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What We Read Today 19 January 2015

Econintersect: Every day our editors collect the most interesting things they find from around the internet and present a summary "reading list" which will include very brief summaries (and sometimes longer ones) of why each item has gotten our attention. Suggestions from readers for "reading list" items are gratefully reviewed, although sometimes space limits the number included.

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Obama Stands At Crossroads On Financial Reform (Jesse Eisinger, ProPublica)  The Dodd-Frank Act was "built mostly on legislation and ideas that were developed before the crisis, not after".  This lack of insight was backed by the Obama administration and the nation "got a law of incremental tinkering with existing rules".  And now that Republicans have control of Congress they want to 'untinker' as much as possible and some Democrats are likely to go along with that, too - certainly more than enough to replace the few Republicans in the Senate who are not lapdogs of the banks, such as David Vitter of Louisiana, John McCain of Arizona and Bob Corker of Tennessee (mentioned by Eisener).  But what will be watered down is not what really would have resolved the problems that produced the Financial Crisis of 2008 if left at full strength.  Eisinger writes:

Dodd-Frank is the Clement Attlee of legislation: a modest law with much to be modest about. This history and context needs to be understood to grasp what is happening now.

Eisener says the administration seems to be awakening..  Econintersect hopes so.  The lap-dog-in-chief needs to break out of the kennel.


Articles about events, conflicts and disease around the world

France

Belgium

Greece

Nigeria

Yemen

Saudi Arabia

Iraq

Iran

Russia

Sri Lanka

India

China

  • Xi’s Selective Punishment (The New York Times)  The Chinese leader’s anticorruption drive is more of a Stalinist purge than an attempt to clean up government.

Australia

Mexico


Continuing Proof of Structural Changes in the U.S. Workforce (Doug Short, Advisor Perspectives dshort.com)  Doug Short is a regular contributor to GEI.  While the labor force participation rate (percentage of a group that is "in the labor force") remains at a long-term low for the prime working age group ages 25-54 ( near 81%) the percentage of the age group that is employed has been rising since late 2011.  See first two graphs below and note the difference between4.0 million more needed in the labor force to reach the year 2000 peak and 6.0 million employed  to reach the peak for employment to population ratio.  Those numbers would produce an unemployment rate for this cohort around 2.9%, the minimum unemployment rate reached in 2000 (seen in another Short graph not shown here).  Today the rate is 4.7%.  The millions of prime age people not working and not even actively looking for work is a measure of the amount of slack in the labor force.  A small part of that slack is being taken up by increased employment in the age 65+ cohort, see third graph below.

Click on any graph below for large image at Advisor Perspectives dshort.com.

labor-forceparticip-25-54-2015-jan

employ-pop-ratio-2015-jan65-plus-employment 


 Rising US Income Inequality Is Hurting State Tax Revenues: S&P (Meagan Clark, International Business Times)  Rising income inequality is hurting state tax revenues, according to Standard & Poors.  See also Income inequality is hurting state tax revenue, report says (Josh Boak, The Washington Post)  We can see the correlation but did they actually prove causation?  Could there be a causative factor not identified which drives both metrics?

income-inequality-state-tax-revenue


How Increasing Income Inequality Is Dampening U.S. Economic Growth, And Possible Ways To Change The Tide (S&P Capital IQ, McGraw Hill Financial)  Increasing income inequality is dampening U.S. economic growth.  This article also discusses possible ways to change the tide. 

Of the number of variables associated with longer growth spells, income inequality's relationship with the duration of growth spells was the strongest (see chart 8). They found that a 10% decrease in inequality (a change in the Gini coefficient to 0.37 from 0.40) increases the expected length of a growth spell by 50%. 

As always, we ask if causation is proven or simply correlation.

income-inequality-and-growth


Study: Poor families pay double the state, local tax rate of the rich (David Sirota, International Business Times, MSN Money)  Some quiz questions:

  1. What is the difference in definition between regressive taxation and progressive taxation?
  2. What state has the most regressive taxation?
  3. Which five states are the least regressive in instate taxes?
  4. What is a common characteristic of the most regressive states?
  5. What form of income tax formula is most regressive?
  6. What is the single most regressive tax imposed in the U.S.?
  7. What is a common argument to justify regressive taxation?
  8. What is a common argument to justify progressive taxation?

Answers:

  1. Regressive taxation collects a higher percentage of income from lower earners than from higher; Progressive taxation increases percentage of income collected in taxes as income increases.
  2. Washington taxes the bottom 20% of income an average of 16.8% while the 1% pay an average of 2.4%.
  3. California, Delaware, Minnesota, Montana, Oregon and Vermont.
  4. Flat, nearly flat or no state income taxes.  Four of the ten most regressive states have no state income tax.
  5. Flat tax.
  6. FICA.  Individual incomes $118,500 and below pay 15.3% (half from employee nominal pay and half by employer direct) and amounts above $118,500 pay a marginal rate of 2.9% (also split between nominal pay deduction and employer paid).
  7. High income people (half the people or the top 40% incomes, or the top 20% incomes, etc.) pay most of the taxes.
  8. The wealthy should pay their "fair share", which is an emotionally defined statement without generally being specific.

