Tag: Washington Post

It Depends on What the Meaning of “Tax” Is

The print edition of the Washington Post and the online Real Estate home page feature this headline:

Debunking rumors of a housing sales tax

The article begins:

Rumors are flying that the health-care legislation Congress passed this year will impose a sales tax on all real estate sales.

So I’m thinking, OK, more crazy Glenn Beck tea-party stories about mythical Obama tax hikes, and the Post is going to debunk them. Then I keep reading:

But the rumors are based only partly on fact. Although there is a new tax, it will not apply to everyone, and existing tax breaks for home sales will remain in place.

The Health Care and Education Reconciliation Act of 2010, which President Obama signed into law March 30, is comprehensive and complex. Section 1402, “Unearned Income Medicare Contribution,” imposes a 3.8 percent tax on profits from the sale of real estate – residential or investment.

But the levy is aimed at high-income taxpayers, leaving most people untouched. And it will not take effect until Jan. 1, 2013.

Let’s look at the facts of this new law.

First, it is not a sales tax, nor does it impose any transfer or recordation tax. It is called a Medicare tax because the money received will be allocated to the Medicare Trust Fund, which is part of the Social Security system.

Next, if your adjusted gross income is less than $200,000, you are home free….

How is the tax calculated? Through a complex formula that could be called “the accountants’ protection act.” As a taxpayer, you (or your financial adviser) must determine which is less: the gain you have made on the sale of your house, or the amount by which your income exceeds the appropriate threshold.

So let’s recap here. Post contributor Benny Kass promises to “debunk” the “rumors” that “the health-care legislation Congress passed this year will impose a sales tax on all real estate sales.” And he concludes, “In the meantime, don’t believe the rumors.” But in fact the health-care law did include a new tax on real estate profits. It’s not exactly a sales tax, and it won’t apply to most people. But the only real inaccuracy in the “rumors” that he said “are flying” was the word “all.” It’s only a 3.8 percent tax on some real estate sales, no doubt only a minority of sales, though perhaps affecting more readers of the Washington Post Real Estate section than people in less-affluent regions where housing prices didn’t soar and then remain high. Frankly, I’ve seen more effective debunkings.

This “rumored” real estate tax is also discussed on page 20 of Michael Tanner’s new study “Bad Medicine: A Guide to the Real Costs and Consequences of the New Health Care Law.” But if you’re really going to try to understand the new health-care legislation, you may want to clip the Kass article to keep with your copy of the Tanner paper, as no one study can guide you through every detail of a 2000-page law. Journalists and HR experts will be kept busy for years tracking down every sub-reference and interaction in the bill.

Your Health Insurance, Designed by Lobbyists

Christopher Weaver of Kaiser Health News has an excellent article in today’s Washington Post on the various government agencies that will now be deciding what health insurance coverage you must purchase, and how many of those decisions will ultimately fall to lobbyists and politicians:

For years, an obscure federal task force sifted through medical literature on colonoscopies, prostate-cancer screening and fluoride treatments, ferreting out the best evidence for doctors to use in caring for their patients. But now its recommendations have financial implications, raising the stakes for patients, doctors and others in the health-care industry.

Under the new health-care overhaul law, health insurers will be required to pay fully for services that get an A or B recommendation from the U.S. Preventive Services Task Force…[which] puts the group in the cross hairs of lobbyists and disease advocates eager to see their top priorities – routine screening for Alzheimer’s disease, diabetes or HIV, for example – become covered services.

And it’s not just the USPSTF that will be deciding what coverage you must purchase:

[P]lans must also cover a set of standard vaccines recommended by the Advisory Committee on Immunization Practices, as well as screening practices for children that have been developed by the Health Resources and Services Administration in conjunction the American Academy of Pediatrics. Health plans will also be required to cover additional preventative care for women recommended under new guidelines that the Department of Health and Human Services is expected to issue by August 2011.

The chairman of the USPSTF says the task force will try “to stay true to the methods and the evidence… the science needs to come first.”  A noble sentiment, but as my colleague Peter Van Doren likes to say, “When politics and science conflict, politics wins.”  Witness how industry lobbyists have killed or neutered every single government agency that has ever dared to produce useful comparative-effectiveness research.  (You’re next, Patient-Centered Outcomes Research Institute!)

