The disparity between rich and poor is growing in America as the federal minimum wage has remained flat for years, union membership has declined and industries have faced global competition, according to a study released Thursday.
The report by the Center on Budget and Policy Priorities and the Economic Policy Institute, both liberal-leaning think tanks, found the incomes of the poorest 20 percent of families nationally grew by an average of $2,660, or 19 percent, over the past 20 years. Meanwhile, the incomes of the richest fifth of families grew by $45,100, or nearly 59 percent, the study by the Washington-based groups said.
Okay, what's wrong with this? As usual, the Center is comparing categories rather than actual households, denying that real househlds move into and out of the categories over time. (It's like claiming all the Jews living along Devon Avenue must have converted to Islam or Hinduism between 1955 and 2005 because the neighborhood now looks so different!)
Here are recent actual numbers for the State of Illinois using PSID household data and Census income averages. Start with these US averages
1993 AVERAGE STARTING INCOME BY QUINTILE: 1:$9,292 2:$23,388 3:$39,203 4:$60,925 5:$126,933
Now look at average year 2000 income of Illinois households who started at those 1993 figures: 1:$20,167 2:$41,601 3:$71,840 4:$124,467 5:$137,861
Now compute the percent household income increase, by quintile, of actual Illinois households between 1993 and 2000: 1: 117% 2: 78% 3: 83% 4: 104% 5: 9%
It is a sad irony that those at the bottom of the income spectrum have nowhere to go but up, while those at the top have nowhere to go but down. This tautology proves the opposite of what we're often told -- it the poorest who (by definition) persist in getting richer, while the richest persist in getting poorer.
Real working folks with two jobs are LOTS more interesting than these people, even with a limp murder mystery thrown in.
The trailer was great. The movie turns out to be just plain embarassing at best, boring at worst. Professional film critics are wrong in this case.
U.S. popular writing on film has turned into worthless political correctness. It is no longer possible to tell whether Roger Ebert genuinely likes a film or whether he thinks we ought to see it because it will make us better people.
This, probably the best of the weekend talking heads shows, was unavailable via WTTW Chicago (too politically "diverse" for them I guess), so I got it by long-distance antenna out of Gary Indiana during its brief sojurn on the few so-called public television stations willing to carry it.
Briefing.com is predicting 3% and says the consensus market forecast is 2.8%, so once again EconoPundit is way way way out there on the limb with Ray Fair (who actually couldn't care less, because right he is busy updating about 100 data series getting ready to reestimate things for this quarter).
So now there's nothing to do but wait for the announcement...
UPDATE: Okay, the branch broke and I fell and I'm now on the ground with several broken bones.
You can bet Chris Matthews and most of his guests will display an unusual sudden interest in GDP data tonight. "The economy -- is it overrated?" I can hear it now...
The deceleration in real GDP growth in the fourth quarter primarily reflected a deceleration in PCE, an acceleration in imports, a downturn in federal government spending, and decelerations in equipment and software and in residential fixed investment that were partly offset by an upturn in private inventory investment.
Hmmm, what's that about a "downturn in federal government spending?" Remember that sudden budgetary surplus we talked about recently?
All you deficit hawks out there, take note: the Keynesian model works. Cut back your spending, build the surplus, but at least partly at the expense of slower growth.
UPDATE III: Crap. The secret's out. They heard about it at the New York Times.
He that sells a house he can't afford can buy one...
With avuncular nodding approval of Chicago Tribune's Opinion Page editors, Mark Cloud whines about all the "McMansions" (no -- that's too plain -- call them "Chateaus de Mac", he suggests) going up in his Atlanta suburb:
This kind of construction isn't just happening on our street, either. The whole neighborhood is quickly changing from an affordable close-to-the-city haven into an exclusive enclave of million-dollar homes. I suppose the good news for us is that the property values in this area have increased thanks to all the big new houses. Of course, we couldn't afford to buy our own house now, but maybe that's just the price of progress. Besides, even if we could afford it, I don't think we'd want one of those beautiful, spacious, modern Chateaus de Mac. Because from what I've heard, there's not a one of them that has a yellow bathroom that glows in the dark. Man, they just don't make 'em like they used to.
Marc, you're just so wrapped up in irony you're not thinking clearly. Stop. Take a deep breath. If you sell your house (that you couldn't afford to buy) and buy something more humble than a McMansion (as you implicitly brag you, great modest guy that you are, would do), you will move into a larger home with money in the bank!
Here's some new crackpot international economics from the Peak Oil Cult. (Did you know the US dollar is "backed" by oil? Guess that's why they're always talking about oil "reserves!")
