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Are Corporate Inversions Shareholder Capitalism or Wall Street Capitalism? Print
Friday, 12 September 2014 04:27

Allan Sloan raises an important point about winners and losers from corporate inversions, the process through which a U.S. company arranges to be taken over by a foreign company to lower its tax bill. He points out that many shareholders will be hit with a large individual tax bill because as an accounting matter they will have sold their stock and thereby realized a capital gain.

This isn't a question of shedding tears for these shareholders, who will mostly be in the top tenth or even the top one percent of the income distribution. The point is that this tax scam is not in their interest. While the company may benefit over time from paying lower corporate taxes, this is unlikely to result in a net gain for those current shareholders who have to pay capital gains taxes because of the inversion.

Sloan points out that the big gainers are the financial firms that arrange the deals, who can count on hundreds of millions in fees from a major deal. The corporate insiders (top management) may also stand to gain since they are unlikely to be faced with the problem of having to pay taxes on large amounts of unrealized capital gains.

If the point is to change practices such as corporate inversions, rather than just complain about them, it is important to recognize these distinctions. The financial sector and the corporate insiders are incredibly powerful interest groups. If some number of wealthy shareholders can be brought into a coalition to restrict this sort of tax gaming, it would have a far greater chance of succeeding. (The same story applies to bloated CEO pay, which most immediately is money out of shareholders' pockets.)

 
Fiery Comebacks Ain't Want They Used to Be Print
Friday, 12 September 2014 04:04

When countries went into recessions in the past they usually came out with a year or two of rapid growth that more than made up the ground lost in the recession and then resumed a normal growth path until the next recession. That hasn't been the case in any major wealthy country following the 2008 downturn, although some countries, notably those in the euro zone, have done markedly worse than others.

Perhaps it is this comparison to the weak performance of the euro zone countries that led a piece in the NYT Dealbook section to tell readers:

"Britons also see a Continent that is plagued by deflation and stagnation while their economy has staged a fiery comeback from the financial crisis."

According to the I.M.F. the U.K. economy will be 1.5 percent larger in 2014 than it was in 2007. This would be equal to a bit more than a half year of growth in normal times.

Book2 30620 image001

                               Source: International Monetary Fund.

It is also worth noting that this piece seems to imply that the loss of part of its financial sector would be a big hit to the U.K. economy. This is not clear. Economists usually assume that economies tend to be at their full employment level of output in the long-run. If this is the case, then the loss of banks in the U.K. and/or Scotland would lead the people currently employed in finance to move to other sectors where their labor could be employed productively.

 
Washington Post on Public Pensions: People Should Refuse to Pay for Their Washington Post Ads Print
Thursday, 11 September 2014 07:14

The Washington Post thinks its fantastic that Rhode Island broke its contract with its workers. It applauded State Treasurer and now Democratic gubernatorial nominee Gina Raimondo for not only cutting pension benefits for new hires and younger workers, but also:

"suspending annual cost-of-living increases for retirees and shifting workers to a hybrid system combining traditional pensions with 401(k)-style accounts."

In other words, Ms. Raimondo pushed legislation that broke the state's contract with its public employees. The Post's argument is that these pensions were expensive and the state couldn't afford them. This is not clear. (The Post again played the Really Big Number game telling readers about the $1 trillion projected shortfall in state pensions. That is a really big number and is supposed to scare readers. If it was interested in informing readers it would have told them the shortfall is equal to about 0.2 percent of projected GDP over the thirty year planning horizon of public pensions.)

Anyhow, if the state of Rhode Island really can't afford to pay its bills, why should public sector workers be the only ones to pay the price. The state has hundreds or even thousands of contractors. Why not short them all 10 or 20 percent of their payments? That would be the fairest way to deal with the situation if the state really can't pay its bills or raise the taxes needed to do so. Obviously the Post doesn't believe that contracts with workers are real contracts.

 
Japan's Economy Grew at a 6.0 Percent Annual Rate in the First Quarter Print
Thursday, 11 September 2014 04:13

A NYT editorial on Japan's economy may have created false alarms by noting that its economy shrank at a 7.2 percent annual rate in the second quarter. This is true, but it is important to point out this plunge followed a first quarter in which it grew at a 6.0 percent annual rate. The net for the first two quarters is still negative, and the editorial is correct to raise warnings about the impact of sales tax increases on growth, but the picture is not nearly as dire as the second quarter figure taken in isolation suggests. 

