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Thursday, December 26, 2013

Watch this Link: Will Heritage Scrub Its Obamacare History?

Mike the Mad Biologist leads me to a host of articles on the crazy things going on at Heritage Foundation, especially since former Senator Jim DeMint of South Carolina took over as president of the organization. Mike quotes Alex Pareene at length on how the rise of MBAs running both the Foundation (DeMint) and Heritage Action (Michael Needham) has turned Heritage from a respected think tank into a mainly political organization of the hard right. Pareene, in turn, leads to a good analysis by Julia Ioffe in The New Republic.

As regular readers know, Heritage is an organization that I've already lost most respect for, it being famous both for proposing Obamacare's main components and denying that it is responsible for the individual mandate. This has been well-debunked in both Forbes and The Wall Street Journal, by Avik Roy and James Taranto respectively.

My modest contribution was to note that the January 1989 research report Taranto found in the Heritage archives was actually noted on its cover, "Revised Edition." This pushes the original research back into 1988 at least and clearly refutes Stuart Butler's claim that the individual mandate was a response to Hillarycare. In fact, it was a response to the considerable political groundswell for single payer in the 1980s.

The question is how far the deterioration of the Heritage research mandate will go. I think one clear indicator would be if Heritage decides to take the 1984 "Ministry of Truth" route and delete the research from its website. So far, it has yet to stoop that low. But when "A National Health System for America, Revised Edition," can no longer be downloaded, we will know another big step in the hyper-politicization of Heritage has taken place. Should it happen, and you need a copy, email me and I will send you a copy of the pdf document on a "fair use" basis.

You will know it has happened when you can no longer download the report from

Wednesday, December 11, 2013

America's Most Wanted: Boeing

Boeing is America's Most Wanted Corporation in two senses. First, now that the Machinists' union in Washington state has refused the company's contract demands, it is shopping production (h/t Pacific Northwest Inlander) of the 777x aircraft nationwide and lots of states are making offers for it. Second, it is emblematic of everything the 1% is doing to destroy the middle class: despite being highly profitable, it pays virtually no taxes; it accepts billions of dollars in government subsidies; it is trying to eliminate pensions and cut salaries for its highly skilled workforce; and it is trying to move production away from its unionized workforce, something it has already accomplished in part.

The first part of the story is nauseating enough. With Boeing already threatening to leave its home in Washington state if it didn't get what it wanted from both the state and the union, Democratic governor Jay Inslee called a special session of the state legislature that took three days to approve subsidies for Boeing. The incentive package is the largest ever in U.S. history for a single company, according to Greg LeRoy of Good Jobs First, an astounding $8.7 billion over 16 years (2025-2040). By my own back-of-the-envelope calculations, this looks to be the largest-ever U.S. subsidy on a present value basis as well as in nominal terms.

By the way, this represents a huge jump from Boeing's current tax break package for the 787 Dreamliner, passed in 2003, which was $160 million a year for 20 years ($2.0 billion in present value, by my calculations). Under the new package, this would more than triple to $543 million annually.

Also of note, the World Trade Organization ruled that the 2003 subsidies are illegal under WTO rules, a finding that was upheld by the WTO's Appellate Body in April 2012. While the U.S. government has eliminated some of the illegal subsidies provided by NASA and the Defense Department, the state and local subsidies found to be in violation of the WTO's Agreement on Subsidies and Countervailing Measures have not been eliminated. As noted in the last source, the European Union was seeking permission from the WTO to apply $12 billion worth of sanctions on U.S. exports. The EU will certainly file a new complaint against whatever state and local subsidies Boeing ultimately receives for the 777x, and on the basis of the last case there is every reason to think the EU would again prevail.

But just days after the legislature approved the subsidy, the union rejected the proposed contract by a 2-1 margin. Though the company described it as a "contract extension," there were major changes involved, including replacing the defined benefit pension with a 401(k) (continuing an economy-wide trend contributing to the coming middle-class retirement crisis), increased health care costs for employees, a lower wage structure for new hires, and smaller raises than in the current contract, all in exchange for a one-time bonus of $10,000 for current workers.

After the contract offer rejection, Boeing announced that it would entertain offers from 15 states that might be interested, including Washington state. The proposals were due in less than a month, with the company imposing a December 10 deadline on prospective suitors. As Good Jobs First reported in its January 2013 publication, The Job-Creation Shell Game, we see a two-sided use of the corporate mobility conferred by a location decision to (as I like to describe it) extract economic rents (superprofits) from governments: Job blackmail directed at Washington state and the Machinists' union; combined with an offer to the other 14 states to engage in job piracy by subsidizing the firm's potential relocation. This is an exercise in raw corporate power.

And to what end? We have already seen the details on how Boeing wants to terminate true pensions, reduce other worker benefits, and create a two-tier employment structure. As Greg LeRoy highlights in a recent post, Citizens for Tax Justice has shown that over the decade 2003-2012, Boeing made $35 billion in pre-tax U.S. profits, yet paid negative tax to Washington state of $96 million and a whopping $1.8 billion in federal income tax refunds over that same period! To put the new deal in perspective, LeRoy points out that should it eventually be approved, the $543 million annual subsidy would be "more than twice what the state provides to the University of Washington." So not only are the labor provisions a direct assault on middle class living standards and retirement security, the opportunity cost of the deal will no doubt further imperil public education in Washington at all levels, undermining one of the very factors that gives the state a trained workforce that is attractive to employers in the first place.

Boeing has already shown its willingness to move work away from Washington state, when it built a  787 Dreamliner assembly line in South Carolina despite the billions in subsidies it received from Washington. However, the South Carolina site has been plagued with production problems, which some see as strengthening the bargaining position of the Machinists in Washington.