New orders for manufactured durable goods in December increased $2.8 billion or 1.3 percent to $228.1 billion, the U.S. Census Bureau announced today. This was at the highest level since the series was first stated on a NAICS basis in 1992 and followed a 5.4 percent November increase.
Read the various posts and associated comments. Pay special attention to all the differing theories of wage formation (no, not supply and demand), immigration/labor history ("Immigration in the US and Europe has been seen by the rich and powerful as a way of getting the benefits of serfdom without having to legalize it."), and ultimately scientific-historical victimhood ("Very few immigrants actually [worked their way up]. Each new wave of immigrants allowed the previous serfs to move up. Each in turn climbed on the black population for the first boost.")
UPDATE: Meanwhile, as the glittering educated elite sneer at all the marginal, low-paying jobs offered by (curl your lip and look like you're going to barf as you say it) WAL-MART, here in Evergreen Park a record 25,000 applications are filed by workers seeking to fill the new location's 325 new jobs.
Yeah, really bad jobs.
UPDATE: A spokesman for the United Food and Commercial Workers Union claims this is all a PR stunt. He should know about such things.
Let me make this point in more-explicit fashion: through the miracle of modern situational union ethics, WAL-MART is enemy when those giant multinationals drive small local enterprise out of business, and then the very same small local enterprise is the enemy when its workers have the nerve to disagree with their union overseers.
Draft -- Not for Quotation or Citation Without Permission
While I enjoy statistics, I take it lots less seriously than most econometricians I know. So I've avoided this controversy so far.
Another reason I've stayed away is one of the participants is a colleague for whom I've got lots of regard.
But heck, now everything is different. I must pay attention, because I've generated a conference paper that may set the record for lowest level of statistical significance reported by anyone bothering to finish the research. In attempting to measure the existence of what Albert Hirschman called the "tunnel effect" in I've reported a sign change in an ad hoc regression coefficient as evidencing the looked-for effect -- but the coefficients explain only 3% of the LHS term's total variation. Yes that's right, THREE PERCENT. Perhaps a record for a low R-squared!
Idea for a movie: continued ethnic violence in Iran drives world Oil prices up beyond the $120/bbl mark. With enthusiastic European support the US invades with the sole stated purpose of stabilizing and bringing back into control world energy prices.
The US President announces a new doctrine, that OPEC-control of world energy prices (as well as OPEC capture of petroleum rents) is no longer ethically acceptable. From now on these rents will go toward (a) economic development for less-advantaged regions and (b) transition to new postpetroleum energy technologies.
The Conservatives have won big in today's Canadian election; it appears that they will form a minority government. Congratulations to our friend Captain Ed, who deserves a huge share of the credit. Ed is the first blogger who can credibly claim to have influenced a national election. Not that Ed makes that claim, but we do. And it couldn't happen to a nicer guy. Congratulations, Ed!
Trailers for this film have been appearing on HDN for some time. Looks extemely interesting. (I've looked but can't find it -- if you find the trailer online, please send a link.)
Iran's leader has challenged the Europeans to "take back" the Jews. On this proposition, a commentator at Haaretz.com suggests:
Europeans I`m sure would applaud a trade-off whereby the Jews in Israel find homes in Europe while the masses of Arabs and Muslims presently overrunning Europe would return to the countries they, or their parents, had originally come from.
Without these clarifications, strictly propaganda...
In reference to this editorial we once again ask the following questions, and invite David Cay Johnston (or anyone else) to answer these questions in public:
1. What percent of total returns in the income brackets being discussed are actually audited? 20%? 10%? 5%?
2. What percentage of audits do you consider "too high?" Is there any number you would consider "too low," or should all returns of taxpayers below, say, $15,000 be exempt from any audit as a permanent entitlement?
3. How does the number and percentage of new audits compare with number and percentage of fraudulent returns?
My quick reading of numbers in the document on which this editorial is based leads me to conclude about 6% of all returns are audited, and this roughly matches the number of recent fraudlent returns. If I am wrong I would like to see numbers and sources.
UPDATE: David Cay Johnston sends this:
As for audit ratios, it takes time to calculate from the latest data, but from my book Perfectly Legal at Page 130:
The IRS in 2001 audited "about out to one in every 47 returns seeking the [Earned Income Tax] credit, compared to about one in 366 taxpayers who did not apply for it. Small businesses with $5 million of assets were about as likely to be audited as the working poor despite the far greater potential for tax cheating by the business owners."
and at Page 132:
From 1988 to 1999 "audit rates for the poor increased by a third, while falling 90 percent" for those making more than $100,000, the top tier threshold in IRS statistics at the time.
and at Page 134:
"In 2001 the IRS audited 397,000 of the nearly 20 million returns filed by the working poor who applied for the earned income tax credit. The IRS audited about 50,000 of the more than seven million returns filed by people making $100,000 or more...indeed, of all the 744,000 individual tax returns that the IRS audited...more than half were filed by the working poor....looked at another way, one in 47 of the working poor had their returns audited compared to one in 145 of the affluent and one in 400 returns filed by partnerships, which are used mostly by the wealthy. Many of the affluent rely on wages for most of their incomes, so they have few chances to cheat, which helps to explain their low audit rate. But how, then, to explain the fact that among businesses with assets of $1 million to $5 million the audit rate was just one in 49, almost the same as the working poor despite abundant opportunities for the business owners to cheat."
