Archive for January, 2010
How ObamaCare Would Keep the Poor Poor
Suppose you’re a family of four at or near the federal poverty level. Under current law, if you earn an additional dollar, you get to keep around 60-70 cents.
Under the House and Senate health care bills, however, you would get to keep maybe 38 cents. Or 26 cents. Or maybe just 18 cents.
The following graph (from my recent study, “Obama’s Prescription for Low-Wage Workers: High Implicit Taxes, Higher Premiums”) shows that under the House and Senate bills, the combination of (1) a mandate tax and (2) subsidies that disappear as income rises would impose implicit tax rates on poor families that reach as high as 82 percent over broad ranges of income.
This graph actually smooths out some rather bumpy implicit tax rates that spike as high as 174 percent.
In the 1980s and 1990s, the public saw that too-generous government subsidies can actually trap people in a cycle of poverty and dependence. President Obama and his congressional allies seem not to have learned that lesson.
Surveillance, Security, and the Google Breach
Yesterday’s bombshell announcement that Google is prepared to pull out of China rather than continuing to cooperate with government Web censorship was precipitated by a series of attacks on Google servers seeking information about the accounts of Chinese dissidents. One thing that leaped out at me from the announcement was the claim that the breach “was limited to account information (such as the date the account was created) and subject line, rather than the content of emails themselves.” That piqued my interest because it’s precisely the kind of information that law enforcement is able to obtain via court order, and I was hard-pressed to think of other reasons they’d have segregated access to user account and header information. And as Macworld reports, that’s precisely where the attackers got in:
That’s because they apparently were able to access a system used to help Google comply with search warrants by providing data on Google users, said a source familiar with the situation, who spoke on condition of anonymity because he was not authorized to speak with the press.
This is hardly the first time telecom surveillance architecture designed for law enforcement use has been exploited by hackers. In 2005, it was discovered that Greece’s largest cellular network had been compromised by an outside adversary. Software intended to facilitate legal wiretaps had been switched on and hijacked by an unknown attacker, who used it to spy on the conversations of over 100 Greek VIPs, including the prime minister.
As an eminent group of security experts argued in 2008, the trend toward building surveillance capability into telecommunications architecture amounts to a breach-by-design, and a serious security risk. As the volume of requests from law enforcement at all levels grows, the compliance burdens on telcoms grow also—making it increasingly tempting to create automated portals to permit access to user information with minimal human intervention.
The problem of volume is front and center in a leaked recording released last month, in which Sprint’s head of legal compliance revealed that their automated system had processed 8 million requests for GPS location data in the span of a year, noting that it would have been impossible to manually serve that level of law enforcement traffic. Less remarked on, though, was Taylor’s speculation that someone who downloaded a phony warrant form and submitted it to a random telecom would have a good chance of getting a response—and one assumes he’d know if anyone would.
The irony here is that, while we’re accustomed to talking about the tension between privacy and security—to the point where it sometimes seems like people think greater invasion of privacy ipso facto yields greater security—one of the most serious and least discussed problems with built-in surveillance is the security risk it creates.
Dear Poor People: Please Remain Poor. Sincerely, ObamaCare
In a new study titled, “Obama’s Prescription for Low-Wage Workers: High Implicit Taxes, Higher Premiums,” I show that the House and Senate health care bills would impose implicit tax rates on low-wage workers that exceed 100 percent. Here’s the executive summary:
House and Senate Democrats have produced health care legislation whose mandates, subsidies, tax penalties, and health insurance regulations would penalize work and reward Americans who refuse to purchase health insurance. As a result, the legislation could trap many Americans in low-wage jobs and cause even higher health-insurance premiums, government spending, and taxes than are envisioned in the legislation.
Those mandates and subsidies would impose effective marginal tax rates on low-wage workers that would average between 53 and 74 percent— and even reach as high as 82 percent—over broad ranges of earned income. By comparison, the wealthiest Americans would face tax rates no higher than 47.9 percent.
Over smaller ranges of earned income, the legislation would impose effective marginal tax rates that exceed 100 percent. Families of four would see effective marginal tax rates as high as 174 percent under the Senate bill and 159 percent under the House bill. Under the Senate bill, adults starting at $14,560 who earn an additional $560 would see their total income fall by $200 due to higher taxes and reduced subsidies. Under the House bill, families of four starting at $43,670 who earn an additional $1,100 would see their total income fall by $870.
In addition, middle-income workers could save as much as $8,000 per year by dropping coverage and purchasing health insurance only when sick. Indeed, the legislation effectively removes any penalty on such behavior by forcing insurers to sell health insurance to the uninsured at standard premiums when they fall ill. The legislation would thus encourage “adverse selection”—an unstable situation that would drive insurance premiums, government spending, and taxes even higher.
