was the claim by Rep. James Clyburn that Republicans stood on the sidelines when Social Security, Medicare, and Medicaid were created. While there was vigorous debate about all three programs, a majority of Republicans supported all three in the final vote.

That said there were still issues that should be mentioned because they weren’t entirely accurate.

On the debt, Obama said, “Independent analysis shows that my plan would cut our deficits by $4 trillion. Last summer, I worked with Republicans in Congress to cut $1 trillion in spending.”

The problem with this statement is that there was no mention of the timeline on the $4T which could give the impression that the current $1T deficit would be eliminated. The facts are that a the end of the most recent 10-year budget proposal, the debt would be 76% of GDP. That represents and increase of approximately 4% of the 74% debt figure today. Simpson-Bowles, by comparison, would reduce the debt as a percentage of the GDP over the same period to 60%. The bulk of the deficit reductions comes from tax increases on the wealthy rather than spending cuts.

On a related topic, Obama also said that savings from winding down the wars in Iraq and Afghanistan would be used to rebuild roads, bridges, schools and runways. The problem is that those wars were financed with “deficit” dollars. So ending those wars doesn’t magically free up money for other projects. Any infrastructure spending using the same model that funded the Iraq and Afghanistan wars will increase the deficit in the same way the wars have done.

Obama referenced trade agreements that he signed which will improve our exports. What he didn’t say is that the Bush administration negotiated those agreements. Obama still had to get those agreements through an obstructive Congress, but he can’t take full credit for the final product.

Obama implied that Romney would turn Social Security over to Wall Street. While Romney did support this position in 2008, he no longer does. Obama does get positive marks for including modest Social Security reform in his latest budget proposal.

Joe Biden and the film that aired before Obama spoke referenced an incident during Obama’s mother’s hospitalization for breast cancer. She did have a dispute with an insurance company, but it wasn’t over health benefits. It was for disability pay. So the clear line from the death of Obama’s mother to healthcare reform, is really a more complicated story than the Democrats have been telling.

Biden also repeated the line that Romney was willing to let Detroit go bankrupt. The actual WSJ opinion piece that Romney wrote didn’t say that. Only the headline, which Romney didn’t write. Romney did, however, support that headline in a TV appearance. What Romney was recommending a “managed bankruptcy” and claimed that the private sector could finance that. The Obama administration explored that concept but couldn’t find any private firms willing to participate, so the government essentially funded the managed bankruptcy and reorganization of GM and the sale of Chrysler to Fiat. They do, however, deserve credit for the results of this actio.

Biden claimed the the Romney plan would cause Medicare to go bankrupt. The inaccurate term here is “bankrupt”. The reference here was to Medicare Part A which is funded by a payroll tax paid by employees and employers. The administration negotiated a $716B savings in the ACA which would benefit this fund and extends its life well past the 2016 date. Romney wants to repeal the ACA which will eliminate this savings and shorten the life of the Medicare trust fund. The fund won’t technically go bankrupt, but if it does run low on fund, the government is going to have to respond to make up the shortfall or cut benefits.

Biden cited a new territorial tax as being part of Romney’s proposal and that it will create 800,000 overseas jobs. Romney does propose as part of his corporate tax reform initiative to exempt foreign corporate profits from domestic US taxes. The study cited by Biden does support Biden’s claim with regard to foreign employment gains, though it doesn’t specifically examine Romney’s proposal. The study does not suggest that these foreign jobs will come at the expense of US jobs.

Finally Biden claimed that Romney’s tax plan would include an effective tax increase of $2,000 for middle class families. This is based on an analysis of the Romney plan by the nonpartisan Tax Policy Center. Romney has claimed that his tax reductions would be revenue neutral because he would simultaneously close man tax loopholes, but he hasn’t said which ones he would close. The Tax Policy Center in their analysis said that the only way to make the math work, would be to close some tax loopholes like the deduction for mortgage interest that benefit the middle class. The Romney campaign disputes these findings but hasn’t provided an alternate explanation of how their math would work. In the absence of this explanation, Biden’s claim has to stand.

The quick summary is that the Republicans generally were significantly more fact-challenged than the Democrats and also shared far less detail about what they planned to do than the Democrats.  The Democrats did their fair share of fact stretching, but none of these compared with the many “pants on fire” lies that were core portions of the Republican convention message.

Crazy Train

Sunday, August 26th, 2012

This has been a remarkable week for exposing the crazy side of conservative Republicanism.

Women’s Issues
Suburban women were a significant part of Obama’s winning coalition in 2008 and were also the reason why so many Tea Party Congressmen were elected in 2010.  So how are the Republicans doing with this particular voting block this year?

Look no further than Todd Akin the tea-party backed Congressman running against Clare McCaskill in the Missouri senate race.  He referenced a loony theory created by Dr. Jack C. Willke, the father of the antiabortion movement, that pregnancy from rape is rare.  This theory is important to the pro-life movement because it allows them to argue that the current exclusions of rape from abortion bans are unnecessary.  Not only is this whole concept deeply offensive to women across the political spectrum, but the theory has no basis in fact.

