Coyote Blog

Check out this very nice NY Times article (I think it is outside the firewall) on Harvard economist Edward Glaeser and his takes on urban economics and housing markets.  One study of his that resonates with me is his research about just how much modern regulation and zoning is contributing to the high cost of housing:

Glaeser and several colleagues considered two explanations. First, the
possibility that builders in the metro area were running out of land and that
home prices reflected that scarcity. The second hypothesis was that building
permits were scarce, not land. Had the 187 townships in the metro area created a
web of regulations that hindered building to such a degree that demand far
outstripped supply, driving prices up?

Almost as a rule, Glaeser is skeptical of the lack-of-land argument. He has
previously noted (with a collaborator, Matthew Kahn) that 95 percent of the
United States remains undeveloped and that if every American were given a house
on a quarter acre, so that every family of four had a full acre, that
distribution would not use up half the land in Texas. Most of Boston's metro
area, he concluded, wasn't particularly dense, and even in places where it was,
like the centers of Boston and Cambridge, there was ample opportunity to
construct higher buildings with more housing units.

So, after sorting through a mountain of data, Glaeser decided that the
housing crisis was man-made. The region's zoning regulations "” which were
enacted by locales in the first half of the 20th century to separate residential
land from commercial and industrial land and which generally promoted the
orderly growth of suburbs "” had become so various and complex in the second half
of the 20th century that they were limiting growth. Land-use rules of the 1920's
were meant to assure homeowners that their neighbors wouldn't raise hogs in
their backyards, throw up a shack on a sliver of land nearby or build a factory
next door, but the zoning rules of the 1970's and 1980's were different in
nature and effect. Regulations in Glaeser's new hometown of Weston, for
instance, made extremely large lot sizes mandatory in some neighborhoods and
placed high environmental hurdles (some reasonable, others not, in Glaeser's
view) in front of developers. Other towns passed ordinances governing sidewalks,
street widths, the shape of lots, septic lines and so on "” all with the result,
in Glaeser's analysis, of curtailing the supply of housing. The same phenomenon,
he says, has inflated prices in metro areas all along the East and West Coasts.

One of his other areas of research was new to me.  Glaeser argues that the long-lived nature of housing is part of what keeps cities like Detroit and St. Louis around long after the economic and demographic logic would have had them die. 

Glaeser and Gyourko determined that the durable nature of housing itself
explains this phenomenon. People can flee, but houses can take a century or more
to finally fall to pieces. "These places still exist," Glaeser says of Detroit
and St. Louis, "because the housing is permanent. And if you want to understand
why they're poor, it's actually also in part because the housing is permanent."
For Glaeser, this is the story not only of these two places but also of Buffalo,
Baltimore, Cleveland, Philadelphia and Pittsburgh "” the powerhouse cities of
America in 1950 that consistently and inexorably lost population over the next
50 years. It is not just that there were poor people and the jobs left and the
poor people were stuck there. "Thousands of poor come to Detroit each year and
live in places that are cheaper than any other place to live in part because
they've got durable housing still around," Glaeser says. The net population of
Detroit usually decreases each year, in other words, but the city still attracts
plenty of people drawn by its extreme affordability. As Gyourko points out, in
the year 2000 the median house price in Philadelphia was $59,700; in Detroit, it
was $63,600. Those prices are well below the actual construction costs of the
homes. "To build them new, it would cost at least $80,000," Gyourko says, "so
there's no builder who would build those today. And as long as those houses
remain, the people remain."

There's a lot more in the article, including a positive economic take on the role of roads and automobiles that he sets in counterpoint to the typical aesthetic arguments against sprawl. 

I found this next bit supremely ironic, though it matches my observations of these cities as well:

Zoning and housing supply ultimately determine not only who lives in a city but
also the very nature of these places. Boston, San Francisco and Manhattan are
obviously becoming rarefied destinations, mostly for America's elites (Glaeser
calls the cities "luxury goods"), with housing floating beyond the reach of the
young and the middle class. These cities' economies are in the process of
becoming boutique, too, accommodating only the most skilled and privileged.
Their desire to limit construction and grow not in buildings and population but
in prices has, in effect, begun to shape their destiny.

Residents of these cities turn up their noses at the aesthetics and red-state politics of places like Houston and Phoenix, piously believing that all the while they are the true friends of the poor, while at the same time putting in place a government-enforced housing system that only the rich can afford, driving those of moderate incomes to, well, Houston and Phoenix.

This last observation provides a fitting conclusion:

And what surprises him is that the changes in how we have treated property
rights for the last 40 years "” who gets permission to build, the size and
location of what owners are permitted to build "” have been the subject of
virtually no national dialogue, even as the effects on prices, in his view, have
been extraordinary.

As the Enron trial lumbers towards the end of its second week, Tom Kirkendall continues to have good analysis (keep scrolling).  While the Enron bankruptcy has spawned a number of books, it is likely that the Enron prosecution may spawn a few of its own.  Already, the prosecution has botched trials thought to be lay-ups and has demonstrated a new level of presecutorial abuse.  I know that most people have little sympathy for the defendants, but one has to be concerned with the tactics being used in these cases.  From reading his posts, while its early in the game, the defense may be ahead on points, as the prosecution made another tactical error in leading with and spending far too long with a weak witness, indicating that they are ready to commit on the same mistakes they made in the failed broadband trial.

By the way, this snippet is very funny - the indictment against Skilling and Lay is apparently so unclear and confusing and poorly written that the prosecution, who wrote it, is asking that the judge not allow it to be mentioned or quoted in the trial.  LOL - they are asking that no one mention the charges against the defendants in front of the jury.  Which is actually pretty appropriate, since in effect the prosecution is going to try to get Skilling and Lay convicted of being rich and unlikable rather than convicted of any specific charges.

By the way, we in Phoenix have been watching the revelations about gambling surrounding our Coyotes coaching staff.  The leaks by the police of as-yet unproven charges against prominent people is yet another abuse that happens all-too-often.  Beyond my own questions as to why gambling of this sort is even illegal in this day and age, it is crystal clear to me that the NJ police are going out of their way to leak insinuations of Gretsky involvement, which I don't think they can prove, merely to get press and attention for themselves.

I am running a three-day off-site for my managers this week, so I am pretty tied up.  I do, however,  want to take a second to observe that the NY Times should be embarrassed by their stance on these cartoons.  Their lame-ass explanation that the immediate cause for a wave of world-wide violence and rioting is not really newsworthy is so transparently bullshit as to be unbelievable. 

And to argue that the cartoons are somehow too inflammatory is just pathetic.  As I posted earlier, these cartoons are nothing.  Hell, check out stuff like this, syndicated by the NY Times.  Clearly the cartoon shown is inflammatory against the US military (as is their right under the 1st amendment), so the issue of being inflammatory is a dodge too.  Hell, the NY Times has run multi-part series designed specifically to inflame people against the rich and successful, or more recently to inflame people against oil companies.  To to say they avoid being inflammatory as a policy is a bald-faced lie.  The fact is that there is an unwritten code today among the intelligentsia as to who it is "OK" to be inflammatory against and who it is not.  It is OK under the code accepted by the NY Times to be inflammatory against rich and successful people, white males, women and minorities who are not Democrats, Christians, the military, and the US in general.  It is not OK to be inflammatory against Muslims, suicide bombers, women's groups, most academics, advocacy groups, or the leader of the NAACP.  In the case of the cartoons above, it is OK to blame Islamic terrorism on the US military, but not OK to blame Islamic terrorism on the teachings of Islam.