When government agencies are making non-scientific value judgments–e.g., are these studies reliable enough to merit an A or B recommendation? what should be the thresholds for an A or B recommendation? will the benefits of mandating this coverage outweigh the costs?–politics does even better.  Witness Sen. Barbara Mikulski (D-Md) overruling a USPSTF recommendation when she “inserted an amendment in the [new] health-care law to explicitly cover regular mammograms for women between 40 and 50. “

Speaking of value judgments, the one flaw in Weaver’s article is that it inadvertently conveys a value judgment as if it were fact.  He writes that the mandate to purchase coverage for preventive services is “good news for patients” and that 88 million Americans “will benefit.”  Whether the mandate is good news for patients depends on whether patients value the added coverage more than the additional premiums they must pay.  (The administration estimates that premiums for affected consumers will rise an average of 1.5 percent.  One insurer puts the average cost at 3-4 percent of premiums.  Naturally, some consumers will face above-average costs.)  Whether the benefits outweigh the costs is ultimately a subjective determination. (The best way to find out, as it happens, is to let consumers make the decision themselves.)

WaPo on No-Fly: Black Hole to Quicksand

I wrote here Monday, and the Washington Post editorialized today, about the lawsuit in which the ACLU is representing a group of people who believe they have been wrongly placed on the government’s no-fly list. I find the Post’s editorial needlessly equivocal and muddied.

The plaintiffs “have a point — to a point,” says the Post. “[T]he list is essentially a black hole.” But it never says how their suit overshoots the mark.

When someone vindicating a constitutional right has a point, he or she has a point—period. Due process is a right prescribed by the Constitution, not something to dither about like Hamlet.

Hewing to a reasoned-sounding middle ground, the Post says, “There are legitimate law enforcement reasons for keeping the list secret: Disclosure of such information would tip off known or suspected terrorists, who could then change their habits or identities to escape government scrutiny.”

Think this through. The no-fly list is self-revealing. Any terrorist who tries to fly and can’t is “tipped off” that he or she is a suspect. (Does it matter whether the list or something else prevented him or her from flying? No.) Said terrorist will take steps to evade the list or someone else will take over—terrorists are fungible. The benefit of secrecy is small to the point of superfluous.

The Post correctly states that “U.S. citizens who believe they are on the list because of bad information should have a chance to challenge that designation before an independent arbiter.” But then it goes all mealy: “A federal court may be an appropriate forum, if governed by procedural safeguards to protect national security information. Creating an independent review panel within the executive might also meet the need.”

The secrecy rationale is tiny. The federal courts have vast experience with issues of all sensitivities. Developing a new (suitably) ”independent” panel would be a mountainous chore. And the constitutional doctrine of separation of powers cuts strongly against the Post’s proposal.

This editorial’s “middle ground” looks a lot like quicksand—a lot like the black hole the no-fly list is.

It’s Summer in Washington and the Livin’ Is Good

“According to a new Regional Income Earnings Index developed by the Martin Prosperity Institute, Greater Washington, D.C. is the nation’s metropolitan region with the highest income,” writes Richard Florida, author of The Rise of the Creative Class.

Washington, which produces rules, regulations, and political consulting services, ranks just ahead of San Jose and Stamford, Connecticut, where people invest their own money to produce software and allocate capital for a complex economy.

Even before the Obama administration started concentrating job creation on the federal sector, the Washington Post was reporting

The three most prosperous large counties in the United States are in the Washington suburbs, according to census figures released yesterday, which show that the region has the second-highest income and the least poverty of any major metropolitan area in the country.

Rapidly growing Loudoun County has emerged as the wealthiest jurisdiction in the nation, with its households last year having a median income of more than $98,000. It is followed by Fairfax and Howard counties, with Montgomery County not far behind.

This of course reflects partly the high level of federal pay, as Chris Edwards has been detailing. And it also reflects the boom in lobbying as government comes to claim and redistribute more of the wealth produced in all those other metropolitan areas.

To slightly amend a ditty I posted a few years ago,

Mamas, don’t let your babies grow up to be cowboys,

Don’t let ‘em make software and sell people trucks,

Make ‘em be bureaucrats and lobbyists and such.

Pearlstein Wants Tough Trade Measures Against China…and the U.S.

Steven Pearlstein’s ready for the nuclear option.  With the conviction of a man who knows he won’t be held accountable for the consequences of his prescriptions, Pearlstein says the time has come for action against China.  Hopefully, those whose fingers are actually near the button will recognize Pearlstein’s suggestion for what it is: an outburst of frustration over what he considers China’s insubordination.