It has also shined a light on Paul Ryan’s record regarding women’s rights.  Ryan and Akin co-sponsored a bill which attempted to introduce this concept of “legitimate rape”.  Ryan’s 100% rating from the National Right to Life Committee is the result of his support for the Partial-Birth Abortion Ban Act, the Unborn Victims of Violence Act, and the No Taxpayer Funding for Abortion Act.  Ryan and Akin were also co-sponsors of the Sanctity of Human Life Act which sought to give a fertilized egg the same rights of “personhood” as a human being and would not only ban all abortions but outlaw some forms of birth control.

Ryan has said he will support the Romney position of allowing abortions in the case of rape, incest, or threat to the life of the mother.  Some women are already wondering what would happen if Romney were elected and then could no longer serve?

Climate Change
We are going through the worst drought in 60 years which deeply affects famers.  New scientific studies are released almost every week attributing this drought specifically to climate change caused by human activities.  Yet, John Shimkus of Illinois who heads the house subcommittee on climate change says there is nothing to worry about.  “The earth will end only when God declares it to be over,” he said, and then he went on to quote Genesis at some length.

John Barton is on the same committee.  He’s the one who among other things apologized to BP because he felt the Obama administration was being too demanding following the gulf oil spill.  Barton cited the Almighty in questioning energy from wind turbines.  Careful, he warned, “wind is God’s way of balancing heat.”  Clean energy, he said, “would slow the winds down” and thus could make it hotter.  “You can’t regulate God!” Barton barked at the House speaker, Nancy Pelosi, in the midst of discussion on measures to curb global warming.

Michele Bachmann and Jim Inhofe claim that global warming is a hoax.  Mr. Inhofe is a senior member on the Senate Committee on the Environment and Public Works.

Romney’s energy plan calls for increased oil drilling and relaxation of EPA regulations on the use of coal.  He promises North American energy independence by 2020 (assuming Canada still likes us by then).  He depends on a study by the Citigroup for his data but ignores the portion of the study which also recommends dramatic increases in conservation standards in order to achieve energy independence.

Finally Romney also promises freedom from foreign oil and cheaper gas.  As long as oil is a globally traded commodity, he can’t deliver on either of these promises unless he is willing to restrict domestic oil exports.  He’s said he won’t do that.  So though the US balance of trade may improve when the US becomes a net oil exporter, prices will still fluctuate based on international events that could affect supply, and we will still be burning foreign oil.

Education
Jack Kingston of Georgia, a 20-year veteran of the House, is an evolution denier, apparently because he can’t see the indent where his ancestors’ monkey tail used to be. “Where’s the missing link?” he said in 2011. “I just want to know what it is.” He serves on a committee that oversees education.

Romney has taken the position that college students don’t need the loan supports they currently receive.  His advice to a college student asking about how they are going to afford the costs of college is that they shop around for a cheaper college or borrow the money from parents and relatives.

Taxes
Romney does not want this election to turn on whether or not he releases his tax returns.  However he continues to assist the Democrats in keeping this issue in the news.  The latest evidence of this is from a talk he gave recently to a small business group.

“We’ve got to make it easier for small businesses,” Romney told a crowd of about 300 people at a high-dollar fundraiser in Minnesota. “Big business is doing fine in many places -they get the loans they need, they can deal with all the regulation. They know how to find ways to get through the tax code, save money by putting various things in the places where there are low tax havens around the world for their businesses. But small business is getting crushed.”

So not only did he echo Obama’s remark regarding the private sector, and effectively take that off the table as a future talking point for his campaign, but one of his recommendation for helping small business appeared to be easier access to tax havens.  This remark came on the heels of several reports on Bain’s practice of setting up tax havens for their customers and additional analysis of Romney’s public returns suggesting extensive use of off-shore accounts to avoid US taxes.

Budget
Romney has promised to balance the budget, but recently he also said he was going to add back $700B in Medicare spending which the Obama administration had listed as cost savings in the Affordable Care Act.  This $700B, as many have already pointed out, is coming from reduced re-imbursements primarily to hospitals who have agreed to the cuts in return for seeing a reduction in their costs for caring for the uninsured.  The other major source of that reduction comes from reducing the rates paid to insurance companies for the Medicare Advantage coverage since the Affordable Care Act also addresses many of the gaps in Medicare coverage that the Medicare Advantage plans filled.  I’ll address the whole Medicare issue in another more detailed post.  But Romney also hasn’t said how he hopes to pay for this additional $700B in spending and still keep his promise to balance the budget and reduce the deficit.  His math didn’t work before.  It has only gotten worse.

Birtherism
Romney has said that he doesn’t dispute Obama’s citizenship.  At the same time, he met with Donald Trump during the primaries and recently made a joke about his own citizenship in a talk in Michigan where he said “no one ever asked to see my birth certificate”.

