Sunday, November 25, 2012

Why Obama's Re-election is Not the End of the World

I voted for Obama's re-election. He is not an evil Kenyan, Muslim, socialist. He is not a crazy spendthrift. Nor do I think he is the second coming. I believe he had some solid, very strategic victories in his first term that are and will be good for the country. Really if you look at what Obama actually did, he is pretty much in the same camp as some of those crazy herd-line right wingers like Goldwater, Nixon, Romney, and Reagan.

I want to lay out my logic and reasoning for myself on why I think this was the right thing. It will be fun to look back 4 or 10 years from now at this.

I also want to thank those whose views are different tlhan mine who have respectfully engaged around issues using facts and logic. The issues we face are not simple and are not solvable by sound bites and cynicism. There is tremendous depth of knowledge, thought, and understanding required.


I believe that if you separated Mitt Romney from the party system, he would be shown as a very effective leader, with some degree of actual human compassion, and a lot of raw intelligence. His business history is a demonstration of it. I do not fault him for his taxes, etc.

Unfortunately, today's republican party has devolved to a very strange place. When I see all the candidates for the Republican nomination standing there and claiming to not believe in evolution, I worry. There is either a tremendous lack of intelligence, or total pandering to the party's least common denominators. Romney himself has claimed to hold every position from fairly moderate to extremely conservative. He had to take an extreme right position in order to become the republican nominee. He tried to do his etch a sketch thing and divorce himself from many of those positions, but of course he chose Ryan as his running mate, so he had very little credibility in the end.  Game theory suggests that this being the case, the bulk of the republican party has shifted so far to the right, that the party itself may be in danger of losing relevancy.

I was left not knowing where Mitt really stood on anything and not having any idea where he would try to steer the country. Best case, he would be pretty much Obama in a republican suit, worst case, with a republican house and two or more Supreme court nominations, he could do a lot of damage.


That is not to say that Obama has been all sunshine and daisies. He took a really big risk in going for health care. He had passed a large stimulus package (which ultimately proved insufficient), and he had a democratic congress. I think he saw an opportunity to make a truly strategic move and, finally, get the US some kind of national health care policy. I'll write more about that later.

In retrospect, it is like refinancing your house, instead of putting out the fire in the basement. Good in and of itself, but perhaps it should not have been his highest priority. He bet that someone would put out the fire while he did the refinancing. It didn't work that way.

Beyond health care, he did stop the economic free fall. The world was on the brink of a great depression and it was averted. Along the way, mistakes were made. IMHO, emphasis on green energy was misplaced. The gas shale boom in the US, killed any chance in the short term for green energy to make sense as an investment. Of course, I say that in retrospect. But, I am on the record as not buying the left's solutions to climate change.

The Economy

The stimulus was insufficient and misguided. The economy was in far worse shape than anyone knew in 2008. Bush actually did a lot of things right during the crisis. The initial pulse of stimulus, in all likelihood arrested the free fall. Since then, the economy has recovered slowly with help from deficit spending brought on by tax relief. Without the deficit spending, our economy would have gone far deeper into depression, and there would be a tremendous amount of suffering.

But was tax relief the right approach? Believe it or not, I have a pretty wide conservative streak. If I am going to give someone money for welfare, I want them to do something to earn it. Build a bridge; replace water mains; bury electrical cables; repair some roads; at least pick up trash in my neighborhood. Many of those projects need to be done anyway, let's use our deficit spending to do that. Unfortunately, the republican focus on reducing tax rates, largely to the top tier of earners, was in effect, welfare for the rich. Hey, I'll take it, but it doesn't do much to help my country. Sure, reduction in social security tax disproportionately helping the poor was not a bad thing, but it was so much less than it should have been.

The Deficit

But what about the deficit? I am not comfortable with the deficit we are racking up. I would be much happier if we were building with the deficit though. In business, in your personal life, you go into debt. But we all know that going into debt for capital goods that have long lives, is fundamentally OK. You buy a house or a car, at the same time as you incur a debt, you receive an asset of equal value. In essence, at that moment, you have simply traded a liquid asset (cash) for a tangible asset. Spending has occurred, but no value loss. You need a place to live and a means of transportation anyway.