The abuse of the rarely audited partnerships to cheat on taxes on a multi-multibillion dollar scale -- and the failure of the IRS to make use of techniques its top partnership expert devised to pinpoint such cheating -- is examined in several chapters of Perfectly Legal.
Posts like this are all over the internet today. Sometimes it is hard to tell whether they're angry at Chris Matthews for (a) defaming Michael Moore by comparing him with Osama Bin Laden or, rather, (b) insulting Osama Bin Laden by comparing him with Michael Moore.
UPDATE: Here's John Kerry wetting his pants over Chris Matthews' deviation from the approved antiwarinIraq path. You couldn't make this stuff up.
tax cuts still stand in disrepute among most of the media, academics and Democrats in Congress, albeit for shifting reasons. When Reagan proposed his 30% across-the-board tax-rate cut, his critics howled that this would cause demand to rise and lead to hyper-inflation. In fact, supply rose faster than demand, and inflation fell to 4% from 13% and has fallen even lower since. When the economy went into a deep recession in 1981-82, Reagan's adversaries (and some of his own advisers) declared his tax cuts a failure. Reagan said stay the course, and the moment the final leg of the tax cut took effect, in January of 1983, the economy roared to life with an expansion that lasted more than seven years.
When the budget deficit rose in the mid-1980s, the liberals warned that if Reagan would not raise taxes interest rates would skyrocket. He didn't and rates didn't. After the 1987 stock market crash, liberal John Kenneth Galbraith wrote that "this debacle marks the last chapter of Reaganomics . . . and the irresponsible tax cuts." Again, Reagan refused to buckle, and two months later the stock market recovered and the expansion roared on--an expansion that didn't end until George H.W. Bush reversed course and raised taxes in 1990.
This is a particularly interesting month to be discussing the whole matter of supply side, because according to (unrevised) data last month generated the first budget surplus since the Clinton years. But the "proof" of supply side isn't whether tax cuts generate sufficient revenue to pay for themselves (they don't, they only generate some additional revenue). Rather, the proof lies wrapped up in the whole complicated question of how aggregate costs relate to output -- and how taxes, laws (especially those related to property rights), and natural factors like weather and nonrenewable resource price movements, all impinge on the cost/output relationship.
Let's make it simple: supply side economics isn't simply about whether tax cuts generate their own revenue fixes, but rather whether diminutions of central government's role in the economy are matched (or even more-than-matched) by increases in private sector activity.
He has studied the recent Western postmodern mind, nursed on its holy trinity of multiculturalism, moral equivalence and relativism. As a third-world populist, Ahmadinejad expects that his own fascism will escape scrutiny if he just recites enough the past sins of the West. He also understands victimology. So he also knows that to destroy the Israelis, he--not they--must become the victim, and the Europeans the ones who forced his hand. Ahmadinejad also grasps that there are millions of highly educated but cynical Westerners who see nothing much exceptional about their own culture. So if democratic America has nuclear weapons, why not theocratic Iran? Moreover, he knows how Western relativism works. So who is to say what are "facts" or what is "true"--given the tendency of the powerful to "construct" their own narratives and call the result "history." Was not the Holocaust exaggerated, or perhaps even fabricated, as mere jails became "death camps" through a trick of language to take over Palestinian land?
My first reaction to the announcement was similar to this -- the new tape shows we're winning in other words.
But read the part of the statement currently available in translation:
We do not mind offering you a long-term truce with fair conditions that we adhere to...We are a nation that God has forbidden to lie and cheat. So both sides can enjoy security and stability under this truce so we can build Iraq and Afghanistan, which have been destroyed in this war. There is no shame in this solution, which prevents the wasting of billions of dollars that have gone to those with influence and merchants of war in America...
First of all we know to whom he's referring when he talks about "those with influence and merchants of war," right? (Hint: it begins with the letter "J".)