While the piece also reasonably calls for Japan to remove obstacles to women working and to advancing in the corporate hierarchy, it is worth noting that the country has already made substantial progress in this area. According to the OECD, the employment rate for prime age women (ages 25-54) is actually somewhat higher in Japan than in the United States, 71.4 percent in Japan compared to 69.9 percent in the United States.

 
Robert Samuelson Wants to Cut Social Security and Medicare Spending Because Medicare Costs Could Start Rising Rapidly Again Print
Thursday, 11 September 2014 03:55

Nope, I'm not kidding. We've seen a sharp slowdown in health care costs across the board over the last seven years. This has led the Congressional Budget Office to lower its deficit projections. In fact, the reductions in projected deficits due to this slowdown has been sharper than the reductions that we might have seen as a result of almost any politically plausible cut in benefits. But Robert Samuelson is not happy. He tells readers:

"No one truly grasps why Medicare spending has slowed so abruptly. A detailed CBO study threw cold water on many plausible explanations. What we don’t understand could easily reverse."

In other words, just because the problem seems to be going away doesn't mean we still shouldn't make cuts to benefits. One factor that may lead us to believe that lower cost growth can be maintained is that the United States still pays more than twice as much per person for its care with nothing to show for it in terms of outcomes. In fact, if our costs were the same as those in any other wealthy country we would be looking at huge budget surpluses, not deficits.

The difference in costs is attributable to the fact that our doctors, drug companies, and other providers get paid twice as much as their counterparts in other wealthy countries. Of course these are all very powerful lobbies so we more often hear about proposals to cut benefits for seniors rather than reduce the money being paid to providers.

As noted before, since Social Security payments come from a designated tax, there is no real way to get money for the rest of Samuelson's agenda unless we tax people for Social Security and then use the money for the military or other purposes. Such a scheme is not likely to be very popular and few politicians are willing to openly advocate it.

 
Poor Logic on Missing Mortgages Print
Wednesday, 10 September 2014 04:42

The NYT Magazine had a piece asking whether subprime mortgages are coming back. The gist of the argument is taken from an Urban Institute study arguing that if we had the same lending standards in place as in 2001, there would have been 1.2 million more purchase mortgages issued in 2012. It goes on to tell readers that reduced sales are holding back the housing market and the recovery. All of these claims are questionable.

First, asserting that 2001 is an appropriate base of comparison is rather dubious. House prices were already rising considerably faster than the rate of inflation, breaking with their long-term trend. Furthermore, the number of home sales had increased hugely from the mid-1990s, which were also years of relative prosperity. If the Urban Institute study had used the period 1993-1995 as its base, before the beginning of the bubble, it would have found few or no missing mortgages. It is a rather herioic assumption to pick a year of extraordinarily high home sales and treat this as the reference point for future policy.

The idea that we should expect more sales to be a big trigger for the economy is also dubious. The factor that determines building is house prices. House prices are already more than 20 percent above their trend levels. There is no reason that we should expect prices to go still higher or even that they would necessarily stay as high as they are now. One factor that is likely suppressing construction is the fact that vacancy rates are still above normal levels. It is understandable that builders would be reluctant to build new housing in a context where there are still many vacant units available.

Finally, it is worth noting that it is not clear that many people are being harmed by not being able to get a mortgage. As the piece notes, the benefits of homeownership are often overstated. With prices already at historically high levels, homebuyers have a substantial risk of price declines and little reason to expect that the price of their home will rise by more than the rate of inflation.

Furthermore, there are large transactions costs associated with buying and selling a home, with the combined buying and selling costs equal to roughly 10 percent of the purchase price. This means that people who move within 3-4 years of buying a home will likely lose on the deal. This is an especially important point if the marginal homebuyers are younger people who are likely to have less stable family and employment situations.

The latter point is especially important in a context where much of the elite is demanding that the Fed raise interest rates to slow job growth. If the labor market does not improve much further, then it is likely that many people will find themselves in a situation where they have to move to get a job. That is not a good situation for a homeowner to be in. 

 

 
Most People Are Not Doing Well in Today's Economy Print
Tuesday, 09 September 2014 04:41

That's not exactly news, but Neil Irwin does a nice job summarizing the data in the Fed's new Survey of Consumer Finance. The item that many may find surprising is that median wealth was lower in 2013 than it was in 2010 is spite of the boom in the stock market over this period. As Irwin explains, this is due to the fact that most middle income families own little or no stock, even indirectly through mutual funds in retirement accounts.

For people near the middle of the income distribution their wealth is their house. In 2010 house prices were still headed downward. The first-time homebuyers tax credit had temporarily pushed up prices. (The temporary price rise allowed banks and private mortgage pools to have loans paid off through sales or refinancing, almost all of which was done with government guaranteed loans.) After it ended in the spring of 2010, prices resumed their plunge, especially for homes in the bottom segment of the market.

