Monday, December 31, 2012

Emerging Fiscal Cliff Deal: Good Deal, or Bad?

Congress over the past couple of years has orchestrated a round of automatic spending cuts (sequestration) and taxes increases which are set to take effect tomorrow.  If we go over this fiscal cliff, we will all feel it. 

There is general consensus across the political spectrum that implementing sequestration and returning to pre-Bush tax levels at the same time will provide another blow to our teetering economy.  We also have agreement that we must address long term structural problems with the cost of social programs and the amount that we are currently taxing.  In short we are not taxing enough to sustain our social programs, and we don't have enough young workers coming in and too many workers retiring to sustain our social programs at the current levels without raising taxes.  Finally, we have agreement that the deficit presents a long term problem.  The deficit is large and growing due to 1) the Bush tax cuts, 2) the Iraq and Afghanistan wars, and 3) our structural problem with social programs and tax rates. 

There is disagreement between the parties regarding the solution to these problems.  Republicans advocate drastically less spending on social programs, and no increase in tax rates (although they are open to base broadening elimination of tax exemptions).   Republicans believe their approach would invigorate the economy like a New Years Day polar bear swim.  They believe the underlying dynamism in the market would grow the economy and lift all boats.  Democrats are advocating a balanced approach of some tax increases, and some spending cuts, but no (substantial) cuts to social programs.  Democrats believe that if social spending is reduced, the market will not fill the gap to provide for all members of society.  They believe we must spend on medicare, medicaid, social security, education, mental health, etc. in order to take care of a large percentage of the population that would not otherwise be provided for by the market. 

Democrats don't want to go over the fiscal cliff because it will result in across the board spending cuts in social programs that they don't want to see happen at all, because it will result in too-sudden spending cuts that will shock the economy, and because it will result in too-sudden tax increases for our anemic economy.  Republicans don't want to go over the fiscal cliff because it will result in tax increases they don't want to see happen at all, because it will result in too-sudden spending cuts for our anemic economy, and because it will result in cuts to military spending they don't want to see happen at all. 

There is a lot of sideline commenting going on as to who has leverage in this negotiation and how it should be played.  Should we go over the fiscal cliff now because this might give one side more leverage later?  Some say Democrats would have more leverage later because they will have pocketed the automatic tax increases and they might find political support for social spending priorities once those cuts actually bite.  Of course, in the meantime, social programs will be cut.  Some say Republicans would have more leverage later because they will have pocketed spending cuts, and they may be able to extract more concessions on taxes in the context of the next debt ceiling increase, which is coming right up, thank you very much.

As of 7:00 p.m. (EST) on the 31st, it looks like the House will vote on Tuesday on a plan cobbled together by Senate minority leader Mitch McConnell and Vice President Joe Biden--technically over the cliff, but before the Congressional session ends on Tuesday. 

Here are the deal parameters as reported by the NYT

Taxes:

  •  Income taxes to 39.6 percent from 35 percent on income over $400,000 for single people and $450,000 for couples.
  • Dividends and capital gains tax rates to 20 percent from 15 percent on income over $400,000 for single people and $450,000 for couples.
  • Phase out of personal exemptions and deductions at $250,000 for single people and $300,000 for couples.
  • Rise in estate tax on estates over $5 million to 40 percent, up from the current 35 percent.
  • A five-year extension of  child tax credit that goes out as a check to workers who do not earn enough money to pay income taxes, an expanded earned income credit, and a refundable credit for tuition.
Under the deal, the new rates on income, investment and inheritances would be permanent.  All combined, the new package would raise about $600 billion of revenue over 10 years. That  is approximately 85 percent of the revenue Democrats had wanted to raise under Obama’s initial proposal, which would have raised around $700 billion.
Spending:
  • Democrats secured a full year’s extension of unemployment insurance without strings attached, a $30 billion cost.
  • Democrats were able to stave off sharp cuts for one year to health care providers who treat Medicare patients. That cost, about $30 billion, would be paid for with cuts to other health care programs.
A final deal is reportedly still being held up by one last question: What to do about $110 billion in automatic spending cuts set to begin Jan. 2.

