Thursday, April 4, 2013

Wealth and Income Inequality

Wealth and income inequality is discussed a lot today and with the economy struggling, the rich receiving a lot of the blame.  Groups like the occupy movement and other socialist/communist/anarchist groups love to throw out the statistics that the to 1 percent of the earners have a growing percent of the total wealth and income.  But is this true, and if so is it bad for America? If the rich are getting richer, are the poor getting poorer?  How has the relative Like many other political discussions, the truth is often obscured by rhetoric and grandstanding.

To analyze these claims it is important to differentiate wealth from income.  Like the debt and deficit debate, these two terms are also confused and used incorrectly interchangeably.   Wealth is a stock measure, it is the sum of all the static assets in the possession of an individual.  Things that account wealth are bank account balances, investment balances, property valuations, and the like.  Income is a flow measure meaning it is the the difference between inflows and outflows over a period of time.  Income measures include pay rates, capital gains, and interest on investments and accounts. 

Thursday, March 28, 2013

Bush Tax Cuts myths: War on the Middle Class

3. The Bush Tax cuts hurt the middle class and were only a benefit to the rich

Another common criticism of the Bush Tax cuts was that they were a sort of kick back to the rich from the administration.  The US uses a progressive income tax system where the income tax you pay is determined by the last dollar you make in the year.  There are levels or brackets that determine the tax rate that an individual pays.  for example, if you make 0 to $7,000 in a year you pay only 10 percent on your income.  If you make between $7,000 and $28,000 you pay 10 percent on your first $14,000  and 15 percent on the next $13,000.  Each tax bracket is defined by these income thresholds and tax rate and they are subject to change when the tax code is amended.  This analysis focuses on the individual brackets because the married brackets follow the same patterns and the dependent deductions are too individual specific for this analysis.

The Bush Tax Cuts: Fiscal Effects on the Debt and Deficits

 2. The Tax Cuts caused the budget deficit and current national debt problem 

The second criticism of the Bush tax cuts is that they caused major budget deficits and thus greatly added to the national debt.  If this were true, from 2003 forward there would be increasing yearly deficits and greater increases in the national debt.  Like the previous analysis, the budget numbers must be normalized for population and inflation.  The population normalization is done by dividing the numbers by the total population to get the revenue and outlays per person.  The per person metrics allows analysis across years with different populations.  Inflation is normalized by using 2005 dollars for all the data.  The first portion of this analysis proved that more revenue was collected after the tax cuts than beforeThat fact alone should dispel most of this myth but there is room for further analysis.

Tuesday, March 19, 2013

The Policy, The Myth, and The Legacy of the Bush Tax Cuts

 The policy:
Depending upon who you ask, the Bush tax cuts evoke great pride or revulsion.  The controversial tax policy of the Bush administration was passed by Congress in 2001 and took effect for the 2003 tax year.  The policy is loosely based on the Reagan supply side economic theory where lower taxes stimulates the economy which increase the tax base for the government.  Supply side economics revolves around the private sector as the major economic engine for the economy as a whole where the government holds a small but important role in enforcement of law and maintenance of infrastructure.  The theory pinpoints an economic sweet spot where the taxes are low enough to encourage economic and taxable activities but not too low where further taxation would not prevent further activity.  Economist Art Laffer created the "Laffer Curve" that depicts the visual representation of this policy.

 The theory behind the Laffer curve states that if taxes are at 0 percent, the government will collect no taxes because it will tax 0 percent of income.  If the tax rate is 100 percent, then all income will go to the government so there is no incentive to earn an income that will go directly to the government.  Somewhere in the middle is a tax rate that maximizes the tax revenue.  Most economists understand that this optimal rate is lower than 40 percent but greater than 30 percent.  The Bush Tax Cuts adjusted the income rates downward closer to 35 percent for top earners. 

Friday, March 8, 2013

Minimum Wage Myth

Everyone one should have the right to earn a livable wage, right?  No one should be stuck in a job that forces them to work in subhuman conditions for a wage that does not allow them to provide for their families.  Not raising the minimum wage will punish those who are the most disadvantaged in our society and keep people living in poverty.  These are the concerns raised over the debate to adjust the minimum wage at either the Federal or State levels.  Arguments like these are made out of pure emotion without actual data to back them up.  The debate often lacks answers to crucial questions like what effect has previous minimum wage increases had, who makes up the majority of minimum wage workers, and how do we determine to what level the minimum wage is determined?