Welfare
Romney’s claim that the Obama administration is dismantling welfare work requirements has been widely criticized as a thinly veiled bit a race-baiting.  It is factually inaccurate because if anything, the states requesting waivers of the current work rules were attempting to put MORE people to work rather than less.  Instead it was an appeal to the portion of the Republican base who distrust an African American President and the motivation of the African Americans who support him.

Conclusion
There are a couple of things going on here.

There is a segment of the Republican party that hold beliefs well outside mainstream America.  34% of conservative Republicans believe Obama is a Muslim.  51% doubt his citizenship.  50% feel that he is a socialist.  You can see that extremism in the Republican platform which includes a pledge to pass a constitutional amendment to outlaw abortion without exception.  It includes the construction of a giant wall along the US border with Mexico, mandatory use of electronic verification by private employers, no support for a path to citizenship, the blocking of funds to universities offering in-state tuition fees to the undocumented, and an end to federal lawsuits against controversial anti-immigrant legislation such as Arizona’s SB1070.  There’s even language suggesting an annual audit of the Federal Reserve and a “gold commission” to investigate return to the gold standard.

Romney’s strategy to become President has shifted over the last month.  Some pundits say that his selection of Ryan had much more to do with needing to put Wisconsin in play than it did anything else.  That’s because many say that Romney can’t win Ohio.  Romney has to win one of the rust belt states to have any hope of a November victory and he was willing to put Florida at risk because of Ryan’s unpopular Medicare proposals in order to improve his chances in Wisconsin.

The other shift in Romney’s strategy is that he has refocused his attention on his base.  Selecting Ryan made it more difficult for him to win women, but it did guarantee a vigorous attack from Democrats.  That attack and Romney’s recent statements on energy, welfare, and birtherism all indicate that the focus of the rest of his campaign is going to be on turning out the Republican base.  He wants every Republican voter (including those with loony beliefs) so energized that they will be first in line when the polls open.  The added benefit is that a divisive campaign not only gets his base to the polls but also suppresses the less partisan undecided voters who may decide to just stay home because they are so disgusted with the whole process.

This scorched earth strategy  may work to get him elected.

It won’t leave much room for him to govern if he is successful.

What Swing Voters Really Want

Thursday, August 2nd, 2012

This election is going to turn on a relatively small number of voters in a relatively small number of states.

These are the voters who haven’t already decided who they are going to vote for.

In the 10-12 swing states that will decide this election, these undecided voters represent roughly 10% of the electorate.  In the other states leaning or solidly in either candidate’s column, their leads exceed the margin that these undecided voters could influence.

So what do they want?

According to the AP, these voters want more details about Romney’s economic proposals and Bain Capital record, less bickering between the parties and a greater sense of inspiration and leadership from both candidates.

They also understand that this is a vague wish list, but it happens to be the issues that will move them from one candidate to the other.

What is also striking is what is NOT on this list.  This group, for example, is not going to be moved the by jobs reports.  Most feel that the economy, or at least short term improvement in the economy, is beyond the ability for either candidate to deliver.  They also aren’t questioning Obama’s personal history or Obamacare.

So what does that mean for both candidates who have been running very controlled campaigns designed to minimize the mistakes and quickly respond to criticisms?

Here’s my take.

Romney is going to hold out as long as he can hoping that the economy will deteriorate to the point where he can win without providing more information about either his personal finances or his economic plans.  He is certainly not going to do much before the Republican Convention in hopes that the national coverage associated with the convention and his choice of a VP will give him a bounce that will close the gap in the battle ground states.

Obama is going to continue to hammer Romney on his failure to provide specifics while Romney will attempt to deflect that criticism by claiming that he would rather talk about the economy while at the same time avoiding any specifics on what his plans really are to improve it.

This will likely not help either candidate because the undecided will view it as more bickering and less leadership and inspiration.

Romney will eventually be forced to reveal more personal and policy information.  When he does, he will lose.  That’s because on a policy level, his numbers won’t add up.  On a personal level, the information he releases will not answer any questions, but only raise more questions.

Until that happens, we have one of these weird end games that in chess would just result in a draw.  Neither candidate is going to make a bold move because they don’t have to.  Romney is hoping between the economy and the convention to close the gap without releasing any more information.  Obama is hoping that the economy does not get any worse, and that his unrelenting attacks on Romney will eventually force Romney to release more information.

They could very well stretch this whole thing out until November and frustrate undecided voters in the process.

Here’s what I wish they would do to demonstrate leadership and inspiration.

Romney should promote himself as the candidate who can square the circle.  He should be claiming that he is the only one who will be able to reform that tax system, close loopholes created by the rich and powerful, create an incentive-based hiring program, a federally subsidized jobs training program, and capital gains incentives for domestic investments that result in new jobs.  He could have promoted himself as someone who understands the need for healthcare reform and would IMPROVE the Affordable Care Act rather than repeal it.

