Why It Would Be Great if Congress Was Forced to Buy Their Own Health Insurance at Full Cost

From FDL, highlights:

Making Congress and their staffers pay the full cost of their insurance is fine with me because that is how the law will treat millions of middle class families. All members of Congress and most staffers will have salaries high enough they would not qualify for subsidies on the exchanges. If Congress is going to make regular people with similar salaries buy insurance out-of-pocket than that should be good enough for Congressional aides.

I also have no problem with the law forcing Congressional staffers to lose their relatively good insurance because that is a long term goal of the law for everyone. The excise tax on “Cadillac coverage” was designed to stop employers from providing good insurance, covering a large share of your premium, and/or getting them to drop offering coverage altogether.  What might happen to Congress is very similar to what Congress intended to happen to others. 

Finally, if Congress is worried their staffers can’t afford to buy insurance out-of-pocket they can just use the money Congress would have spent on their premium and raise their salaries by the corresponding amount. The financing of the law was based on the theory that a dollar in benefits is exactly the same as a dollar in salary. The theory, put forward by Obama’s economists, advisers and the Joint Tax Committee is that if you force companies to offer their employees worse insurance, they will increase their wages by an equal amount. This sounds like a perfect opportunity to put the theory to the test.

Have laws apply to lawmakers the same as it applies to the governed, have the law play out as it was designed, and put the underlying economic theory to the test: these seem like common sense ways to make sure that our democratic decision-making structure is working. Unfortunately we have ample evidence that this structure is working better for lawmakers (and lobbyists) all the time, and correspondingly worse for everyone else.  Congress exempting itself from things that won't personally benefit its members is not a new story, and in light of the brazen roll-back of the "Stop Trading on Congressional Knowledge Act" in order to make it easier for members to quietly line their pockets via insider trading, there is ample reason for pessimism.

Still, WAPO has a story about how Congress isn't really trying to exempt itself, just trying to fix some inadvertent writing in the code that caused some unintended consequence that only a few people understand enough to get upset about. A book could be written on that recurring theme.

To understand why citizenship-based taxation is objectionable, consider the STEM Jobs Act of 2012

Victoria Ferauge explains in as clear a way as may be possible why it is important to understand what people mean when they talk about citizenship-based taxation, and why the US effort to impose it with the big stick of FATCA is so objectionable to Americans living in other countries (also known as "immigrants" in those countries). She makes a number of points but I wanted to highlight one here:

In the [dialectic on Americans living abroad, which equates expatriation with tax evasion] it seems not to have occurred to the American public or its lawmakers that the people they are trying to attract [through immigration policies aimed at high-skilled workers] are the product of other countries' investments in producing a well-educated populace. 

In light of that, consider what the Heritage Foundation says about the STEM Jobs Act of 2012:

American businesses are struggling to fill high-skilled employment opportunities. STEM jobs grew at over three times the pace of non-STEM jobs between 2000 and 2010 and are expected to grow almost twice as fast by 2018. Business groups have spent years urging Congress to reform the visa system in order to fill these empty positions.

Enhancing the ability of high-skilled workers to enter the U.S. would be an asset to the nation’s economy as well as its indebted government. 

In case the instrumentalist nature of our interest in immigrants is not clear, the point is we're going to make these foreign-born, foreign-raised, foreign-educated, now high-skilled, highly-paid workers a permanent part of the American taxpaying public, which can increasingly be defined as the American wage-earning public. One may be forgiven, perhaps, for juxtaposing this deep thirst for foreign talent against America's ongoing disinvestment in its own social infrastructure, including public education (also helped along by the Heritage Foundation).

Victoria's post thus seems to me to contain the contours for constructing the normative case for taxing humans. There is much to be done on this topic, but it seems clear that the practice of admitting immigrants at all, let alone actively seeking highly-skilled ones, demonstrates that inbound human mobility is a social good that states support; that inbound human mobility (perhaps especially of the high-skilled kind) may be the product of rather intense social investment by some other country; and that conversely taxing on the basis of citizenship regardless of residence is a means of preventing outbound human mobility and so runs strictly counter to the overall good of human mobility while also being hostile to the aims of other countries also seeking inbound labour.

The US has long objected to onerous fiscal controls on the capital it sends across borders, so it seems particularly difficult to understand the ongoing support for placing onerous fiscal controls on its outbound labour supply. Contextualize that observation within the story of the shift of taxation from capital to labour over the past 50 years, however, and a pragmatic explanation is easily ascertained. But pragmatism does not make the normative case. In fact, it violates the conventionally-understood major normative factors for assessing taxation--efficiency, administrability, and fairness--because it introduces an insurmountable amount of arbitrariness. This topic deserves much more thinking than has been allocated to it by tax policy observers, including myself.

There is much more at the link, please do go and read Victoria's whole post.

Taxpayer morale--a case study in Detroit

Someone could write a PhD dissertation on the fiscal devolution of Detroit and the role of taxpayer morale. Between the below story and the continuing sage of the attempt to make a tax haven out of Belle Island, it would be a fascinating study.

Half of Detroit property owners don't pay taxes:

47 percent of the city's taxable parcels are delinquent on their 2011 bills. Some $246.5 million in taxes and fees went uncollected, about half of which was due Detroit and the rest to other entities, including Wayne County, Detroit Public Schools and the library.