Second, check out what the Islamic world has considered "fair conditions" when guest hosting Dhimmis. (Hint: when the Taliban started forcing non=Moslem guest people to start wearing badges "for their own protection" -- Were the badges actually yellow? I don't remember -- they were only moving from a slightly less- to a slightly-more traditional means of managing guest peoples.)
UPDATE II: And does the timing have anything to do with France's startling announcement regarding nuclear retaliation? (What, indeed, is Chirac's meaning -- is he saying if Paris is nuked, Mecca goes too, or is he threatening this response if, say, an Airbus takes out the Eiffel Tower?)
But we have linked to this before and now we now link to it again. And we repeat EconoPundit's Theorem 1(a)Z: a society which continually spends more on redistribution has continually less to offer those engaged in actual production.
Our tort system fails to impose fair penalties and provide the right incentives. In principle, the tort system should encourage individuals and businesses to take reasonable care and to be mindful of potential injuries. In practice, our tort system often delivers "roulette justice," in which outcomes bear little relationship to economic rationality or notions of fairness. The undesirable side effects are manifest.
Doctors are discouraged from high-risk procedures and practices, but are encouraged to prescribe unnecessary tests and procedures as they practice defensive medicine. Companies are discouraged from developing new products. Costs go up for all of us as prices build in a "tort tax" to cover the cost of litigation.
Our tort system fails our economy. In 2002, tort costs amounted to more than $233 billion--over 2 percent of GDP. This cost is high as judged by either historical or international standards. The share of national income going to tort costs is about twice what it was thirty years ago. If we look around the world, we see that the United States has the highest tort costs of any developed nation. As a percentage of GDP, Canada, France, and Japan each spend less than half of what we do.
Self-referential internal contradictions of postmodernism...
I am becoming increasingly convinced the Democratic Party is in for a huge defeat because in most voters' minds it has become the TRP -- Terrorist's Rights Party.
UPDATE: More here. I particularly like this snippet:
The asserted interest of the ACLU, its Michigan affiliate and the individual board member plaintiffs of the ACLU Michigan affiliate appears to derive from their representation of terrorist detainees and their communication with others of a similar bent. ACLU Michigan board member Noel Salah, for example, complains that the NSA program has caused him to curtail his communications with "Palestinians under Israeli occupation" and inhibited his "efforts to promote peace and justice in this country."
UPDATE II: Back in the 1960's left-center activists drew the line at (often purely imaginary) discussions of terrorist tactics. This is one reason the Vietnam Vets Against the War was generally avoided. Yet none of us were yet old enough to be lawyers then, and don't lawyers have those special privileges enabling them to politically go where others fear to tread?
It has been 30 years since the launch of the so-called Chilean economic miracle, when the government of General Augusto Pinochet, on the advice of Milton Friedman's disciples from the University of Chicago, toppled the country's high barriers to trade and investment and privatized vital services, including telecommunications, electricity, and eventually the pension system. The resulting growth spurt made Chile a hot emerging market -- and ushered in the era of the "Washington consensus," the doctrine that free trade and free markets could work their magic anywhere.
By most measures, Chile remains Latin America's star performer. Per capita income has increased at an annual rate of 4.1% over the past 15 years, compared with just 1.1% a year in the rest of Latin America. Yet class divisions remain stark. Having the "right" surname, light skin, and diplomas from a small cluster of prep schools and from two top universities is still key to landing a top-level job, says Marta Lagos, managing director of the MORI polling institute in Santiago. "Chileans feel that a powerful minority still dominates the country, and that while people may have more access to material goods than they did in the past, they don't enjoy the kind of social mobility and opportunities that make them feel part of the Chilean success story," she says. That's partly why Chilean voters are gravitating to presidential candidate Michele Bachelet, a down-to-earth 53-year-old pediatrician turned politician who preaches a message of social inclusion.
The U.S. economy has once had the experience of completely eliminating record deficits owing to record economic growth. Would the Minneapolis Star Tribune argue it is beyond all possibility this could happen again?
The federal government posted the first budget surplus for December in three years as corporate tax payments hit an all-time high, helping offset a record level for spending, the Treasury Department reported Thursday.
The department said...government receipts surpassed spending by $10.98 billion last month...[This reflects] the fact that government receipts were up 12.1 percent from a year ago to $241.88 billion while government spending rose by a slower 5.6 percent to $230.9 billion. The figure for outlays still represented an all-time high for spending for any month.
And so we say: O my prophetic soul!
UPDATE: Yes, I know this is for one month only, but please don't bother me while I'm feeling warm and fuzzy and prophetic. (It only lasts about twenty minutes.)
