Month: February 2019

Not Easy Being Green

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February 24, 2019

by Steve Stofka

Newly elected Democratic Rep Alexandria Ocasia-Cortez has introduced a House resolution that details a broad basket of long-term infrastructure and humanitarian goals titled a Green New Deal. Connecticut Senator Ed Markey has introduced the resolution in the Senate. Whether it makes it to the floor of either chamber for a vote is uncertain. Some of the attacks on the resolution have been on points that were rejected from the resolution but were raised in a Q&A passed around to some House members in the building of a political consensus (Note #1).

The aspirations behind these improvements echo the infrastructure dreams of a post-World War 2 America. Politifact recently summarized the various points (Note #2). The key characteristics of the infrastructure goals are “safe,” “efficient” and “clean.” Those characteristics are embedded already in thousands of laws and regulations – but with practical limitations. A flexible approach is key to achieving these goals.

This week, I’ll focus on the infrastructure goals, starting locally at the granular level. “Upgrading all existing buildings in the United States and building new buildings to achieve maximum energy efficiency, water efficiency, safety, affordability, comfort, and durability, including through electrification.”
Someone clumsily attached those last three words, but they are critical. The words may be read to include an electrical upgrade of all buildings. They may be understood to include all buildings which could be improved with new electrical service. The language may be interpreted as a call for building retrofits for solar power.

These are expensive retrofits, so it is important that this clumsy language be sold as an aspirational guide, not the model language of a law or an agency rule. Local building regulations often “grandfather” older buildings so that they do not have to meet more recent building guidelines if they passed existing codes when they were built or remodeled. Anything other than a gradual approach in this area will be doomed.

“Universal access to clean water.”
Shortly after WW2, the Federal government took an increasing role in regulating local water supplies and sanitation, while helping to fund improvements (Note #3). This Green resolution is a reaffirmation of those goals. After seventy years, many existing water systems need massive and costly improvements. A contaminated water supply forced the residents of Flint, Michigan to use bottled water for more than three years.

The key word in this goal is “universal” and how that word is read. An exodus of residents and industry from poorer rural communities have crippled their budgets and resources. Who will pay to rebuild the aging plumbing systems of these hollowed out communities? Within many thriving metro areas are rural communities who do not have a central water system or sanitation. Homeowners and commercial buildings rely on private wells and are responsible for the maintenance of their wells and septic systems. Poorer residents may not have the means to service their systems properly. Will proposed legislation subsidize those residents? Since the Clean Water Act was passed fifty years ago, state and local governments have been fighting a legal battle with the Federal government over improvements to the water supply. Without a deft approach, legislation would continue to keep the lawyers busy.

Smart grids, a more efficient electrical delivery system, is a regional goal that is a restatement of the EISA law created in 2007 (Note #4). Our existing grids are more than fifty years old and need upgrading to a system that senses and adjusts to the changes in the system load. It would enable more clean power alternatives. Federal legislation which mandates upgrades to existing buildings to implement this vision will be met with impassioned resistance. Shall all power lines and power stations throughout the country be upgraded to meet new standards?

In conjunction with a transition to smart grids, this Green resolution restates an earlier vision: “eliminating pollution and greenhouse gas emissions as much as technologically feasible.” In the years after WW2, there was talk that the country would transition to nuclear power plants, a source of clean, cheap energy. The accident at the Three Mile Island nuclear plant in 1979 disrupted that vision (Note #5).

“Clean, affordable, and accessible public transit, and high-speed rail.”
This was a 20th century goal whose implementation stumbled. In 1960, my family traveled by train from Chicago to Dallas. We enjoyed the passing countryside from the upper deck of an observation car on the train. When Amtrak was created in 1971 (Note #6), there was going to be a highly efficient and affordable rail network built throughout the country. We are still waiting. After 9-11, let’s face it – plane travel sucks. The U.S. has the finest rail transport for goods in the world. Why are we so bad at moving people by rail?

There are many reasons. Following WW2, America invested more in highways than railroads. Families fell in love with the individual freedom of their automobile. The public is more resistant to the Federal government’s exercise of eminent domain. When the Civil War Republican Congress passed the Railway Act in 1862, the Federal government took what land it needed, and gave vast tracts to railroad companies who became rich selling off the land after laying the rails (Note #7). The Federal government played a key role in creating the corporate America that now wields an extraordinary amount of political and economic control of our daily lives. The public is weary and wary of large Federal projects.

Sweeping Federal legislation to achieve these goals must overcome the constitutional design of the country which gives those in rural areas a greater say in policy than their numbers warrant. This design was a 19th century compromise between agricultural and industrial states. Until a Supreme Court decision in 1964, many rural states did not redraw their state electoral maps after each census. In some states, one rural vote counted the same as forty urban votes (Note #8). Fifty years later, the structure of many state houses is designed to weaken the power of urban voters within the state.