Delinquency is so pervasive that 77 blocks had only one owner who paid taxes last year, The News found. Many of those who don't pay question why they should in a city that struggles to light its streets or keep police on them.

"Why pay taxes?" asked Fred Phillips, who owes more than $2,600 on his home on an east-side block where five owners paid 2011 taxes. "Why should I send them taxes when they aren't supplying services? It is sickening. … Every time I see the tax bill come, I think about the times we called and nobody came."

...Detroit's delinquencies are so pervasive that some owners have been allowed to keep their property even if they don't pay taxes. Wayne County treasury officials are so overwhelmed by foreclosures that they ignored about 40,000 delinquent Detroit properties that should have been seized last year and said they will look the other way on about 36,000 this year.

...Leola Wesley questions what services she gets for her taxes. ...She was the only resident on her 32-parcel block who paid.

"It makes me not want to pay," said Wesley, 85, who would move from her home of more than 20 years if she could afford it. "If nobody else is paying, why should I?"

...In the past five years, the city has lost out on $317 million in taxes, county records show.

"It makes me wonder why I pay my taxes and keep my property up," said Kisner, a North Rosedale Park resident and former top finance official for the city and Detroit Public Schools. "I keep asking myself, 'Am I the stupid one?'"

The billionaires looking to liberate Belle Island don't want any part of this problem, and if they are successful they most certainly won't be any part of its solution.

Exit taxes and human mobility

An interesting article in Tax Analysts [gated] talks about exit taxes (taxes imposed on assets when a person or entity migrates to another nation) as an impediment to human mobility. I'd say yes, exit taxes do impede mobility, and whether and when they are justified is debatable and under-studied. But there's no universally recognized human right to mobility across national borders, as we well know. (There should be, of course, but that's a discussion for another day).

Instead, every country has high barriers to entry, some more onerous than others, and many have high barriers to exit, some more onerous than others. The US is high on both sides. Many people want to come in and are denied the chance; many others want to leave and can't escape the clutches. It's an odd world.

In any event, the Dutch exit tax has run into trouble becuase Europe has created a right to mobility within the EU zone, via the "freedom of establishment," under article 49 of the Treaty on the Functioning of the European Union (TFEU). The ECJ deemed the Dutch exit tax a violation of that freedom in Commission v. Netherlands (C-301/11), saying that while an exit tax may be justified to ensure a balanced allocation of taxing rights between member states, the Dutch obligation to immediately pay the exit tax was "disproportional." Tax Analysts explains:

Under Dutch tax law, when a taxpayer operating a business moves its place of management to another country, including another EU or European Economic Area member state, the taxpayer becomes subject to a tax assessment for the (deemed) capital gain upon exit. The tax is imposed on the unrealized profits (for example, goodwill, hidden reserves, and tax reserves) attributable to that business. 

The exit tax rules apply both to legal entities and to individuals that relocate their businesses' place of effective management from the Netherlands to another country. 

...As could be expected, in its January 31 decision, the ECJ referred to its previous decision in National Grid Indus. That case concerned Dutch exit tax imposed on a company that relocated its place of effective management from the Netherlands to the United Kingdom. The ECJ approved of the concept of exit taxes because of the need to ensure a balanced allocation of taxing rights between member states. However, a "balanced allocation measure" of this type must satisfy the proportionality test, and the ECJ found the immediate payment obligation disproportional. Because the cross-border relocation exposed the taxpayer to a cash flow disadvantage that would not have existed if the relocation had been domestic, the ECJ deemed the immediate taxation of the unrealized (foreign exchange) gains under some circumstances to be in violation of the TFEU principle of freedom of establishment. 

...This judgment comes as no surprise, as both the state secretary of finance (through the above policy statement) and the lower house of the Dutch parliament (through a draft bill) had already recognized this restriction in domestic law. On December 4, 2012, the lower house approved a bill of law concerning the deferral of exit tax. ... After the bill of law is approved by the upper house (which is expected in early 2013), the new rules will take effect retroactively from November 29, 2011 (the date of the ECJ decision in National Grid Indus). 

The Dutch parliament has drafted a bill to allow for deferral on a retroactive basis and the authors conclude that hopefully, a lesson has been learned. For those outside the EU zone, of course, there is no great comfort to be had but this is another interesting development on the connection between the state and the individual in a world featuring ever-increasing mobility.

Galt's Gulch Chile, Randian Utopia?

I've called charter cities "the ultimate gated community," and it turns out that characterization wroks well as a marketing strategy designed to appeal to Randians with visions of state-free utopias dancing in their heads:

With the oppression of the over regulated, over taxed, war riddled and welfare riddled society consuming the world, Ayn Rand's famous protagonist character, John Galt, came to conclude that he would not use his talents to support such a society any longer...driving him to create a community where scientists, inventors, entrepreneurs and many others would come together to escape from the confines of their daily lives to not only be free...but to thrive.  

In today's world, it is becoming more and more difficult to find true freedom from very much the same oppressive forces Ayn Rand wrote of...which drove John Galt and others to a place where they found their freedom, success and peace of mind. 

But you can find yourself in just such a utopia for a modest investment:

Residential lots at Galt's Gulch Chile will be offered at much more affordable price points than one would expect for a community of this caliber. In the initial phase of the project, which is over 4,200 acres, lot sizes will range from 1.25 acres up to over 10 acres, within the separate neighborhoods of the master planned community, which is projected to have well over 1,000 lots on over 10,000 acres at build out. 

