Taxation without Representation

Prior to the Revenue Act of 1913, the federal government was supported pro rata by the states. States are apportioned seats in the House of Representatives according to population, and this was also their share of the federal budget. Congress could levy direct taxes only in proportion to population. It’s easy to see the wisdom in this approach, plus it didn’t require a huge federal agency.

Tax by StateRepresentation was linked to cost sharing. Without this link, there would be a risk that populous states could pass laws shifting the federal tax burden to small, rich ones.

We wanted to see what the House would look like if the original rule were still in effect, so we downloaded the IRS data book and reallocated the seats according to each state’s tax payments.

Federal tax collection, all types, net of refunds, was roughly $2 trillion for 2012. The table shows the current allocation of 435 seats, by population, and our reallocation by net tax.

The third column shows the number of seats by which each state is over (or under) represented relative to the old rule. Another way to think of under-representation is to say that the state is overtaxed relative to its voting power.

Sure enough, richer (though not necessarily smaller) states are underrepresented and poorer ones are overrepresented. Could this result in a legislative bias? Almost certainly.

The top twenty-three states in this list enjoy a voting majority in the House. They have an incentive always to vote for higher income taxes – because the burden will fall disproportionately on other states.

See also: Easy Constitution

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Cash Cows and Scapegoats

Now that Bank of America has settled with DOJ for an unprecedented $16 billion, it is time to reflect on the pervasive corruption that led to the housing bubble. The settlement is for sins committed by Countrywide Financial and Merril Lynch, which BofA bought after the crash, under pressure from the government.

The majority of the mortgage securities at the heart of the Justice investigation are the product of Countrywide and Merrill Lynch.

BofA now tops the list of settlements sans verdicts or, as The Economist calls them, “an extortion racket.”  If you are one of those who blame the banks for the housing bubble, you might wonder why the DOJ never insists on a trial.

Bank Fines

American housing policy was insane to begin with, and still is. Mortgage interest is tax deductible, encouraging home buyers to overextend themselves. On the other side of the transaction, lenders are backed up by Fannie Mae, encouraging them to overextend as well. This means that our mortgage market is, at all times, bigger and riskier than it would be without policy intervention.

Starting in the Clinton administration, we added 1) the Community Reinvestment Act and 2) regulatory pressure for lending to underprivileged buyers, plus 3) the repeal of Glass Steagall, and 4) a suppressed Fed funds rate. These policies caused mortgage risk to be further underpriced, and directly resulted in the housing bubble.

Anyone with any knowledge of economics saw it coming. Offhand, we can recall Taleb, Schiller, Rajan, and that guy from Goldman Sachs. Look up “predicted the housing crisis,” and investigate some of the claims. Here is an article from City Journal, warning about the impending crisis – in 2000. All the participants knew exactly what would happen, and how they would profit from it.

The cash cow was the government backed mortgage agency, Fannie Mae. When the housing bubble burst, the taxpayers were left holding most of the bad debt – and the guy running Fannie Mae got a fat bonus.

Johnson spotted a golden opportunity to use a popular cause—increasing home ownership—as a means of building Fannie’s power in Washington, and also feather his and his fellow executives’ nests along the way.

Fannie Mae CEO James Johnson had a lead role in the policies that created the bubble. He organized various advocacy groups to push for the failed policies, and bribed Congress with campaign donations. If you really want to raise your blood pressure, read the New York Times account of this scam – or the book, Reckless Endangerment.

Fannie Mae co-opted relevant activist groups, handing out money to Acorn, the Congressional Black Caucus, the Congressional Hispanic Caucus and other groups that it might need on its side.

There was something in it for everyone. The politicians would look good because there would be a temporary boom, led by housing activity. Underprivileged buyers would finally get homes. The boom might run for years, and the bust would be on someone else’s watch. Meantime, everybody would get rich. The bankers just needed to get the bad loans off their books before the music stopped.

Securitizing mortgage loans was not new. Banks had been routinely packaging loans and reselling them, to Fannie and to each other. The innovation was bundling loans of varying risk classes into inscrutable “collateralized debt obligations.” These were inscrutable in the sense that, when the bubble popped, no one knew who was holding the bad mortgages. Banks stopped lending to each other, and the financial system locked up.

This brings us to the various interventions of Sec. Paulsen and Chairman Bernanke, and brings our story back to Bank of America. Paulsen prevailed upon BofA to buy the assets of Countrywide and Merrill Lynch. The CEO, Ken Lewis, knew this was a bad deal, but gave in to pressure from Paulsen. They made a handshake deal that BofA would be protected from liability.

Wall Street was crumbling and BofA faced intense government pressure to buy Merrill to keep the crisis from spreading.

