Friday, November 18, 2011

The False Promise of Tax Cuts

Let's look at the idea that tax cuts will help the economy recover. Let's go to Small Town USA. Small Town, like the rest of the US, has been suffering from the economic slump. Because they are in California, they get most of their income from property taxes and sales taxes.

Property values took a dive, so property tax revenues are down. Sales at the ten small local stores and one big-box store are down, so sales tax revenues are down, too. Small Town is looking at about a 10% budget deficit, so they decide to do a 10% across-the-board cut in spending.

Small Town lays off one of ten teachers, one of ten police officers, one of ten firefighters, one of ten maintenance workers, one of ten library staff and one of ten office staff. Because of the slump, one of the ten small stores goes out of business, putting three employees out of work. Business at the big-box store and the local factory is slow, too, so they each lay off ten people. So now you have six public employees and 23 private employees out of work.

Following the idea that tax cuts are good for the economy, the City Council of Small Town decides to enact an additional 10% tax cut, divided between property and sales taxes. Accordingly, Small Town lays off another six employees, so there are 12 public and 23 private employees out of work. But wait, shouldn't the tax cut result in more jobs?

Let's look. The small store that closed gets about a $1000 annual property tax break, but no benefit from the reduced sales taxes. Is $1000 and lower sales taxes likely to allow them to open up again? Not likely. The other nine stores get the $1000 annual property tax saving, and about $200 per month in lower sales taxes (assuming that the stores, not the customers, get the tax savings). Are any of those stores likely to hire additional help? Not just from the tax savings - it is not enough. Besides, business is still slow. It might delay them going out of business for a little bit, but that is about all.

The big store gets about a $50,000 annual property tax break, and a $10,000 monthly sales tax (again, assuming the store gets to keep that). That is enough to hire back a few employees, but business is still slow, and they don't need more employees. Besides, the money question is decided in Large Headquarters City, not Small Town. The big store headquarters happily keeps the proceeds of the tax break. When pressed by the City Council why they are not hiring, the big store agrees to hire back two laid off employees.

The local factory gets about a $50,000 annual property tax break, but no significant benefit from the sales tax break, as the bulk of their purchases and sales are made at wholesale. That would be enough to hire back one employee, but business is still bad, and they are worried that they may have to lay off even more employees, so they do not hire anyone.

But there are still 33 more people out of work than before (12 public plus 23 private minus 2 rehired private), and those 33 people (and their families) are not spending money. Since Small Town is not big, having those 33 people and their families not spending more than the minimum to survive makes a difference. Sales at the nine remaining small stores and the big-box store go down, further reducing sales tax revenue. One more small store goes out of business, laying off two employees. Big box store lays off the two rehired employees and three more. Now there are 40 people out of work.

Notice which direction things are going? Tax cuts are not a way out of recession

(For those interested, here are my assumptions: 1) the stores are open 20 days per month, and the pre-cut sales tax rate is 10%. 2) the small stores pay $10,000 per year in property tax before the tax cut, and they do about $1000 a day of business. 3) the big store pays $500,000 per year in property tax, and does about $50,000 per day of business. 4) the factory pays $500,000 per year in property tax.)

Sunday, November 6, 2011

Getting Away With Murder (and More)

When I was a kid, my parents would watch a TV show called Murder, She Wrote, starring Angela Lansbury as a mystery writer. She would just happen to be somewhere when a murder occurred, and would help the (usually clueless) local police solve the crime. I figured if she came to my town, I would either leave or kick her out, because someone was going to get killed. Every week, wherever she was, someone would get murdered, and she would be close enough to get involved.

In the real world, this would not happen. If every week you were near to a murder, the police would be hauling you in for some serious questioning. You would be in tabloid headlines ("Murder Magnet!") and people would avoid you like the plague. Unless, of course, you are near the top of the social elite, like Larry Summers.

If you don't know Larry Summers, as a high official in the Clinton administration, he was part of a unified effort (also including Alan Greenspan and Robert Rubin) to quash Brooksley Born's efforts to regulate derivatives markets. (For a short summary, check out: http://articles.businessinsider.com/2009-10-21/wall_street/30087500_1_brooksley-derivatives-market-stock-market.)