Obama needs to call the Tea Party Republicans out for the hypocrites that they are regarding government spending and jobs.  He should be using the current conservative Republican bleating about sequestration as evidence to the American people that those who said that debt was THE most important thing and were willing to put the country into default rather than approve one dollar of tax increases are now suggesting that we NEED all of this deficit spending to keep all of the defense industry jobs that will be lost if the defense budget is cut.  He needs to defend government spending as an effective stimulus tool, and propose a whole series of “targeted” jobs programs.  Things like “first fired first hired”.  Eliminate time limits on unemployment insurance until unemployment numbers go under 8% for at least six months, and provide mortgage protection for homeowners who have been laid off until they are able to get new jobs.  This gets paid for through meaningful entitlement reform.

In other words, Romney the conservative should be touting his WILLINGNESS to raise taxes on the rich by closing loopholes.  Obama the liberal should be touting his willingness to reform the entitlement programs in order to continue to invest in job growth.

Just like the undecided, it is a wish list that probably won’t come true.

Putting Tax Returns in Context

Thursday, July 19th, 2012

In Romney’s defense, he is not required to disclose his taxes in order to run for President. To some degree, however, he has created this problem himself by making his business success at Bain a campaign issue. He claims that he has experience that President Obama lacks and as a result will do a better job managing our economic recovery. That gives the Democrats and the American voters every right to request more information about both his business success and how that affected his admitted personal wealth.

Some conservatives have tried to make this a tit for tat sort of exchange. Some examples I’ve read include Obama releasing his college transcripts or the Obama administration releasing more information about the Justice Department’s failed “Fast and Furious” operation.

This isn’t, however, an “I’ll show you mine if you show me yours” exchange of information. Neither Obama nor Romney has made their college experiences an issue in this campaign. If they did, it would be appropriate to expect both of them to produce documents to support their claims.

Similarly, Romney hasn’t made the wrangle between Congressional Republicans and the Justice Department a campaign issue either. Mainly because you don’t have to get very deep into this particular issue before it starts to come apart. Where it starts to come apart is when you ask Congress what it is that they are expecting to find that they don’t already know in the additional documents that they have requested from the Justice Department. The range of answers goes from, “I don’t know” to “A covert government plan to restrict gun rights”. The reason why the Justice Department has refused to provide more documents is because the documents Congress already has provide more than sufficient support on how this operation went bad and who the people were in the Justice Department that initially attempted to cover it up. There is no suggestion that the cover up went any further in the agency of any other motivation or any deeper plot that reaches higher in the administration.

There ARE valid reasons, however, to request more information from Romney based on the small amount of information that he has already released.

Here are a few.

The Swiss Banks Account

The person managing Romney’s assets in a blind trust said that he put some of Romney’s money in a Swiss Bank account and used it to buy Swiss Francs in order to hedge against the possibility that the US dollar would lose value. Tax experts say this is a weak justification for a Swiss Bank account. Why would someone making a run for the Presidency admit to betting against the US dollar and if they did, why use a Swiss Bank account to do it? There are many easier ways to speculate in foreign currencies that don’t require the secrecy and expense associated with a Swiss Bank account.

The account was closed in 2010. Earlier returns should reflect income earned from that account. Those using foreign bank accounts are also required to file a form with the government. As part of an effort to curtail money laundering, the Justice Department offered an anonymous amnesty program in 2009 for those who had not properly reported on foreign bank accounts. So there is also the possibility that Romney participated in that program. Earlier tax returns would reveal more detail about this account and how it was used.

The $100M IRA

During the time that Romney worked at Bain, he started an IRA which is now worth $100M. The problem is that the maximum tax free contribution that Romney could make to that IRA on an annual basis is $30K. At that rate, it would take 3,000 years to get to $100M. Since the only value of an IRA is to shelter current income from tax, that leaves a very reasonable question regarding the remarkable rate of growth seen in this IRA, particularly given the damage many other IRA’s suffered during the financial meltdown.

One possible explanation is that he just made some remarkable investment choices.

Another possible explanation is that he sheltered much more than the allowed $30K/year in his IRA by using Bain stock that was valued from a contribution perspective at far less than it was actually worth. He could have done that using an obscure “safe harbor” rule which covers taxation of service partner income in the sorts of deals Bain did, but the “safe harbor” taxation rules specifically exclude contributions to retirement plans. Retirement plan contributions must be measured at fair market value. More tax returns covering periods of time when these retirement plan contributions were made would answer that question.

Family Trusts

There are also huge amounts of money in Romney family trusts. There are gift taxes associated with funding these trusts. That raises the question of how much tax he paid to setup these trusts. If he used similar sorts of “safe harbor” valuations for contributing Bain stock to these trusts in an effort to reduce his tax exposure, he could be liable for serious penalties.