This is a symptom of the same disease that inhabits politically correct speech codes at universities.  Specifically, institutions are increasingly banning speech that is "insulting" or "degrading" or "offensive", and then allowing some (but not all groups) of listeners to set the definition of when they consider themselves offended.  Muslims argue that these cartoons are hateful - so the Times reaction is "oh, we are so sorry, we won't publish them."   Can you imagine the NY Times giving executives at Exxon the same ability to define certain speech as insulting to them and therefore out of bounds of publication?  Sure.

I got several emails to my first post that boiled down to the following, "Coyote, what you don't understand is that we in America may not think there is anything out of bounds with those cartoons, but Muslims really are offended by them."  This is exactly my point - what other groups do we allow to effectively get a veto on the press coverage they receive?  Do we give the military the right to say "gee, that cartoon is hurtful to us, don't publish it".  No, and in fact this was just proved recently with the Tom Toles cartoon.  We give military leaders the right to say the first part, that they think is wrong for such and such reason, but we don't give them a veto over publication.  Nor, of course, should we give such a veto to anyone.  So why do we make an exception for people whose idea of political discourse is to burn down some embassies, kill a few priests, and set off a few bombs?  I would love to see the WaPo explain why it published (I think rightly) the Toles cartoon in the face of vociferous objects from the Pentagon and American veterans, but won't publish the Danish cartoons in the face of vociferous objections from violent Islamic totalitarian extremists.  Especially when the Muslim reaction to the cartoons is only serving to demonstrate exactly those qualities of Islam that the cartoons were meant to highlight.

At the end of the day, this whole episode I think will be very useful, in finally putting to the forefront the bizarre speech code many of America's intelligentsia have explicitly adopted, a code that absurdly defines exactly the same speech as alternately "healthy" or "offensive" depending on what specific groups are the target of such criticism. 

Earth to Muslims:  Grow up.
Earth to the NY Times:  The time is long overdue for a serious self-awareness episode.

Postscript: Another bit of irony:  The media often criticizes the administration as being the enemy of free speech, when the very fact of the frequent publication of this criticism without any government intervention tends to blunt the force of the argument.  On the other hand, when the group being criticized actually does respond with violence meant to suppress publication, the media decides that the targeted group is not really worthy of criticism.

Update: Here is a compiled excuse page from major US newspapers as to why they are not publishing.  Read it to enjoy the spectacle of supposedly smart and principled people twisting themselves into ethical pretzels.

Update #2:  Those of you who mainly rely on the TV and print media for news probably haven't seen the actual cartoons.  Here they are.  Internet to the rescue again, printing the news that the NY Times deems not fit to print.

Every once in a while I post something off the cuff and find retroactively that I have tapped into a rich source of blogging material.  Such is the case with my post a couple of days ago about technocrats on the left regretting loss of control of the statist institutions they created.  In that article I cited examples of the left freaking out over a conservative-controlled FDA halting over-the-counter approval of the Plan B morning after pill and the injection of certain conservative dogmas (e.g. intelligent design) into public schools.  The moral was that the left is lamenting the loss of control, when they should be reevaluating the construction of the regulatory state in the first place.

David Bernstein at Volokh brings us another example with the Solomon Amendment, the legislation that requires universities that accept public funds to allow military recruiters on campus.  Folks on the left hate this act, many because they oppose the military at all junctures while others more narrowly oppose recruiting as a protest against the Clinton-era "don't ask, don't tell" policy law brainchild.  Eskridge and Polsby debate the pros and cons at the ACS Blog.  I tend to be sympathetic to the private universities, who rightly don't feel like acceptance of federal money or research grants should negate their control of their institution.

But my point is not the merits of the Solomon Amendment, but to point out the irony, very parallel with the FDA and public schools examples previously:  The Solomon Amendment is built sturdily on the precedent of Federal Title IX legislation, legislation that is a part of the bedrock of leftish politics in America.  Title IX first established the principal that the Federal government could legally override the policy-making and decision-making at private universities if they accepted any federal cash.  It was the left that fought for and celebrated this principal.  The left ruthlessly defended the state's right to meddle in private universities in substantial ways, and passed legislation to shore Title IX up when the Supreme Court weakened state control (from the Bernstein post):

The Court's attempt to preserve some institutional autonomy for universities
from anti-discrimination laws caused uproar among liberal anti-discrimination
activists. They persuaded Congress to pass the "Civil Rights Restoration Act."
This law ensured that if a university receives any federal funds at all,
including tuition payments from students who receive federal aid, as in Grove
City's case, all educational programs at that university are subject to Title
IX.

The Solomon Amendment is modeled after the Civil Rights Restoration Act's
interpretation of Title IX.

In fact, in the linked articles, Solomon is being attacked by the left precisely because it does not allow universities the freedom to set their own anti-discrimination policy (in this case, banning recruiters judged discriminatory to gays), when the whole issue of Title IX was precisely to override a university's chosen anti-discrimination policy (or lack thereof).  So again we have the case of the left building an government mechanism to control private decision-making, and then crying foul when their political enemies take control of the machinery.

In my naive youth, I would have assumed that this contradiction would quickly be recognized.  However, the left (and the right too, but that is for another post) has been able for years to maintain the cognitive dissonance necessary to support the FDA's meddling in every single decision about what medical procedures and compounds a person can have access to while at the same time arguing that abortion is untouchable by government and that a woman should make decisions for her own body.  In this case, it will be interesting to see if the left is able to simultaneously decry state control of discrimination policies at private universities in Solomon while continuing to support state control of private university discrimination policies as essential in Title IX.

Correction: You learn something every day.  I called don't-ask-don't-tell a "policy, as I had assumed that it was merely an internal military policy.  Apparently it is a law.

Its always interesting when someone successfully challenges a widely-held assumption.  Like much of America, I have always accepted the notion that the all-volunteer army attracted a disproportionate number of poorer enlistees.  This made sense, since a large part of the recruiting message is one of education and opportunity, which should be powerful inducements to folks trying to get themselves out of poverty.  A few have argued that this is not true, that messages of duty, honor, and country resonate with all classes, but we have all been trained of late by the cynical media that those are dated and powerless concepts.  The main difference in perception about army demographics has been between those who thought the perceived demographic skew was bad and those who thought it just was.  A number folks of late have actually supported a draft due to this perception of a demographic bias.

So it was interesting to see this study by Tim Kane, as unearthed by Mark Tapscott, that tends to explode this myth.  Not having family income data for army enlistees, the study chose as a reasonable proxy the relative wealth of their home zip code.  Based on this methodology, we find that the all-volunteer army actually skews rich rather than poor:

As with all studies like this, I caveat that I have not seen their methodology, etc. etc.  However, it is interesting in that it is completely opposite of public perception.  Since I didn't really find anything horrible about the old perceived skew, this study doesn't change any of my opinions on the army or the draft, but it will be interesting to see if Charlie Rangel reverses course and starts criticizing the army for being a rich kid's boondoggle.

