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Estate Tax: Can You Say "Marginal Rate?" Print
Wednesday, 21 July 2010 07:19

Market Place radio did a segment on the estate tax this morning and neglected to tell listeners that the tax is a marginal rate that only applies to the value of an estate above a cutoff. It also got the pre-Bush tax cut rate wrong.

Therefore when it told listeners that the estate tax will revert to the 2001 level next year if nothing is done, it likely left them hugely confused about the tax rate. The piece said that estates of more than $1 million would face a 55 percent tax rate. This would have led listeners to believe that an estate worth $1.1 million would face a tax liability of $605,000.

In fact, the first million would face no tax liability and the next $100,000 would be taxed at a 37 percent rate, making the total liability $37,000.

 

 
NYT Finds that Social Security Makes Overpayments Equal to 0.01 Percent of Its Spending to State Workers Print
Wednesday, 21 July 2010 07:05
The NYT devoted a story to an audit by Social Security's Inspector General that found the system pays $53.2 million annually more than it should to former state and local government employees. The overpayment stems from a failure to correctly offset pensions earned in government employment that is not covered by the Social Security system. 
 
Good Article in the WSJ on Bank Concentration Print
Tuesday, 20 July 2010 06:56
Too bad that they couldn't run it before the financial reform bill was approved.
 
Is Declining Faith in Social Security Due to the Recession or Peter Peterson? Print
Tuesday, 20 July 2010 06:07

USA Today notes a decline in the percentage of people who expect to receive their Social Security benefits. The first sentence of the piece implies that the loss of confidence is due to that fact people have been: "battered by high unemployment and record home foreclosures."

While the recession could explain the loss of confidence in Social Security, it is also possible that the huge public relations campaign by Peter Peterson and others has played a role. Peterson, a Wall Street investment banker, has pledged $1 billion to a foundation that has cutting Social Security and Medicare as its major goals. He has spoken widely around the country telling people that Social Security is going broke and that it has no trust fund. He has enlisted prominent political figures, including former President Bill Clinton in this effort.

There are other efforts to undermine public confidence in Social Security, most notably President Obama's deficit commission. Former Wyoming Senator Alan Simpson, one of the co-chairs of this commission, has also frequently insisted that Social Security is going broke.

It is possible that these public relations efforts have had their intended effect of undermining confidence in the Social Security. The article should have at least noted this possibility.

 

 
Voters Confuse the Bailout With the Stimulus and Post Won't Tell Readers Print
Tuesday, 20 July 2010 05:06

The Washington Post felt that it was important to tell readers that the stimulus was very unpopular in a working class Pennsylvania district. However, it did not point out that a main reason that it is unpopular is that voter confuse the stimulus with the TARP bank bailout, which the paper strongly supported.

According to the article:

"Democratic pollster Mark Mellman said disgust with the stimulus and anxiety about the deficit are 'really a metaphor for wasteful government spending.' From the perspective of many voters, 'a lot of their money has gone out the door to bail out big banks and big corporations while their jobs have been lost.'"

This is a pretty direct statement that the TARP remains incredibly unpopular and that voters tend to confuse the stimulus with the TARP. A serious newspaper would have made this point. It is not that the voters object to measures that create jobs, they object to measures that hand banks money.

 
The NYT Still Has Not Heard About the Housing Bubble Print
Monday, 19 July 2010 16:30

The housing wealth effect -- the idea that people's consumption is determined in part by their housing wealth -- is one of the oldest concepts in economics. Apparently the NYT still has not heard about it.

An article about the consumption patterns of the wealthy made no mention at all of their housing wealth. The economy lost around $6 trillion in housing wealth with the collapse of the bubble, a disproportionate share of this wealth was held by the wealthy. It would be very surprising if their consumption did not decline in response to this loss of wealth. (The housing wealth effect is usually estimated at 5-7 cents of additional consumption each year for every additional dollar of housing wealth.)

 
IMF and the European Union Support Larger Deficit in Hungary to Help Banks Print
Monday, 19 July 2010 11:30

The NYT reported that negotiations between Hungary and the IMF and EU on the release of additional funds reached a deadlock over the weekend. Buried deep in the article, the NYT reported that:

"The I.M.F and E.U had criticized Hungary’s decision to impose a special tax on financial institutions, saying it would send the wrong signal to investors and could hurt economic growth."

This is striking since apparently the IMF and the EU are insisting that Hungary tax measures like cutting benefits for retirees rather than tax banks. This would have been worth publicizing.