Complex Tax Returns

The one complete tax return that Romney has released for 2010 raises more questions than it answers about Romney’s finances. If the purpose here is to be transparent and provide the American public a clear understanding of the candidate’s finances so they can assess whether this candidate would have any conflicts of interest if they were elected, Romney has not provided enough information. His assertion that he has paid all of the taxes due does not address the issues of conflict of interest.

Low Tax Rate

The bulk of Romney’s income these days comes from fees that Bain earns for managing other people’s money (carried interest). He and his family enjoy a remarkably low tax rate because of a loophole inserted to benefit this one particular form of income. The vast majority of tax scholars and policy experts agree that there is no policy justification to single out one particular form of income for this special treatment. Romney hasn’t addressed this issue, but he has said that he plans to close tax loopholes are part of his plan to lower tax rates across the board. Since he happens to benefit directly from one of these tax loopholes that costs taxpayers billions of dollars every year, he has to state whether this one in on his list. Otherwise voters have a right to question how he plans to deal with this conflict of interest. Obama, in comparison, has said that he WANTS to raise his own taxes because he falls into the group that makes more than $250K a year.

Conclusion

The American people need to know if a presidential candidate has financial interests that create a conflict of interest. Romney clearly DOES have a conflict of interest regarding the special tax rate that “carried interest” has. The American people also need to know that the success that Romney has enjoyed is the result of his business savvy rather than his ability to hire smart tax attorneys and “game” the tax code. Romney also claims that he has paid all of the taxes that he owed. There is some evidence, particularly with his $100M IRA, that he may have some tax liabilities.

The only way to resolve these issues is for Romney to release more tax returns dating back to his days at Bain AND to declare whether or not he plans to close the tax loophole on “carried interest”.

There is nothing wrong with wealthy people hiring experts to minimize their tax burden. There is also nothing wrong with wealthy people taking advantage of tax loopholes that they themselves didn’t lobby to get inserted into the system.

When you run for President, however, you represent everyone – not just your economic and social peers. Since he is using his wealth as a qualification for the office, I think he also owes more detail to the rest of the country that isn’t wealthy. If the detail shows that he has aggressively “gamed” the tax system, he should be prepared to defend those actions. If it raises issues of potential conflicts of interest, he should explain how he is going to resolve them. If he has in fact cut some corners that put him at some personal risk regarding the legality of his past tax activities, the American people should know that before they cast their vote.

That’s why he has to release more information and declare what specific tax loopholes he plans to close.

 

Same old Story

Saturday, June 16th, 2012

The economy isn’t recovering as fast as it should because Obama, at least according to the Republicans, has the wrong plan.

The evidence is that the unemployment rate is still too high.  Whether that is the published unemployment rate or the real unemployment rate doesn’t really matter.  I think that we can all agree that there aren’t enough jobs for the number of people who would like to work.

Obama says that the major drag on the economy right now is the continued downsizing of government at the state and local level.  This is primarily teachers and first responders (fire and police).  The data support his claim even though he was criticized for the observation.

Obama’s plan is to funnel more money short term to states and cities to help them retain more of these employees and invest in infrastructure to create construction jobs.  The hope is that this growth in both private and public sector employment will improve state and local revenue to the point that they can retain more of these public sector workers when the federal money runs out.  We are already seeing this sort of revenue growth here in Michigan as a result of the robust rebound of the auto industry, though the Republican governor is unwilling to use this increased revenue to refund his education cuts.

What is Romney’s plan?

Here’s what we know so far.

Romney last September said that his administration would create 11.5M jobs in his first term by growing the economy at a 4% rate.  The problem is that his plan has no math associated with it to demonstrate how he plans to create those jobs.  Is he, for example, claiming credit for all of the jobs that economy creates if it expands at a 4% rate, or just the jobs that his policies would add over and above the jobs that would have been created anyway if his policies were not enacted?

Here’s how the experts across the political spectrum responded.

“Nowhere in the 160 page plan could I find a stated job creation number,” wrote Rebecca Thiess of Enterprise Policy Institute. “The math doesn’t just appear to be fuzzy — it appears to be nonexistent.”

“It is a plan from the Republican candidate for president designed to maximize corporate profits. What it doesn’t do is help the middle class or create jobs.” David Madland of the Center for American Progress

The Wall Street Journal called Romney’s fifty-nine-point economic tome “surprisingly timid and tactical considering our economic predicament.”

Last month, in response to the poor May jobs report, he did offer more specifics.  Those included:

  • Taping our energy resources to “put a lot of people to work in the energy sector.”
  • Repealing Obamacare, which is “scaring small businesses from hiring.”
  • Balancing the budget so people know “investing in America is going to yield a return in dollars worth something.”
  • “Open(ing) up new markets in American trade.”
  • Revamping the National Labor Relations Board and lowering tax rates on employers, both of which would make it easier to hire people.

Economists were just a skeptical about this plan as they were his original plan.