Memorandum's links to this story (as well as the story's Chicago Tribune version) have mysteriously vanished from the web during the last half hour. The story has encouraged some bloggers to contend (as Max Sawicky puts it):
Since the misnamed "Revenue Reform Act of 1997," Congress has been steering the Internal Revenue Service to focus tax enforcement on the estimated $9 billion not paid by the working poor, rather than the other $340 billion not paid by everyone else (annually). Now we learn that escalating enforcement will further deprive many of benefits to which they are entitled.
You should be clear, it is the Republican Congress at the root of this sickening trend, aided by Democratic apathy.
fraudulent EITC claims per year: 118,000 tax returns frozen owing to prior year investigations: 210,000 tax returns currently frozen owing to current-year fraud investigation: 118,000
In other words the "hundreds of thousands" of tax returns the NYT talks about consists of all previous as well as current-year investigations. On a percentage basis, current year low-income-earner tax returns frozen for investigation amounts to a bit under 6% -- and the actual number of new investigations is approximately equal to the expected annual number of previously discovered fraudulent returns.
On the surface -- in this matter at least -- it looks like the IRS is doing precisely what they get paid to do.
UPDATE: And I've found one radical commentator who ought to be fully on the IRS side in this issue because, as he puts it:
More importantly, recovery of unpaid taxes would eliminate the bulk of projected federal budget deficits over the next 10 years. Burgeoning budget problems...and the associated difficulties of enacting tax increases make closing the tax gap a salient political issue and an important policy priority. Indeed, one reason to resist tax increases is the knowledge that many others are escaping their own tax obligations.
What's that you say? What? The person who wrote these words was --- none other than MAX B. SAWICKY himself??????
Notice [the NYT article] was written by David Cay Johnston, who seems to make a living writing about the many ways that our progressive tax system isn't really progressive and is out to get poor folks. Do a search for his old articles and you'll find a significant percentage dealing with that topic.
Plus, he wrote a book called "Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich - and Cheat Everybody Else". So, of course, the NYTimes has him covering the tax system. Funny, isn't it, how left wing pundits -- I could name a few -- routinely get jobs as reporters at major media outlets, but you never see reporters coming from, say, National Review or Weekly Standard.
At his blog Jon Henke has taken note of David Cay Johnston a number of times, most notably here, here, and here. He has also exchanged emails with him, and finds him a pleasant fellow who can't seem to see past his own biases.
UPDATE II: Sorry Max, I avoided the issue assiduously (too afraid of seeming TOO conservative I guess) but now an astute reader sends in this link showing in explicit graphic form the point I've been reluctant to make: we're not really talking about tax refunds here, but rather about income redistribution. Marginal tax rates below (roughly) $18k are negative. If you add lifetime social security benefits into the mix we're talking about low-income-earners being subsidized by everyone else -- including the low income earners at the slightly higher income scales just above them.
You may also notice the NYT misrepresenting the data.
The basic (and false) premise might be labeled in varying ways, but the basic idea is to apply changing numbers to a situation essentially assumed to be perfectly static. If the same households under circumstances "B" save less than under circumstances "A" then something must be wrong with the circumstances, not the households. (And it is the job of the free press to uncover all those nasty bad circumstances, right?)
In reality, however, the households themselves have changed. A disproportionate number of them are (a) getting older and doing what older households normally do, namely, drawing down their accumulated savings, and (b) enjoying the tail end of a housing price boom which has made them feel wealthier than would otherwise have been the case.
Be prepared for lots more low saving rates in coming years. The baby boomers -- never a shy lot -- are none the less now retiring!
The most telling moment in Alito's opening statement came when he described how the privileged and intelligent people he met at Princeton in the late 1960s and early 1970s lacked the common sense and decency that his friends in the neighborhood possessed. The committee Dems represent the people Alito met at Princeton. Alito still represents the people from his neighborhood. The American people will notice the difference.
...the reality is, the Democrats are just making it up as they go along. They recognize no duty of consistency. Their logic can't withstand the most elementary scrutiny, and their leader is a dimwit who, after being thrown out of Harvard for cheating, graduated last in his law school class. While a law student, he endured the humiliation of being arrested by a highway patrolman while cowering in the back seat of his car, pretending not to be the driver. He subsequently drove off a bridge, thereby drowning a young woman whose only crime was assuming that he was a competent escort. She probably could have been saved if he had gone for help, but instead of trying to rescue her, he spent the night looking for someone who would pretend to have been the driver of the car, discussing legal strategies with his family's advisers, and trying to establish an alibi. And now Ted Kennedy purports to sit in moral judgment over a brilliant, self-effacing public servant like Sam Alito. The American public isn't paying much attention, but I think they're smart enough to figure this one out.