The IMF has publicly claimed that it supported making the banks and either financial institutions pay more towards supporting government budgets. The effort to force Hungary to get rid of its bank tax, apparently accompanied by the threat of withholding funds, suggests that it is not following in practice the position that it has taken in public. This contradiction merits attention from the media.  

 

 
How Does the NYT Determine Which Spending is "Deficit Bloating?" Print
Saturday, 17 July 2010 14:23

That must be what NYT readers must be asking after seeing unemployment benefits described as "deficit-bloating government spending" in an article about the problems facing those who have lost their benefits and the prospect that Congress will vote to extend benefits. While this view may express the reporter or editor's opinion, it conveys no information whatsoever to readers.

The article also asserted that Congress is reluctant to extend benefits because: "fears about the country’s skyrocketing deficit, which are at the heart of Republican objections, have gained growing prevalence."

The article does not say how it has determined that fears about deficits ("skyrocketing" is more editorializing) explain the Republicans' motivations. Most of the Republicans expressing these concerns had little problem supporting the Bush tax cuts or spending on the wars in Iraq and Afghanistan, all of which added to the deficit. This may call into question their professed concerns about deficits now. They may just not want to give the Democrats a victory or they could hope that by making the economy worse the the electoral prospects of Republicans will be improved in November.

The reasons that politicians give for their actions are often not the true reason. Since reporters cannot typically know the true reason, they should just tell readers what the politicians say rather than trying to explain their motives. 

 
Nonsense Doesn't Make Sense Because a J.P. Morgan CEO Says It Print
Friday, 16 July 2010 15:01

The NYT had a piece reporting on how banks may alter their business practices in order to make up for provisions in the financial reform bill that could reduce profits. The article notes that banks may start charging for some services that they currently provide free to customers. For example it reports that banks may no longer offer free checking, instead charging most customers fees for their accounts as a way to make up for lower margins on credit and debit cards.

The piece then quotes J.P. Morgan CEO Jamie Dimon:

“If you’re a restaurant and you can’t charge for the soda, you’re going to charge more for the burger. ... Over time, it will all be repriced into the business.”

Actually, this is not typically true. If a particular restaurant charged high prices for its drinks in order to subsidize its burgers, then we would expect many customers would just buy the burgers and order water. The restaurant would only be able to get away with its burger subsidy strategy if it either did not offer the customer the choice of just getting the burger or if there was collusion with other restaurants. This suggests collusion in the highly concentrated credit and debit card industry, which would mean that anti-trust action would have been appropriate in the absence of the restrictions in the new law. The implication is that banks used their market power to have customers subject to overdraft fees or users of debit cards subsidize the checking accounts of customers who did not paid these fees.

It also is worth noting that banks' profitability will not necessarily be restored to pre-regulation levels. This would only necessarily be the case if banks were just making a normal profit, below which they would go out of business. Certainly J.P. Morgan and other large banks are making more than a normal profit.

 

 
Franklin Raines on Deficit Reduction: More Advice from the Folks That Wrecked the Economy Print
Friday, 16 July 2010 05:24

As the continued interest in the thoughts of Alan Greenspan shows, there is absolutely no amount of failure and incompetence that can get a person removed from the ranks of wise people once they have held an important government office. In keeping with this spirit, the Washington Post turned to Franklin Raines, a former director of the Office of Management and Budget (OMB), to get advice for Jack Lew, the income director, on dealing with the deficit. 

Mr. Raines was a past director of OMB, but his greatest claim to fame was probably his tenure as CEO at Fannie Mae, which ended in 2004 due to an accounting scandal. While Fannie and Freddie are not the villains of the housing bubble that the right likes to claim (private issuers of mortgage backed securities were far bigger sinners), the mortgage giants were incredibly irresponsible in their failure to recognize the bubble (which was already evident by 2004) and to adjust their lending accordingly. 

This is why it is more than a bit infuriating to see Mr. Raines tell us that:

"Most of the long-run deficit is composed of the interest on debt piled up because we were unwilling to pay today (or over an economic cycle) for the spending we want today." 

Yes, we did not run up huge surpluses in prior years in anticipation that there would be a huge housing bubble, the collapse of which would devastate the economy and require massive government stimulus to restore growth. I suppose that we can all plead guilty on that one.

 

[Addendum: Yes, I had earlier written in Harold Raines, which I corrected after a reader e-mailed me. The cause of the confusion is of course the legendary Chicago White Sox outfielder, Harold Baines.]

 
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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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