“On net, all of these policies would do more harm in the short term,” responded Mark Hopkins, a senior adviser at Moody’s Analytics. “If we implemented all of his policies, it would push us deeper into recession and make the recovery slower.”  That’s mainly due to the deep cuts in government spending that would be required to balance the budget.  The CBO also supports this conclusion that even implementing the $500B+ in planned cuts currently on the books could drive the economy into recession and those cuts are far short of what would be required to balance the budget.

We have also already heard, as a result of the oil pipeline controversy, that all the experienced oil and pipeline people are already working and even the construction job estimates may be inflated.

Romney hasn’t said what new markets he would open beyond what Obama is already doing.  The balance of trade under Obama has been declining because of increased exports and cheap oil.  He has also outlined a future based on increased domestic energy production which could turn the US into a net exporter.  Future growth of trade for the next couple of years will likely depend on how quickly Europe recovers more than anything else.  That’s because slowing growth in Europe will affect the rest of the world’s ability to buy too.

Romney has provided no data which suggests that the Affordable Care Act, deficits, NLB regulations, or lower tax rates will spur hiring.

In fact the data suggests exactly the opposite.

According to analysis by Moody’s commissioned by the Fiscal Times, US businesses are more profitable over the past few quarters than they have been in the last 50 years.

 

“Giving more tax breaks to corporations that are awash in cash is not going to lead to anything,” said Joseph Stiglitz, a Nobel Prize-winning economist at Columbia University after serving as President Clinton’s chief economic adviser and top economist at the World Bank. “It’s a lack of demand that’s really impeding investment.”

Lack of demand is the result of unemployment, underemployment, and personal incomes which have lagged corporate profits.  Recent data supports this claim that middle class families are reluctant to spend because they are still recovering from the 40% loss in net worth that they suffered during the recession.  It is middle class consumers, not corporations or wealthy individuals, which drives our economy.

What is even more troubling is that the percentage of corporate profit going to employees as a whole is dropping.  That’s good news for investors but bad news for workers and our economy.  That means that it is going to take middle class families who rely on salary rather than investment income, longer to recover than it might have in past recessions because corporations are keeping a higher percentage of the profits they generate for themselves.

Aaron Smith, a senior economist at Moody’s Analytics, said, “What is clear going forward is that in the absence of debt and government support, we’re going to need the labor share to stop declining if consumers are to regain their prowess as drivers of the U.S. economy.”  In other words, without direct government stimulation to drive up employment which as we get below 8% unemployment levels will also drive up wages, the current corporate position on wages points to continued slow growth.

Summary

The Romney jobs plan is a fiction.  His economic recovery plan will not only fail, it will make things worse because it will continue to shrink the public sector workforce that is currently dragging down the recovery.

The Republican supply side solution is based on several false premises.  The first is that corporate profits are the driver for employment.  The second is that Obama’s policies are suppressing corporate profits.  Corporate profits are the highest they have been in recent history and we are still struggling with high unemployment.  The current economic conditions have created what the Republican plan is supposed to deliver (smaller government and higher corporate profits) AND IT’S NOT WORKING.

The REAL solution is to invest both in public and private sector hiring to stimulate demand which will ultimately grow the economy.   The CBO essentially said the same thing in their most recent report.  Keep taxes low and don’t reduce the size of government any more, and the economy will grow at 4% all on its own.  That plan comes with a risk, however, because it will add to the debt and adopting a rational program that reduces the debt by restructuring Medicare and to a lesser extent Social Security appears to something he problem is that neither party seems willing to address.

Next up: A look at the current recovery in a little more detail

The Thin Red Line

Wednesday, June 6th, 2012

CBO came out with their annual report on the economy.

As you might expect, it wasn’t pretty.

The country is essentially caught between a rock and a hard place.

On one hand, without any other changes in current policy, federal debt will hit 93% of GDP in ten years.  That reflects some improvement from the outlook issued a year ago based on the spending cuts enacted as a result of the debt crisis compromise.

“Current Policy” by the way is that tax levels don’t change (existing tax cuts get extended) and current Medicare benefits remain unchanged.

The CBO also warned that if the current tax cuts are allowed to expire in 2013 and the full scheduled set of $560B in federal spending cuts that have been agreed to are enacted, the economy will likely go into recession.

Finally, if Congress renews the tax cuts and does not enact the budget cuts, the economy would likely grow at 4.4% which would put us among some of the fastest growing economies in the world.

What we are left with then is this Scylla and Charybdis moment that has absolutely nothing to do with ideology.

Neither political party has a whole solution.  Both parties have part of the solution and part of the risk.

We can’t continue to reduce the size of government and as a result extract more dollars from the economy.  If the cuts that are currently on the books are implemented, we risk recession.  That means the Republican strategy to aggressively reduce government spending is now officially dangerous.

This Congress can’t even kick the can down the road as other Congresses before them have done.  That’s because the debt crisis is now a clear and present danger that could become a reality within the next decade.