In his Washington Post business column yesterday, Pearlstein criticizes U.S. policymakers for blindly adhering to the view that China will inevitably transition to democratic capitalism, while they’ve excused market-distorting protectionism, mercantilism, and state dominance over the economy in China.  Pearlstein writes:

Up to now, a succession of administrations has argued against directly challenging China over its mercantilist policies, figuring it would be more effective in the long run to let the economic relationship grow deeper and give the Chinese the time and respect their culture demands to make the inevitable transition to democratic capitalism.

What we have discovered, however, is that the Chinese don’t view the transition as inevitable and that, in any case, they really aren’t much interested in relationships. If anything, they’ve proven to be relentlessly transactional. And their view of business and economics remains so thoroughly mercantilist that they not only can’t imagine any other way, but assume that everyone else thinks the way they do. To try to convince them otherwise is folly.

Pearlstein’s suggestion that the Chinese “aren’t much interested in relationships” strikes me as frustration over the fact that China is no longer a U.S. supplicant.  Perhaps the truth is that China isn’t much interested in a one-way relationship, where it is expected to meet all U.S. demands, while seeing its own wishes ignored.  Calling them “relentlessly transactional” is accusing them of naivety for missing the bigger picture, which, for Pearlstein, is that the U.S. is still top dog and China ignores that at its peril. 

Pearlstein is not the first columnist to criticize the Chinese government for putting its interests ahead of America’s (or, more accurately, putting what it believes to be its best interests ahead of what U.S. policymakers believe to be in their own interests).  In a recent Cato policy paper titled Manufacturing Discord: Growing Tensions Threaten the U.S.-China Economic Relationship, I was addressing opinion leaders who have staked out positions similar to Pearlstein’s when I wrote:

Lately, the media have spilled lots of ink over the proposition that China has thrived at U.S. expense for too long, and that China’s growing assertiveness signals an urgent need for aggressive U.S. policy changes….

One explanation for the change in tenor is that media pundits, policymakers, and other analysts are viewing the relationship through a prism that has been altered by the fact of a rapidly rising China.  That China emerged from the financial meltdown and subsequent global recession wealthier and on a virtually unchanged high-growth trajectory, while the United States faces slow growth, high unemployment, and a large debt (much of it owned by the Chinese), is breeding anxiety and changing perceptions of the relationship in both countries….

Of course, the U. S. is the larger economy and the chief designer of the still-prevailing global economic architecture.  But the implication that that distinction immunizes the U. S. from costly repercussions if U.S. sanctions were imposed against China is foolish.  But that’s exactly where Pearlstein’s going when he writes:

Getting this economic relationship back into balance is the single biggest challenge to the global economy, not just because of its direct effects on China and the United States, but the indirect effects it has on the rest of the world. The alternative is a return to living beyond our means, a further erosion of our industrial and technological base and a continued loss of ownership of business and financial assets.

By balancing the economic relationship, presumably Pearlstein is speaking about the need to reduce the bilateral trade deficit, which spurs a net outflow of dollars to China, some of which the Chinese lend back to Americans, who in turn can then buy more imports from China, and the cycle continues.  But to tip the scales in favor of the blunt force action he recommends later, Pearlstein characterizes Chinese investment in the United States as living beyond our means, losing ownership of “our” assets, and eroding our industrial and technological base.  That is a paternalistic and inaccurate characterization of the dynamics of capital inflows from China.

First, let’s remember that the Chinese aren’t holding a gun to the heads of the chairs of our congressional appropriations committees demanding that politicians borrow and spend more on senseless programs.  It’s absolutely priceless when spendthrift members of Congress, oblivious to the irony, blame the Chinese for having caused the U.S. financial crisis for providing cheap credit to fuel asset bubbles when it was their own profligacy that brought the Chinese to U.S. debt markets in the first place.  Stop deficit spending and the need to borrow from China (or anywhere else) goes away. 

Likewise, it is a sad commentary on the state of individual responsibility in the U.S. when a prominent business writer thinks the only way to keep consumers from living beyond their means is to deprive their would-be-creditors of capital.  It sounds a bit like the same tactics deployed in the U.S. War on Drugs.  Blame the suppliers.  The fact that U.S. savings rates have been rising for two years suggests that responsible Americans are interested in rebuilding their assets without need of such measures.