I have no idea what price point to expect from a community of that caliber.  Doesn't it depend on the height of the retaining wall built to keep the bands of roaming marauders out of my libertarian paradise?

Pictured: libertarian paradise

See that? No walls.  Also: no pesky roads, schools, hospitals, police stations, firehouses, courts, legislative bodies, telecommunications equipment, etc. But wait, here's another image:

These walls appear inadequate to protect paradise.

Galt's Gulch does have a facebook page...good thing facebook is still "free"!  But ...what is this?

The lots, roads, lakes and community amenities of Galt's Gulch Chile are currently being laid out by the architecture and engineering team. The on-site sales office is being retrofitted with solar panels and upgraded a bit inside and out, with a proposed opening sometime in March. Our Santiago office should be open sometime in the next two weeks as well. We look forward to getting in contact with everyone and meeting you down in Chile!

and, from their website:

Galt's Gulch Chile is slated to have all of the world-class amenities ...including a championship-caliber golf course, community clubhouses, tennis facilities, spa and fitness centers, hiking trails, horse facilities and trails, vineyards, underground storage facilities, downtown main street shopping, farmer's market, 24-hour guard-gated security and many others.  

Since there will be no imposing of onerous regulations or taxes here in Galt's Gulch, these items will obviously have to be priced into those "much more affordable price points than one would expect for a community of this caliber." But at least you won't have to use your talents to support a society. Your benevolent dictator GALT'S GULCH TRUSTEE LIMITED in Menlo Park, CA will contract you right out of all that messiness. Right? ....or, perhaps not.

Will this be like Independence, USA, "an entire city, developed around patterns?"

The Daily Show with Jon Stewart
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Actually, it does sound a little alike:

Galt's Gulch Chile is being designed to be a fully self-sustaining community, affording those who live there an abundant and unending supply of fresh drinking water from the natural springs located throughout the mountains and valleys of the community, clean and renewable energy from hydroelectric and solar power generation, organic fish from the scenic manmade lakes...and a plethora of organic fruits, vegetables and nuts, born from the fertile soil and the ideal year round climate of the region. 

Well then! Oh, how I yearn to sign up for more information on Galt's Gulch, if only it wouldn't mean being inundated with advertising from some trustee company in California trying to prey on my basic mistrust of government.

A handy guide to Davos-speak

From Ryan McCarthy at Reuters:

...What Davos folks mean when they constantly call for a “growth plan” or “restoring growth” is that no one can see any particular industry that’s going to increase the pace at which they get rich. And, as a result, the rest of us will have fewer jobs.

...[Bridgewater hedge fund CEO Ray] Dalio expanded a bit: the big conversation in politics and economics, he said, will be about how to get more out of workers – growth won’t come  from the next Internet, the next real estate boom or any new asset, in other words. This means, he said, hard choices about questions like “How long is a vacation?” or “What is a good life?” 

...what Dalio is saying is particularly dire for the rest of us. When the world’s most successful investors tells you economic growth is going to depend on whether or not you take a vacation, it’s time to worry. 

Emphasis mine. Make no mistake: whenever CEOs call for policies to increase growth, they mean in their own pockets.

What's FBAR got to do, got to do with it

Everything, I am guessing. Tina will give up her US citizenship now that she has attained Swiss citizenship.  Reason given: to "clarify her situation." John Nolte says "She's 73 years-old, her longtime partner lives overseas, and as far as I know she's not in any way making a political statement." He seems a bit puzzled about her decision to give up her status, and he welcomes her back anytime.

Well said. So why is she giving up her citizenship?  Short of making a political statement, I can think of only one good reason: America's newfound vigor for enforcing citizenship-based taxation, and all of the surveillance and form-filling that entails.  Just consider that giving up citizenship is not a simple matter of mailing in your passport. It can be a complex and time- and resource-consuming process which involves enhanced scrutiny and fees for those with high net worth, who are viewed as attempting to flee the tax jurisdiction.

The US has always had citizenship based taxation on the books, but it wasn't truly enforced until FBAR came under IRS authority and FATCA emerged as its enforcement mechanism in 2010.  Now those who have not been compliant will be "rooted out" (former IRS Commissioner Shulman's description of FATCA) with ongoing monitoring, and hefty fines for failure to file. Those who have been compliant will go on to face a regime that is increasingly byzantine, with new forms and requirement seemingly being piled on all the time, in a situation that is becoming very lucrative for tax return preparers and the compliance industry in general--just google FATCA compliance officer job posting and you will get the idea.  Of course, the regime is meant to catch Americans hiding their cash offshore: a laudable goal especially in light of so many high profile cases, many prominently featuring Switzerland.

So the question is whether Tina Turner is an "American" and if she, with her Swiss bank accounts, is "hiding offshore." This raises a series of unanswered questions about the relationship between the individual and the state, none of which, I think, are easily answered. These include, to which country does Tina belong, if she has dual citizenship?  Is this a first come, first served world, so she belongs to the US in perpetuity, based on her birth in Tennessee, no matter where she lives out her life?  Can she choose to belong to another country, or only if she is willing to pay the cost of her continued US status in the form of ongoing compliance with US tax law?  Is Tina going to be allowed to leave the US jurisdiction only on the condition that she renounces any right to come back?  What financial restrictions should a state place on people--especially wealthy ones--who want to move to other jurisdictions?