What is left is a very thin line through the middle of this problem.  Spending cuts have to continue but they have to be more gradual and occur only after the economy has improved to the point where it can absorb them.  Taxes also have to go up because you just can’t cut enough government spending fast enough to bring the deficit down and also not risk shocking the economy into recession.  Those new tax increases also have to be gradual and take effect only when economic growth is strong enough to withstand the shock.  Finally Medicare has to be reformed, but only in a way that doesn’t affect the ability of seniors who depend on that program to continue to receive care.  Otherwise, there is also a risk of recession as seniors reduce their spending in order to cover their higher medical expenses.  Some sort of means test is an example.

These sorts of highly coordinated actions imply a Congress that recognizes the problem, is on the same page with regard to the solution, and is willing to put the good of the country ahead of personal and party issues.

The bad news is that both parties are blaming the other for getting to this point.

The additional bad news is that a deeply divided congress is not going to be able to walk this thin line with any precision UNLESS those who hold elected office finally agree to put down their swords and work together to get us onto firmer ground.

It will be interesting to see how all of this plays out.

We also can’t raise taxes in any significant way without a similar risk.  So the Democratic strategy of raising taxes on the rich also has to be examined very carefully.

Perhaps the best outcome would be continued gridlock, except that Congress will have to act to limit the cuts already scheduled and to renew the tax cuts that are scheduled to expire.

Waiting for Obama

Monday, May 28th, 2012

We’ve already gone through the analysis of the Ryan, Romney, and Obama budgets and find them all lacking.   They are all basically political documents rather than practical plans to create more jobs and reduce the deficit.

As I wonder why, I’ve come to the conclusion that it is because of the way that politics is practiced in this country.

Mitt Romney said basically the same thing the other day when he complained that he can no longer have a casual conversation with the media.  That’s because everything that he says can be fodder for today’s brand of “gotcha” politics.  That is true not only of Romney but of Obama too.  It is very difficult for them to be themselves, warts and all.  Instead they have to be a caricature of themselves constructed by their respective political consultants, pollsters, and focus groups.  They have a message created by these people that includes an image designed best to communicate the message.  Those caricatures end up being prisons for both candidates.

We can sense both candidates struggling to express their humanity behind the masks that their campaigns create for them.  That makes us uneasy because we can tell that neither candidate is telling us the truth.  Those less in touch with reality express this in conspiracy theories and fanatical searches for the big lie that would expose either Obama or Romney as a fraud.  The fact is that the big lie is that they are both telling us somebody else’s story and claiming that it is their own.  The truth that this reveals is that both candidates are willing to become a different person in order to win (or retain) the Presidency.

The sad thing is that I think that Obama at least, could more easily win re-election being the person that I think he really is.

He has been told by his campaign staff that he can’t run on this record, because of the narratives that the Republicans are already attempting to pin on him – socialist, irresponsible spender, weak leader, etc.

I disagree.

He is the first President in history to pass significant healthcare reform.  The provisions that are already in place prevent insurance companies from denying coverage based on pre-existing conditions and allow families to include their children up to age 26 on their policies.  Those two provisions alone have likely benefited every family in the country.

He should be standing up and taking credit for it in every speech and asking for a show of hands of those who have a young adult on their insurance, have someone with a pre-existing condition in their family, or have a close relative or friend taking advantage of one of these two benefits.

Instead this program has been attacked as socialized medicine.

He should be standing up to this claim by pointing out that the CURRENT system is the real socialized medicine.  That’s because anybody without insurance can go to any emergency room anywhere in the country, receive treatment, and hand the bill to all of us who are insured in the form of increased rates.  It’s that practice that Obamacare ends.  Obama is, in fact, a champion for private insurance; and yet he has allowed himself to be painted as a healthcare socialist.

Obama did save the domestic auto industry and that industry is leading us out of recession because of their robust hiring rebound.  What he fails to mention in this stump speech is that, in the process, he also required this “new” auto industry to adopt the most aggressive fuel efficiency standards in history.  Auto fleets will have to average 57.5 MPG by 2025.  That’s up from the 27.5 MPG requirement today.  This will not only drive innovation which creates new markets and new jobs, but also cut our fuel consumption dramatically over the next decade.

High energy prices have driven a wave of new domestic drilling using new technology.  New sources of supply coupled with aggressive conservation campaigns promise to turn us from a net importer to a net exporter of energy.  You simply can’t understate the profound impact on domestic and global politics when the United States is no longer dependent on imported oil.

Instead of telling the country how different life will be when this country again becomes energy independent, he has to defend himself against claims that gas prices are too high.  The goal of energy independence is not to bring down gas prices, but to bring down oil-based dictatorships that use their wealth to threaten our country and warp our foreign policy.

Finally Obama has allowed himself to be boxed in by those who are intent to revise the history of our current debt crisis.  Rather than paint the Bush administration as the “deficit exploder”, he suffers that claim while Bush is portrayed as the “tax cutter”.  In fact much of the spending that did occur in his first year in office was the result of Bush policies he inherited, and his own budgets cut discretionary spending more than any President since Eisenhower.