UPDATE: Find this in the Washington Times:
In a torrid and rambling...Washington Post [editorial], Mr. Kennedy...accused Judge Alito of racism and sexism because he reportedly belonged in the 1970s and 1980s to Concerned Alumni of Princeton...[Such] guilt-by-association logic is always...dangerous... If Mr. Kennedy were the nominee, perhaps a muckracker would happen upon his onetime membership in the Fox Club, one of Harvard's so-called "final clubs," which in the 1950s were havens for white, wealthy sons of privilege like Mr. Kennedy. Mr. Kennedy's name was scrubbed years ago from the alumni list, according to club members. Perhaps that's because at least a few racists or sexists must have been members -- it was an old boys' club in the 1950s. But no reasonable person can hold Mr. Kennedy responsible for the association[, even though he] now wants to hang Judge Alito for something similar.
I'm not sure how strong the analogy between 1984 and 2006 is. One basic difference is that for a generation, resistance to the Communist threat was the bipartisan foundation of America's foreign policy. While that consensus eroded starting in the 1960s, in 1984 there were still relatively few Americans who didn't understand who the "bear" was or who doubted that military strength and preparedness were necessary for our defense. I'm not sure that's true today. Any bipartisan consensus on the war on terror fell apart soon after September 2001, and I think there are a great many people who fervently believe that there is no "bear," i.e., no significant terrorist threat, and whose wishful thinking leads to the conviction that if we stop our vigorous prosecution of the war, the terrorists will simply go away.
Which is not to say that the Democrats have embarked on a winning strategy. But I do think that the pacifist option is more viable politically today, than it was in 1984.
* On January 3, Iran's Revolutionary Guards Corps began a two day seminar in Tehran devoted to nuclear-biological-chemical warfare and new defense technologies, that included lectures by Iranian experts on electromagnetic pulse weapons, graphite bombs, and laser-guided bombs. These are the same weapons many Western intelligence analysts believe Iran will attempt to use against us.
* On January 4, three battalions of the IRGC ground forces began three days of [nuclear-biological-chemical] military exercises in Semnan province, not far from Iran's main ballistic missile proving ground.
* In addition to a recent $1 billion arms agreement, announced last month, Russia is now negotiating with Iran's Revolutionary Guards to modernize Iran's fleet of MiG-29 fighters with state-of-the-art radar, electronic counter-measures, and reconnaissance systems, specifically designed to counter the threat of Israeli aircraft. A Rev. Guards buying mission will visit Lukhovitsy and Kalayazin in Russia to view these new systems in February 2006. The Russians have also agreed to sell Iran S-300 anti-missile systems, believed by most experts to be superior to any comparable system currently available on world markets.
China indicated on Thursday it could begin to diversify its rapidly growing foreign exchange reserves away from the US dollar and government bonds -- a potential shift with significant implications for global financial and commodity markets.
Economists estimate that more that 70 per cent of the reserves are invested in US dollar assets, which has helped to sustain the recent large US deficits. If China were to stop acquiring such a large proportion of dollars with its reserves -- currently accumulating at about $15bn/mo...it could put heavy downward pressure on the greenback.
In a brief statement on its website, the government's foreign exchange regulator said one of its targets for 2006 was to "improve the operation and management of foreign exchange reserves and to actively explore more effective ways to utilise reserve assets".
It went on: "[The objective is] to improve the currency structure and asset structure of our foreign exchange reserves, and to continue to expand the investment area of reserves.
"We want to ensure that the use of foreign exchange reserves supports a national strategy, an open economy and the macro-economic adjustment."
The announcement came from the State Administration of Foreign Exchange (Safe). It gave no more details about whether this meant a big shift in the investment strategy for Chinese reserves, which according to local press reports reached nearly $800bn at the end of last year and are expected by economists to near $1,000bn this year.
The regulator also said it would end quotas on the amount of foreign currency Chinese companies can acquire to invest in overseas assets, a decision that removes a bureaucratic hurdle facing companies that plan to make international acquisitions.
The statement comes at a time of growing debate in China on how the reserves are invested. Some economists have called on Beijing to use the funds to finance infrastructure investment and clean up state-owned companies, or to invest in higher-yielding assets rather than financing US borrowing.
However, according to Stephen Green, economist for Standard Chartered in Shanghai, although the language was "vague", Thursday's statement was the first time Safe has publicly indicated a shift away from dollar assets.
"It is a subtle but clear signal that they are interested in moving away from the US dollar into other currencies, and are interested in setting up some kind of strategic commodity fund, maybe just for oil, but maybe for other commodities," he said.
The Group of Seven leading industrialised economies has repeatedly called for an adjustment in global trade imbalances, including a rise in the renminbi. The US has expressed frustration that China has not allowed its currency to rise significantly after last July's 2 per cent revaluation. That saw China move from a dollar peg to managing its currency against a basket of currencies, potentially allowing the renminbi to rise against the dollar.