Personally, I tend to believe that the Machinists do have a strong negotiating position. It is hard to imagine other states coming up with some 20,000 highly skilled workers to take on the job. While I think it is possible that part of the production could be moved away from Washington state, for instance the wing assembly only, I think the company will have to leave most of the work in Washington. Moreover, Boeing only gets the $8.7 billion in tax breaks if it produces the entire project there. Missouri, by contrast, has only offered $1.7 billion in subsidies to attract the facility, which I consider to be unlikely to be successful because Boeing workers in St. Louis are also Machinist union members. But really, there is no way to tell for sure whether the company's desire to weaken the union will overwhelm what looks like a compelling case for staying in Washington.

We do know, however, that Boeing is displaying everything that is wrong with corporate America today. As I wrote recently, there needs to be a federal law against states providing subsidies to move existing jobs out of another state. Banning job piracy would also weaken companies' ability to engage in job blackmail by reducing the economic viability of actually relocating to another state. With Boeing's auction sure to set a new standard in the annals of job blackmail, the sooner we can get action on relocation subsidies, the better.

Cross-posted at Angry Bear.

Friday, November 22, 2013

Subsidy Insanity in Western Missouri

I have written before about the gross waste of taxpayer monies on retail in the St. Louis region. According to the East-West Gateway Council of Governments (p. 18), governments in the bi-state metropolitan area pumped about $2 billion worth of subsidies into retail projects from 1990 to 2007, but only saw a net increase of 5400 jobs, meaning that each low-wage, low-benefit retail job cost the cities of the region $370,000 apiece. The price is only this low on the generous assumption that the subsidies were solely responsible for this job creation. However, given the growth of incomes in the metro area during that time period, it is likely that most if not all the jobs would have been created without the incentives provided.

It turns out something similar has been happening in the Kansas City region. As regular readers of this blog know, the border job piracy in the Kansas City metro area is probably the second-worst in the country, after metro New York City. As it turns out, there has recently been data released on the scope of job piracy there.

Less than a year after Governors Jay Nixon (D-Missouri) and Sam Brownback (R-Kansas) told New York Times reporter Louise Story, on camera, that there was no way they would back off of their wasteful poaching, a new Times story reveals that Nixon is now calling for an end to their futile battle.

Part of the reason for his change of heart probably lies with a recent study by the Hall Family Foundation showing that since 2009 alone, Missouri and Kansas City have spent $212 million on relocation subsidies to drag existing operations across the border, sometimes more than once as in the case of Applebee's. The net effect, however, has been virtually nil: 3200 jobs moved to Kansas, while 2800 move to Missouri, for a net movement of 400 jobs.

The math of course is simple: $212 million/400 equals $530,000 per net moved job. And remember, these aren't net new jobs, merely net moved jobs. As I've written on numerous occasions, job piracy is the least defensible use of development incentives, precisely because it creates no new jobs. Good Jobs First had a detailed analysis of the issue overall and the Kansas-Missouri border war in particular in January 2013.

However, if the most recent Times article is to be believed, we could be on the verge of ending this particular border war. Mind you, don't hold your breath. The two states tried before, according to Good Jobs First, and failed miserably. Indeed, there has yet to be a successful voluntary no-raiding agreement between states, even though there have been at least three attempts. But in this case, there has been a strong push for a cease-fire from a number of prominent Kansas City businesses, so there is a better-than-usual chance that this could be successful.

Really, though, there oughta be a law. A federal one.

Cross-posted at Angry Bear.

November Tax-Cast Highlights Fiscal Secrecy Index and Retrospective on President John F. Kennedy

This month's Taxcast from the Tax Justice Network highlights the results of the newest edition of the Financial Secrecy Index as well as U.S. President John F. Kennedy's attempts to rein in tax havens 50 years ago. These are definitely worth your while!

Thursday, November 14, 2013

Columbia U. Conference Shows Incentives Pervasive but Controls Work

Day one of the Columbia International Investment Conference in New York has concluded, and the takeaways are very clear. The topic is investment incentives, prompted by Louise Story's "United States of Subsides" series last December. Story moderated panel 1, which covered the pervasiveness of subsidies. How widely used are investment subsidies? As the presentations made clear, they are used by virtually every country in the world. That is depressing takeaway number one.

The second big lesson is that for most types of foreign direct investment, the use of incentives has no effect at all. Resource companies, companies seeking strategic assets, and companies needing to sell in a particular market are coming regardless of the use of incentives. (I would qualify the last part to say that only applies when coming to markets that aren't divided into a number of competing jurisdictions, such as the US and EU, where the member states can engage in subsidy wars, related but gated article here.) It is only for "efficiency seeking" or cost minimization investment that incentives can make some difference in location decisions.

Third, one of the biggest cost of incentives consists of funds given to firms that were coming to your location even if they had not received the subsidy, according to Louis Wells, the panel 2 moderator. He says most studies place this at 60% to 70%. A more recent study by Peter Fisher (p. 8) says that a more typical figure for the amount of jobs is only about 9%, versus the 30-40% implied by Wells. This means that the real cost per job of projects is at least 2.5 times as large as reported cost per job, and may be up to 11 times higher. And don't forget that there is also a big opportunity cost based on the value of other possible uses of the funds given away. As I have pointed out, all the public sector jobs lost since December 2007 could be replaced if incentives were abolished.

