Hearing about inflation I kept arguing there is almost none. Intellectuals kept yelling inflation, then quieter, and quieter, finally they are silent. So after a few days sailing I find even Jim Jubak agreed today in “What happened to inflation?”
First he talks about all the traditional things which used to be suspected of causing inflation. “The world’s central banks have flooded the global financial markets with cash — and they’re still hooking up more and bigger hoses. The Bank of Japan alone now promises to add $80 billion to the global money supply each month.
And yet there’s no inflation. There’s no sign of inflation. Investors aren’t afraid of inflation. And inflation hedges such as gold are sinking like a stone.” Finally he asked if this makes any sense?
Yes it makes lots of sense if we understand what causes inflation.
Inflation is caused when demand outpaces production. With the amount of US workforce out of work and idle production capacity there is no inflation, demand is far from meeting capacity let alone exceeding it.
I for one am delighted to see the price of gold falling. With many of my friends using the price of metals to point out how the value of the dollar is diminished (inflation) relative to metals, this makes my point nicely. Demand for gold went up right with the expectation of inflation increasing demand. Today with market highs and little/no inflation, demand for gold is falling…and along with it, the price.
Once again to the argument Quantitative Easing now underway for over four years, is devaluing the US dollar and causing inflation, the answer is NO. Inflation occurs when demand exceeds supply, nothing more, nothing less. But in this case more importantly I simply have to ask; what inflation?
Yesterday lots of people got excited about the weak March jobs report including MSN, ABC, CBS and many others. Some (MSN Money for one) claimed big market drops, others questioning the economy is if all this were news or unexpected. I guess you could be asleep, but if you’re writing for a major news network you really shouldn’t be. This was not a surprise and not breaking news.
Yes only 88,000 jobs were created last month as compared to 268,000 in February. But this is just what we were asking for right? Budget cuts via sequestration, reducing government spending, reducing employee pay, cutting contracts…just what did anyone think was going to happen? If the market failed to price this in, and it appears they didn’t since the drop was a whopping 40.86 points (less than 3/10ths of just one percent) it would be shame on them. But they got it right it seems.
How can the money editors get it so wrong, so often? Oh that’s right the guys in Washington have it wrong too…trying to cut the budget with a major chunk of the workforce sitting idle.
We’ve done this before and it didn’t work out well then either. Contractionary fiscal policy at this time is the wrong direction. We have, if we look past the DC bickering, been lowering the amount of deficit spending through economic growth. Yes getting people jobs instead of food stamps, up until this month anyway. I’m going to be very interested in the finger pointing on Monday and how the contractionary party attempts to sell their latest budget.
We just finished four days looking at income inequality and how the U.S Tax system favors the rich. Yesterday afternoon we see It’s time to ‘tax’ the ‘poor’, Anthony Mirhaydari saying “even before January’s tax hikes, the rich were carrying a greater and greater share of the burden” It appears Mirhaydari has not done much reading lately. While he points out how the upper classes pay a large percent of the overall tax bill, he does not recognize the logarithmic growth of wealth at the top nor acknowledge the very special treatment of income received from investments when those who work and subsequently “earn” their income have to pay heavier taxes. He also overlooks that income tax is but one form of tax, there is the highly regressive payroll tax, FET, and many more which overwhelmingly impact low/middle class at a greater degree. It is not surprising Americans don’t understand how the system works and what needs doing when we have a national media, MSM in in this case, perpetuating such drivel.
Here’s another data point on how regressive the payroll tax already is. The poor are already paying a huge portion of the bill. Time for MSN to rid of this Mirhaydari.
If you’re only contribution to the economy is already having enough money you don’t have to work, you are golden per U.S. tax rates. Let’s look at income and taxes of some hypothetical couples to see how truly regressive the U.S Tax system is. Working folks providing a product or service are heavily penalized for having that job and earning the exact same income as those who already have enough they no longer have to work. In short the lowest taxes are paid by folks who don’t have to work.
Here are five couples all with two kids, no exotic deductions just the basics.
Mortgages around their annual income which is under the U.S. norm, and I’ve used the same rates etc. for comparison.
Again there are no expensive accountants working in my examples…I expect the well off would be even better off if there were. Take a look.
Now let’s compare the Betters with the Bests. The Bests made exactly four times the income but since they didn’t have to “earn” it to use the IRS terminology, they paid only 2.6 times the tax.
Dick and Jane Happy have $194,876 left after taxes in spite of not having jobs while Dick and Jane Better have $183,336.80. Of course the Happys are happy; they brought home the exact same amount as the Better’s but after taxes kept $11,539.20 more, simply because they are financially positioned to not to have to work.
There is my rub; that folks who are working hard to provide a product or service to our country and economic base are being penalized for having that job and earning income. Meanwhile “unearned” income is taxed at a significantly lower rate. Just as in the Hungerford study, we see here how the U.S. tax system is subsidizing the income inequality wedge.
A look at why such inequality of income distribution is occurring. Just why are the rich getting so much richer and the poor getting poorer? Capital gains and dividends. But don’t take my word for it.