A recent editorial in the NY Times by Stanford professor David Kennedy really has me flabbergasted. So much so that I have rewritten this post three times and still not been able to adequately communicate my horror of this editorial.   Mr. Kennedy argues that the all volunteer, non-drafted, non-coerced-service army is a huge threat to America.

But the modern military's disjunction from American society is even more
disturbing. Since the time of the ancient Greeks through the American
Revolutionary War and well into the 20th century, the obligation to bear arms
and the privileges of citizenship have been intimately linked. It was for the
sake of that link between service and a full place in society that the founders
were so invested in militias and so worried about standing armies, which Samuel
Adams warned were "always dangerous to the liberties of the people."

By the way, his words "disjunction from American society" are his coy way of saying a volunteer army is not somehow as representative of America as a draft army.  This
article, as far as I can tell, is totally and completely about the
benefits of
draft (without ever actually using the word).  He is arguing that
forced compulsory military service is somehow more democratic and more appropriate for a free society than voluntary
service.  Forgetting how stupid this is for a minute, why is the volunteer army so "disturbing" to him?   It is really hard to figure out.  He keeps saying things like "the danger is obvious" but I guess I am just stupid - I can't find a clear statement of the danger in his editorial.  The closest I get is this:

But thanks to something that policymakers and academic experts grandly call
the "revolution in military affairs," which has wedded the newest electronic and
information technologies to the destructive purposes of the second-oldest
profession, we now have an active-duty military establishment that is,
proportionate to population, about 4 percent of the size of the force that won
World War II. And today's military budget is about 4 percent of gross domestic
product, as opposed to nearly 40 percent during World War II.

The implications are deeply unsettling: history's most potent military force
can now be put into the field by a society that scarcely breaks a sweat when it
does so. We can now wage war while putting at risk very few of our sons and
daughters, none of whom is obliged to serve. Modern warfare lays no significant
burdens on the larger body of citizens in whose name war is being waged.

This is not a healthy situation. It is, among other things, a standing
invitation to the kind of military adventurism that the founders correctly
feared was the greatest danger of standing armies - a danger made manifest in
their day by the career of Napoleon Bonaparte, whom Jefferson described as
having "transferred the destinies of the republic from the civil to the military
arm."

So in other words, its bad that wars are much less costly in lives and property.  If wars are less costly, and the combatants volunteers rather than conscripts, then we as a nation are more susceptible to military adventurism.  His bio says he is a historian, but what possible historical evidence does he bring forward for this?  None.   

In fact, there is no evidence that the government is any less likely to send a non-volunteer army (e.g. Korea, Vietnam) into harms way than a volunteer army (e.g. Afghanistan, Iraq).  In fact, we may actually be starting to see, via reenlistment rates, that the volunteer army provides a useful check against unpopular wars.  The author wants to imply that we would fight fewer bad wars with a draft, non-volunteer army.  But does anyone think we could have fought the increasingly unpopular Vietnam War with a volunteer army?  Only the draft made continuation of that war possible.  So where is his argument now?

Beyond the fact that his logic does not hold together, how morally bankrupt is it to long for the day when wars were much more costly in terms of lives and property?  Oh for the good old days of the 1960's when we could watch those much higher draft army body counts on the nightly news.  My guess is that he is not actually arguing that we should go back to higher body counts, but that the bodies we do have should represent a broader cross section of America.  In other words, he wants more elite rich white bodies (but not elite rich white Stanford bodies, since he and the Stanford faculty actively oppose all sorts of military recruiting and ROTC programs on campus). 

I have zero tolerance for this kind of forced-to-be-free fascism.  I have no idea what the author's politics are, but his argument reeks of collectivism and totalitarianism.  Think I am exaggerating?  Here is how he concludes:

The life of a robust democratic society should be strenuous; it should make
demands on its citizens when they are asked to engage with issues of life and
death. The "revolution in military affairs" has made obsolete the kind of huge
army that fought World War II, but a universal duty to service - perhaps in the
form of a lottery, or of compulsory national service with military duty as one
option among several

Sorry, but in a free society, there is not universal duty to service.   There is not "link between service and a full place in society."  When someone starts arguing that you have a "duty to service" and that government should "make demands on its citizens" rather than the other way around, run the other way because they are selling totalitarianism.

Update:  This is a pretty compelling article about a volunteer army at work.  Would they really be better off with a draft?

The south gate of Muthanna army barracks in Baghdad is one of the most
frequently bombed sites in Iraq.

Suicide bombers have killed 198 people here since last year.
Almost all were potential recruits to the country's fledgling armed forces.
Another 465 have been wounded.

Body parts that had been hurled by an explosion over the 30ft
high concrete wall a week earlier were still being picked up when the second
suicide bomber struck last week.

But, in an extraordinary display of optimism, the youngsters
hopeful of being recruited into the forces still come to queue....

The young men and handful of women in the queues say they are as
keen for the private's salary of $400 a month as they are to serve their country
to rid it off insurgents.

There are others who have had friends and relatives among the
estimated 25,000 civilians killed over the past two years. Some also believe
that the only way to get an American withdrawal from Iraq is to build a secure
and substantial security force.

But all have an air of defiance, and in some of the fresh
recruits there is a hint of gratitude for just making it through the queue at
the murderous south gate, on Zawraa Road.

Postscript:  I'm not really into the patriotism finger-pointing exercises so many people are into nowadays, but if you want some of that, try conservative blogger Captains Quarters writing on this same editorial.

A few days ago, I spilled a lot of electrons discussing the sources of wealth and poverty. This week, Arnold Kling has a great article applying many of the same concepts to give advice to Live8 and others who want to eliminate poverty.  While I droned on for about 30 inches of computer monitor space, Robert Lucas's quote in Kling's article gets to the heart of the issue in just a few lines:

"of the vast increase in the well-being of hundreds
of millions of people that has occurred in the 200-year course of the industrial
revolution to date, virtually none of it can be attributed to the direct
redistribution of resources from rich to poor. The potential for improving the
lives of poor people by finding different ways of distributing current
production is nothing compared to the apparently limitless potential of
increasing production."

He concludes with some advice for protestors:

1. The world is a complex place. The farther you are
removed from a situation, the less likely that your intervention there will do
good and the greater risk that it will cause harm. No matter how thoughtfully it
is administered, long-distance aid will tend to be
ineffective.

2. The easiest poverty to prevent is poverty that is
close by. By developing useful skills and remaining employed, you can help keep
yourself and your family out of poverty. That makes you less of a burden on the
world than if you fly half way around the world to stage
confrontations.

3. Learn to distinguish motives from consequences. A
well-meaning policy can backfire. The seemingly cold-hearted impersonal market
is enormously beneficial.

4. Poverty is not a simple problem. See What Causes
Prosperity?

5. Remember that unlike the Folk Song Army of Tom
Lehrer's song, you have no monopoly on good intentions. A morality play in which
those who care crusade against those who are square makes for great theater.
However, it is not a realistic basis for economic policy.