So did Obama sell out?  Thus far it does not apear so.  On the taxing side, this deal would secure $600 billion of revenue over ten years.  It's not what we'll need, but we don't want it all at once;  we'll want to add revenue slowly as the economy grows stronger, and Obama has made clear that he'll be asking for additional revenue in connection with discussion on spending reductions.   On the spending side, there are no cuts here to Social Security, Medicaid, or other social programs so far.  Let's see what happens with that $110 billion in automatic spending cuts.  If those are deferred, that's the right thing to do for now... 

Going over the cliff is bad for the economy, bad for seniors and kids, bad for the military, bad for the country.  In light of this fact, it's irresponsible to advocate going over the cliff just to (perhaps) increase leverage in the upcoming debt ceiling negotiation.  If we can prevent sequestration now and get agreement on $600 billion of tax revenue over 10 years, and defer discussion on cuts.... let's do it!







Sunday, December 23, 2012

The Power of Tradition.


You’d think that 57 years of life and 33 years of marriage would be enough to get your traditions in order.  It’s not.  Traditions are like your kids growing up; every time you think you have them figured out, they change on you.

Take Christmas, the central tradition of my childhood.  The Christmas tree is not an easy tradition to bring to a mixed Christian-Jewish marriage.  The roots of the Christmas tree lie in Germany where they do Christmas really well.  The Germans, and Swiss Germans in my case, don’t water this holiday down to a generic Happy Holiday.   It’s Wheinachten.  It’s a holy night, no questions asked.  It’s magical.  It’s a month of Advent and wreaths, and Stollen, and Handel, and snow, and stockings, all culminating, like Burning Man, with family and friends basking in the glow of fire.  For us, two dozen live candles on an eight foot Noble Pine. 

The trouble is, for a short while Germans also hung Swastika ornaments in their Christmas trees, and for my mother in law, who escaped from Vienna on her own Kindertransport, the season is too proximate to Kristallnacht for comfort. Burning candles on a Christmas tree is somehow connected with the fires of 95 burning synagogues in Vienna.   So I studied Maimonides and we were married under a Chuppah and broke a glass for good luck to set us off on our own traditions. 

Living as newlyweds in Seattle, away from family, we joined with other young adults trying to figure things out.  For ten years we gathered with friends for Thanksgiving, in apartments, in newly mortgaged houses, and on our boat that served as our apartment.  We joined in Seders.  We lit Hanukah candles. 

But we were restless, so we left. We left work behind and sailed the waters of British Columbia, the Pacific, and Mexico, ultimately settling in the Bay Area near family.  Young professionals now, energetic, without child, we joined a circle of friends around biking.  Our traditions became the Grizzly Peak Century, the Markleeville Death Ride, the Marin Century.  There was skiing in December and January; later there was squash, tennis, and music.  For several years we attended Camp Harmony music camp on New Years, Fiddletunes in summer.  There were weekly music lessons. 

But we moved on.  Kayla arrived.  Soon there was Halloween, birthdays, play-dates, and the JCC pre-school, which, for a brief time, enhanced the profile of the Jewish calendar for us.  Then there was soccer, and for ten years our life revolved around practices, games, and the struggles of a team progressing from recreational to competitive, to elite competition.  But that too ended. 

Through it all Christmas was present through its absence.   Our first two years in the Bay Area we put up a tree, but it did not take.   The tradition soon succumbed to spousal discomfort and our desire to give a non-mixed identity to our daughter.  But what were we thinking?   We celebrated Hanukah and Passover, and noted the passing of Rosh Hashanah and Yom Kippur.  We did not observe Shabbat, Rosh Kadesh, Tu B’Shevat, Purim or any of the other holidays on the Jewish calendar.   How do you instill religious traditions in a secular household?

And now Kayla has moved on.  We are left behind with all traditions inconstant.  Hanukah is long past, this year, and somehow the absence of Christmas has hit hard.  So this morning we walked the Haight, ate a tuna melt sandwich at the Ice Creamery on Cole, and returned with a Christmas tree from Cole Hardware.  We dug out the old ornaments from the back of the closet, put 18 candles on the tree, and called our daughter.  “It makes me want to come home,” she said.  And all is well with the world.  