Thomas Hungerford, leader of the Congressional Research Service study Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945 has just concluded another study addressing Income Inequality. Changes in Income Inequality Among U.S. Tax Filers between 1991 an 2006: The Role of Wages, Capital Gains, and Taxes, Thomas Hungerford, 23 January 2013 takes a look at the income distribution and elements the of influence. One important note made by Hungerford during his discussion whether it is good or bad to have this growing wedge talks about another very important issue, the potential for upward mobility. Being low/middle class isn’t really a bad thing IF I can work really hard and smart and move up…the American Dream right? Unfortunately research indicates income mobility is not very great and the degree of income mobility has either remained unchanged or decreased since the1970s (Hungerford 2011, and Bradbury 2011). It looks that if we fail to do something different, the American Dream may be on life support at best.(I really recommend a read of the Bradbury paper, she advises the Federal Reserve and her work is extensively documented)
A graph of the Hungerford study findings
But here are a few key points from the January research “The single greatest driver of income inequality over a recent 15 year period was runaway income from capital gains and dividends.”
And direct from the report abstract: “Changes in wages had an equalizing effect over this period as did changes in taxes. Most of the equalizing effect of taxes took place after the 1993 tax hike; most of the equalizing effect, however, was reversed after the 2001 and 2003 Bush-era tax cuts. Similar results are obtained with other inequality measures.”
Or, as Hungerford put it in an interview with Greg Sargent: “The reason income inequality has been increasing has been the rising income going to the top one percent. Most of that has come in capital gains and dividends.”
In other words, wealthy beneficiaries of low tax rates on capital gains and dividends are doing extremely well — and their runaway wealth is a major driver of income inequality. A lot of that money could and should be taxed as ordinary income — as some folks in Washington want as a way to help resolve the sequester, and many believe is a way to reduce the growth of income inequality.
As a next project I hope to do up a couple tax examples to demonstrate the differences in how our current tax rates and rules affect the tax bills and percent paid by some hypothetical couples in each of low, middle, and high incomes. What I’m most interested in is how differently incomes are taxed dependent on from where the income was received. Do you work for it? Or do you already have so much you don’t need to?
Yesterday I promised to explore income inequity further and delve into impacts of tax rates. Here is the first edition but with a disclaimer, there may be some outside reading to do…I’m a little self-conscious repeating what all these really smart folks and thorough studies have already determined. But here goes.
Start with the two previous charts yesterday. First the growing wedge between productivity and compensation. We claim increasing productivity is a path to a better standard of living. True it will help US competitiveness in the world market. But it does nothing for worker Smith if his productivity grows but he isn’t seeing a share from his increased competitiveness. The study: The wedges between productivity and median compensation growth  is well done and deserves a read. Not tough, best for guys like me it includes few graphs, you know pictures for us slow readers. Anyway Mishel explains:
“The analysis above has shown that from 1973 to 2011, the largest factor driving the gap between productivity and median compensation has been the growing inequality of wages and compensation, followed by the divergence of consumer and output prices and the shift of income from labor to capital. From 2000 to 2011, when the productivity-median compensation gap grew the fastest, the divergence of prices had only a modest impact, whereas the shift from labor to capital income was the single largest factor, accounting for roughly 45 percent of the gap.”
He goes on to discuss the three factors impacting this wedge. The one I see as most significant when looking at the capital flow relative to tax rates is:
“The first is the substantial gap between the growing earnings of the top 1 percent of earners and other high earners within the upper 10 percent: Between 1979 and 2007 the annual earnings of the top 1 percent grew 156 percent, while the remainder of the top 10 percent had earnings grow by 45 percent.”
From here lets jump to the depiction from Krugman and his short “No Trickle” blog. Most of us remember the term “Trickle Down Economics”. We believed if we allow the top tax rates to be lowered, that money would be re-invested in American business and we will all share in the wealth as the economy grew. Sure…and the economy did grow (following a huge rise in government spending and deficit growth under Reagan.) But looking back at both of these charts from yesterday, it’s pretty obvious the middle and lower class was left far behind. But let’s check in on the “Trickle Down Theory”
Capital Gains Rate Changes…yet Steady Increase in Real Investment
So today’s new entries; first is a chart depicting Capital gains taxes as compared to real investment….exactly what the lower tax rates were claimed to stimulate. A look from post depression years on shows a steady upward curve in the amount of real investment once through the first few post-depression bumps. But there just aren’t any of the peaks or valleys relative to the capital gains tax rates we’d see if there was actually a relationship between a rate change and additional investment. So like the (lost but now found) Congressional Research Service study, there just is not any direct impact of low capital gains tax rates and real investment. With no real investment, the additional findings of no increase to the GDP and no increase to the GDP are right in line. In short, “Trickle Down” –Doesn’t.
Compare this curve to the opposing curve in the “Wedge” Chart from Mishel yesterday.
Lastly today is a tighter focus on Maximum Long Term Gains Rates. I specifically chose this chart because it represents the years from when the wedge between productivity and compensation began to grow. If we overlay these two charts we see a second wedge between productivity/profitability and the lower max capital gains rates. Fall back to the worker compensation line to see where the income inequity comes into play. Don’t forget…that additional income at the top is being taxed at some of the lowest rates in history.Making more and paying less taxes = adding to income inequity.
Next look will be at another Hungerford study which clearly lays out various elements contributing to income inequity.