Contrast that with the person who goes deep into debt to pay for a cocaine habit. They have spent a ton of money on an expense and have nothing to show for it. It has been a decrease in their net worth.

After Obamacare passed, Congress took this turn towards austerity (balance the budget) right as the economy started to turn around. I believe it was prompted by a few things, but I'll start with something that could potentially stem from a  difference of opinion and philosophy.

I m bothered that of the 10 or so trillion dollars debt we had as a nation, about 8 was accumulated under republican leadership. Most of that was from tax cuts with the idea or promise that it would stimulate the economy (voodoo economics). Te republicans in question (specifically Reagan and Bush 2) cut taxes and increased spending. Where were the deficit hawks then? I am not interested in hearing the complaints about Obama increasing the deficit when he inherited the worst economy since the great depression. Really, if you are not comfortable with the current total debt, blame the guys who drove us into a hole to buy votes; don't blame the guy who spent to stop the bleeding.

If you believe that some deficit spending was necessary to get the economy on track, the turn towards austerity was premature. We all recognize that you can't deficit spend forever (but it's more palatable if it is on infrastructure).

Fixing the Deficit

There are two paths out of the deficit. The first is to cut spending AND increase taxes. But simply transferring spending from public to private sector is not the answer. I would like to think that privatizing FEMA, garbage collection, prisons, health care, etc. would save money, but it turns out it doesn't in general. Efficiency gains are offset by economies of scale, government waste and fraud is offset by corrupt rent-seeking. So ultimately, expenditures should be made at the level where negotiating power overrides bureaucratic inefficiencies. As an example  most of the world has cheaper, better health care than the US. there are a few areas where we shine, but in general, we should not be too proud of our health care system. Using the example of the VA, converting to a one-payer system could potentially lead to more efficient and effective health care.

So driving expenditures to the level most efficient for the economy is part of the solution. What about the revenue side? There are some obvious loopholes to close. Taxing capital gains differently is one avenue. There are capital gains and capital gains. If I invest in a well-established oil company stock, I am not increasing the capital stock of the economy. I'm simply placing a bet with someone who is not as confident about the prospects of the company. There will be a winner and a loser. This is not a capital investment; it is truly a bet. Why would we think that a lower tax rate is good on this? Especially galling are the fund managers who use the carried-interest loophole to categorize their income as capital gains.

These measures alone will not drive us out of the hole. We also need the economy to grow. I will emphasize that there is little or no correlation between mid-level tax rates and economic growth, so measures to help the economy grow, such as the infrastructure investment mentioned above will help ultimately.

Given where we started and where we are now, simply spending less, taxing more, and growing the economy may not be enough to pull us out of the fire. Plan B would call for some degree of inflation. I am NOT talking about Weimar Republic inflation, but rather controlled 3 - 5 percent inflation. First, it helps us all (financial institutions and individuals) recapitalize. Second, we pay back our creditors with cheaper funds. The downside is that we lose a reputation as creditworthy. This may not be a substantial problem, as the US is still seen as one of the most creditworthy countries on the planet.

I'm not saying that any of it will be easy, but it is doable. We pulled out of huge debt after World War II, we can do it again, if the political will is there.

The Republican Party

I think there was a deeper game in the turn towards austerity. First, anger from the republican leadership that Obama had gotten health care (let's face it, it is the same as Romneycare, and the same thing that republicans had been proposing for years). And second, a deep desire to make Obama a one term president. In my opinion, the republicans in congress were willing to sacrifice the fledgling recovery, throw people back on the unemployment lines and sacrifice them to the whims of the health insurance companies to win back the presidency. It's documented. Mitch McConnell himself said that was their main goal.

I voted for Ronald Reagan twice. I work for an oil company. I have no bone to pick with the republican party, until they sacrifice the health of the nation for their petty power goals. That makes me angry.