Tuesday, December 11, 2012

The Sea, John Banville (2005)


A couple of years ago, my friend Kathy Hirsh, a Plein Aire painter of the highest caliber, a wit, and voracious reader, recommended JohnBanville’s The Sea, the 2005 Booker prize winner.  No wonder.  The book has been living in my Kindle for some time and I just got around to reading it.  It is full of poetic and insightful writing, with fresh and unusual observations of adolescence, first loves, and lost loves.  A graceful meditation on budding life and death.

The sixty something protagonist of this story, Max Borden, returns to a boarding house on the Irish seaside to “live amidst the rubble of the past.”  He is a scholar of Pierre Bonnard, a matter of special interest for any plein aire painter.  But Bonnard did not paint many seascapes.  A founder of the Nabi movement (the Prophets) in Paris in 1888 or so, he preferred to capture images in photographs and paint them later in the studio.  His pictures were predominantly of interiors, his circle of friends, his wife.  The sea makes an appearance through open French windows and across rooftops in the South of France.  But it’s not the subject matter of Bonnard’s work that matters here, but the muted colors, and blurred images that are evocative of memory. 

The ouroboros structure of the novel begins with the sea,  perhaps grandiosely, but memorably:

They departed, the gods, on the day of the strange tide.  All morning under a milky sky the waters in the bay had swelled and swelled, rising to unheard of heights, the small waves creeping over parched sand that for years had known no wetting save for rain and lapping the very bases of the dunes.  The rusted hulk of the freighter that had run aground at the far end of the bay longer ago than any of us could remember must have thought it was being granted a relaunch.  I would not swim again, after that day. 

… and it ends a compact 195 pages later with a young Max Borden standing in the quiet surf.

“in a sort of driving heave, the whole sea surged, it was not a wave, but a smooth rolling swell that seemed to come up from the deeps, as if something vast down there had stirred itself, and I was lifted briefly and carried a little way toward the shore and then was set down on m feet as before, as if nothing had happened.  And indeed nothing had happened, a momentous nothing just another of the great world’s shrugs of indifference”

While an old Max Borden recalls this penultimate image...  “A nurse came out then to fetch me, and I turned and followed her inside, and it was as if I were walking into the sea.” 

In between, the novel weaves seamlessly and masterfully between young and old (Max Borden, truth be told, feels much older than my mid-sixty year old friends), and between the far past, the recent past, and the present.   The drama is contained in the memory, and it is peeled back patiently and lovingly as the story unfolds without chapter breaks in one long stream of consciousness.   The book is a phenomenology of memory.  And it is phenomenal.  

Saturday, December 1, 2012

Obamacare: A Matter of Allocation--Or Regulating the Low Wage Job Creator Moocher Class


Approximately 61 percent of adults in the U.S. are covered by an employer sponsored health plan.  The percentage is higher for whites, lower for Hispanics and blacks, and lower overall in light of the recession.  Ezra Klein of the Washington Post provides a serviceable explanation of how this came about. 
 The hinge question in health care reform is "where do you get the money?" And the main … pot of money in health care reform comes from the employer tax exclusion. … [It] is a World War II-era tax quirk. The Roosevelt administration had instituted wage and price controls to prevent profiteering. Excess profits were taxed at (very) high rates. Wages were frozen so employers couldn't offer raises. But the government decided to exempt health benefits from these rules. So corporations took their wartime profits and plowed them into health care benefits. In 1953, with the war over, the IRS tried to overturn the rule. Congress overruled the IRS. 
And so here we are. If you walk out, on your own, and attempt to [purchase health insurance], you're taxed on that dollar. If your employer [purchases insurance] on your behalf, that dollar is not taxed. As a result, getting health insurance through your employer [is] a much better deal than purchasing it with your wages. This … made employer-based insurance the default. 
Obamacare won’t change this.  In fact, Obamacare is trying to increase the percentage of workers covered by employer sponsored health plans.  Effective in 2014, employers with more than 50 employees must offer health insurance and if they don’t, they will be taxed $2,000 per employee. This has led to some recent impolitic statements by angry CEO’s about lay-off’s and converting full time jobs to part-time jobs in light of Obamacare. 