There are other destinations for capital inflows from China, which (despite Pearlstein’s disparaging allusions) should be entirely unobjectionable.  Chinese investment in U.S. corporate debt, equities markets, real estate markets, and direct investment in U.S. manufacturing and services industries does not erode our industrial and technological base.  It enhances it.  It does not constitute a loss of ownership of business and financial assets, but rather a mutual exchange of assets at an agreed price.  When Chinese investors compete as buyers in U.S. markets, the value of the assets in those markets rises, which benefits the owners of those assets when there is an exchange.  Chinese purchases of anything American, with the exception of debt, do not constitute claims on the future.  Accordingly, the economic relationship can achieve the much vaunted need for rebalancing without need of attempting to forcefully reduce the trade deficit by restraining imports.

Pearlstein continues:

So if the urgent need is to rebalance the global economy by rebalancing the U.S.-China economic relationship, we are probably going to have to begin this process on our own. And that means establishing some sort of tariff regime that will increase the cost of imports not just from China, but other countries that keep their currencies artificially low, restrict the flow of capital or maintain significant barriers to imports of goods and services. The proceeds of those tariffs should be used to encourage exports in some fashion…

This relationship, however, is one that must be actively managed by the two governments. It should be obvious by now that their government is rather effective at managing their end of things. It should be equally obvious that we cannot continue to rely on free markets to manage our end.

So Pearlstein comes full circle.  He wants the U. S. to impose tariffs on Chinese imports, subsidize U.S. exports, and institute top-down industrial policy.  In other words, he wants the U.S. to be more like China. 

Of course, I would argue, we already have something that encourages exports.  They’re called imports.  Over half of the value of U.S. imports are intermediate goods—capital equipment, components, raw materials—that are used by American-based producers to make goods for their customers in the U. S. and abroad.  Furthermore, foreigners need to be able to sell to Americans if they are going to have the dollars to buy products from Americans.  And finally, if the U.S. implements trade restrictions on China to compel currency revaluation or anything else, retaliation against U.S. exports is a given.

In short, imports are a determinant of exports.  If you impede imports, you impede exports.  So Pearlstein’s idea that we can somehow subsidize exports by taxing and reducing imports is not particularly well-considered.  And though it may be tempting to look at China’s economic success as an endorsement or vindication of industrial policy, it is difficult to discern how much of China’s growth can be attributed to central planning, and how much has happened despite it.  But in the U.S., where one of our unique and core strengths has been the relative dynamism that has produced more inventions, more patents, more actionable industrial ideas, more freeedom, and more wealth than at any other time in any other nation-state in the world, it would be imprudent bordering on reckless to suppress those synergies in the name of industrial policy.

In the end, I rather doubt that Pearlstein is truly on board with the course of action he suggests.  In response to a question presented to him on the Washington Post live web chat yesterday about how the Chinese would react if his proposal were implemented, Pearlstein wrote:

They’d make a huge stink. They’d cancel some contracts. They’d slap on some tariffs of their own. They’d launch an appeal with the World Trade Organization. It would not be costless to us – getting into fights never is. But after a year, once they saw we were serious, they would find a way to begin accomodating [sic] us in significant ways, and if we respond with a positive tit for tat, things could finally improve. They’ve been testing us for years and what they discovered was that we were easy to push around. So guess what – they pushed us around.

I’m willing to chalk up Pearlstein’s diatribe to pent-up frustration.  But let me end with this admonition from that May Cato paper:

 [I]ndignation among media and politicians over China’s aversion to saying “How high?” when the U.S. government says “Jump!” is not a persuasive argument for a more provocative posture.  China is a sovereign nation.  Its government, like the U.S. government, pursues policies that it believes to be in its own interests (although those policies—with respect to both governments—are not always in the best interests of their people).  Realists understand that objectives of the U.S. and Chinese governments will not always be the same, thus U.S. and Chinese policies will not always be congruous.  Accentuating and cultivating the areas of agreement, while resolving or minimizing the differences, is the essence of diplomacy and statecraft.  These tactics must continue to underpin a U.S. policy of engagement with China.

Uncertainty More Than Anecdotal

During a recent CNBC debate on federal spending, I argued that government policies are creating uncertainty in the business community. Businesses are reluctant to invest or hire because they’re concerned that the president’s big government agenda will mean higher taxes and more onerous regulations.