Fourth, the good news is that there are control methods that do work. I have written before about this, and a conference presentation by Investment Consulting Associates (p. 3) illustrates this with a comparison of incentives in the United Kingdom and the Czech Republic. Recall that European Union state aid policy aims to direct bigger incentives to poorer regions of the EU. ICA's database shows that the mean incentive was more than twice as large ($8.61 million vs. $3.41 million) in the Czech Republic than in the UK; the  mean "aid intensity" (subsidy/investment) was 36% in the Czech  Republic compared to just 15% in the UK; and mean cost per job was $67,088 in the Czech Republic versus only $20,288 in the UK. These are precisely the outcomes the European Commission wants to achieve with the state aid rules, creating a reliable bias in favor of poorer regions (and at the same time the poorer regions have subsidy limits holding down what investors can receive).

Tomorrow (Thursday, November 14) will have panels on "What are the alternatives" and my panel, "The way forward," where we will discuss EU rules and other methods of controlling out-of-control incentive wars. You can follow the action on Twitter at #CIIC13.

Cross-posted at Angry Bear.

Monday, November 4, 2013

Ted Cruz's Tax Haven Past

A version of this post was previously published at US News and World Report's "Economic Intelligence" blog:
Reprinted here under the terms of my contract with US News and World Report.

Time (h/t TPM) reports that Texas Senator Ted Cruz invested $6000 in a company with his college roommate/debate partner, David Panton, which has turned into at least $100,000. While this is true on paper and required Cruz to make multiple amendments to his Senate financial disclosures, the story is of more interest to me for Cruz’s use of a tax haven company.

The tax haven in this case is the British Virgin Islands. Caribbean Equity Partners Limited was founded by Panton, Cruz, and two other partners in 1998. Cruz’s $6000 plus help starting the firm gave him a 10% ownership stake, according to a spokesperson for Cruz in response to my email inquiries. The other partners owned 30% apiece, she said.

Caribbean Equity Partners Limited consisted of two separate units, Caribbean Equity Partners Limited (Jamaica) and Caribbean Equity Partners Limited (BVI). Cruz held stock in both of them. In the Jamaica corporation, he held 100 regular shares plus 250 Class “C” Preference Shares. He held 5000 shares of the British Virgin Islands-incorporated company. This information comes from a Certificate of Divestiture dated January 6, 2003, filed when his wife, Heidi Cruz, took a job in the Department of the Treasury, one of many documents published by Time (see link above). The Cruz spokesperson confirmed his ownership in both companies.

This divestiture, about five years after the company was founded, netted Cruz $100,000, consisting of $25,000 in cash and a $75,000 promissory note from a different company, CEP Investments Holdings Limited. This firm is headquartered in Jamaica but domiciled for tax purposes in the British Virgin Islands, Cruz told Time. He also told the magazine that it is “effectively” a promissory note from Panton, as the company is owned by Panton. Based on what the Time story describes as an “oral provision” with Panton to pay reasonable interest on the note, it has now grown to over $100,000 in value as noted in an October 1 amended disclosure and confirmed by the Cruz spokesperson. As the promissory note shows, it was originally scheduled to have been paid December 31, 2003, but according to Cruz’s spokesperson he and Panton have an oral agreement to postpone payment indefinitely. (For this reason, his $6,000 investment may never grow beyond the $25,000 he has already collected.)

Cruz’s ownership of a firm with a tax haven-based unit does not augur well for him to oppose tax havens, as did some Republicans in the past. Notably, former Senator Norm Coleman (R-Minnesota) co-sponsored the Stop Tax Haven Abuse Act of 2007. Moreover, we find from that Cruz has received campaign contributions from Goldman Sachs (where his wife now works) PAC and Credit Suisse Group PAC, in addition to tens of thousands of dollars from employees of the two companies. According to the Government Accountability Office, as of 2009 Goldman Sachs had 29 tax haven subsidiaries, including 15 in the Cayman Islands and one in the British Virgin Islands. Credit Suisse, of course, is a Swiss bank under criminal investigation for assisting at least some of its American clients to commit tax evasion.

Bottom line: Senator Cruz is almost certainly a vote against tax haven reform.

Cruz’s spokesperson also issued a statement: “This story is much ado about nothing.  It concerns a 15-year-old business venture from which Sen. Cruz entirely divested more than a decade ago.  He holds no equity interest in any Caribbean business, and has not had any such interest, compensation, or income for more than 10 years. Upon divesting from the venture in early 2003, the Senator received a partial payment and also a promissory note from his business partner and college roommate.  That promissory note--on which [Time’s] entire article is based-- is technically still owed (and thus was voluntarily disclosed), but it has never been paid and Sen. Cruz has never attempted to collect on it.”

Friday, October 25, 2013

Columbia U. Conference on Investment Incentives

On November 13 and 14, the 8th Annual Columbia International Investment Conference will be held in New York City. Sponsored by the Vale Columbia Center on Sustainable International Investment, the conference is titled: "Investment Incentives -- the Good, the Bad, and the Ugly: Assessing the Costs, Benefits, and the Options for Policy Reform."

The meetings will focus primarily on location subsidies for foreign investment, and primarily in developing countries. But there will also be plenty of coverage of North America and the European Union, as well as discussion of global institutions and regimes. Louise Story, author of the very valuable New York Times series, "The United States of Subsidies," will moderate the first panel.

As the conference materials lay out in greater detail, "The aim of this year’s Conference is to advance our understanding about the role that incentives have played in attracting and retaining foreign direct investment; the policy rationales supporting or discouraging various types of incentives; the strategies that may be more effective at achieving the objectives of host governments; and the potential for future coordinated action on these issues."

I will be speaking during the Thursday afternoon panel on the topic of controlling investment incentives (what else?). There will be an outstanding roster of panelists, both academics and practitioners. If you're interested in the topic and will be in the vicinity, you should attend. Registration is free, but also required in advance. You can register at the link above.