See also my Kaiser Health News oped, “Individual Mandate Would Impose High Implicit Taxes on Low-Wage Workers.”
And be sure to pre-register for our January 28 policy forum, “ObamaCare’s High Implicit Tax Rates for Low-Wage Workers,” where the Urban Institute’s Gene Steuerle and I will discuss these obnoxious implicit tax rates.
(Cross-posted at Politico‘s Health Care Arena.)
Obama Bank Tax Is Misguided
Perhaps I am a little confused, but didn’t the Obama Administration tell the American public only months ago that TARP was turning a profit? But now the same administration is proposing to assess a fee on banks to cover losses from the TARP. Maybe President Obama is coming around to the realization that the TARP has indeed been a loser for the taxpayer. He appears, however, to be missing the critical reason why: the bailouts of the auto companies and AIG, all non-banks. This is to say nothing of the bailout of Fannie Mae and Freddie Mac, whose losses will far exceed those from the TARP. Where is the plan to re-coup losses from Fannie and Freddie? Or a plan to re-coup our rescue of the autos?
If the effort is really about deficit reduction, then it completely misses the mark. Any serious deficit reduction plan has to start with Medicare and Social Security. Assessing bank fees is nothing more than a rounding error in terms of the deficit. Let’s put aside the politics and get serious about both fixing our financial system and bringing our fiscal house into order. The problem driving our deficits is not a lack of revenues, aside from effects of the recession, revenues have remained stable as a percent of GDP, the problem is runaway spending.
The bank tax would also miss what one has to guess is Obama’s target, the bank CEOs. Econ 101 tells us (maybe the President can ask Larry Summers for some tutoring) corporations do not bear the incidence of taxes, their consumers and shareholders do. So the real outcome of this proposed tax would be to increase consumer banking costs while reducing the value of bank equity, all at a time when banks are already under-capitalized.
Another Reason Imports Get a Bad Rap
Why blame only media and politicians for the public’s confusion about imports and trade deficits? Surely economists deserve some scorn. Some of the misunderstanding can be traced to the famous National Income Identity, which expresses gross domestic product, as: Y = C + G + I + (X-M). That is, national output (Y) equals personal consumption (C) plus government spending (G) plus investment (I) plus exports (X) minus imports (M).
The expression clearly lends itself to the wrong interpretation. The minus sign preceding imports suggests a negative relationship with output. It is the reason for the oft-repeated fallacy that imports are a drag on growth. Here’s why that conclusion is wrong.
The expression is an accounting identity, which “accounts” for all of the possible channels for disposing of our national output. That output is either consumed in the private sector, consumed by government, invested by business, or exported. The identity requires subtraction of aggregate imports because consumption, government spending, business investment, and exports all contain, in various amounts, import value. Americans consume domestic and imported products and services, the aggregate of which shows up in Consumption. Likewise, Government purchases include domestic and imported products and services; businesses Invest in domestic and imported machines and inventory; and, eXports often contain some imported intermediate components. Thus, the identity would overstate national output if it didn’t make that adjustment for iMports. After all, imports are not made on U.S. soil with U.S. factors of production, so they shouldn’t be included in an expression of our national output.
Federal Job Creation
The board game Monopoly first took off during the Great Depression. A different game has become popular during today’s Great Recession. In this game, politicians race against high unemployment to create jobs in order to save their own. The players (politicians) have unlimited tax and borrowing authority, and can call upon friendly economists to help them maneuver. The players even get to keep score, although the media can penalize shoddy scorekeeping. Ultimately, voters will decide which players win and lose in the fall elections.
Okay, I’m being facetious. But as politicians continue to throw trillions of dollars at the economy in a vain effort to create jobs, and the media continues to go along with it by obsessing over meaningless job counts, the entire spectacle has become surreal. If government job creation is a game, the losers have been the taxpayers underwriting it, as well as the employers (and their employees) who are closing shop, laying off workers, or not hiring because of uncertainty over what big government schemes will be next.
Two news articles point to this “regime uncertainty” being generated by Washington.
So Much for That Argument for War!
Remember when President George W. Bush was pushing war for democracy? Excited neoconservatives promised that a new wave of democratization was about to roll through the Middle East, sweeping out authoritarian and anti-American regimes.
Oops.
The most significant finding of the latest report is the decline in freedom in the Middle East, [Arch Puddington] said.
Three countries — Jordan, Yemen and Bahrain — were reclassified from “partly free” to “not free,” and freedoms declined in Morocco and Iran.
“Freedom House saw the region as a whole as headed slightly in the right direction after 9/11,” he said. “But that has changed.”