As a parting shot, I noted previously the odd contradiction that is inherent in many G8 and similar protestors who purport to want to eliminate poverty:

In a nutshell, they want to fix poverty in the third world by
disavowing everything -- private property rights, individual
enterprise, free commerce, entrepreneurship, individual freedoms, etc.
-- that made the G8 not impoverished.  Rich nations, you have to help
the poor nations, but whatever you do, don't allow they to emulate what
you did to get rich. 

This is so nutty its unbelievable.  If they were camping outside of
the G8's door and saying that we want you to drop trade barriers on our
goods and help us foster entrepreneurship and we want your help
promoting private investment in our economy and infrastructure, I could
understand perfectly.  This is like activists camping outside of Jack
Welch's door looking for him to help the poor by funding programs to
teach children to drop out of school and avoid getting a jobs.

As a note, I had this post ready last Thursday, but with the terrorist attacks in London, the regular G-8 protesters sort of dropped off the radar screen.

For years now, I have struggled trying to categorize what philosophy motivates the brick-throwing protesters that seem a regular part of G-8 summits ever since they ripped up Seattle several years ago.   To say they are against Globalization does not answer the question, since what exactly does that mean, given that the protest movement itself is global and multinational in nature. 

To some extent, the protests of course just Marxism returning under a different guise.  However, even when compared to socialist reality avoidance, the arguments of the protesters seemed really hard to follow.  Part of the problem is that many of the protesters are violent anarchists and out-and-out criminals who want nothing more than violence and destruction.  However, there are people and groups who seem to be trying to accomplish something, and who resent being associated with these criminals.  After reading a number of different web sites of the protesters (many are really, really hard to parse logically), I have come up with the following basic argument shared by the core of the protesters.

1. They want to help the poor and outright poverty-stricken nations of the world
2. Many want the wealthiest nations (G8) to help these poverty-stricken nations, both because they blame the wealthy nations for this poverty, and because the wealthy nations are seen as the ones with the means to do something
3. They want to help these nations by encouraging the poorer nations to avoid any of the techniques or economic models the G8 used to get wealthy and successful in the first place

There is nothing particularly new about arguments 1 and 2; however, it was recognizing part 3 of the argument that helped me realize why I could never understand what they wanted.  In a nutshell, they want to fix poverty in the third world by disavowing everything -- private property rights, individual enterprise, free commerce, entrepreneurship, individual freedoms, etc. -- that made the G8 not impoverished.  Rich nations, you have to help the poor nations, but whatever you do, don't allow they to emulate what you did to get rich. 

This is so nutty its unbelievable.  If they were camping outside of the G8's door and saying that we want you to drop trade barriers on our goods and help us foster entrepreneurship and we want your help promoting private investment in our economy and infrastructure, I could understand perfectly.  This is like activists camping outside of Jack Welch's door looking for him to help the poor by funding programs to teach children to drop out of school and avoid getting a jobs.

I discussed suggestion on providing aid to Africa here and here.  A good companion article to this piece is this one on why progressives are too conservative to like capitalism.  Here is the part that is relevant to development:

However, when we move to fields such as commerce, progressives stop
trusting individual decision-making.  Progressives who support the
right to a person making unfettered choices in sexual partners don't
trust people to make their own choice on seat belt use.  Progressives
who support the right of fifteen year old girls to make decisions about
abortion without parental notification do not trust these same girls
later in life to make their own investment choices with their Social
Security funds.  And, Progressives who support the right of third
worlders to strap on a backpack of TNT and explode themselves in the
public market don't trust these same third worlders to make the right
decision in choosing to work in the local Nike shoe plant.

Beyond just the concept of individual decision-making, progressives
are hugely uncomfortable with capitalism.  Ironically, though
progressives want to posture as being "dynamic", the fact is that
capitalism is in fact too dynamic for them.  Industries rise and fall,
jobs are won and lost, recessions give way to booms.  Progressives want
comfort and certainty.  They want to lock things down the way they are.
They want to know that such and such job will be there tomorrow and
next decade, and will always pay at least X amount.  That is why, in
the end, progressives are all statists, because, to paraphrase Hayek,
only a government with totalitarian powers can bring the order and
certainty and control of individual decision-making that they crave.

Progressive elements in this country have always tried to freeze
commerce, to lock this country's economy down in its then-current
patterns.  Progressives in the late 19th century were terrified the
American economy was shifting from agriculture to industry.  They
wanted to stop this, to cement in place patterns where 80-90% of
Americans worked on farms.  I, for one, am glad they failed, since for
all of the soft glow we have in this country around our description of
the family farmer, farming was and can still be a brutal, dawn to dusk
endeavor that never really rewards the work people put into it....

More recently, progressives have turned their economic attention to
lesser developed nations.  Progressives go nuts on the topic of
Globalization.  Without tight security, G7 and IMF conferences have and
would devolve into riots and destruction at the hands of progressives,
as happened famously in Seattle.  Analyzing the Globalization movement
is a bit hard, as rational discourse is not always a huge part of the
"scene", and what is said is not always logical or internally
consistent.  The one thing I can make of this is that progressives
intensely dislike the change that is occurring rapidly in
third world economies, particularly since these changes are often
driven by commerce and capitalists.

Progressives do not like American factories appearing in third world
countries, paying locals wages progressives feel are too low, and
disrupting agrarian economies with which progressives were more
comfortable.  But these changes are all the sum of actions by
individuals, so it is illustrative to think about what is going on in
these countries at the individual level. 

One morning, a rice farmer in southeast Asia might faces a choice.
He can continue a life of brutal, back-breaking labor from dawn to dusk
for what is essentially subsistence earnings.  He can continue to see a
large number of his children die young from malnutrition and disease.
He can continue a lifestyle so static, so devoid of opportunity for
advancement, that it is nearly identical to the life led by his
ancestors in the same spot a thousand years ago.

Or, he can go to the local Nike factory, work long hours (but
certainly no longer than he worked in the field) for low pay (but
certainly more than he was making subsistence farming) and take a shot
at changing his life.  And you know what, many men (and women) in his
position choose the Nike factory.  And progressives hate this.  They
distrust this choice.  They distrust the change.  And, at its heart,
that is what globalization is all about - a deep seated conservatism
that distrusts the decision-making of individuals and fears change,
change that ironically might finally pull people out of untold
generations of utter poverty.

Scratch a progressive, you will find a totalitarian.  That is why progressives support totalitarians like Chavez in Venezuela and why you find "progressives" supporting brutal Muslim totalitarian apartheid states.  That is why you will hear a lot from protesters about Nike wages being too low, but nothing about the impact totalitarians like Robert Mugabe have on creating poverty.  By the way, I am willing to offer them some help spotting dictatorships if they need it.

To their point that poor nations got that way because of rich nations, their argument relies on a zero-sum mercantilist view of economics that I deconstruct here.  Their other argument is that western colonialism ruined the poor nations, but if that is true, why do they attack the US the most, which had the fewest colonies of any of the G8, instead of France, which made the worst mess of its colonies?

Arthur Cherenkoff and Glenn Reynolds seemed surprised that aging shock-rocker Alice Cooper had some sensible opinions on foreign policy issues.  Those of us who live in the Phoenix area, however, are not.  Oddly enough, Alice Cooper has become something of an elder statesman in Phoenix, keeping a fairly high profile leading various community and charity events.  Its a little odd living in a town where your most visible community leaders include Alice Cooper and Charles Barkley, especially given the area's attraction to many of the rich and famous as a retirement location, but it seems to work.