Tuesday, October 22, 2013

Irish Austerity Exodus Continues

The Eurozone experiment in austerity continues to fail as the peripheral countries endure ongoing cuts. Following up on my post of August 15, it's time to look at the most recent Irish immigration data to update it through April 2013 (Ireland records population data from May 1 to April 30) and see how it affects the reported unemployment rate. The picture remains ugly, with emigration climbing once again, from 87,100 in 2011-2012 to 89,000 in 2012-13. Immigration increased by 3200, so net emigration fell by 1300, with net out-migration over the year declining by about 3% to 33,100. Here are the details:

  Year ending

April 2012April 2013



Net migration-34,400-33,100

of which Irish nationals-25,900-35,200
Source: Central Statistics Office Ireland

Take a good look at the last line: Net emigration by the Irish themselves increased by 35.9% and accounts for all net out-migration; there was net in-migration by non-Irish citizens of 2100 in 2012-13. Indeed, the Irish comprised 57.2% of all emigrants in the most recent report.

What was the effect of emigration on the unemployment rate? Once again in 2013, people in the age group closest to what we would consider prime-age workers (15-64, given how Ireland reports immigration by age groups; see Table 4 of the linked report) left the country at a higher rate than children and seniors, with total out-migration for those 15-64 of 35,300. That brings total out-migration for population years 2010-2013 to 126,000.

Since April 2013 data is a much better match for Ireland's official first-quarter 2013 unemployment data than April 2012 was, I am going to repeat my calculation from August, still using Q1 2013 unemployment of 13.7% as my base. Again, there were 292,000 officially unemployed in the first quarter; dividing by 0.137 gives an estimated workforce of 2,131,387. We now add 126,000 to numerator and denominator to get the maximum potential unemployment rate, which would exist if all 126,000 were in the labor force and unemployed: 418,000/2,257,387, or 18.5%.

Even if we add in only those in the most prime working-age group in the Irish statistics, those from 25 to 44 years old, we still find that the imputed unemployment rate exceeds the country's maximum during this crisis of 15.1%. 2013's 12,500 net out-migration in this age group brings the 2010-2013 total to 48,500; adding this to the numerator and denominator gives us 340,500/2,179,887 or 15.6%.

Paul Krugman points out that we can also see this by looking at Ireland's employment rate. Over 2.1 million were employed in the third quarter of 2007; in the second quarter of 2013, the number is still far depressed at 1,869,900, which represents a 1.8% increase from a year earlier.

Finally, the overall picture for the EU and the eurozone has deteriorated over the previous year: EU unemployment rose from 10.6% in August 2012 to 10.9% in August 2013 (most recent month available), while eurozone unemployment rose from 11.5% in August 2012 to 12.0% in August 2013. Both figures were down a hair from several months earlier. But in Greece, new records continue to be set, with unemployment in June 2013 (most recent month available) hitting 27.9%. By contrast, as Eurostat shows, unemployment has steadily declined in the United States and Japan.

Unfortunately and unsurprisingly, the evidence that austerity has failed in Europe still is not affecting EU policy, nor has it stopped the cacophony of voices in the United States calling for more austerity. While Republicans supposedly "lost" the government shutdown crisis, they succeeded in locking in sequester-level government spending until the next crisis, and sequester II will be here soon. God help us.

Cross-posted at Angry Bear.

Thursday, October 17, 2013

Median Wealth Increases, but U.S. Still Stuck at 27th in World

The new Global Wealth Report and Global Wealth Databook from Credit Suisse were released last week. According to the Report (p. 3),
Global wealth has reached a new all-time high of USD 241 trillion, up 4.9% since last year and 68% since 2003, with the USA accounting for 72% of the latest increase. Average [mean] wealth per adult reached a new all-time high of USD 51,600, with wealth per adult in Switzerland returning to above USD 500,000.
For the United States, this represents an increase in mean wealth per adult of 11.4% from mid-2012 to mid-2013 (Databook, p. 92). Median wealth per adult increased even faster, from $38,786 to $44,911, or 15.8%, although we should recall that measurement of median wealth is less reliable than that for mean wealth.

Nonetheless, while these data represent improvement for the typical American, there was no change in our ranking relative to the rest of the world. While Kuwait and Cyprus fell below the U.S., Slovenia and, more surprisingly, Greece now have higher median wealth per adult. Thus, the United States remains only 27th in the world.

These data are significant for at least two reasons. First, they highlight the fact that while the United States has a higher gross domestic product per capita than all but four of the 26 countries ahead of it in median wealth per adult (Qatar, Luxembourg, Singapore, and Norway), the long-term trend of economic policies has clearly hurt the middle class. Inequality is a big part of the explanation here: mean wealth per adult in the U.S. is 6.7 times median wealth per adult, the highest ratio in the top 27. By contrast, in #1 Australia the mean-to-median ratio is only 1.8:1. In fact, this ratio is less than 3:1 for 19 of the 26 countries with higher median wealth per adult. In Slovenia, mean wealth per adult is less than 1.5 times median wealth per adult! (All figures calculated from Databook, Table 3-1.)

Second, these low levels of wealth contribute to the coming retirement crisis of the middle class. Americans have low levels of saving, while Social Security still looks vulnerable to the chopping block despite our already high level of elder poverty.

Here are the top 27 countries by median wealth per adult.