Not only are countries moving backwards, but America’s friends and allies are leading the parade: Jordan, Morocco, Bahrain.
So much for that justification for invading and bombing other lands.
Actually, Justice Breyer, the Constitution Enumerates Specific Powers, not Limitations on Otherwise Plenary Federal Power
Today I went to the Court to watch the argument in United States v. Comstock, which I blogged about previously and in which Cato filed an amicus brief. As I also blogged previously, Cato’s arguments so concerned the government that the solicitor general spent four pages of her reply brief going after them.
At issue is a 2006 federal law that provides for the civil commitment of any federal prisoner after the conclusion of his sentence upon the appropriate official’s certification that the soon-to-be-released prisoner is “sexually dangerous.” The problem is that, while states have what’s called a “police power” to handle this sort of thing — to appropriately deal with with threats to society from the dangerously insane and so forth — the federal government’s powers are limited to those enumerated in the Constitution. And I’m sorry, there’s no power to civilly commit people who have committed no further crime beyond those for which they’ve already been duly punished.
“Risk of Accidents Ameliorated!” Doesn’t Sell Papers
What a headline on the Washington Examiner today! It’s a good illustration of the propensity of media to overplay terrorism.
“Terror threat to city water,” the headline blares in large type. “Chlorine changed to protect D.C., Va. supply.”
The actual story is about the Army Corps of Engineers’ switch from chlorine gas to a liquid form of chlorine called sodium hypochlorite. Gaseous chlorine is relatively more dangerous and difficult to contain if it’s released, so the change is a prudent safety step.
It has as much to do with protecting against accidental release as any terror threat. And an accidental release is not a threat to the water supply; it’s a threat to people near the facilities or transportation corridors where cholrine gas could be released.
The idea of terrorism may have gotten the Corps moving forward, but nothing in the story says there was any specific threat by anyone to attack the D.C. water treatment infrastructure.
This is a story about risks being ameliorated, and it’s pretty boring—except for the headline!!
Supreme Court Lets Eminent Domain Abuse Continue
Yesterday, the Supreme Court decided not take up an important takings case, the infelicitously titled 480.00 Acres of Land v. United States. As I blogged previously, Cato filed an amicus brief in the case in the hopes that the owner of the “480.00 Acres of Land,” Gil Fornatora, would ultimately receive the “just compensation” to which he is constitutionally entitled. The Court also missed the chance to correct the pattern of due process abuse that is apparently rampant in Florida. The case involved the federal government maneuvering to unjustly drive down property values before taking land for (legitimate) public use — in this case expanding the Everglades — thus greatly diminishing the compensation it was obligated to pay the owners. Fox News recently had a report about the case, in which I briefly appeared.
Interestingly — and sadly – since the Fox News report, my voicemail and email inbox has been receiving story after story of individuals who have experienced injustices similar to that of Mr. Fornatora. While it is unfortunate that this case has come to an end, the number of calls and emails leads me to believe that more cases like this will be making their way through the federal judiciary and that, eventually, this abuse will be halted.
To that end, while Cato does not involve itself directly in litigation, on the subject of takings and eminent domain abuse I can certainly recommend our friends at the Institute for Justice and Pacific Legal Foundation. Specifically on the type of “condemnation blight” at the heart of the Fornatora case, feel free to contact PLF’s Atlantic (Florida) office at (772)781-7787 or write to Pacific Legal Foundation, 1002 SE Monterey Commons Blvd., Suite 102, Stuart, FL 34996. Steven Gieseler was the attorney who presented the Fornatora case to the Supreme Court, and who got me involved.
In other eminent domain news, George Will had an excellent column on January 3 condemning the pernicious Atlantic Yards land grab that you can read about here.
Good News in the Rising Trade Deficit
The U.S. trade deficit jumped to its highest level in 10 months, according to data released by the U.S. Commerce Department this morning. What to make of this?
Every month the Commerce Department publishes data on the value of U.S. exports and imports. And every month, the media do an absolute hatchet job explaining the meaning of those data. As I’ve been arguing for a long time, careless reporting and inaccurate media analyses of imports, exports, the trade balance (exports minus imports), the “Trade Account” and the slightly broader measure of international trade activity called the “Current Account” help explain the growing aversion of Americans to trade and trade agreements during the past decade.
The media’s tendency to describe a rising trade deficit as bad news or imports as a drag on economic growth has reinforced misconceptions that politicians perpetuate all the time: that exports are good; imports are bad; the trade account is the “scoreboard,” and; the large U.S. trade deficit is proof that the United States is losing at trade.