As long as Tina holds on to her citizenship, even if she is a dual citizen living in another country, the answer to the first question is that she is now and will ever be American. And as long as she has any accounts anywhere in the world outside of the US, the answer to the second is "guilty unless proven innocent on an annual basis." None of the other questions are answerable in law: all are a matter of opinion and, more than anything else, geo-political power.

I am sure that Tina's expatriation will be viewed by many as a response to the high US tax rate, or a betrayal of her US roots, or both. But it is likely neither.  As a Swiss citizen resident in Switzerland, Tina's worldwide income is subject to income tax (federal, cantonal, and municipal), wealth taxes, VAT, etc., and we can only speculate about how much tax she may be asked to pay in the US after credits, exemptions etc. as a US citizen living abroad.  It could very well be zero or close to zero.  So it is seems more likely this is about the hassle of filing a thicket of tax forms, year after year, despite owing little or no tax to the US, and stiff penalties for even "non-willful" infractions, including mistakes.  And it could be about having to do all of that because Americans living abroad are viewed as likely criminals because they have offshore bank accounts.  

If Tina has been tax compliant all these years, she may just be exhausted with the effort; if not, she may see many reasons to cut ties by going the drastic step of irrevocable renouncement.

I would very much like to know if there is some other reason to give up her US citizenship. "Clarifying" one's situation seems just abstract enough to cover the hassle of dealing with US tax compliance.

Manx tax strategy

Interesting: Isle of Man announces it will keep its 0/10 corporate tax rate and pretty much the rest of its tax system as is, but wil cooperate with the US on FATCA and the EU on its codes of conduct, and might join the mutual administrative assistance in tax matters agreement, and even "consider working with other countries and multilateral organisations on the development of co-operation systems similar to FATCA." I think that last one is in regards to the UK, but it could be broader in scope.

At the same time, the Isle of Man will

"maintain competitive  personal income tax rates  as one of the features making the Island an attractive place to live and work; and

maintain a competitive business tax system in the Isle of Man to support economic development;"

among other aspirations. I think they are in a tough spot, with the US and the UK focused on chasing individual tax cheats and corporate tax avoiders (respectively, perhaps) through their banks. By way of background, the tax strategy says:

The Isle of Man‟s taxation policies have played an important part in our economic success. 

...The key principles of fiscal sovereignty, economic stability and adherence to international standards which underpinned the original taxation strategy remain just as relevant today. 

I'm not sure what anyone means by fiscal sovereignty anymore. Then again, I never really did think it was a real thing.

Recent scholarship of interest

Here are some recent papers of interest:

On the power and role of the state:

• Bernard Schneider, The End of Taxation without End: A New Tax Regime for U.S. Expatriates, arguing that the US should settle for residence based taxation like everyone else in the world. Has a nice section on the history of the practice.
• Claudia Williamson, Contracting Institutions, asking what constrains the state from plundering its people, if the state has monopoly power, and concluding that cultural norms do.
• Martha Fineman, Beyond Identities: The Limits of an Antidiscrimination Approach to Equality, comparing legal cultures of equality and concluding that in the US, human need is seen as a matter of individual responsibility alone while other constitutional democracies also see it as a state responsibility. 

On the inequitable impact of tax treaties:

• Fabian Barthel & Eric Neumayer, Competing for Scarce Foreign Capital: Spatial Dependence in the Diffusion of Double Taxation Treaties, when bilateral FDI positions are asymmetric (as between rich and poor countries), capital importers (poorer countries, usually) lose by entering into a tax treaty; they sign anyway because of competition. Studies DTTs between 1969–2005.

On subsidies & industrial policy:

• Stephanie Rickard, A Non-Tariff Protectionist Bias in Majoritarian Politics: Government Subsidies and Electoral Institutions. Examines how different governments use trade protection via tariffs and subsidies, and finds that majoritarian systems are biased toward both.

And on methodology in legal scholarship:

• Tom Ginsburg, Pitfalls of Measuring the Rule of Law, pointing out methodological challenges for rule-of-law scholarship, calling for caution in policymaking (same argument as I made about using "case studies" to advance international tax principles, you can find that here)

Speaking of austerity: Surprise for Quebec's Universities

Just in time for the holidays: the Quebec government has announced it will cut another $140 million from University budgets this year; schools will have to come up with the cuts by April--yes, in 4 months. That's on top of the rolled-back tuition increases, which represented about another $40 million. This is not a good surprise. It's especially harsh when the PQ is raising taxes all over the place and we all know into whose pockets some outlandish proportion of our taxes go. From the Montreal Gazette:

the PQ repeatedly promised to maintain funding to universities for this year despite cancelling the strongly opposed tuition hike that was to have gone into effect this fall. Universities have been waiting for compensation for about $40 million in lost revenues from the aborted increase.

The student protesters see this as an unintended consequence of their success:

Even the Fédération étudiante universitaire du Québec (FEUQ), which has suggested that universities are more mismanaged than underfunded, was shocked with what president Martine Desjardins called a “hasty” decision. 

“We talked about a redistribution of money, but we never wanted to see university budgets cut,” said Desjardins. “We’re shocked. We fear it’s services to students that will be cut, that students will have to pay the price again.”