Country                                                      Median Wealth
                                                                   Per Adult

1.  Australia                                                    $219,505
2.  Luxembourg                                               $182,768
3.  Belgium                                                     $148,141
4.  France                                                        $141,850
5.  Italy                                                           $138,653
6.  United Kingdom                                         $111,524
7.  Japan                                                         $110,294
8.  Iceland                                                      $104,733
9.  Switzerland                                               $  95,916
10. Finland                                                     $  95,095
11. Norway                                                    $  92,859
12. Singapore                                                 $  90,466
13. Canada                                                     $  90,252
14. Netherlands                                              $  83,631
15. New Zealand                                            $  76,607
16. Ireland                                                      $  75,573
17. Spain                                                        $  63,306
18. Qatar                                                        $  58,237
19. Denmark                                                  $  57,675
20. Austria                                                     $  57,450
21. Greece                                                      $  53,937
22. Taiwan                                                      $  53,336
23. Sweden                                                     $  52,677
24. United Arab Emirates                                 $  51,882
25. Germany                                                   $  49,370
26. Slovenia                                                    $  44,932
27. United States                                            $  44,911

Source: Credit Suisse Global Wealth Databook, Table 3-1

Cross-posted at Angry Bear.

Thursday, October 10, 2013

Governing Through Ungovernability

It's 2011 all over again. House Republicans are once more threatening to force the country into default by not raising the government's debt ceiling. Markets are beginning to get nervous with default only a week away. Fidelity, the country's largest manger of money market funds, has sold off all its government debt maturing in late October and early November.

Unlike 2011, the government is shut down, throwing hundreds of thousands of government workers out of work and reducing gross domestic product by billions of dollars. On the good side, President Obama so far has refused to negotiate over the shutdown or the debt ceiling. Of course, he is haunted by his unforced error of negotiating in 2011, giving us the sequester that even a "clean" continuing budget resolution won't fix.

What we see is the Republican usurping governance of the country by making the nation ungovernable if their demands are not met. They lost the Presidency in 2012, they lost Senate seats, they got fewer votes in the House of Representatives than the Democrats did, but with brilliant gerrymandering they still have a House majority.

Amazingly, the Republicans no longer even seem to know what they want for their hostage-taking. At first it was clear, they wanted Obamacare repealed/defunded/delayed. Now, it appears they just want budget cuts, preferably to Social Security and Medicare. Inadequate as those programs are, they are still central to middle class economic security. We can't give them up.

I'm back to where I can't turn on the TV. I live in fear the President will cave as he did in 2011. But what will it take to actually end the crisis? I'm guessing a huge stock market drop will be required. And I think that's exactly what will happen. What do you think?

Friday, September 27, 2013

A $1000/month pension equals $200,000 in savings CORRECTED

On the road today, but my wife referred me to this article by Lynn Parramore* (originally published here) on how the 401(k) "revolution" was a big bust for the middle class, something I have also written about. I just wanted to add one quick point to her discussion.

Parramore references the common recommendation that you have at least $1 million in savings to retire. This is usually related to the "rule" that you can take 4% of your savings per year and not exhaust it. That would give you $40,000 per year in income. However, with low interest rates and flat stock market performance (the S&P 500 just topped its 2000 peak this spring), even 4% may be too high as you run a greater risk of outliving your savings.

The flip side of that rule, which I haven't seen mentioned anywhere else, is that a $1000 per month pension equals at least $300,000 in savings, as $300,000 times 4% is $12,000 per year. If 4% is too high, then its value is even greater. If you can only take 3% of your savings per year safely, it would be equal to $400,000 in savings, for example. about $200,000 in savings, as it wold take about that amount to buy a $1,000 per month annuity (see Lyle's comment below).

This shows how important it is to protect pensions where they do exist, primarily at the state and local government level. They are being chipped away at varying rates, mainly but not exclusively in red states. Oregon, for example, looks set to cut state pensions in a special legislative session via reductions in cost of living adjustments similar to the idea of using a less generous inflation measure for Social Security to provide backdoor cuts.

It should be obvious that this is even more true for Social Security, since everyone is eventually eligible for benefits. That is why I have argued that expanding Social Security is the best solution to the coming middle class retirement crisis.

* Disclosure: Lynn Parramore is the editor at AlterNet who commissioned my article there on state and local government subsidies to business.

Cross-posted at Angry Bear.

Monday, September 23, 2013

Nauseating Health Care Idiocy from Forbes

A non-blogging friend points me to this new article at Forbes by Chris Conover purporting to show that the "typical family of 4" will see its health care spending rise by $7450. He quotes the Center for Medicare and Medicaid Services (CMS), saying "in its first ten years, Obamacare will boost health spending by 'roughly $621 billion' [that's the CMS quote]  above the amounts Americans would have spent without this misguided law." How stupid is this? Let us count the ways.

First of all, this is not $7450 per year, but over the entire 10-year (or more likely 9-year; he usually refers to 2014-22) period. So he's hyping shock value that isn't there. As he explains, he divides the $621 billion by total population over the period to give a per capita cost, which he then multiplies by 4 to get the cost to his "typical family of 4." So what we're actually looking at, before we start tearing up his calculation, is ($7450/9)/4 = $207 per capita higher spending per year on average. Recall that in 2011 the United States spent $8174.90 per person on health care (see link on how to navigate to the ultimate source for this data,

Second, Conover doesn't understand present value. He writes, "Of course, all these figures are in nominal dollars. In terms of today’s purchasing power, this annual amount will rise steadily." Of course, it is just the opposite. A dollar in 2022 is worth less than a dollar today. In 2013 dollars, the amount is less than $207 per person per year (how much less depends on what you consider an appropriate discount rate). How does an editor not catch this? I have a screen shot to memorialize the error after it eventually gets fixed.

Third, Think Progress's Igor Volsky is completely right when he quotes Paul van der Water of the Center on Budget and Policy Priorities that none of this will apply to the "typical American family" because that family gets its insurance at work. More money will obviously be spent over time, but it won't be spent at the center of the health insurance distribution, if you want to look at it that way. But Conover can't see this point. Instead, he points the finger at President Obama for promising that the ACA would reduce premiums for the typical family by $2500 per year. Not only do two wrongs not make a right, but...