He also was instrumental in the repeal of the Glass-Steagall Act, enacted in the wake of the last great stock market crash, and designed to keep banks from getting too big, too powerful, and too speculative. (This is an interesting account: http://www.nytimes.com/1999/11/05/business/congress-passes-wide-ranging-bill-easing-bank-laws.html.)

By most accounts, these were two major factors that allowed for and exacerbated the 2008 crash and our current recession.

Larry Summers was also a supporter of Enron, willing to lean on California on Enron's behalf. (http://www.thedailybeast.com/articles/2008/11/12/larry-summers-and-enron.html.)

After Clinton left office, Summers became president of Harvard. His tenure there was marred by accusations of racism, sexism, and conflicts of interest, a faculty no-confidence vote, and huge investment losses. (http://en.wikipedia.org/wiki/Lawrence_Summers#President_of_Harvard.)

So what happens to Summers next? Does he slink off into obscurity somewhere? No, he is chosen to be Director of Obama's National Economic Council.

And this is not unique to Obama - there is also Gen. William Boykin, who played significant roles in the failed Iranian hostage rescue attempt, the Waco tear-gas-attack-turned-firebombing, and the "Black Hawk Down" fiasco in Mogadishu, only to be made Deputy Undersecretary of Defense under Bush and get his fingers into the Abu Ghraib torture scandal.

Summers, Boykin, and others at the top levels of American society have been relieved of the burden of having to do a good job. No matter how badly they perform, they continue to be rewarded, and even given higher positions.

The same is true in American business, with top executives being rewarded with "golden parachutes" of millions of dollars when they have failed dismally. Alan Fishman got close to $20 million for running the failing Washington Mutual for 17 days. Leo Apotheker got over $7 million in severance, plus a $2.4 million "bonus," after unsuccessfully heading HP for all of 11 months. Peter Darbee got a $35 million severance from Pacific Gas & Electric despite an expensive failed ballot initiative and a fatal gas pipeline explosion and fire. There are numerous other examples of executives getting obscene payouts for utter failure.

It must be great to be at this Angela Lansbury level - no matter how many dead bodies you leave in your wake, they still want you back, and will even promote you. So how do you get up to this level, where you can get paid huge amounts and get offered ever-higher positions despite spectacular and repeated failure?

The classic American answer is that you do it through hard work and determination. We love those rags-to-riches stories, like Steve Jobs and Oprah Winfrey. And yeah, hard work and determination help. But the best way is to know someone already at the top, who can pull you up.

Let's look at the new Chief Operating Officer of Facebook, Sheryl Sandberg. She is likely a smart and hard-working person. But she got to her exalted position in large part because one of her professors at Harvard took her under his wing, and helped promote her. That professor? Larry Summers. (Check it out here: http://www.newyorker.com/reporting/2011/07/11/110711fa_fact_auletta?currentPage=all)

There were and are undoubtedly other students out there who are as smart and hard-working as Sandberg. But if they did not get to hang with Larry Summers (maybe they were at Northeast Texas Community College or Cal State Bakersfield instead of Harvard) their odds of getting to the top 1% are not so good.

In the real world that most of us live in, failure has serious consequences - we lose our jobs, and perhaps our ability to earn a living. For those lucky enough to get to the very top, despite the huge impacts that their failures have - people dying, thousands losing their jobs, multi-billion dollar costs - they get to walk away with payouts that most of us would associate with winning the lottery. And they get another plum job. And, perhaps most galling of all, they get to choose - like Larry Summers chose Sheryl Sandberg - who gets a shot at getting to the top next.

So maybe Murder, She Wrote was not so unrealistic after all. After all, reality looks even worse. Not only can some (but only a few) people get away with murder (figurative or literal, your choice), they get rewarded for it, and can set up their friends and toadies to be rewarded for it as well. Eat your heart out, Angela Lansbury.


Tuesday, November 1, 2011

What Does Occupy Want? Part 2 - They Still Want Back What Was Stolen, And Not Just The Dream

While riding in the carpool I was subjected to Ronn Owens on KGO radio criticizing the Occupy movement for not having clear short-term demands, such as calling for specific legislation, or backing a specific presidential candidate.