What Obama hasn’t done, however, is adopt a bold plan to both revive the economy and reduce the deficit.  That plan was on the table during the last credit limit crisis, but fell apart when neither party could find a majority of members willing to do what was best for the country.  That was the point when Obama should have stopped playing the Washington inside politics game and gone directly to the American people.

What he should have promoted was Simpson Bowles to reduce the deficit combined with a short term investment in infrastructure to get us over the hump on job growth.  You have to have both in order to explain to the American people why popular programs like Medicare and Social Security have to be cut.  If there isn’t also some promise of job growth, it is just austerity with no near term promise of a better tomorrow in return for increased pain today.

It was a “you bet your life” or at least your presidency moment.  He would have been the first to tell the American people what every rational politician in Washington already knows – you can’t continue to have low taxes, high unemployment, big defense budgets, and generous benefit programs.  He would have hung it all out there for the American people to either accept or reject.  If they rejected it, they would also be rejecting his bid for a second term.  He would have created enemies on both the right and the left.  But he also would be betting on the basic fairness and common sense of moderates of both parties and independents.

Instead he let that moment pass, and retreated to the comfort and certainty of partisan politics.

He very well may be able to win a second term with this more conservative strategy.

We’ll see whether or not he, or perhaps Romney, will end up having another opportunity to lead the country in the way that it is begging to be lead over the next four years.

 

Tell the Truth – The President’s Budget

Thursday, May 24th, 2012

First a little bit of background

The President proposes a budget, but ultimately it is the Congress that decides how to spend the money.  So the President has to produce a much more detailed document than either Romney or Ryan, while at the same time recognizing that Congress may choose to do something completely different.

Romney and Ryan, however, can leave huge gaping holes in their spending plans, are under no obligation to explain any of the details, and can still get away with promising outcomes that only Congress ultimately is able to deliver.

So let’s look at the big numbers first

Obama proposes a .2% increase in federal spending from $3.796T to $3.803T.  When you factor in inflation it is actually a net spending decrease.  When you factor in the 2.5% growth in mandatory spending (Medicare, Medicaid, Social Security, and interest) it is actually a fairly significant decrease of 4.3% in discretionary spending.

You will see Democrats promoting this as a responsible cut in spending.

Romney has already said that there is no reduction in spending. 

Technically, they both are right.

Now let’s look at the details

The plan promises to, “trim $4 trillion from the deficit over the next decade, while boosting spending to programs to stimulate the still-ailing U.S. economy.”

It includes:

  • $140 billion in research and development spending, including $2.2 billion for advanced manufacturing.
  • $476 billion over six years in transportation infrastructure, financed in part with money that will no longer be needed in Iraq and Afghanistan.
  • Ending Bush-era tax cuts for families earning more than $250,000 a year, limited tax deductions for high earners, and the so-called “Buffett Rule,” which would ensure that millionaires pay a minimum tax rate of 30 percent.
  • A new $61 billion tax on big banks and $41 billion in additional taxes on fossil fuel producers
  • A 6% overall defense spending decrease based on a big drop in troop strength
  • A 10% reduction in foreign affairs spending in Iraq
  • An $8B fund to train 2 million workers in health care, transportation, information technology and advanced manufacturing.
  • A $452M cut to the Low Income Home Energy Assistance Program
  • A .5% cut in the Homeland Security Budget
  • No increase for NASA or Healthcare
  • A 2% increase in Transportation spending
  • A 3% increase for Energy to promote conservation, natural gas, and cheap solar.
  • A 1% cut to the EPA

Now the analysis

The CBO said that the budget would increase short term economic growth 1.4% more than what would happen without the proposed budget changes.  That is primarily due to the proposed tax cut extension for those earning less than $250K/year.

That does come at a cost, however, of adding $977B to the deficit in 2012.  Over the next decade, the deficit would grow to $6.4T, which sounds like a huge number, but when compared to the growing economy would remain below the 3% of GDP number that according to most economists is a danger point.

After 2017, however, this rapid growth would push up interest rates and failure to cut the deficit would start to drag down growth.   If nothing else were done, GDP would be negatively impacted by as much as 2.2% from 2018 to 2022.

While there are some minor differences between what the White House claims and what the CBO has forecast, they are mainly the result of the CBO using a more conservative economic model.

The major difference between this proposal and those from Romney and Ryan is that this budget has all spending and tax details spelled out.

Final comparisons

None of the proposed budgets reduce the deficit.

The Republican budgets lean very heavily on tax policy to improve the economy, but only the Obama budget, based on CBO estimates generates any significant growth.  In fact, the CBO warns that the Obama budget may result in some inflation.

The Obama budget comes closest of the three budgets to the Simpson Bowles model, but none of the budgets cut defense and entitlement programs sufficiently to actually reduce the deficit.

So what we are left with is two different political views of how government should operate, but none of them are a practical plan to reduce the deficit.