Point four is that what he says is impossible just isn't: "It’s simply not possible for national health spending to rise by $621 billion and for the “typical” family to expect a $2500 (per year!!!!) premium reduction." I don't know if it will happen, but it certainly isn't impossible. Conover is overlooking the fact that the increase in health spending is being funded in ways that don't come out of individual health care spending. High-income taxpayers ($200,000 single, $250,000 filing jointly) are paying 0.9% points more in Medicare tax and an extra 3.8% on investment income. According to Robert Pear of the New York Times, "The new taxes on wages and investment income are expected to raise $318 billion over 10 years, or about half of all the new revenue collected under the health care law." The medical device tax will raise $29 billion over 10 years, over $100 billion will come from insurance companies, $34 billion from drug companies, and $150 billion from the "Cadillac" tax, according to the Obama administration. (We can debate the wisdom of this tax, but it doesn't fall on the "typical" family.) We're already at $631 billion over 10 years. If we increased these taxes more, yes, we could use the money to fund premium reductions, most plausibly by increasing the income levels eligible for subsidies.

Then, there's the little matter of the newly insured. By 2022, according to the CMS report Conover cites, 30 million more people will have insurance than would be the case without Obamacare. While many of those people will be receiving subsidies, a lot of them will be paying something for their insurance, adding even further to the sources of income that don't come out of what the "typical family" will pay.

Finally, the new 30 million people will be covered very efficiently. $621 billion divided by 9 years is $69 billion per year, divided by 30 million people is $2300 per person per year. While that figure is too low because we won't be insuring all 30 million immediately, remember that 2011 U.S. health spending per capita was $8174.90. Any way you look at it, the newly insured will be costing far less per person than those currently in the insurance system.

There you have it. Forbes' most-read story of the day (with over 26,000 Facebook shares and 3400 tweets as I write this) is simply false. Between all the new taxes and the premiums from the newly insured, you can cover the total increase in health care spending. The typical, already insured family isn't going to see increases due to the rise in overall health care spending. You add 30 million new insured at a far lower cost than what we currently spend per person. And the editors didn't catch a blatant error on present value.

Cross-posted at Angry Bear.

Friday, September 20, 2013

New Jersey Subsidies Get Even Worse

As if New Jersey's subsidies weren't bad enough already, Leigh McIlvaine at Good Jobs First reports that the state has just passed new legislation that expands the state's investment incentives even further. On Thursday (September 18), Governor Chris Christie signed the New Jersey Economic Opportunity Act of 2013, which reduces the number of state subsidy programs but unleashes the two remaining ones to give even more money than ever. Not only that, the new law reduces job quality provisions and guts geographic targeting of subsidies to the poorest areas of the state. The bill easily passed the Democratic-majority state legislature, making this a bipartisan fiasco.

As Governing magazine reported and I covered in my last post, from the beginning of 2011 through early 2013, New Jersey gave an astonishing $1.9 billion in investment subsidies, "more than the previous 15 years combined," as the magazine noted. The new law removes annual spending caps for Grow New Jersey and the Economic Redevelopment and Growth (ERG) grant while reducing the minimum job creation and investment requirements, thus paving the way for even more applicants to qualify. There is, however, a maximum subsidy per firm of $350 million, a level not reached -- yet.

New Jersey Policy Perspectives (see link above; h/t Leigh McIlvaine) details the decline in job quality standards. For the first time, retail facilities are eligible "if they are 150,000 square feet or larger, at least half-filled with a full-service supermarket or grocery store and located in one of New Jersey’s four poorest cities," which sounds like a description of a Wal-Mart Super Center. "Tourism destination projects" (read: Bass Pro Shop or Cabela's, most likely) are also eligible in Atlantic City. Worse still, tourism projects are not subject to the state's normally high wage and benefit standards. Additionally, Christie vetoed long-standing prevailing wage requirements for workers at recipient firms.

Finally, as Newark's Star-Ledger points out, virtually every location in New Jersey is now eligible to use state subsidies.  This has the effect of diluting the incentive effect these programs could provide to the poorest areas of the state. This is yet another example of a phenomenon I have written about extensively: It is extremely hard to maintain the targeting of subsidy programs to the poorest areas of a jurisdiction as there are always political pressures from richer areas to be included as well. This is true even in the European Union (though far less so than in the United States), where EU state aid law and Commission negotiation over Member States' regional aid maps provide strong support for targeting.

To sum up, it looks like New Jersey will spend over $1 billion a year on incentives -- just at the state level -- while reducing job quality standards, subsidizing low-end retail jobs, and greatly weakening the geographic targeting of its subsidies to the poorest parts of the state. This is a prescription for failure at the state level and an inducement to other states to increase their subsidies as well, exactly the opposite of what needs to be happening.

Sunday, September 8, 2013

New Jersey Subsidies More Out of Control than Ever Under Christie

I have written before how state and local subsidies are more out of control than ever, and more recently how the number and size of megadeals has increased substantially since the Great Recession.

Now a new study from Governing magazine (h/t to Al at LinkedIn group Economic Development 2.0) exhaustively analyzes New Jersey's five largest incentive programs and their growth since 2011. Governor Chris Christie has made aggressive use of incentives a centerpiece of his economic development strategy, but the magazine's comparison of New Jersey's job performance with than of surrounding states shows that it simply isn't working. Not only that, according to the report, "at least 20 companies receiving incentives filed layoff notices" before fulfilling their job requirements.

But it is the sheer dollar value of incentives that makes the head spin. According to the magazine's estimates, the state awarded $904 million in 2011 and $872 million in 2012. Adding in this year's awards brings the total to $1,950 million which is, Governing notes, "more than the previous 15 years combined." (Note: 15 years is the entire life of these programs.)