John Snow, US Treasury secretary, speaking earlier on Thursday, repeated his call for China to allow the renminbi to rise against the dollar. "The trade deficit is influenced by lots of things, differential growth rates, differential savings rates and investment rates and so on. But clearly, getting the [Chinese currency] more appropriately valued will be helpful to the global adjustment process," he said.
However, some economists believe it would be a mistake for China to shift its reserves into domestic investment or other asset classes.
Okay, what to make of this? If you're old fashioned, you'll be looking for judgment day fairly soon. If, on the other hand, you've got a more modern set of ideas that includes financial markets as actors rather than simple reactors, you'll be looking for a few short-term adjustments (that some -- alarmists mostly -- will call "alarming") and eventual long-term exchange rate adjustments that will benefit US consumers, workers, and business owners.
This Pulse-Journal article clouds the relevant timeline and lauds Russ Tice as heroic whistleblower -- yet at best Tice seems angry, disgruntled, unreliable, and perhaps dangerous:
"I reported my suspicion and got blown off," Tice said. "I pushed the issue and that ticked them off, the fact that I questioned their almighty wisdom."
What exactly was this "suspicion?"
Tice had been at the odds with the agency since he reported suspicions that a female co-worker at the Defense Intelligence Agency... was a spy for the People's Republic of China...He made his initial report about the suspected spy at DIA after noticing that a co-worker voiced sympathies for China, traveled extensively abroad and displayed affluence beyond her means.
Ohhkaay -- because she travels, has money, and says she likes the Peoples' Republic of China she must be a spy, right? And it is clear everyone in the agency is either incompetent or bought off because when he started sending angry emails complaining about his superiors and claiming he was being watched, people started treating him like somebody who might have a psychological problem:
In April 2003, Tice sent an e-mail to the DIA agent handling his suspicions...He was prompted to do so by a news report about two FBI agents who were arrested for giving classified information to a Chinese double agent.
"At the time, I sent an e-mail to Mr. James (the person at DIA handling his complaint) questioning the competence of counterintelligence at FBI," Tice wrote in a document submitted to the Inspector General. In the e-mail, he mentioned that he suspected that he was the subject of electronic monitoring.
Shortly after sending the e-mail, an NSA security officer ordered him to report for "a psychological evaluation" even though he had just gone through one nine months earlier. Tice believes James called NSA to ask them "to go after him" on their behalf.
When Tice called Mr. James to confront him about calling the NSA security official, he told Tice that "there was reason to be concerned" about his suspicion about his former co-worker.
The Defense Department psychologist concluded that Tice suffered from psychotic paranoia, according to Tice. "He did this even though he admitted that I did not show any of the normal indications of someone suffering from paranoia," Tice wrote in a statement to the inspector general.
According to what I can find out, [what's being reported is just] the tip of the story. Tice was stalking this ex co-worker, harrassing her, obsessedly convinced she was a spy and generally causing a rukus around the office when there was absolutely no evidence of her being a Chinese spy. He then opened his own little investigation...Word is that his security clearance (because he was misusing infomation and looking with unauthorized peeks into the co-worker's background), was subsequently revoked...because he violated the terms of keeping a clearance.
Throw a hefty rock down a steep and rugged hill. It tumbles and crashes, crushes and smashes, until at last it explodes into the dusty rock heap at the bottom.
Okay, so tell me what just happened? It was a physical event, right? The rock (a small object) was attracted by a larger object (the earth). We use language to call this principle the "law of gravity." If you agree philosophically you're a materialist.
Wait just a second. About that "law of gravity" -- it existed before we decided to name it, right? Heck, it even predated language, even the earth and the sun! So what just happened wasn't a rock rolling down a hill, but the physical world expressing an underlying independently-existing reality. What's "real" here isn't the rock and the earth, but the law of gravity itself. The physical event just expresses that reality. If you agree you're not a materialist but an idealist. To the idealist, insisting the rock and earth are the "reality" is as silly as claiming a declarative statement like "Impeach George W. Bush!", rather than the actual person uttering the words, is the "reality."
Laffer's theory really breaks down into two assertions. The first is that tax relief will stimulate the economy by encouraging people to spend more, work harder and save more, an idea accepted by most economists. In a new study, the CBO modeled a 10 percent cut in federal taxes on all individual income and found that it would raise the nation's economic output over a decade by up to 1 percent, or many billions of dollars.
The second question is whether this spurt in economic activity would produce enough new taxes to replace the revenue lost in the original tax cut. The CBO modeled this question using nine different assumptions about individual behavior and government borrowing, and found that in no case did the tax cut replace more than 28 percent of the lost revenue over a decade.