They are completely beholden to Grover Norquist and their pledge to not raise taxes. The republicans have pursued a scorched earth policy over anything Obama proposed. And "when republicans took control of the House, they became even more extreme. The 2011 debt ceiling standoff was a first in American history: An opposition party declared itself willing to undermine the full faith and credit of the U.S. government, with incalculable economic effects, unless it got its way." The debt ceiling is a fairly minor thing that gets passed every year. It keeps the government running. It looks like the amoral republicans are at it again (nice credit rating; I'd hate to see it get hurt).

The Tea Party

I have a lot of time for libertarians in general. The Tea Party has taken some of those ideas and philosophy on the fiscal side, which IMHO is weaker than the social issues side and blended it with the bad part of what the religious right has given to the republicans, then they took it and threw in some anti-science. We're left with people who do not believe in evolution, who want to ban abortion in all circumstances (as well as birth control and in some cases in vitro fertilization), and who do not understand basic economics. They have better sound bites, but their policies are truly scary on many fronts.

Fact Checkers

Any policy, any reasonable discussion has to start with facts. That is necessary, but not sufficient for a reasonable policy decision. The facts have to be relevant to the issue at hand as well.

The Romney campaign said, “We’re not going to let our campaign be dictated by fact-checkers.” That would have been ok, except they had already been caught in a ton of whoppers, including attributing a McCain quote to Obama (because he was quoting McCain). It seems like there is always some degree of misattribution and scummy lies in a campaign. When a mature adult gets caught red-handed, he fesses up and corrects it. Romney couldn't be bothered. That was very troubling.

I am sure that Obama had some of the facts a bit out of line and distorted, but I would suggest that the Romney campaign told more, and more obvious, lies. Of course they don't want fact checkers, it would have ruined their story.

Health Care

I do not have a strong partisan view on health care. Clearly, our system before Obamacare, was among the most expensive and, on a per dollar basis, least effective systems around. Chalk it up to opacity in the insurance industry, distortions in the way they do business, and the whole system around prescription drugs that treat symptoms without affecting the underlying cause.

Face it folks, all those companies are not in it to make you well, they want to make money. If they can do that by making you well, that's better, but it is not a requirement. Statin drugs, which reduce blood cholesterol, but have virtually no impact on death rates, while at the same time bringing lots of nasty side-effects (or simply effects) are a great example.

Having said all that, the health care system should be the one that delivers the best care at the lowest rates. Someone has to pay for the medical care that people receive. Simply having government be the entity that negotiates and pays for care is neither good nor bad by itself. If health care costs $x per person, that is the cost whether it shows up as taxes or an insurance deduction from your paycheck is simply not relevant.

I think there's an argument that insurance companies with a profit motive will strive to reduce costs, but with the profit motive comes a conflict of interest. Government run health care, lacks the conflict of interest, it has negotiating leverage, but it does not have the profit motive to drive efficiency. Ultimately, that leverage, and disconnecting an insurance company's profit movie from my health care decisions is a good thing. Many nations with a government health care system in place are beating the US badly in cost and quality. Yes, there are problems (lines), but overall they are better.We can learn from them.

My impression is that Obamacare tries to capture the best of both worlds.

But forget about that argument. Anyone who works and relies on their employer for health care should welcome Obamacare. You can now change jobs, or start your own company and not have to worry about being turned down for insurance or having pre-existing conditions excluded. This is a huge win for rank and file workers, and IMHO, one of the big reasons that companies like Papa John's and Applebees feared it.

Why Romney Might Have Been a Good Choice

I did consider voting for Romney. I believe there is the possibility that he would be a reasonable president and one thing that would be good is that he would not have the automatic enmity from the house of representatives. There is a chance that he could work with them. There are two things that turned me away from that.

1. The Israelis taught us that you should never negotiate with terrorists. The obstructive republican leadership in the house has been holding us hostage for 2 years now. In essence, a vote for Romney would be a vote for those people who have been whipping us for two years just to get them to stop. The correct response is to vote for their opponents, not reward them for their bad behavior. In essence, this rationale is something like, "Vote for Mitt Romney or the republicans will destroy the economy."