Moreover, some of the biggest incentive awards have been some of the most outrageous. The Urban Transit Hub Tax Credit awarded Panasonic $102.4 million to move nine miles, within the state, from Secaucus to Newark. As I have reported before, giving subsidies to move existing facilities is the most obviously wrong form of incentive use, because no new jobs are being created, but tax revenue is cut. Interstate job piracy is bad, but for the state to fund intra-state piracy is lunacy.

Meanwhile, New Jersey's July unemployment rate came in at 8.6%, #43 of the 50 states.

Kudos to Governing and reporter Mike Maciag for a great piece of reporting, providing a well-documented case study of what out-of-control subsidies look like as the country tries to recover from its ongoing jobs depression.

Cross-posted at Angry Bear.

Thursday, August 29, 2013

We're #194!

I recently learned that a company called Onalytica calculates the influence of economics blogs, using the model of impact factors for academic journals. Basically, it is a question of how often you are cited and the importance of who cites you.

I was tickled to find out that Middle Class Political Economist is now ranked in its top 200 economics blogs, a new entry at #194. At the relatively tender age of 25 months, this was a nice pat on the back.

Of course, this is a testament to both my readers and those who cite me, and I'd like to thank you all. Also, congratulations to my friends at #34 Angry Bear, where I often re-post my articles.

Wednesday, August 28, 2013

Republicans' "Market-Oriented" Health Care Reforms Won't Work, Part 2

Last time we examined a common conservative "solution" to the country's health care problems, allowing insurance companies to sell policies across state lines. What we found, though, is that this would lead to a race to the bottom in state regulation of insurance products, and that there is no reason to think that further marketization of healthcare in the U.S. will lower costs.

Today, we turn our attention to tort reform. It figured prominently in Karl Rove's Wall Street Journal article last week (paywalled). This has been a conservative theme for so long that most states have already done it. In fact, since 1986, 39 states have limited noneconmic damages, punitive damages, or both, making it hard to see how further tort reform can yield much in terms of gains that haven't already been achieved. The current conservative battle cry is for federal tort reform, in other words forcing the states to reduce protection against medical malpractice whether they want to or not.

And make no mistake, malpractice happens a lot. According to a New York Times article by Dr. Sanjay Gupta, about 200,000 people die each year because of what he calls "medical mistakes," up from an estimated 96,000 in 1999. This makes it the third-leading cause of death in the United States, after only heart disease and cancer. Yet Republican proposals would reduce the legal rights of their survivors, and of the many more patients who are only sickened or injured, but not killed, by malpractice.

The conjunction of plenty of malpractice with plenty of tort reform should make us skeptical that the cost of malpractice laws can be reduced much more. According to Aaron Carroll, the biggest proportion of the estimated $55.6 billion (a figure Rove accepts, by the way) that malpractice adds to the health care system comes from defensive medicine, for $47 billion of the total. We should start out by noting that this is only about 2.35% of the country's $2 trillion health care system. While it isn't nothing, we are talking about approximately $150 per capita, compared with U.S. spending of over $3000 per capita more than the OECD average for doctors and hospitals alone. But if tort reform has already reduced a lot of malpractice exposure, how much more of that $47 billion can doctors cut with even more tort reform? Not much, I'd argue.

No analysis of tort reform can go without mentioning Texas' 2003 Big Bang of tort reform, which conservatives widely tout as a stunning success. A July 2013 Heritage Foundation report by Joseph Nixon and the Texas Public Policy Foundation claims that not only did tort reform result in many doctors moving to Texas, but that tort reform "is the foundation of the Texas economic miracle." (I've expressed my skepticism of a Texas miracle before here.) It claims that there has been substantially increased access because of all the new physicians.

However, there are a couple of teenie-weenie problems with this analysis. First of all, as Politifact pointed out when Governor Rick Perry was running for President, the number of doctors per capita rose much more rapidly in the 1990s than it has since tort reform in 2003. From 2003 to 2011, growth in the number of doctors barely outpaced population growth, 24% vs. 20% over those eight years. Despite Nixon's claim that doctor growth was double population growth since tort reform, Politifact shows that it was only during the 1990s that this held true. Perry's "false"-rated claim that the state had gained 21,000 doctors since tort reform was based on ignoring the distinction between doctors licensed in the state and those who actually practiced in the state. Nixon's report appears to do this as well, because he says, "By the end of 2013,...Texas will have close to 60,000 doctors to care for its citizens." However, the Texas Medical Board source that he cites shows in January 2013 only 52,707 licensed doctors were practicing in Texas. The May update, which I presume was not available when he wrote, shows only 528 more. Texas will not be anywhere near 60,000 by the end of the year.

Second, while the state has improved its ranking since 2003, in 2010 the state had only 216 doctors per 100,000 population, far below the national average of 273 This makes it #40 of the 50 states. Massachusetts, a state conservatives love to hate, and which has not had either kind of tort reform, had 474 doctors per 100,000 population, first in the nation.

Third, contra Nixon, having more doctors is not the same thing as having access to health care. There is the little matter of insurance. Texas continues to have the highest rate of uninsured people in the country, 24% of its total population, which is six times as high as Massachusetts, with 4%.

Finally, tort reform has not done anything for the cost of medicine. As Aaron Carroll (link above) shows, since 2003 Medicare spending per patient  has risen more rapidly in Texas than for the country as a whole. He sends us to an analysis by Public Citizen, which produced the table he uses:

Source: Public Citizen, via Aaron Carroll

Summing up, tort reform has not produced more doctors (in Texas, population growth did), does not increase access because it does not give people insurance, and does not reduce costs. Even more tort reform isn't going to give us any savings, either, though it will reduce consumer protection for the hundreds of thousands of victims of malpractice annually.