One story that comes to mind:  Alice Cooper is a regular at Suns games.  A couple of years ago, my company had some nice season tickets just a few rows up from Mr. Cooper, who had seats in the first row on an aisle.  Just about every game I attended, at least one pair of guys would come down the steps, kneel on the floor next to Alice's seat, and bow down saying "We're not worthy" ala Wayne's World and then head back up the aisle without another word.  Always made me laugh.

Reason has a good article on helping Africa.  To some extent, their arguments echo the ones I made in my previous post:

Despite political pressures, increasing the U.S. foreign aid budget would be a
mistake. The true cause of Africa's poverty is the continent's long history of
crippling misgovernance"”a problem that is exacerbated by rich countries' trade
protectionism, particularly with respect to agriculture....

The aid is ineffective because of the appalling way in which Africa is
governed. In recent decades, of each dollar given to Africa in aid, 80 cents
were stolen by corrupt leaders and transferred back into Western bank accounts.
In total, Nigerian President Olusegun Obasanjo estimated, "corrupt African
leaders have stolen at least $140 billion from their people in the [four]
decades since independence." All that is left when these regimes eventually
collapse is a massive public debt.

The article discusses how US and European agricultural subsidies really hurt the poorest nations:

While advocates of current market-distorting agricultural policies do not
intend to harm developing nations, the collective effect of U.S. farm policies
is devastating for producers of agricultural goods worldwide. American farm
policies might provide short-term benefits for agricultural producers in the
U.S., but those benefits are more than offset by the cost to American consumers
who pay higher taxes to support the U.S. farmers and higher prices for
agricultural products. Meanwhile, U.S. tariffs, quotas, and export subsidies
exacerbate poverty in regions like sub-Saharan Africa where people are heavily
dependent upon agriculture....

U.S. agriculture policy undermines U.S. efforts to alleviate poverty because
it drives down global agricultural prices, which in turn cost developing
countries hundreds of millions of dollars in lost export earnings. The losses
associated with cotton subsidies alone exceed the value of U.S. aid programs to
the countries concerned. The British aid organization Oxfam charges that U.S.
subsidies directly led to losses of more than $300 million in potential revenue
in sub-Saharan Africa during the 2001/02 season. More than 12 million people in
this region depend directly on the crop, with a typical small-scale producer
making less than $400 on an annual cotton harvest. By damaging the livelihoods
of people already on the edge of subsistence, U.S. agricultural policies take
away with the right hand what the left hand gives in aid and development
assistance.

Several people say that I have missed the point in my post here - that the issue is
with mobility, particularly in multiple generations.   They argue that
the rich of the next generation are likely to be the kids of the rich
of this generation, that success now depends on education and
connections that only the wealthiest can buy for their kids.   

A couple of thoughts on this.  First, the Times's own data (plus
many other studies) doesn't bear this out, particularly with new
immigrants.  Thomas Sowell addresses this in more depth here and here,
and suggests that the explanation may lie more in values and
aspirations than in purchased stuff.  Marginal Revolution, for example,
had this thoroughly depressing story featuring a study by Harvard economist Roland Fryer on the social pressures in many African-American and Hispanic neighborhoods to under-perform in school.

My other thought on this is that to the extent social mobility is
slowing in this country, our public education system is a major
culprit.  Forget for a moment about quality issues.  Schools have
increasingly emphasized self-esteem over achievement and competition.
Standards are lowered, and the value of exceeding standards or
improving performance is downplayed.  Without other influences,
students will walk out of public schools with a value system vis a vis
achievement and competition and performance that leaves them totally
unprepared for the real world.  I am reminded of one of Bill Gates' pieces of advice to graduates: 

Rule 8: Your school may have done away with winners and losers, but life HAS
NOT. In some schools they have abolished failing grades and they'll give you as
MANY TIMES as you want to get the right answer. This doesn't bear the slightest
resemblance to ANYTHING in real life.

Kids with parents who have achieved in some way in the world are likely
to overcome this by the example and exhortations of their parents.  But
what happens to kids without this example?  Or kids (lacking voucher
programs) who can't afford to escape the public school system cult of
mediocrity for high-achievement private schools or home schooling?

Ironically, the very people who bemoan income inequality and lack of
mobility are the very same people who have gutted the public education
system.  These are the people who deal with inequality by flattening
down the peaks, which is exactly what they have done in schools,
eliminating valedictorians and substituting social promotions.

The NY Times has somehow decided that one of America's real problems is widening income distribution, or more specifically, the exponentially increasing wealth of the top tenth of one percent of US earners.  The series seems to be running to about 47 episodes (actually 10), but a key article is here, entitled "Richest Are Leaving Even the Rich Far Behind,"  There are a number of ways to attack this article.  One is to fisk their really abused and misused numbers, which George Reisman does here on the Mises Economics Blog. 

Lets accept that the very very rich are getting richer.  So lets move from there to the question of...

"so what?"

The Times is a little weak on the "so what".  I presume that in their intellectual-statist readership,  it is an axiom that rich people suck and rich people getting richer sucks more.  However, it is possible to pull out four things the Times extended editorial-masquerading-as-a-news-story finds bad about increasing income inequality:

• As the rich get richer, there is less money left for the rest of us
• The process of the rich getting richer reduces opportunities for the rest of us
• Having very rich people around make the rest of us feel bad
• The rich are only getting richer because the rest of us are subsidizing them through tax policy

It has been a while since I have really gotten carried away writing about a topic (at least three or four days) so I will now proceed to address each of these in turn and in some detail.

As the rich get richer, there is less money left for the rest of us.  At the end of the day - this is what is in most people's minds when they decry aggregations of wealth.  There are many, many people in the world, even in this country, who think of wealth as a fixed pie, as a zero sum game where one person's victory requires another persons loss.

If we were living in 17th century France, where the rich nobility got that way by taxing the crap out of the working peasantry, this would probably be an adequate view of reality.  Wealth came from the land and its products, whose supply, given no technology improvements for decades, were both relatively fixed.  This zero sum view of commerce led to a mercantilist view of the world economy, where it was thought that wealth was fixed, and that the only thing that could be done to it was to move it around, or tax it, or steal it, or loot it.

But we don't live in 17th century France.  We live in a modern, dynamic capitalist society where wealth is created.  One proof of this is so obvious that it amazes me anyone clings to the implicit zero sum economy assumption:  Compare the US in 2000 to the US in 1900.  We are so much wealthier top to bottom in our society than in 1900 its not even worth spending much time on the proof.  This is not just in real dollar terms, but in things that affect ones life, from average life span to leisure time to entertainment to technology.  People who live in the poorest 20 percentile today have things -- such as a lifespan over 70, access to cancer cures, cars, computers, VCRs -- that not even the richest one half of one percent had in 1900.  The poorest 20 percentile in this country would be the upper middle class or even the rich in many countries of the world today.