But the fact is that imports are very much pro-cyclical. They increase as the economy grows and decrease when it contracts. One of the more obvious reasons for this is that as personal consumption increases (decreases), consumer demand for imports increases (decreases). But another critical, but less discussed, reason is that U.S. producers rely heavily on imported raw materials, components, and capital equipment. As businesses starts to ramp up output, demand for imported intermediate goods rises. Purchases of intermediate goods have accounted for over half of all U.S. import value in recent years, which would suggest that the rising trade deficit has more to do with business being poised for expansion than with consumers itching to go to the mall.
Yet, media and politicians often characterize imports as a sign of profligacy. They argue that balanced trade or a trade surplus should be an objective of economic policy, and that policies designed to slow import growth can accomplish more balanced trade. But imports and exports are also very much positively correlated. They rise and fall together. Imports are contained in domestic output, and a good chunk of domestic output is exported. Buy more from abroad, and foreigners can afford to buy more from us. Sell more abroad and we can afford to buy more from foreigners. Stymie imports and you get stymied exports.
My colleagues and I have joked in recent years that what we need is a good recession to cause Americans to reexamine their feelings about imports. Maybe that would mark a turning point in public opinion about trade. Well, we may have been onto something. In recent months, as we’ve been emerging from the Great Recession, the media’s reporting of the trade figures has been more circumspect and more balanced.
The opening sentence in Martin Crutsinger’s Associated Press story today is: “The U.S. trade deficit jumped to the highest level in 10 months as an improving U.S. economy pushed up demand for imports (my emphasis).”
There’s nothing like a good reminder of the pro-cyclicality of imports to help Americans reconsider their antipathy toward trade. However, before concluding that we’ve fully turned the corner, there’s this passage from the same report:
“Through the first 11 months of 2009, the overall U.S. trade deficit in 2009 was running at an annual rate of $371.59 billion, down by nearly half from last year’s imbalance of $695.94 billion. That improvement (my emphasis) reflected a deep recession in the United States which cut sharply into consumer demand for foreign products.”
If an “improving” U.S. economy is associated with a trade deficit that “jumped” in 2009 (as described in Crutsinger’s first passage), how can an “improvement” in the trade deficit “reflect a deep recession in the United States,” as reported in his second?
It’s time reporters adopted neutral terminology when describing the trade account. The trade deficit “increased” or the trade deficit “decreased” are not only more objective descriptions, but more accurate ones as well.
Obama’s Health Tax Conundrum
As President Obama is finding out, spending a trillion dollars on health care reform is easy; paying for it is a bit harder.
Both the House and Senate versions contain huge tax increases. But they take completely different approaches toward which taxes are hiked and who would pay them. And, as President Obama discovered in yesterday’s contentious meeting with labor bosses, those differences will not be easy to resolve.
The Senate wants to slap a 40 percent excise tax on so-called “Cadillac” insurance plans, that is plans with an actuarial value of more than $8,500 for an individual and $23,000 for a family. The tax technically falls on the insurance company that offers the plan, but there’s widespread recognition that insurers will merely pass that tax on to their customers in the form of still-higher premiums. The Congressional Budget Office estimates that initially about 19 percent of insurance plans would be subject to the tax, and union surveys suggest that it could hit as many as 25 percent of union workers. Moreover, as inflation drives costs higher, more and more plans will be subject to the tax. That is because the threshold for the tax is indexed to general inflation not medical inflation which runs higher.
As today’s Washington Post editorial points out, economists and deficit hawks see this measure as one of the few cost-control provisions left in the bill. Its goal is not just to raise some $150 billion in revenue over 10 years, but to discourage the type of “gold plated” insurance plans that encourage over utilization and drive up costs. That is why the Obama administration has endorsed this approach.
However, as labor leaders made clear in yesterday’s meeting with the president, this middle-class tax hike is unacceptable. AFL-CIO president Richard Trumka has even threatened to retaliate at the polls against Democrats who vote for it. In addition, 124 House Democrats have signed a letter opposing the “Cadillac tax.” With just a three vote margin, House Speaker Nancy Pelosi cannot afford to have any defections from tax opponents.
The House, on the other hand, has gone with a “soak the rich” strategy, calling for a surtax on incomes of $500,000 or more a year. But Democrats already plan to allow the Bush tax cuts to expire next year, raising income taxes for millions of Americans. An income tax surtax on top of that would mean marginal tax rates of more than 50 percent in many states with devastating consequences for economic growth. Moderate Democratic Senators like Ben Nelson (Neb.) and even liberals from states with high cost of living like Chuck Schumer (NY) are unlikely to go along with this tax. And, in the Senate, Democrats can’t afford even a single “no” vote.
The conventional wisdom in Washington is that a health care bill is inevitable. But if the growing fight over taxes is any indication, inevitability is overrated.
Cato on Facebook
Cato on Twitter
Cato on Google+
Cato on YouTube