2. He promised to repeal Obamacare and Wall street reforms on Day 1. I argue that Obama's timing may have been bad, but universal access to health care is still a good thing. Wall Street's problem is not over-regulation. Quite the opposite.


Shortly after the election, a Romney supported asked me, "What has changed?" I didn't know what to say. In retrospect, this is what has changed. We have universal access to health care and some wall street reform. Obamacare by itself might establish the president as one of the all-time greats.

Those now will not go away. I had hoped that the republican house would be able to find some middle ground and work a little revenue enhancement into the budget discussions, but they seem more interested still in holding the nation hostage.

Saturday, November 10, 2012

What They Mean When They Talk About Tax Hikes On The Rich

Increase Taxes On The Rich - What that means

There is a tremendous amount of innumeracy in this country. I don't know why that is.

One thing I keep seeing is talk of tax hikes on those making more that $250k. I want to describe what that means.

First, technically, it is an increase of tax rate on incremental income above $250k. It's not simply raising the rates on everyone making more that $250k. It may have that effect, but words matter.

What is the distinction?

Consider a person who makes $1.01 less than $250k. He or she will pay let's say $50k in income tax. If he makes $1 more, he will pay about $0.30 more taxes at a 30% income tax rate.

Now let's say that the tax laws change so that income above $250k is taxed at 40% (up from 30%). It does not mean that suddenly his entire income is multiplied by 40%, it means that only the amount above $250k will be multiplied by 40%.

So let's say our $249,999 earner gets a raise to $260k. Under a 30% rate, his tax would increase about $3,000, so his net goes up by $7k. Under a 40% rate, his tax would go up by $4000, so his net is $6k higher.

Look, I'd rather pay less in taxes, but we as a nation need to work down the deficit. Doing it by taxing high earners more really makes a lot of sense, and you know what, that $1,000 will not even make a dent in Mr. 260k. For a $10k increase in salary, his total taxes go from $50k to $54k instead of $53k.

An Alternate Scenario

Let's try another scenario to see why that all matters. Drop taxes on the first $250k, raise taxes above that.

In the above example, our $260k guy paid an average 20% rate on the first $250k, then 30% for money above that. His taxes would be $53k.

Now suppose you were to drop the rate on the first $250k to 16%, then at the same time increase the rate above $250k to 40%. What would be the impact then?

On the first $250k, he would pay $40k, then on the next 10k he would pay $4k, for a total of $44k.

This is similar in form to what President Obama has been proposing. The press has distorted the actual implications to make it sound like a big tax increase. That is simply not the case.

The table below shows the differences:

                       "As Is"           Raise Tax above 250k     Tax below 250k=16%
                       20%, 30%                        to 40%              Above 250k = 40%
First 250 k        50k                            50k                                    40k
Next 10 k           3k                              4k                                      4k
Total                 53k                            54k                                     44k

So you can see that lowering taxes on income less than $250k and raising them on income above $250k actually lowers taxes even on some people making more than $250k. In the example above, a high earner would begin paying more taxes at $350k compared to the As Is case.

Here is what it looks like graphically:

Note that the more you make gross (x-axis, the more you make net in all three cases. If the tax is raised only on the high earners (green), you net  more at all income levels than not earning the extra money. However you net less than the other cases.

And zoomed in on the region above 250k.  Green is less than the other two, but something interesting happens in comparing red and purple. From 250 to 350 k gross, purple with a higher tax rate on income above 250k actually yields more net than the As-Is case. That's because the higher rates on income above 250k is offset by lower rates above 250k. Purple and red are equal at 350k, then red nets more than purple.

So if rates on lower income are dropped, while rate on higher income are increased, will that hurt high income people and create a disincentive to work?

At 500k gross, there's about a 15k difference in net income. The person who earns 500k per year takes home 360 instead of 375k.


I am not putting a value judgment here on what is good or bad, I just want to encourage people to look at and understand these issues. Headlines and sound bites simply do not do justice to the complexity of these issues.