What is the function of the minimum wage? 
The minimum wage was implemented as part of the fair standards act during the New Deal.  It's intention was to ensure that every employee no matter how unskilled or productive could earn a "decent" wage.  It was originally set at twenty-five cents when the law was past in 1938 and is currently $ 7.25.  The decent wage was originally set arbitrarily and increased infrequently as a result of cost of living and inflation demands.  The changes were rarely made in relation to actual market fluctuations in the labor market and mostly made for political gain.  Minimum wage increases are an easy way for a politician to champion a cause that endears them to a large segment of the population who can sympathize.  On the surface it seems reasonable to set a floor for the wages that a worker can earn.  The rationale came from the horror stories of underage factory workers getting paid very little for excessive amounts of work.  But what are the actual effects of minimum wage increases and is public opinion correct?

Wednesday, February 13, 2013

California: Pension or Bust

Public pensions have attracted a great deal of public scrutiny recently.  State budget problems add fuel to a problem that is decades old.  The media and politicians love to politicize public pensions because the well being of retired workers evokes a lot of emotion with the public.  Both sides can tell the public that the fate of many retired workers hangs in the balance and their side will protect their interests.  Unfortunately, public pensions pin public workers against tax payers when it comes to funding their retirement pension and healthcare benefits.  The higher and less restricted that public pensions are, the more the state is at risk of carrying large unfunded liabilities (i.e. mandated fiscal responsibilities without dedicated funding).  The long term effects of unfunded pensions include chronic budget shortfalls, snowballing debt, State credit downgrades, and increased interest payments leading to larger budget deficits.

Thursday, January 31, 2013

The Problem with Gun Legislation

In light of the recent tragedies in Aurora Colorado, Newtown, and Tucson have renewed debate about how we look at privately owned firearms.  Could these tragedies been prevented by a comprehensive firearm policy? Were there warning signs that were missed?  How this country proceeds depends on how we interpret the second amendment and how we define the underlying causes of gun violence.  Gun rights advocates see any regulation as an affront to their constitutional rights, while gun control advocates see the second amendment as limited to maintain public safety.  Currently Congress is debating whether a law banning assault style weapons and high capacity magazines would solve this ongoing problem.  
Although an honest debate is healthy, a few key points always seem to be overlooked when lawmakers create gun laws.   Luckily, a rather large sample size of data exists from the 1994 Clinton assault weapons ban that provides some background to past policy efforts.  This ban addressed semi-automatic rifles and high capacity magazines.  This law only applied to assault weapons made after the date the bill was signed in to law.  This law had a sunset clause that kicked in after 10 years if the bill was not renewed.    The National Institute for Justice (NIJ) produced a report on the effects of the ban and the results were mixed at best.  The NIJ stated that the impact was minimal because assault weapons were only used in 2 percent of crimes to begin with and any change would be almost insignificant.   Most of the crime data showed that high capacity magazines (10 rounds or more) were used in nearly a quarter of the gun crimes.  The report further elaborated that assault weapons with high capacity magazines are mostly used in public assaults on police and mass shootings, both exceedingly rare events.  Finally, the reduction of crime involving assault style weapons was somewhat offset by the use of more conventional pistols with high capacity magazines.  Overall the report showed that the ban lacked the proof that it made any significant decreases to gun crime (Koper 2004).

Wednesday, January 30, 2013

California: Wasting Away

Wasting Away

(Courtesy of CalTax)

The Conditions in California are ripe for opportunities to change course and experiment with alternatives that government leaders have shied away from for years.  Fiscal restraint and control has not been in the state's vocabulary for decades.  Government waste is sometimes hard to pinpoint and make a case for because it rarely occurs in singular occurrences.  Waste in government is a systematic problem that grows with each added layer of bureaucracy.  With each layer, the path from inputs (financial resources) to outputs (services) is not always clear.  The larger that government program gets the harder it is for watchdogs to follow the resources from start to finish.  Yes some layers of bureaucracy are necessary in a government setting to protect against fraud and waste.  At a point, all these layers can actually aid in the coverup of waste instead of its prevention.  This is story of many programs in California.

Friday, January 25, 2013

California: A Shrinking Economic Kingdom

 California: A Shrinking Economic Kingdom

The story of the Sacramento Kings is sad in and of itself but it mirrors a larger saga unfolding in the once great State of California.  The current economic conditions of the State and the response of California's lawmakers have created a grand incentive to leave the state, and now those chickens are coming home to roost. 

The Sacramento Kings are currently up for sale and in danger of leaving California for greener pastures, possibly to Seattle, Washington.  The Kings have been a vagabond franchise overall but have played in Sacramento since the 1985-86 season.  Before that the franchise had success in a few locations including Kansas City, Rochester, and Cincinnati.  The franchise enjoyed moderate success since landing in Sacramento and build up a lot of capital within the community and among the fans.  In the mid 1990's the franchise was at its pinnacle of success. The team finally had a permanent home and a healthy cash flow and fan support.  Years or poor business decisions, arrogance, and the economic recession took their toll on the Malouf family finances and they found themselves backed in to a financial corner.  Now they are looking for an out in a fashion that mirrors the economic reality in the State as a whole.