Price began to turn around in 2013, but adjusting for inflation they were still about even with where they were in 2010. In many areas the prices of more moderate priced homes were still well below their 2010 levels. This would explain why wealth for families near the middle of the income distribution would be below its 2010 level. 

 
Is Microsoft Leading the European Backlash Against U.S. Technological Dominance? Print
Tuesday, 09 September 2014 04:13

The NYT tolds readers that Google is the victim of a European backlash against U.S. technological dominance. In addition to anti-trust and privacy issues being raised with regard to Google, the piece also notes that Apple and Amazon are being investigated for their tax practices, taxi drivers have protested against Uber, and Facebook is being investigated for anti-trust violations. 

It's not clear that any of this amounts to an anti-American backlash. Apple and Amazon constantly face tax issues in the United States as well. Taxi drivers in the United States have protested Uber. And it would not be surprising if both Facebook and Google face anti-trust issues here as well.

But the last two paragraphs go furthest to undermine the European backlash story:

"Then there is Microsoft, Google’s longtime nemesis, which spends three times as much in Europe on lobbying and similar efforts. ICOMP, a Microsoft-backed group, has long targeted Google.

"'Google is clearly in the cross hairs,' said David Wood, a London-based partner at Gibson, Dunn, one of Microsoft’s law firms, and legal counsel at ICOMP. 'A lot of the aura has faded, and the shine has come off, and people don’t think they’re the good guy anymore.'"

Companies often try to use government regulation to hamper their competitors. It is not clear that anything about the actions against Google reflect the "European backlash" promised in the headline as opposed to the sort of opposition that any large company would likely face regardless of the country in which its headquarters are located.

 
That Fracking Fueled Boom In Manufacturing in Youngstown Isn't Showing Up in the Data Print
Monday, 08 September 2014 15:12

The proponents of fracking have made many big claims about its economic benefits. In addition to lower cost electricity, we are also supposed to get energy independence and a boom in jobs. The NYT picked up this theme with an article that touted an "energy boom" that is lifting the heartland. The piece claims that fracking related jobs have revitalized Ohio's economy with Youngstown being at the center of the action.

The piece tells readers:

"Here in Ohio, in an arc stretching south from Youngstown past Canton and into the rural parts of the state where much of the natural gas is being drawn from shale deep underground, entire sectors like manufacturing, hotels, real estate and even law are being reshaped. A series of recent economic indicators, including factory hiring, shows momentum building nationally in the manufacturing sector."

"New energy production is 'a real game-changer in terms of the U.S. economy,' said Katy George, who leads the global manufacturing practice at McKinsey & Company, the consulting firm. 'It also creates an opportunity for regions of the country to renew themselves.'"

That sounds really impressive. Unfortunately the data do not seem to agree. The Bureau of Labor Statistics shows that manufacturing employment in Youngstown is still down by more than 12 percent from its pre-recession level as shown in the figure below. There is a comparable story with Canton.

 

                                   Manufacturing Employment in Youngstown

Youngstown jobs

                                  Source: Bureau of Labor Statistics.

 

While fracking jobs may have helped bring these areas up from the troughs they experienced at the bottom of the downturn, employment in both metropolitan areas is still far below 2007 levels. No one thought either city was booming at that time. In short, the data do not seem consistent with the story told in this article.

 
The Money Wall Street is Making Off Rhode Island's Pension Funds Is Also an Issue Print
Monday, 08 September 2014 04:58

The NYT gave readers only part of the story in an article on the Democratic primary race for governor of Rhode Island. It notes that state Treasurer Gina M. Raimondo is currently the frontrunner.

It then told readers in reference to Raimondo:

"The 'tough choice' was her overhaul of the state’s pension system in 2011. She marshaled the state’s Democratic political establishment to increase the retirement age, cut benefits and suspend annual cost-of-living adjustments for state employees until the finances of the underfunded system improved. The move was meant to save $4 billion over two decades and slow state property tax increases. ...

"The pension overhaul is now at the center of a primary race for governor that has become one of the most divisive in the country."

Raimondo did not just cut benefits. She also invested a large portion of the state pension fund with hedge funds and private equity companies under terms that were not disclosed to the public. (Raimondo formerly worked with a hedge fund.) The state's major newspaper has sued (unsuccessfully) to force disclosure of this information.

However the issue is not just cuts to the benefits promised public sector workers. There is also a question of whether the state's pension funds are being used to enrich Wall Street.

 

 
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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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