This is a classic misleading argument - change the other side's position into something that is easier to attack than its real position. Owens is right that Occupy is not asking Congress to pass a bill - but that is because the goal of the Occupy movement is much broader. It is after a fundamental shift in our society's values, to refocus on human needs instead of accommodating corporate greed. Our elected government needs to be a part of that systematic change, so while passing a bill might be good (if it helps people instead of corporations), it is only a little piece of what is needed, a small step in the right direction.



The erosion of human values for the benefit of corporate interests has gone on for years, and is embodied in numerous laws enacted over the last 30-odd years. But those laws are not the disease - they are just a few of the symptoms. The disease is deeper, and more pervasive. So passing a bill or two, no matter how good, won't do it. Repairing the damage will be a longer term, ongoing process. Symbolic gestures are not enough - we need real change.



Changing some laws is part of the process, but how those laws are changed is important. It cannot be a corporate-whore Congress and President grudgingly giving in to a list of demands forced on them by public protest. Congress and the President must be on board, acting willingly and positively to treat our current corporate parasite infestation. If they did that, then passing some bills would be a sign that we might be on the road to recovery.



If Congress and the President took the following steps, I would take it as a positive sign that they are heading in the right direction. This is just my list of things that would relieve some of the symptoms of our malaise. It is not the cure, or the whole treatment, but even so it should make us feel better.



1) Enforce the the anti-trust laws. This would help keep businesses from becoming "too big to fail."



2) Undo the recent changes to bankruptcy that make it easier for corporations to duck out of labor agreements, and that make it harder for people to get relief from credit card debt.



3) Encourage the production of food that is healthy for us to eat, rather than encouraging the industrialization of the food industry. Heavy pesticide use, high fructose corn syrup, and genetically modified crops benefit big agribusiness at the expense of the small family farmer and those of us that eat (last I checked that was everyone).



4) Bring back something like the Glass-Steagall Act (enacted after the last big crash caused by banks getting out of control) that kept banks from becoming too big and engaging in overly speculative practices.



5) Require banks and other mortgage lenders to hold the loans they make, instead of foisting them off on others. Lending practices would suddenly become a lot more conservative - no "liar loans" and other speculative products, and lenders would not want to push people into loans they could not afford.



6) If we won't do #5, then we need effective regulation of derivatives markets (where the mortgages end up after being sliced and diced), which was quashed by the Clinton administration. The meltdown of the derivatives markets based on crappy mortgages was a major cause of our current financial crisis.



7) Stop the vilification of public employees and their pensions. They don't make that much money, and they did not cause our current problems. Wall Street hates the California public employees pension system since it has billions of dollars that Wall Street wants and it demands good corporate behavior.



8) Undo some of the recent limitations on class actions that prevent the thousands of people ripped off by corporations for $5 or $50 or even $500 at a time from having any effective recourse. You can't get a lawyer to help you sue a big corporation for $500.



9) Rein in corporate tax shelters. GE and other big multinationals can avail themselves of tax schemes that allow them to legally pay little or no tax on billions of dollars of income. You and I can't do that.



10) Make health care and higher education accessible and affordable. This should be a no-brainer, and would provide far more benefit to Americans (and our economy) than two wars, and at a lower cost. But no, we chose the wars instead. Something is seriously wrong here.



There are more, but that is a start. Occupy has not specifically asked for these things, but these steps would show that our society is moving in the right direction. Ronn Owens asked for legislation, so here is a sampling. But it is not enough.

New Name

Yes, this blog has a new name. I am no longer running for California Attorney General, so it seemed a bit weird to still have that as the name of my blog. I thought of just starting a new blog, but I wanted to keep the content from my campaign blog. So, a new name.

Why "Hinged?" I like the idea of a hinge - things on opposite sides may move in opposite directions, but they are still connected. And it is the opposite of unhinged. I thought of calling it "Hinge of the World," but decided that might be a bit pretentious. Anyway, it is time to take a fresh swing at things.

Thanks for reading.