I doubt the students alone will pay the price, but the juxtaposition of widespread & rampant corruption, steadily increasing taxes, and steadily increasing cuts to education reads like a serious governance crisis.

Tax chats, with your friendly local tax authority

From the Daily Mash (satire): "YOUR tax bill can be negotiated over a cup of tea and a chocolate Hobnob, officials have confirmed."  That's because:

Her Majesty’s Revenue and Customs revealed that tax laws are all very well, but what really matters is having a nice chat about how much you think you should pay.

But don't get too excited:

The spokesman added: “Oh Christ, I’m really sorry, but I’ve just realised I should have said that ‘tax chats’ are only available to large corporations.

Another sign of the widespread effect on public perception of the Starbucks approach to taxation; more at the link.

 

Activists: inequality is a legal, institutional choice that can be revisited through resistance

Al Jazeera has a short article by a couple of global justice activists and well known justice scholar Thomas Pogge, about growing global wealth inequality, the role of law and legal institutions in fostering and protecting the status quo for those who benefit from it, and the rise in information and collaboration that is empowering resistance from civil society:

The scale of inequality and poverty can appear overwhelming and unchangeable. Yet it is not inevitable. It is the outcome of active choices by people who make and enforce the rules we all live by: rules about global trade, banking, loans, investment, taxes, working conditions, land, food, health and education. These rules are made by people and people can change them.

...Right now, there is a special moment of opportunity. Throughout the world, citizens have access to information in ways once unimaginable. Affordable technologies are revolutionising our ability to communicate with one another and act collectively. The opportunities for new citizen-powered movements to become catalysts for change have never been greater than today. Powerful elites are losing the structural advantages they once enjoyed of being able to maintain secrecy, restrict information and suppress popular movements.  

The authors are launching an activist initiative entitled /The Rules.  This is something to watch as the activists circle around international tax--a technical expertise-laden field that has not worked out important questions of justice in any kind of coherent matter. When Lennon sang about power to the people he did not mention tax havens, but global tax avoidance and evasion appear to be front and center of popular resistance to status quo legal regimes today.

CEOs: welfare is good, but only if it's corporate

From Naked Capitalism, 9 Greedy CEOs Trying to Shred the Safety Net While Pigging Out on Corporate Welfare:

A gang of brazen CEOs has joined forces to promote economically disastrous and socially irresponsible austerity policies. Many of those same CEOs were bailed out by the American taxpayer after a Wall Street-driven financial crash. Instead of a thank-you, they are showing their appreciation in the form of a coordinated effort to rob Americans of hard-earned retirements, decent medical care and relief for the poorest.

...they are gearing up to pull the wool over the public's eyes by cutting Social Security, Medicare and Medicaid. The CEOs are part of the Fix the Debt campaign ... which plans to unleash tens of millions pushing for a deficit reduction deal that favors the rich.

...these Scrooges are so bold as to publicly announce their desire to pick the pockets of fellow Americans while simultaneously pigging out at the corporate welfare trough. Multitasking!

NC provides a sample of what it calls the Fix the Debt CEO Council Hall of Shame (complete list at the Fix the Debt website here):

1. Lloyd Blankfein, chairman and CEO, Goldman, Sachs & Co. Blankfein, infamous for describing his financial activities as "God's work," shared his attitude toward society with CBS news recently. He explained his keen desire to see Americans lowering their sights for the future. ...he gives a pithy summary of what life is going to be like for the 99 percent:

You're going to have to do something, undoubtedly, to lower people's expectations of what they're going to get, the entitlements, and what people think they're going to get, because you're not going to get it.

...Since the financial crash, Blankfein's company, Goldman Sachs, has received tens of billions of dollars in ..."direct and indirect succor from the Fed."...

2. Jeffrey Immelt, chairman and CEO, General Electric Company. ...supporting disastrous financial deregulation, dodging taxes and helping to destroy American manufacturing has not satisfied Immelt. He'd like to add insult to injury by making sure that people who have been screwed by the reckless activities of short-sighted corporate titans like himself are left to starve in their golden years and go without medical care. And as for the poor, well, couldn't they be just a little bit poorer? Immelt thinks that would be swell.

After the 2008 crash, the government gave a giant boost to hard-pressed GE Capital, the company's financing arm, through the Temporary Liquidity Guarantee Program. GE has also helped itself to enormous taxpayer-funded subsidies, especially in green energy. And guess how much GE paid in taxes in 2010? Nothing. ...

3. Jamie Dimon, chairman and CEO, JPMorgan Chase & Co. ... Dimon is deploying a familiar scare tactic on the topic of the so-called fiscal cliff. He's claiming that his company will be forced to cut down on hiring and so on if a budget plan is not tailored to enrich the wealthy. ...Maybe Dimon's company would be better served figuring out what happened to the $6 billion that recently went up in smoke in the "London Whale" derivatives fiasco.

NC covers several more including the CEO of Honeywell (of powerpoint "union busting for dummies" fame), all at the link.