Request:  Please suggest (in a comment or email) what you think the best (or at least the most fair) formula for taxation might be.  If we get several worthwhile inputs we will post an article which gives those details.  Please indicate if you wish to remain anonymous in any such article (although, if you leave a comment your "nom-de-comment" will be public (to all newsletter subscribers, who are the 'public' for What We Read Today.  We will post the article (if written) as a general Opinion blog item. 


America’s wealth gap between middle-income and upper-income families is widest on record (Richard Fry and Rakesh Kochhar, Pew Research Center)  We spend a lot of time looking at growing income inequality, but, not surprisingly, that correlates positively with rising wealth inequality.

wealth-inequality-1983-2013-pew


Inequality, the Great Recession, and Slow Recovery (Barry Z. Cynamon and Steven M. Fazzari, Social Science Research Network)  Hat tip to Wayne Marr.  There are many arguments about "fairness" in income distribution but this paper goes after a different characteristic in increasing income inequality:  the mechanism by which it limits future growth.  After decades of stable income distribution with an average of about about 23% of income going to the top 5%, after 1981 that ended and from that point forward the fraction of income going to the top 5% has risen to 38% in 2012, with a trendline slope greater than half a percent a year.

income-top-5-percent-1960-2012-annotated

After the fraction of income going to the bottom 95% started its decline in the early 1980s from 77% to 62% by 2012 there was an increase in debt for that cohort from about 77% to 177% of income over the next 23 years.  See graph below.  For the top 5% there was no change in the average debt level trend as a ratio to income comparing 1983 to 2012.  The authors say this is very significant:

Compare the first observation in 1983 to 2007, the final observation before the onset of the Great Recession. The ratio rises dramatically from 77 percent to 177 percent for the bottom income group. For the top 5 percent, there are some fluctuations, but the ratio is largely without trend.11 This evidence provides further support that unsustainable household balance sheet dynamics that spawned the Great Recession were concentrated in the bottom 95 percent.

household-debt-to-disposable-incom

The authors examine the nature of the houshold debt for the bottom 95% and show that it was partly offset by an increase in net worth of 50% (debt increase by nearly 5X as much ( 230%).  But then they go on to show that liquid net worth actually declined by about 25%; all the increase was confined to home equity and retirement accounts.  So, when the financial crisis hit, the large amount of increased household debt had limited liquid assets to cushion the blow.  They assert that the condition of insufficient liquid assets for the amount of existing houssehold debt as no significantly improve from the condition in 2007 and  presents a significant barrier to economic recovery.

To show how the increasing income inequality impacted the economy the authors consider a counterfactual:

  • According to our data the debt-income ratio of the bottom 95 percent rose from 0.92 in 1989 to 1.77 in 2007 on the eve of the Great Recession.

  • By 2007, the debt of the bottom 95 percent was about $6.6 trillion higher than the level that would have been required to keep the debt-income ratio constant at its 1989 level.

  • The income share (before taxes and transfers) of the bottom 95 percent over the same period fell from 71.5 percent in 1989 to 61.3 percent in 2007.

  • [I]f the before-tax income share of the bottom 95 percent had remained at 71.5 percent in 1989 the bottom 95 percent would have cumulatively earned $7.4 trillion dollars more (after taxes and transfers) from 1989 through 2007, other things equal.

  • This implies, again other things equal, that the bottom 95 percent could have consumed as much as they did in the two decades prior to the Great Recession and modestly decreased its debt-income ratio if this group’s income share had not declined after 1989.

  •  [T]he rise of inequality is easily large enough that it could potentially account for the entire increase in bottom 95 percent debt leverage, an increase that spawned the Great Recession.

The authors conclude:

A first step toward resolving the problem is to have a clear understanding that rising inequality goes beyond the issue of social justice. The evidence and interpretations offered here argue that greater inequality also compromises the demand engine that was necessary for acceptable macroeconomic results in the US prior to the Great Recession, and greater inequality threatens demand growth and employment going forward.

Other Economics and Business Items of Note and Miscellanea

SNB leaves policy vacuum after shock removal of franc cap (Reuters)  "The Swiss National Bank (SNB) had little choice.."

Construction drives Bahrain's economic growth in Q3 (Arabian Business)  5.1% growth in last year.

Improving macro-economics to boost investors’ confidence: PHD Chamber (Economy Lead)  An India industry group in New Delhi says the county's economy is improving but interest rates need to come down by at least 2% to make IUndia competitive globally.

Unofficial Problem Bank list declines to 392 Institutions (Calculated Risk)

Nebraska landowners sue Keystone XL developer (Reuters)  Seven Nebraska landowners allege the massive project violates the state's constitution.


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