Michael Dell and Bill Gates are both in that evil 1/10 of 1% of richest people.  But how did they get that way?  They made their fortunes by providing me with this incredible tool on my desk that was unimaginable when I was born 40+ years ago, but now is pedestrian.  Right now I am typing on a Dell computer using Microsoft Windows, which I bought from the suppliers for a mutually agreeable price in a totally uncoerced manner.  My computer provides me with thousands of dollars of value - in productivity, in entertainment, in the ability to do new things that could never be done before (e.g. blog).  Most of this value I keep for myself; some, about $1200 in this case, went to the suppliers of labor and materials to build and program this thing.  And a small portion, less than $100, went towards the fortunes of Mr. Dell and Mr. Gates who had the vision to build the businesses they did.  The PC I have creates new value all around:  Thousands of dollars of new value for me the user and  hundreds of dollars in the form of jobs and new markets for suppliers.  Mr. Dell and Mr. Gates keep just a small portion of all that value created.  At some level, they are working cheap. And any one of us, had we had the vision, could have piggy-backed on Mr Gate's or Mr. Dell's wealth creation by buying stock in their firms.

The process of the rich getting richer reduces opportunities for the rest of us.  Since the "zero sum" argument is so easy to disprove, proponents of rich=bad have morphed their argument to this one.  This accusation comes up several times in the NY Times series, but is hard to refute mainly because the authors never explain the mechanism that they think is at work here or show any shred of proof.  The articles cite folks such as Warren Buffett, George Soros, and Ted Turner.  But how has their fortune-making reduced my personal opportunities one iota? 

Do I have less opportunity because Warren Buffet has made good investing decisions?  Heck, one can argue that any American has always had the opportunity to gain wealth in direct proportion to Buffet at any time, merely by buying Berkshire Hathaway stock.

How about Ted Turner.  Do I have less opportunities to improve myself because Ted Turner got rich creating CNN?  I guess I could facetiosly argue that by his creating CNN, others can no longer create a 24-hour cable news service because he has locked up the market, but Fox has disproved even this narrow argument.

What about George Soros?  I guess you could argue that from time to time my Sony Walkman was a buck or two more or less expensive because of some currency game he was playing in the markets, but I don't see how my opportunity has been reduced.  A better argument is that Soros's being wealthy might really threaten my opportunity if only because he funds so many statist-socialist causes with his billions.

In fact, this is one of those black-is-white arguments.  The reality is exactly the opposite.  When most rich people get rich (with the exception maybe of Peter Angelos and other tort lawyers) they do so by creating new value and thereby opportunity.  While all these folks may be really wealthy, in reality the wealth they have amassed is but a small percentage of the wealth and value that they created.  Where did the rest go?  To all of us, of course, in the form of jobs, and tools, and longer lifespans, and better entertainment.

Having very rich people around make the rest of us feel bad.  OK, this sounds like a problem for group therapy, but you see it in print all the time.  The disparity of incomes is "troubling" and could lead to "resentment".  If one were living in Venezuela or Nigeria or some country where, like 17th century France, wealth came from looting rather than the free exchange of goods, then I would agree that the income disparity would be troubling.  Shoot, if people were much wealthier than I because they were using the legal system to loot the rest of us, I would be pissed off (ironically, this is the case with the billionaire tort lawyers, but this is the last group that the Times will ever challenge). 

However, in this country, where most of the very rich got that way through hard work and better ideas, the result of free and uncoerced commerce, why be resentful?  Sure, I would love to have a G-V aircraft and hot Swedish wife [ed note:  oops, my wife might read this] like Tiger Woods, but lacking these, I have zero desire to deny them to Tiger.  I don't even begrudge super-tramp Paris Hilton her millions (but she did inspire me to change my will so my kids don't inherit from me until they are well past their majority).  Heck, I have spent whole vacations touring the discarded toys of the super-rich (e.g. mansions in Newport, RI).  What fun would there be without a moving target to aspire to?

So why do the Times and some many intellectualls legitimize this envy?  This type of envy has driven anti-semitism and in fact all sorts of racism through the ages.

The rich are only getting richer because the rest of us are subsidizing them through tax policy.  Around my house, I joke that everything, at least in my family's opinion, turns out to be my fault.  The equivilent at the NY Times is that everything is Bush's fault, and in particular, the fault of Bush's tax cuts.  The Mises article cited above does a pretty good job of fisking the argument that the tax system post-cuts favors the rich.  I took on took this notion here and here.  The Times "analysis" makes two major mistakes:

• Social Security Tax hide and seek:  The NY Times article shows the very wealthy paying lower marginal rates than lower level earners.  As I pointed out here, this is entirely because they are including social security taxes in their analysis and that the taxes are capped at $90,000.  If you look at only income taxes, then marginal rates do not drop at higher incomes.

The left's argument here is highly contradictory.  When wanting to make the "rich are not paying enough" argument, they include Social Security taxes, knowing that since those taxes are regressive, they make it look like the rich are somehow getting off easy.  However, when discussing Social Security, the don't want to think of them as taxes - because they want Social Security to be insurance with premiums rather than a transfer program with taxes. 

• Bracket Creep: The TImes points out that the income tax rate for the super rich is no higher than the rate for the merely rich or even $100,000 earners.  The implication is that the super rich are somehow getting a better deal.  But in fact, the problem is that the definition of rich, vis a vis taxes, has been lowered through the years.  The whole history of the income tax is to sell a tax as applying only to the very very rich, and then broadening the applicability over time.  The federal income tax followed this path, as has the AMT.  More recently, the top rate on California income taxes is seeing the same creep.  The statist trick is to apply a rate to the super rich, then creep it down so eventually it applies to everyone.  Then, they cry that - hey, the super rich aren't paying more than the middle class, so they institute a new higher super rich rate.  Rinse and repeat.

Conclusion.  I will leave you with the lyrics from Rush's The Trees:

There is unrest in the forest
There is trouble with the trees
For the maples want more sunlight
And the oaks ignore their pleas

The trouble with the maples
(and they're quite convinced they're right)
They say the oaks are just too lofty
And they grab up all the light
But the oaks can't help their feelings
If they like the way they're made
And they wonder why the maples
Can't be happy in their shade?

There is trouble in the forest
And the creatures all have fled
As the maples scream `oppression!`
And the oaks, just shake their heads

So the maples formed a union
And demanded equal rights
'the oaks are just too greedy
We will make them give us light'
Now there's no more oak oppression
For they passed a noble law
And the trees are all kept equal
By hatchet,
Axe,
And saw ...

Update:  Several people said I missed the point about mobility, rather than just the rich getting richer.  I respond to this here.

Earlier this week I posted my thoughts on taxation, which included thoughts on taxation and class warfare and linked this recent WSJ editorial on tax shares paid by the rich.

Today, Kevin Drum rebuts the WSJ editorial with a post of his own.  Though I find Mr. Drum's consistent socialism and the-rich-will-be-first-against-the-wall rhetoric tedious, he is a smart guy and does have a point.  There is, as usual, a mixed message in the data.  However, this also means, as I will point out in a second, that Drum is guilty of picking and choosing his data points just as much as does the WSJ.

Drum points out, rightly, that while the share of taxes paid by the "super rich" (his term for the top .5% of income earners) has increased, their share of income has increased faster, such that their rates have gone down (god forbid that anyone violate the left's rule of the tax ratchet that says that tax rates may always go up but can never ever come down).  Using the same study as the WSJ, he rebuts this table of share of tax burden...