Many on the right have been arguing for years that it’s bad policy to rely on employers to provide health care coverage, and we should stop it.  For example, the libertarian CATOInstitute argues that it would be better if workers controlled their own health care coverage, e.g.  through an expansion of HSA accounts (tax deductible accounts used to purchase health care).  CATO argues that a lack of employee control creates a disconnect between the consumer and the provider:  employees are apt to be more wasteful, less sensitive to cost implications of their health care choices; employer sponsored plans are regressive because higher compensated employees get better plans; it puts pre-paid plans like Kaiser, which tend to be more efficient, at a competitive disadvantage because efficiency is less valued by consumers who do not pay for their own health care; and it generally depresses competition because employers, in order to save administrative costs, tend to offer few plans.  But on a broader philosophical level, CATO objects that giving employer’s control over health care plans of workers means employers, with the encouragement of the government, control “28 percent of the $2.5 trillion sloshing around America’s health care sector.” 

At the root of this, of course, is a huge fallacy.  Says CATO:
 A survey by economists Michael Morrisey and John Cawley found that 91 percent of health economists agree that the money that employers use to purchase health insurance comes out of workers’ wages. In other words, if employers were not providing health benefits to workers, they would have to return that $9,000 to workers in the form of higher cash wages. That implies that, rather than encourage employers or shareholders to spend their own money on workers’ health benefits, this tax break instead gives employers control over a significant portion of their workers’ earnings.
 But that is just plain wrong.   As explained in this NYT article, the problem is that many businesses operate on profit margins and wages that are so low that neither the employer nor the employee can afford to pay $6,000/year for health insurance.  Hence the large pool of employed uninsured—a problem Obamacare is trying to fix.
 “Like many franchisees, Robert U. Mayfield, who owns five Dairy Queens in and around Austin, Tex., is always eager to expand and — no surprise — has had his eyes on opening a sixth DQ. But he said concerns about the new federal health care law had persuaded him to hold off. … “Any dollar that gets diverted, whether it’s through Obamacare or increased tax rates, puts franchisees one dollar further away from being able to expand their businesses,” said Don Fox, chief executive of Firehouse Subs, a fast-growing chain of 559 restaurants based in Jacksonville, Fla. At the 30 stores the corporation owns, only full-time managers are offered coverage. Mr. Fox is wrestling with whether to absorb the considerable cost of covering 100 more employees or pay the penalties — which would probably cost him less — but risk losing valued employees to competitors who choose to offer coverage.
 Employee health coverage now averages nearly $6,000 for an individual plan. That is considerable for businesses like restaurants in which the majority of workers make $24,000 a year or less, according to research by the Kaiser Family Foundation. The foundation found that only 28 percent of companies that employ large numbers of low-income workers offer health benefits. “This is where the biggest set of hurdles is,” said Gary Claxton, an executive with Kaiser.”
The problem faced by Papa John’s and the Dairy Queen franchisors is real.  Consumption of fast food is sensitive to price and if they have to raise prices on their product to cover the $6,000/employee for health care coverage, or the $2,000 in tax penalty for not providing coverage, this may make them hold back from expansion, or it may force them to cut back. 

But should we be encouraging “job creators” to create jobs that don’t pay enough for workers to eat and obtain basic health care?   If jobs don’t pay enough to live on, then society must subsidize those jobs through food stamps, Medicaid, and the like.  Job creators like that are moochers.    They pocket profits enabled because society subsidizes their workers. 

Ronald Coase won a Nobel prize in economics back in 1991 for his work on how many things that are regulated can in fact be better handled by private party negotiation, i.e. by the free market.  But Coase also recognized that when practical difficulties prevent private parties from negotiating an efficient contract with each other, then government must step in and make an approximation and enforce a rational cost benefit transaction.   In the United States today, we can afford to create jobs that pay enough to eat and obtain basic health care.    However, because there is an oversupply of unskilled labor the free market does not assure that employers will pay a living wage.  Therefore, government must step in to enforce rational wage structures that allow workers to eat and obtain health care. 

In part, that’s what Obamacare does.  It enforces rational wage structures that properly allocate the cost of providing health care for employees to the job. This regulation is necessary because, if the market is allowed to work without restriction, the low wage job creator class will mooch off the rest of society by having society subsidize their workforce.