U.S. Headed For Fiscal Cliff

The Onion gets it more right than not, in characteristic fashion:

Unless Democrats and Republicans can reach an agreement by Jan. 1, 2013, the United States will go over the so-called “fiscal cliff,” triggering automatic spending cuts and tax increases that many experts believe could plunge the nation back into recession. Here is what will happen if the government fails to act: 

• National Park Service forced to cut Old Faithful eruptions down to once per week 

• Total breakdown of effective government will turn large parts of the country into an unimaginably hellish libertarian paradise 

• Severe cuts to education spending, if you can fathom that 

• Pentagon will be forced to buy off-brand tanks instead of the more costly name-brand ones 

• Historic bridges such as the Brooklyn and Golden Gate will be folded up and put away for safekeeping 

• The American people’s faith in the ability of Congress to get things done will be damaged 

• At stroke of midnight, every government office, place of work, center of commerce, and piece of infrastructure will simultaneously explode 

• Someone will take care of it

Charity vs taxes and the destruction of the state

From the FT this week, a story on John Paulson's $100 million donation to the Central Park Conservancy.  The article focuses on the idea that charitable organizations can step in for government to provide public goods, and why that idea is pernicious:

[America]’s philanthropy is unique. Its two key institutions are the tax deduction for charitable gifts and the tax-exempt foundation. Noting the role of the Ford Foundation in Lyndon Johnson’s “war on poverty” in the 1960s, Daniel Patrick Moynihan, the late senator, called foundations a “new level of American government”. 

Americans pat themselves on the back for their generosity, not always with good reason. Olivier Zunz, a historian of philanthropy at the University of Virginia, calls American charity a “capitalist venture in social betterment, not an act of kindness as understood in Christianity”. 

Giving to a foundation can be self-interested – a way for a rich person to launder economic power that he does not need into political power that he does. Foundations inevitably get politicised, not because donors are corrupt or insincere but because they are rational. Lobbying for a piece of a government budget is a more efficient way of serving most causes than simply spending donations.

Note that this story comes on the heels of the recent news about how presidential candidate Mitt Romney has used donations to the Mormon church to secure huge tax breaks for himself, even while he campaigns to dismantle agencies like FEMA.  True to form, the Heritage Foundation has suggested that the right answer to Sandy and other natural disasters is for the private sector to support charities like the Red Cross.  It is ironic that Heritage begins its discussion by lauding the fact that "Americans are already coming together to help family, friends, and neighbors."  Isn't that, after all, the whole point of our democratic society: people come together and decide how to govern themselves, including how and when to help each other when disaster strikes someone you don't know personally but who is part of your larger community?

We need only look a little closer at the Red Cross to see the utter silliness of the Heritage foundation's response.  From the Red Cross website:

We have the legal status of “a federal instrumentality,” due to our charter requirements to carry out responsibilities delegated to us by the federal government. Among these responsibilities are:

• to fulfill the provisions of the Geneva Conventions, to which the United States is a signatory, assigned to national societies for the protection of victims of conflict,
• to provide family communications and other forms of support to the U.S. military, and
• to maintain a system of domestic and international disaster relief, including mandated responsibilities under the National Response Framework coordinated by the Federal Emergency Management Agency (FEMA).

Yes, the federal government and the several states contract (pay) the Red Cross to fulfill government functions, even on occasion appropriating funds for the direct support of this organization.  It is not an independent charity that sinks or swims on the altruism or lack thereof of the giving class.  It is a public/private hybrid that relies on donors and the government, and--more importantly--that follows direction from the government in responding to matters involving the common good.  It is not, in other words, subject solely to the whims of its donors in deciding what public goods to provide.


The dismissal of FEMA that characterizes organizations like Heritage and sympathetic politicians like Romney and Ryan even while they laud charitable organizations like the Red Cross betrays the utter emptiness of their fundamental mistrust of "government" as well as that of their trust in the private sector to furnish necessary public goods.

The central problem with relying on purely private charities to provide public goods like disaster relief is not that the donors are self-serving (they are) but that in promoting a mythical idea of a private sector that solves public goods problems without any coordination from government, you have to believe that such a sector exists and further that is can and will accurately assess public needs and mete out coherent responses.  That involves a lot of faith in individuals and organizations that are subject to any number of cognitive biases and mistakes even while they are not subject to the same level of scrutiny to which we can subject government.  The FT says, "most charity does some good for someone, at the price of a certain corruption."  True enough, but what are we to do about public goods problems that rich donors don't find compelling or interesting enough to support?  Moreover, where is the accountability if no private charity steps up to meet a given demand or that in responding to a real and serious demand, bungles the job?

That is why the Red Cross' mandate from the federal government to respond to FEMA reveals the bankrupt idea of anti-government sentiment when it comes to disaster management in particular and government vs charity more broadly.  We should be very skeptical of any attempt to wrest the mandate to provide public goods out of the hands of government and into the hands of the private sector alone.

The FT concludes:

[Mr. Paulson's gift raises] no worries that well-heeled experts are bypassing or steering democratic processes. It simply puts a large fortune at the disposal of a beloved and perennially underfunded institution. There is no better use for a billionaire’s money, short of taxing it.

That's the right answer.  Taxes are what we pay for a civilized society: one in which public goods problems are identified, assessed, and responded to in a way that can be in turn assessed, evaluated, and yes criticised when necessary (cf: Katrina).  That accountability loop exists in government, even if imperfectly.  It is not the same for individual donors or purely private charities.  Churchill's famous quote about democracy holds true for taxing and spending.  It's the worst way to fix public goods problems except for everything else.