Countrywide had escaped scrutiny by giving generous mortgage deals to members of Congress. One beneficiary was Sen. Chris Dodd. That’s right – he of the Dodd-Frank “Wall Street Reform Act.” Rep. Barney Frank (you have to ask) was in a relationship with a Fannie Mae employee.

Countrywide … bought influence on Capitol Hill by issuing hundreds of sweetheart loans for members of Congress, their staffs and other government employees

So, the Clinton administration made political hay by inflating a housing bubble, the Bush administration ordered BofA to take a share of the fallout, and now the Obama administration turns around and prosecutes them for it. Along the way, lots of people got rich. James Johnson’s haul is estimated at $100 million. This revolving corruption and scapegoating is so flagrant it’s comical, and the really funny part is –it’s called Bank of America.

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Thank You, Mr. Lee

Saturday was Singapore’s national holiday, and we reread Michael Barr’s wonderful paper on Lee Kuan Yew. This is a thoughtful, well researched inquiry into the question of Mr. Lee’s professed socialism. Looking at Lee’s policies, and modern Singapore, you would never guess that the old man was a socialist.

LKY_2014

The author makes a strong effort to solve this riddle but, at bottom, it is just semantics. We have warned you before about reasoning from labels. Barr starts with the western definition of socialism, and Jeremiah’s essay on socialism uses some of the same examples.

Rather than seeing Lee’s socialism as a gutted version of British socialism, it should perhaps be viewed as a less ruthless version of Chinese communism.

Academic socialists are unhappy with Lee, because they are working from a textbook and he was working with a real economy.   Lee has said, for example, that a welfare state is only possible where the economy is already affluent, as in the West. For tiny Singapore, capital formation was a priority.

The party had called for a social insurance scheme, like our Social Security, but Lee needed the funds for investment. Today, Social Security is bankrupt, while Singapore’s investment fund is one of the world’s strongest. Investment in housing meant homes for workers, plus the economic benefits of home building.

People are not interested in “isms”: Capitalism, Socialism, Fascism, or Communism. They are only interested in seeing that their ordinary lives improve.

Lee believes in state control, but not a welfare state. His model looks a lot like China’s, but he was ahead of Deng and Xi in reform and opening up. Great leaders know they will be judged by results, not dogma – and Lee’s results speak for themselves.

The welfare states of the West are now in obvious decline, just as Lee foretold. Carping about who is a proper socialist is just another example of western arrogance. Socialists in England, France, and America should use this occasion to reconsider their own ideas.

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Mind the Wealth Gap

Bubble MachineStandard & Poor’s, God bless ‘em, have figured out that America’s rising wealth gap is responsible for our boom and bust economy. Obviously, blaming anything on a “rising wealth gap” will have a certain political appeal, but – this is to mistake cause and effect.

What Raghuram Rajan and (separately) Larry Summers have said is that the advanced economies ran out of gas in the late twentieth century, leaving us not only in secular stagnation, but with unsustainable social commitments. Since Chairman Greenspan, Fed policy has been to “jump start” the economy with cheap funds, making available – on credit – a lifestyle we can no longer afford.

Those to whom the system brings windfalls … become ‘profiteers’, who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat.

So, we had an economic boom and the tech bubble in the 1990s, and then a bust. Next, federal policy joined cheap Fed funds to produce the housing bubble, and – now we are on the third bubble in recent memory.

The “rising wealth gap” is responsible for this? Quite the contrary. Our monetary policy is a trillion dollar bubble machine. Whoever is nearest the spigot is going to get rich fast even if – as Keynes observed – he’s not trying. There’s your rising wealth gap. It is an effect, not the cause, of our boom and bust economy.

 

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Done with Wikipedia

BritannicaIf you can afford fifteen dollars, do yourself a favor and download the Britannica app. We had forgotten how good it is to read a real, edited, encyclopedia entry. Jeremiah used to be a big supporter of Wikipedia. The stimulus for the switch was a recent spate of Wikipedia “vandalism,” but – once you’ve seen the difference, you won’t go back.

Russian hackers changed a Wikipedia entry to say that the jets could fly at the altitude of MH17

The first episode was just good fun. America’s Congress has been banned from editing Wikipedia because, among other pranks, they have identified Sec. Donald Rumsfeld as an alien lizard. More serious was The Economist’s finding that hackers are using Wikipedia for topical propaganda.

It’s not surprising to find that an open source encyclopedia is rife with misinformation. Maybe you could use it for math and science, but certainly not for history. For an example, we compared articles on the Chilean coup. This is from Wikipedia:

Pinochet assumed power in Chile following a U.S.-backed coup d’état on 11 September 1973 that overthrew the elected … socialist government of President Salvador Allende

On Wikipedia, there is no dictator anywhere who was not installed by the CIA. Jeremiah suspects someone has “U.S. backed coup” on a shortcut key. Here is Britannica:

Augusto Pinochetleader of the military junta that overthrew the socialist government of President Salvador Allende of Chile on Sept. 11, 1973

We chose Chile because this month’s issue of Foreign Affairs has the real story. The author, a retired spy, is credible because the CIA admits to a failed coup in 1970 and knowledge of the plot in 1973. Morally, this may not be much of a difference, but – for an encyclopedia, it is an intolerable gaffe. How would you answer the question, “when was the CIA backed coup?”