Don't believe the hype.

Cross-posted at Angry Bear.

Friday, August 23, 2013

Republicans' "Market-Oriented" Health Care Reforms Won't Work, Part 1

This has been a week of Republicans saying they have actual ideas for replacing Obamacare, rather than just repealing it. The centerpiece has been an article by Karl Rove in the Wall Street Journal (paywalled) detailing all the swell ideas Republicans have. In addition, a non-blogger friend points me to an earlier analysis based ultimately on a group called Docs 4 Patient Care that sounds essentially identical to Rove's article.

Before I get back to Rove, let's talk first about the  earlier analysis, which highlights two supposed alternatives: selling alternatives across state lines, thereby increasing competition in the health insurance market; and tort reform. These sound like great ideas in theory, but in practice both are deeply flawed. Today I'll take on selling insurance across state lines, while my next post will go on to tort reform and beyond.

Selling insurance across state lines: Aaron Carroll points out that this is a funny point for people so frequently protective of "states' rights" to be making. That's because the essence of this proposal is to end states' current right to regulate their insurance market. He predicts, on the basis of what happened in the credit card industry, pointing to this piece at Salon, that insurance companies would only sell policies from states with the weakest consumer protections. This race-to-the-bottom dynamic is one we see in in my work on competition for investment, and I'm quite sure Carroll is right. Moreover, he points out that some insurance companies do sell policies in many states; they just have to make sure they comply with each state's regulations.

But there's another reason to doubt that increasing competition in the insurance industry will reduce health care spending. We have data! We live in the industrialized world's biggest experiment in market-oriented health care and, rather than being cheaper, it's the most expensive in the world by far. Here are the figures for per-capita health care expenditures from the Organization for Economic Cooperation and Development's great online database, OECD StatExtracts (

Top 5 Countries in Per-Capita Health Care Spending, 2011

United States     8174.9
Switzerland       5642.6
Norway             5458.0
Netherlands       4737.0
Germany           4346.2

Data are in U.S. dollars at purchasing power parity
Source: OECD StatExtracts, then select Data by Theme, then Health, then Health Expenditure and Financing, then Main Indicators, then Health Expenditure Since 2000, then in the table change the Unit to "PPPPER: /capita, US$ purchasing power parity."

To top it all off, in a post yesterday, Aaron Carroll (h/t Paul Krugman) reports that Singapore has just reformed its health care system to look a whole lot like...Obamacare, individual mandate, no discrimination for pre-existing conditions, subsidies, and all.

The bottom line is that competition does not work in the health care area; simplistic economic models are not enough to understand the unique economics of health. America's long experiment with a market model has been a stunning failure costing over $2500 per person per year more than the next most expensive country.

Next up: Tort reform.

Cross-posted at Angry Bear.

Thursday, August 15, 2013

Annals of Austerity FAIL, Eurozone Redux

July 31 saw the latest release of European Union unemployment numbers, and Monday's gross domestic product figures brought no joy, especially for Greece. As Think Progress reports, Greek unemployment hit a new record of 27.6 % in May, while Spain's June unemployment figure was 26.3%, according to Eurostat. As the world's biggest experiment in austerity, the European Union continues to prove a failure. Below is the Eurostat figure for unemployment in member states for June, including new (as of July 1) member Croatia, designated HR (click for larger image).

Source: Eurostat

As reported at first at Reuters, Greece's gross domestic product has fallen by 23% since January 2008. Anyway you slice it, that's a depression, not a recession. Despite austerity, the Greek economy has gotten sicker and sicker.

But, wait! you say. What about Ireland? Its unemployment rate has dropped an estimated 1.5 percentage points from its January 2012 peak of 15.1% to just 13.6% in June 2013. Isn't austerity finally paying off there?

If only that were so. What actually is happening is that Ireland has returned to its historical solution of substantial out-migration to reduce the number of unemployed workers that show up in the official data. And yes, the numbers are way more than enough to wipe out the apparent 1.5 point drop.

According to the Central Statistics Office Ireland (Table 5), emigration has surged from 72,000 in 2009, the last year of net in-migration, to 87,100 in 2012, when net out-migration was 34,400. If you look at net emigration of those 15-64, the closest we can get with the data to prime working age, the situation is even somewhat worse. Over 2010-2012, net out-migration in that age group has totaled 90,700.

I calculate the potential effect on the unemployment rate as follows. Ireland only compiles official unemployment data quarterly, and makes monthly estimates in between. So the last official unemployment rate was 13.7% for the first quarter of this year. According to the CSO, there were 292,000 unemployed then. Dividing by 0.137, we get a labor force of 2,131,387, subject to rounding error. Now add 90,700 to both numerator and denominator, and the maximum potential unemployment rate, if all of those people were in the labor force and unemployed, is 382,700/2,222,087 or 17.2%.

Now, certainly some of the 15-24 year olds would not be in the labor force, though many will. Even if we restrict ourselves to the 25-44 age group, net out-migration for 2010-2012 comes to 36,000, which would bring the unemployment rate back to 15.1%, equal to the worst month since the recession began.

We can see, then, that austerity is sinking all boats. Greece has passed Spain in unemployment and is producing barely 3/4 what it did in 2008. Ireland's reduction in unemployment is a mirage based on emigration. The same is true in Latvia and Lithuania, by the way, which the Irish Times reports have lost 7.6% and 10.1% of their population between 2007 and 2012. As the paper notes, "If Spain and Italy had lost the same proportion, it would have been 11 million."

Yet the drumbeat for austerity continues. The sequester goes on. And millions suffer needlessly.

Cross-posted at Angry Bear as "Austerity Sinks All Boats."