I mentioned that every business owner I’ve spoken with has expressed this concern. In fact, the owner of the TV studio I was in told me that he wants to hire more employees but is afraid he may have to turn around and fire them later on thanks to Washington. My debate opponent dismissed my argument on the basis that “you cannot conduct macroeconomic policy by anecdote.”

Unfortunately, there is plenty of evidence to support my concern beyond what I’ve heard from folks in the business community. Yesterday, the chairman of the Business Roundtable, which the Washington Post calls “President Obama’s closest ally in the business community,” said that the president and his Democratic allies are creating an “increasingly hostile environment for investment and job creation.”

From the article:

Ivan G. Seidenberg, chief executive of Verizon Communications, said that Democrats in Washington are pursuing tax increases, policy changes and regulatory actions that together threaten to dampen economic growth and “harm our ability … to grow private-sector jobs in the U.S.”

“In our judgment, we have reached a point where the negative effects of these policies are simply too significant to ignore,” Seidenberg said in a lunchtime speech to the Economic Club of Washington. “By reaching into virtually every sector of economic life, government is injecting uncertainty into the marketplace and making it harder to raise capital and create new businesses.”

Big businesses aren’t the only ones complaining. Surveys of small businesses conducted by the National Federation of Independent Business continue to point to government taxes and regulations as their single biggest obstacle.

Even the Washington Post’s editorial page is now acknowledging that government-induced uncertainty is an issue:

But as analysts ponder the mystery of weak private-sector hiring despite signs of economic growth, it’s worth asking what role is played by government-induced uncertainty. With the federal government promoting major changes in health care, financial regulation and energy law, it wouldn’t be surprising if some companies are more inclined to wait and see than they might otherwise be. And that’s especially true when they look at looming American indebtedness and the effect that could have on long-term interest rates.

The uncertainty caused by expanding government that we are facing today isn’t a new phenomenon. Economist Robert Higgs coined the phrase “regime uncertainty” in a study that showed that FDR’s anti-business policies prolonged the Great Depression. Had the Roosevelt administration heeded the “anecdotes” from the business community in the 1930s, perhaps the country could have been spared some pain. Let’s hope history doesn’t repeat itself.

Re. Ezra Klein: Did State and Local Anti-stimulus Nullify Federal Stimulus?

A recent Washington Post column by Ezra Klein dreamed up a new excuse for the conspicuous failure of Obama’s so-called stimulus plan.   Klein argues that the stimulus of federal spending has been offset by the “anti-stimulus” of fiscal austerity by state and local governments.  For proof he quotes Bruce Bartlett, who is fast becoming the favorite go-to guy for liberals seeking conservative allies in their endless quest for more spending and taxes. 

Bartlett says, “When the history of the current crisis is written, much of the blame will be placed on the sharp fiscal contraction of state and local governments.  I think economists will view this as a preventable error equivalent to the Fed’s passive shrinkage of the money supply in the early 1930s.”

A historian himself, Bartlett imagines this to be a question that will have to be pondered by historians in the distant future.   But it is easy to identify each sector’s direct contribution to the overall growth rate of real GDP from a St. Louis Fed publication, “National Economic Trends.” 

State and local government spending was rising during the first three quarters of the recession, and the drop in the fourth quarter of 2008 accounted for just 0.25% of the 5.37% annualized decline in GDP.  In the first quarter of 2009, state and local spending subtracted  just 0.19% from real GDP, but federal spending subtracted more (0.33%) due to cuts in defense spending.  Government obviously made only a minor contribution to the 6.4% drop in overall GDP.
  
In the second quarter of 2009, state and local spending was way up (by 0.48%), as was federal spending (0.85%).  But the private economy did not begin expanding until the third quarter – when government spending stopped diverting so many resources to unproductive uses.
 
The table shows that government spending on goods and services had nothing to do with the recovery (transfer payments don’t contribute to GDP).  

As a matter of simple accounting, the state and local sector has been a very minor negative force −scarcely comparable to the Fed’s inaction in 1930-32

Federal purchases, whether for heavily-subsidized ”green jobs” or shovel-ready pork, have been virtually irrelevant during the last two quarters.

Contributions to Real GDP Growth
……………………..  3rd…… 4th…… 1st qtr

Real GDP              2.2         5.6             3.0%
Private                   1.6         5.8             3.4
Federal                  0.6        0.0            0.1
State & Local     -0.1      -0.3           -0.5