Walmart workers rejecting Walmart's vision of the social contract

Walmart workers in California walked out last week to protest unfair labor practices, and now a nationwide strike is under works.  The company, of course, has no unions.  So how do they strike?  Cautiously, and under justified fears of retaliation:

It was the first-ever employee walk-out in the company’s 50 year history, said Dawn Le, a spokeswoman  for Making Change at Walmart, a coalition whose mission is to change the way Walmart conducts business.

“Everyone else has a union,” said Le. “Workers in every other country — Japan, the U.K., Nicaragua, South Africa, Brazil, Argentina — have been able to form a union, except the U.S. and Canada. We just don’t understand the double standard Walmart has. How come those in other countries get to have a voice, yet not in the U.S., its home country?”

Walmart's answer is that the workers don't want to unionize here:

Walmart spokesman Dan Fogleman disputed Le’s charges, claiming that most employees have “repeatedly rejected unionization. “They seem to recognize that Walmart has some of the best jobs in the retail industry — good pay, affordable benefits and the chance for advancement,” he said in a telephone interview with  ABC News.

 If Joe Biden was there, perhaps he would have laughed at the absurdity and wished that Fogleman "would just tell — be a little more candid."  Matt Stoller reports on the high stakes, not just for Walmart's workforce but for society in America and globally:

Workers at Walmart stores across the country, as Josh Eidelson reports, are threatening to walk out on Black Friday, the biggest shopping day of the year. These labor actions are coming on top of earlier labor actions at Walmart's warehouse contractors linked to "non-payment of overtime, non-payment for all hours worked, and even pay less than the minimum wage."

...Walmart is massive – the company is the largest private employer in the US, with more than 2 million employees. The average American household spends $3500 at Walmart, and in 2006, the company alone represented 2.3% of the American GDP. The company is so powerful that when a Walmart Supercenter comes into your community, the entire community's obesity rate increases. It is also, as  New America scholar Barry Lynn has argued in End of the Line, a force that has reshaped the American corporate world.

According to St. Louis Federal Reserve President William Poole... "About 20 percent of their associates are part time and that they are going to be increasing that share to 40 percent so they can staff at peak times and get more productivity out of their workforce."

But the threat of strike could impact this strategy:

Just two months later, Poole offered some very different and shocking news, "My Wal-Mart contact also said that "Wal-Mart is in the process of raising starting wages in about 700 stores. This is the first time in eight years of talking with him that I've heard any comment like that. He said that some of the raises are part of the Wal-Mart, I'll call it "Social/political" agenda because of all the controversy about Wal-Mart." 

... The company, not surprisingly, is ... known for brutal tactics against workers. It is known for retaliating against employers who attempt to organize. Walmart employees often rely on food stamps and Medicaid, because of insufficient wages and lack of adequate health care. In 2005 ... Walmart "observed among their own employees a reduction in health care utilization – that is, fewer doctors' visits – but an increase in emergency room visits. Apparently employees are struggling some to make the co-payments and that kind of thing, again emphasizing the stress that exists in many lower-income households."

That's as it should be, if you're into Romney's current plan for the health of the 47%.

Stoller concludes:

In the 1950s, the so-called "Treaty of Detroit", an agreement between government, business, and labor for ever increasing wages at automakers, set the tone for the next twenty years of political economy. From the 1970s onward, the new social contract was increasingly set, not just by companies like Walmart, but by Walmart itself. As a new social contract, let's call it the "Treaty of Walmart", emerged as a deal cut between the US government, the Chinese government, and global trading corporations, American society began to reflect a race to the bottom. This strike is thus worth watching – if Walmart loses some pricing pressure because of tactics that impact the company's supply chain or ability to sell, we'll be in uncharted territory.

More from Stoller on just how deeply Walmart influences manufacturing practices, retail prices, and wages here, and for an international perspective, take a look at this.  

The ultimate gated community is just a free zone with a new name

MR cautions not to "equate charter cities with extraterritoriality": a charter city works either "because a dominant hegemon — perhaps at a distance — supports the external system of law" or because "the external system of law serves up some new and especially tasty rents to domestic interest groups."  Either way, the charter city is not sovereign, rather some established sovereign is exerting control.  So a charter city is really just a free zone: another experiment in relaxing regulation that Honduras has already tried (along with many many countries, yes, including the U.S.), this one just has a name that taps into some emotional sentiment having to do with freedom and choice and entrepreneurialism.  If Honduras just called this another free zone project, perhaps few would take notice or wonder about it.

As this is just a new name for an old idea, it should not be surprising how quickly we see the familiar accountability/transparency issues pile up.  MR points to the Guardian, which reports:

Plans to create a neo-liberal start-up city in Honduras with its own laws, tax rules and police force suffered a setback on Friday when the economic guru who inspired the project said he has been unable to act as its guarantor and watchdog. 

...days after the deal was announced, Romer said he had not been given the powers and information necessary to fulfil his role as chairman of the transparency commission, which is meant to ensure governance of the new development zones.

Romer said he and four other international figures were appointed by presidential decree to the commission, which has wide-ranging powers to appoint and fire governors, nominate judges and hire auditors in the proposed new zones. But the five will issue a statement distancing themselves from this week's announcement and calling into question the legality of their appointment, which they say has not been published in the official gazette as required by Honduran law, ostensibly because of a challenge in the constitutional court.

Free zones have been around for a long time, they have been studied extensively, and they don't have a great track record, most especially when they lack major up front governance policy planning.  Calling the project a charter city won't avoid these difficult problems.