...with this chart , including Drum's subtle annotations in red:

His point is that the Super Rich actually pay lower rates now and the middle class pays higher rates, or as he puts it:

So shed no tears for the super rich in America. Their incomes have tripled in
the past couple of decades and at the same time their tax rates have decreased
by 9 percentage points. That's a pretty sweet deal in anybody's book.

Here are some thoughts on Drum's rebuttal:

Drum cherry-picked data too:  I will get back to the folks in the top 1 percentile in a minute.  Leaving them aside for a minute, note that Drum's storyline breaks down for everyone else.  If you compare the merely rich in the 1-20th percentiles, they got a smaller reduction in the Bush tax cuts than anyone in the middle and lower quintiles.  For example (comparing the 1999 before tax cut and 1999 after tax cut lines) the 1-5% richest got a rate reduction of 0.21%, while Kevin's favored group at 40-60% got a 1.45% rate reduction.

Don't blame this administration for previous tax increases:  Drum is correct in saying that the tax rate has risen for the middle class over 20 years, but incredibly disingenuous not to explain why.   Note that the 1 point rise (which presumably Drum wants to hang on the current administration) actually consists of a 2.5 point rise from past tax increases, AMT creep, and payroll tax changes (passed by Democratic Congresses and generally supported by Drum) offset by a 1.5 point cut courtesy of the current administration.  Drum is in fact using data that clearly disproves his ongoing "tax cuts for the rich" mantra.  By the way, it is also interesting to see a good "progressive" ignoring progress on the lower two quintiles to decry higher taxes on the upper middle class -- seems like an interesting shift in focus.

Payroll taxes skew the picture:  Including payroll taxes (social security and Medicare) in these numbers causes funny things to happen.  Why?  Because social security tax is straight-out regressive since it is flat up to about $90,000 in income and then zero after that.  This means that the total tax rate shown for the lower quintiles will include nearly 8% for payroll taxes (if this looks funny to you because it seems to imply that the lowest quintile must be paying negative income taxes, you are right, they are paying negative income taxes via the EITC).  However, as incomes rise above $90,000, taxpayers get an effective total rate reduction.  For an income of $180,000, a taxpayer only is effectively paying 3.1% to Social Security.  At $1 million, they are only paying 0.56%.  So, even if income tax rates were perfectly flat with no deductions for anything, those in the 1% category of richest people would have a total rate including payroll taxes over 5.5% points lower than the middle class.  If you recast the numbers above leaving out payroll taxes, you would not see the decrease in rates into the 1% group, the numbers would continue to increase, as can be seen here (from government data):

So, for income tax rates, there is still progressivity all the way to the top.  If you want to argue Social Security taxes, fine, but don't use Social Security tax effects to make a point about income taxes

By the way, in terms of the regresivity of Social Security, the defenders of that program need to stick with a story - is it a transfer payment or is it a government run insurance program?  If it is a government run insurance program (as defenders want to argue, since that seem more palatable to the public) then the $90,000 income cutoff makes sense:  Since the program does not pay benefits based on any incomes higher than this, "premiums" shouldn't be based on higher incomes.  Update: Kevin Drum says in this post that Social Security is

a modestly progressive social insurance program that's paid for by everyone and
that benefits everyone. If it ever stops being that, if it ever stops being
universal, it will eventually cease to exist.

OK, but stop lumping the "premiums" of this program in with income taxes to try to prove a point about the income tax system.

All that being said, there may be something funny going on in the top 1%:  As pointed out above, a portion of the apparent rate reduction for the top taxpayers is in fact due to the odd math surrounding Social Security taxes.  Any income tax cut, even if it is progressive, can make total taxes more regressive by shifting the mix to the very regressive social security tax. All that being said, the taxes of the very very rich are odd, because their income streams are so very different than those of you and I.   In particular, that weird mess of targeted tax reductions that I have decried on any number of occasions come much more into play in the very rich's tax returns, with results that are almost impossible to understand or forecast.  If Drum wants to use this data to argue for flat taxes and an elimination of deductions, I am all ears.

In a surprise move, the US House of Representatives, the arm of the government Constitutionally tasked with initiating any new taxation authority, today passed a resolution "apologizing for the way [the Congress] has historically mishandled Americans' hard-earned income".  In part, the resolution reads:

For years, we in Congress have held closely to the notion that we know better than the average American how to spend his or her money.  Facilitated by economists like John Maynard Keynes, we the Congress have increased the government's share of the economy to over 30%, and have invented taxes on about anything, in part by portraying every tax cut a subsidy for the rich, rather than a return of hard-earned income to the productive. 

We have taken the money you might have spent on private schools to fund a public school system that lags most of the Western world.  We have taken the money you might have used to pay your cable bill to pay for a alternative to Nickelodeon and the Discovery Channel, but for effete snobs.  We have taken the money you might have used to buy a new car or a vacation to gift billionaire sports team owners with new stadiums and to subsidize millionaire farmers who have never actually done any farming....[note the resolution continues with examples for another 16 pages]...

We are sorry.

Finally.

Apparently blue state Democrats, who a couple of months ago were bashing Bush for his "tax cuts for the rich", have a new-found concern about...taxes being too high on the rich.  Specifically, as in this post on BlogCritics, the AMT is apparently hurting blue state rich folks disproportionately:

There is certainly a measure of rich irony in hearing stalwart Democrat Congressman Marty Meehan fretting (in front of microphones and camera of course) that the Bush administration's future tax policies will hit the well-to-do among his constituents. Says Meehan, "if this tax is not fixed, virtually every four person family in Massachusetts making $75,000 a year will have its taxes automatically increased by the AMT".

Duh.  I have been saying for years that the AMT, particularly without indexing, will soon constitute a huge stealth tax increase.  Which is why I hate this kind of unprincipled partisanship out of the Republicans:

Some Republicans have suggested leaving the minimum tax in place because those hardest hit tend to be in states that did not support Bush, including Massachusetts, California, and New York. "˜"˜It is a tax of people living in "˜blue' states,'' said Grover Norquist, the conservative activist who heads Americans for Tax Reform.

Wrong.  Taxes on the rich, even with recent tax cuts, are unbelievably high, even after the Bush tax cuts.  As I wrote here, the wealthiest 10% already pay 2/3 of the income taxes.  It is time for AMT reform.

In my previous post, I took a look at the absurdity of the metrics in the NEA's recent schools report.  In that post, I ran out of room to Fisk the NEA's suggested areas of improvement for better school performance (keep scrolling).

Here are their improvement areas with my comments.  I always try to differentiate the NEA as a group from teachers individually.  The rants in this post are aimed at the NEA as a group.  Many teachers as individuals have my fondest regards.  Note I have helpfully put a big green dollar sign by every recommendation that boils down to "spend more money":

Continue reading ‘Fisking the NEA's Improvement Ideas’ »

In part 1, which you should read first, we discussed how the US has crossed a milestone where fewer than 50% of the taxpayers in this country pay about 100% of the personal income taxes. We also discussed how the recent tax cuts actually shifted personal income tax burden more onto the rich, rather than less.

However, John Kerry has cited the same CBO Report I used to make the points in the previous post to say just the opposite - i.e. that the recent tax cuts actually shifted the tax burden away from the rich to the middle class. Assuming he is reading the study correctly (which he is) how can this be?