Wikipedia articles also tend to ramble, sometimes to the point of incoherence, because they’re written by committee. This blights even objective topics, like math and science. It’s much better to have one expert, with an editor, write the article from beginning to end.

Of course, any reference material is going to carry the editor’s bias, but Encyclopedia Britannica is about as clean a source as you’re going to find – plus, no alien lizards!

See also:   Spectacular Acts of Wikipedia Vandalism

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New World Currency

This article in Huffington Post uses the term “new world order” in a novel (and optimistic) sense. Jeremiah has been warning that America will lose our dominance in international finance, and now it is happening. Punitive fines, sanctions, and currency wars are driving the world out of our currency zone.

A multi-polar financial world with new international financial centres emerging in Mumbai and Shanghai will be a more stable world.

The term “new world order” is generally used to describe a conspiracy, in which an international elite aims to create “one world government” with themselves at top. See here, for example.   The new world order described by Dr. Saidi is actually the antidote for one world government. Such are the pitfalls of using labels.

So, what about the new world order of one world government? Does that sound like a good idea to you? As always, we approach the theory by assuming that it is rational – and not a conspiracy.

We alreSorosady have a raft of supranational institutions like the IMF, the WTO, and the UN. The European Union aims to “transcend” the national governments of Europe, and already controls their currency. The leaders of these institutions may reasonably believe they’re doing the world some good. It’s human nature to believe that your outfit ought to have more funding, and more power.

Globalists, like George Soros and his various think tanks, believe that national governments are obsolete. They deny wanting a world government, but they want every issue – from welfare to monetary policy – handled by a global body.

Insofar as there are collective interests that transcend state boundaries, the sovereignty of states must be subordinated to international law and international institutions.

This amounts to world government, for all practical purposes. It promises an end to war, poverty, pollution, etc. People with this much faith in government are statists, by definition, and they believe in utopia.

SutherlandJeremiah does not have that kind of faith. He believes that the more power and personnel a government has – any government – the more despotic it will be. World government, therefore, would be a giant prison with no hope of escape, like The Hunger Games.

With globalism, as with socialism, we don’t want to get hung up on the label. We want to look at specific policies. For example, Soros and his crew want the IMF to issue the world’s reserve currency. This is obviously the enemy of human liberty. Just look at what happened to Greece, with the Euro.

This brings us back to Dr. Saidi and his multi-polar world order. We can no longer hope for the dollar to retain its reserve status. Failing that, we would rather have competing national currencies than a “new world currency” controlled by the IMF.

See also:  CFR Global Governance Program

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Understanding the Gini Index

Now, you can study the famous Gini index yourself – and not have to rely on Jon Stewart. Here is Jeremiah to show you how. Start by downloading the latest individual income data from the IRS Statistics on Income. Use the AGI line to calculate cumulative income, and the number of returns to calculate cumulative filers.

Jeremiah likes to add back the spouses and dependents, because that brings the total close to 300 million, the actual U.S. population. You don’t need to calculate income per capita, because we are only interested in percentages. Plot the cumulative percentage of income against the cumulative percentage of tax filers. Your chart should look like this:

Lorenz1

Individual income for 2012 was roughly $9 trillion, and the tax take was $1.2 trillion. The distribution of income is pretty unequal, as you can see. Twenty percent of income is earned by the top one percent – those earning $200K or more. That’s the IRS wording, “earned income.” Pundits prefer flows to, or “captured by.”

The more of a belly the blue line has, the more unequal the distribution. The red line represents total equality. To get the Gini index, calculate the area under the blue line, subtract it from the area under the red line (50%) and then divide the area of this lens-shaped region by one-half. It would make more sense simply to compare the two integrals, but then we’d have a positive measure of equality.

In our example, the Gini index is 54%, and worse than the official statistics. Those are based on a survey by the census bureau, and here we are working from tax data. The census bureau reckons the index around 45% and they don’t publish their raw figures. There’s a reason we prefer to use IRS data.

Next, let’s look at who pays their fair share of the $1.2 trillion. We run the same figures as before, only this time we calculate the cumulative percentage of the nation’s personal tax burden.

Lorenz2

The distribution of tax payments is even more unequal than the distribution of earned income. The Gini index for this chart is 73%. That same one percent, who earn 20% of the income, pay 35% of the tax – and 50% of Americans pay next to nothing.  Inequality is an awful thing. Someone should protest.

See also: Selected Measures of Household Income Dispersion

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