You don't need a Ph.D. to get the point. Just look at the data. During the era of Reaganomics in the 1980s the government ran massive budget deficits -- not because spending was higher than the president proposed but because revenues were lower than he predicted.
The same thing is happening today. Daniel Altman of the New York Times points out that, after Congress passed a big cut in the federal income tax in 2001, revenue from the federal income tax dropped from $994 billion to $809 billion in 2004, even though the economy was growing and President Bush had promised that the tax cut would pay for itself.
All this might be so much abstract theory except that the GOP Congress is preparing to vote on some $90 billion in new tax cuts in the next few weeks -- despite a large and stubborn budget deficit -- and lawmakers already have begun arguing that the tax cuts will pay for themselves. Well, it didn't work in the 1980s, it's not working now and honest political leaders would quit pretending that it does.
This is so wrong it defies serious discussion.
Tax cuts, the editorial stipulates, do succeed in raising aggregate income.
Indeed (as the editorialist confirms) aggregate income can rise so high that a full 28% of the tax cut can be replaced by new, higher tax revenues generated at the new, lower rates. This confirms the basic Laffer argument.
The deficit is of course larger than would otherwise be the case, but private sector incomes will increase by a substantially wider margin than the deficit. The tax cut will more than pay for itself, but at the "cost" of shifting spending power from the public to the private sector.
Some aspects of the Laffer argument -- the necessity of so-called "dynamic scoring" for example -- are now settled economic science. Others -- exactly how the economy grew itself out of the Reagan deficits -- are still contentious. (While I disagree with most of it and think its predictions have been discredited, you'll find a somewhat more-honest discussion of the issues here.)
The U.S. economy has once had the experience of completely eliminating record deficits owing to record economic growth. Would the Minneapolis Star Tribune argue it is beyond all possibility this could happen again?
An inherent contradiction -- something's gotta give?
According to this (recent but not current) document the average US primary/secondary school teacher now earns something in the range $45-$49,000 per year.
To greet the New Year the New York Times calls for an increase in the federal minimum wage by dressing up an editorial as if it were a fact-based story. Here's one of the facts:
Tim Nesbitt, the former president of the Oregon A.F.L.-C.I.O., said that despite having one of the highest minimum wages in the country at $7.25 an hour, Oregon had twice the rate of job growth as the rest of the country.
Okay, we'll check out the "job growth" angle presently, but for now here's the Oregon unemployment rate plotted from the early 1990s to the present: Yes, that's right, chronically about 1.5-2% above national average. Even now, as the rest of the US explores life with unemployment rates around 4.9%, Oregon languishes at 6.5% -- just what that big bad economics textbook says will happen!
UPDATE: Here's the basic fact check. It turns out Nesbitt is partly right: The red line shows year-to-year percent change in private sector jobs for the US as a whole. The blue line shows the comparable figure for Oregon. Prior to 1998 Oregon led the nation as far as this measure of job creation goes. After 1998 the record is mixed.
None of this contradicts the unemployment rate measurement, however, and it is the unemployment rate that's the pertinent statistic for this discussion. Why? Because it measures jobs relative to the number of people seeking those jobs. Regardless of whether the wage is raised by market or political forces, the higher the wage (all other things being equal) the more job seekers you'll observe.
Here's the annual average unemployment rate for Oregon (blue line) and the US as a whole (red line): Raise the wage and you increase the number of job-seekers. If jobs don't expand as fast as job-seekers, the unemployment rate goes up.
Conveniently enough, this web site shows us the history of the Oregon minimum wage (in both nominal and inflation-adjusted dollars): So the massive discrepancy between the US and the Oregon unemployment rate emerged just when the Oregon minimum wage started moving upward in real terms.
The textbooks tell us minimum wage hikes kill jobs. Is this simply right-wing ideology? The numbers seem to say "no."
UPDATE: Tim Worstall points to this paragraph as saying in effect what opponents of minimum wage hikes claim:
Advocates of an increase in the minimum wage said that inflation had so eroded the value of the minimum wage in the last nine years that it was worth less today in real terms than at any time since 1955. They also cited studies that found that raising the minimum wage did not cause job loss, as opponents argue. According to these studies, employers can absorb the higher labor costs through efficiencies, less employee turnover and higher productivity.
The NYT doesn't understand the arguments, confusing "job loss" with "business closure" (effective job loss at the enterprise level).
UPDATE II: See also John Broder, who cogently dispenses with all opposition to minimum wage hikes with the following well-turned witty aphorism: "All of this boo-hooing is so much bullshit."