As an aside, I notice that the Guardian puts a price tag on the deal: a business consortium called NKG is paying $14 million for its city.  Who is NKG?  Not the Northern Kite Group or the Neumann Kaffee Group, I suspect.

 

 

The private sector really is doing ok, or, why workers collaborate in their own self-destruction

If by private sector you mean US corporations, which are making more profit than ever:

From Business Insider.  But not if by private sector you mean wage earners.  As we know median wages have plunged in the US; this article shows that in addition wages as a percentage of GDP are at an all-time low:

The author comments that "[o]ne reason companies are so profitable is that they're paying employees less than they ever have as a share of GDP. And that, in turn, is one reason the economy is so weak: Those "wages" are other companies' revenue."


The juxtaposition thus paints a zero-sum picture: that as wages fall, corporate profits rise.  We've seen other charts that show corporations and managers claiming most or all productivity gains over the last several decades at least.

Richard Murphy responds: "the reason why we have a crisis is that the wealthiest and companies got too rich whilst most got left behind so the wealthiest and companies lent the rest of us their excess wealth through debt arrangements which people could not repay."

Now consider Yves Smith's post today in response to sociologist Claude Fischer, who asks "Why Don't Americans Take Vacations?" and answers with rugged individualism and something about the American way.  Nonsense, says Yves, the right answer is, because of a systemic and steady diet of anti-labor propaganda.  Yves points us to a related article of interest by Mark Ames from 2006, "We're not going on a summer holiday," which says:

vacation time has been slowly disappearing for American workers ever since the Reagan Revolution, which ushered in a violent shift in corporate culture away from the paternalistic post-New Deal model towards the current stock-price-is-God model. According to Harvard economist Juliet Schor, in the 30 years before Reagan's presidency American workers were getting more and more vacation time; however, in the 1980s, that trend suddenly reversed. By the time Reagan left office, Americans got three and a half fewer days off per year, on average.

Ames says at the same time corporate managers have vastly increased their leisure time and pursuits.  A glance at the FT's How to Spend It can certainly confirm the market for vacation by the ultra-rich.  For Ames the most amazing aspect is that

the designated victims in this drama - America's workers - are such willing collaborators in their own existential demise.

...according to a New York Times article, British workers get more than 50% more paid holiday per year than Americans, while the French and Italians get almost twice what the Americans get. The average American's response is neither admiration nor envy, but rather a kind of sick pride in their own wretchedness, combined with righteous contempt for their European worker counterparts, whom most Americans see as morally degenerate precisely because they have more leisure time, more job security, health benefits and other advantages. 

We have seen a related version of this in the public outrage ginned up over the "generous" health and pension packages of public sector employees that has allowed conservative governors to eviscerate worker's benefits and their rights in the process--c.f. Wisconsin.   A constant stream of propaganda tells us that public sector workers must be stripped of their many unearned and undeserved benefits.  There is no equally powerful alternative stream of propaganda demanding better health and pension benefits for all workers.   There is no alternative stream painting a picture of life as an American worker when wages stabilise to global median levels.  The result seems to perfectly illustrate Ames' willing collaboration in self-destruction.

Choosing Austerity

Menzie Chinn says the austerity being imposed on Greece, Spain etc is self-defeating, while in the US the states are voluntarily choosing austerity, to their own GDP detriment, in order to reduce the state for political reasons.  More:

...the approach of muddling through, dealing on an ad hoc basis with each crisis with aid conditioned on fiscal consolidation, is not working. It's not working partly because in the demand determined models we teach in intermediate macro work cutting government spending and raising taxes tends to depress output, as highlighted in this post. But when the countries affected are closely linked by trade, then the total effect of the contractionary policies conducted in individual countries results in even greater contraction.

Had these economies been on floating exchange rates, the contractionary effects might have been mitigated by depreciated currencies. But membership in the eurozone meant that shock absorber was gone. That is why the prospect of an expansionary fiscal contraction was never very plausible in the case of the GIIPS. But as long as the rest of the eurozone countries were unwilling to provide substantially more financing or transfers to the GIIPS, these governments had little alternative to fiscal consolidation. That is the fate of many, many countries that have faced IMF stabilization packages in earlier decades.

In contrast, the U.S. has currency flexibility so it can save itself, but the states chose austerity, and Chinn shows this has led to lower GDP growth.  Chinn says:

In contrast to Europe, the choice to slash spending and taxes was unforced. In the absence of tax cuts, spending could have been maintained at higher levels. Furthermore, the Federal government had the resources to further support the state and local governments. 

...Truly, much of the distress at the state and local level is essentially a self-inflicted wound, that allows a push for smaller government to proceed under the guise of austerity. 

Charts and more analysis at the link.

Austerity vs the Social Contract

Yves Smith has a post on how austerity is being used to destroy the social contract:

Greece has been told to reduce health care from its current 10% of GDP to below 6%. Imagine what would happen if the US were told to cut its medical expenditures by over 40% in a one or two year period. And if the IMF boot were put on the US neck, and we were told to get medical spending down to 6% of GDP, we'd need to reduce it by 2/3.

In a Real News Network interview, Rob Johnson of the Roosevelt Institute describes further how the EuroCrisis has become a tool to break the social contract:

More discussion and a lot of commentary at the link.