The answer is in the difference between Federal income taxes and total federal taxes. The tables I used in part 1 were for income taxes only. It strikes me as reasonable to use income tax numbers for analyzing income tax changes. The total tax numbers Kerry uses includes not only income taxes but social security and Medicare taxes (including the employer contribution), federal excise taxes (such as the gasoline tax) and the corporate income tax. Lets look at who bears the brunt of these taxes.

1. Social security taxes are regressive. Very regressive. While your paycheck may show 6.2% FICA, the bill is really 12.4% because your employer matches this payment with funds they probably would otherwise pay you in wages. What makes this tax regressive is that it is a straight 12.4% of every dollar up to a limit, currently $87,900, after which the tax is zero. This kind of profile would never be tolerated in the income tax system. The reason for this is the carryover of the original idea that social security is not a tax and social benefit program but an insurance and retirement plan, a characterization that is becoming increasingly out of whack from reality. (If it was a private retirement plan, the managers would all be in jail right now for the terrible long term returns it pays out).

2. Gas and excise taxes are generally considered regressive as well, since gasoline is probably a much higher percentage of lower and middle class spending than for the rich (those rich who own Hummer H2's notwithstanding).

3. Its harder to pinpoint who pays corporate income taxes. The CBO report allocates corporate income taxes in proportion to dividends reported on income tax statements, which seems reasonable. Fifty years ago, one would have said that this meant the rich pay it, since we pictured the rich as owning all the stock. Today, in our mutual fund world, a lot is probably born by the middle class, particularly middle class retirees.

As a result, the sum of these non-income taxes are probably net regressive - i.e. they disproportionately hit the lower and middle classes. This means that an income neutral income tax cut, i.e. one that does not shift the tax burden but lowers it proportionately for everyone, will still shift the total tax burden to the middle class, because it reduces the amount paid in the progressive system (e.g. income taxes) in proportion to the amount paid in the regressive system (e.g. social security).

This leads me to a couple of thoughts. First, I think while he is quoting correct stats, Kerry is using the data a bit disingenuously. First, it implies to people that the middle class is paying more so the rich can pay less, which is untrue - everyone is paying less. Second, he is trying to use the data to show that personal income tax burden is shifting to the middle class, which we showed in post 1 that it is not - it is actually going the other way. Third, he uses it to justify a tax increase (or a tax cut rollback) on the richest Americans. We showed that already the Bush tax cuts shifted more of an already ridiculously high burden to the rich. This will shift even more.

However, there is a point here if Kerry wanted to latch on to it. Forget the class rhetoric about the income tax system - focus instead on social security. There are two good reasons for this: 1) Social Security is broken, and the financial reckoning is coming 2) unlike the income tax system, social security is truly indefensibly regressive. Yes, you can dig through Kerry's web site and find something on this, but he is for some reason so drawn to the income tax issue he never really hits it hard.

If John Kerry really wants to take up a populist tax banner, leave income taxes as they are (for all the fiscal deficit crisis talk, an economic recovery plus fewer new military invasions will bring the deficit back in line without tax increases). He should instead propose a reduction in the 12.4% FICA tax rate and then an elimination of the $87,900 wage cap. To make this palatable to Congressional Republicans (and me, if I were voting) it should be tied to a package of other reforms such as allowing some investment choice by individuals.

Of course, this is not going to happen. Politicians have used Social Security scare tactics with retired and older people so often that these folks have come to react negatively to any hint of change to Social Security. Reasonable discussion about the future of Social Security is just not possible in the last five weeks of an election, particularly with Florida in play.

This has actually become part 1 of a two-part post. In part one, we will look at the unbelievable proportion of income taxes paid by a small percentage of people in this country, and reflect on how crazy it is to talk about the rich getting a free ride. In post 2, we will look at a couple of truly regressive taxes where the rich really do get a free ride, and wonder why these issues get mostly ignored.

Something interesting has happened in this country over the last decade, and it is shown below in one of my favorite statistics. There is much talk in the media about this or that group paying their "fair share" of taxes, but as is usually true in the media, there are depressingly few facts in these articles. This is strange, since there are several government reports that pretty clearly outline the share of taxes paid by various income brackets. The numbers below are from a Congresional Budget Office Report, but the same numbers are buried in the IRS web site as well.

For 2003, the estimated share of total individual income taxes paid by:

Wealthiest 1%: 33.6%
Wealthiest 5%: 55.1%
Wealthiest 10%: 67.9%
Wealthiest 20%: 83.0%
Wealthiest 40%: 97.8%
Wealthiest 60%: 103.0%

The way to read this is that the wealthiest 10% of taxpayers pay 67.9% of the country's individual income taxes. And yes, that 103% is not a typo - the bottom 40% in income as a group pay negative personal income taxes (because of the EITC).

This leads to the following fascinating conclusion: Half of the people in this country pay more than 100% of the personal income taxes. The other half get, as a group, a free ride (though there are individuals in this group that pay paxes, net, as a group, they do not). We are basically at the point in this country where 51% of voters could vote themselves all kinds of new programs and benefits knowing that the other 49% have to pay for them.

Extra Credit Exercise: Given the numbers above, and all the talk about "tax cuts for the rich", craft an income tax cut that does not disproportionately benefit the top half of the income spectrum.

Hard, huh? The same CBO report had an interesting comparison. They estimated what these same numbers would have been without the recent tax cuts. Without the "George Bush tax cuts that unjustly benefit the rich" these same numbers in 2003 would have been:

Wealthiest 1%: 31.9%
Wealthiest 5%: 51.8%
Wealthiest 10%: 63.9%

OOPS - Coyote, that can't be right? That means that the wealthiest people pay a higher share of income taxes after the Bush tax cuts. That must mean that the tax cuts disproportionately helped the lower income brackets? Can that be right?

Yes, thats right. Without the Bush tax cut, the top 60% would have paid 99.9% of all individual income taxes. Now, after the tax cut, they pay 103%, meaning the bottom 40% have gone from paying about 0% to actually getting a bunch of money in net EITC.

Which just goes to prove a related point I make a lot - agree with him or disagree with him, G.W. Bush has got to be one of the worst presidential communicators in recent memory. For further proof, see debate #1.

Interestingly, John Kerry used this same report to say that these tax cuts shifted the burden of taxation to the middle class. And, in one way, he is right, though not in the way that his statement is generally interpreted. For more, see part 2, coming soon. (hint - think total taxes, not just income taxes)

UPDATE

Reason, my favorite libertarian rag, has a related analysis from Nick Gillespie and Mike Snell here. I don't think I trust either Bush or Kerry on fiscal discipline. Neither, apparently, do Gillespie and Snell:

But the fact remains that Bush's cuts have reduced the amount of income tax we all pay. Though Kerry will certainly suggest otherwise in Friday's debate, the trouble with Bush's budget policy isn't that he cut income taxes. It's that he hasn't cut spending. Indeed, perhaps the strongest case for electing Kerry may be that he will usher in an age of divided government that will restrain federal spending and the various problems that accompany it.

UPDATE #2

Fixed an unbelievably bad triple negative - Even I could not figure out what I was trying to say.