The infrastructure goals contained in this resolution are essentially Infrastructure 2.0, an update of 20th century dreams. As in the past, economic and political realities will present formidable obstacles. Next week, I’ll look at the humanitarian goals contained in the resolution.

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Notes:
1. Green New Deal article at the Hill
2. Green New Deal article at Politifact
3. Water and sanitation regulation after WW2
4. Smart grid
5. Three Mile Island 
6. Amtrak history
7. Pacific Railroad Acts 
8. Reynolds v. Sims reinforced the idea of one person, one vote

 

Economic Cracks

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February 17, 2019

by Steve Stofka

As the recovery enters its tenth year, there are signs of strain. As debtors struggle to pay their loans in a weakening economy, the percentage of non-performing loans increases.  The current rate of one percent indicates a healthy economy (Note #1). When the annual change in the rate of delinquency increases, that has been a reliable indicator that the economy is growing stagnant. Here’s a chart of the percent change in non-performing loans. A change above zero has preceded the last three recessions.

Non-PerfLoansChange

Let’s add one more series to the graph to help us understand the cycle of consumer credit. In the graph below, the red series is the percentage of banks tightening lending standards. Notice how the banks respond to a rise in delinquencies by being more selective in their credit criteria. Eventually, this tightening of credit leads to a recession. The cycle is as natural as the ocean currents that distribute heat around the planet.

NonPerfBankTighten

The financial news agency Bloomberg reports that delinquent auto loans are the highest since 2012 (Note #2). Bankrate reports that credit card debt has risen since last year. Less than half of people surveyed have emergency funds (Note #3).

December’s retail sales report, released only this week because of the government shutdown, showed a surprising decline of 1% from November. Have some consumers reached their limit? Retail sales, adjusted for inflation and population growth, does not show the strain so far. Look at the period from late 2015 through late 2016 when sales growth consistently slowed below 1%. That was a key factor that cost Hillary Clinton the election. Trump turned voter dissatisfaction into an electoral victory in the Midwest.

RetailRealAdjPop

Politicians ride to power on the anger of voters. In 1994, Republicans overcame forty years of Democratic rule in the House by promising less regulation and lower taxes in a “Contract with America.” When the Supreme Court decided the 2000 election in favor of a Republican president, they enacted tax cuts to reverse the tax increases passed by Democrats in 1993. In 2006, voters were angry with the incompetent Bush administration and reinstalled Democrats in the House.

In the depths of the Financial Crisis in 2008, Democrats rode a wave of anger, despair and hope to take the White House and command a filibuster proof majority in the Senate for the first time since the post-Watergate Congress thirty years earlier. Such a rare majority indicated that voters strongly wanted a solution to the crisis (Note #3). The Obama administration and Democratic Congress protected the financial and insurance industries while ordinary people lost their homes and their savings. The one piece of legislation that emerged from that majority was Obamacare, the bastard child of back alley compromises between mainstream Democrats and the health care industry. Few who voted for it knew what was in the bill.

In 2010, Republicans rode the anger wave of the Tea Party caucus to retake the House. With an equal number of Senate seats up for re-election, Republicans took six seats from Democrats and ended their filibuster proof majority (Note #4). In 2014, voters handed the Senate back to Republicans, then gave the reins entirely to the Republicans with the election of Donald Trump to the presidency in 2016.

In 2018, Democrats rode a wave of anger to take back control of the House. Social media campaigns whip up indignation to fan the flames of voter anger in the hopes that Democrats can at least take back the presidency in 2020. Voters may not be in enough economic distress to give Democrats control of the Senate in 2020, but it is the Republicans who have the most seats up for re-election this coming Senate cycle (Note #4).

Credit expands and contracts in a seasonal multi-year cycle. Banks are tightening in response to higher delinquencies. Will the timing of the credit cycle coincide with the 2020 election?

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Notes:
1. In 2016, China, Japan and Germany had rates below 2%; the U.K. and Canada had less than 1%. On the high side, Greece had 36%; Italy had 17%, and Spain had 7%.
2. Why are so many people delinquent on auto loans? Bloomberg
3. In 1964, the Supreme Court forced the states to redistrict their state legislatures based on population changes. For fifty years, Democrats were sometimes able to forge filibuster proof Senate majorities because racist Southern states were effectively one party Democratic states. Reynolds v. Sims . Since the ratification of the 17th Amendment in 1914, Republicans have never had a filibuster proof majority
4. A third of Senators are up for election every two years so party advantage shifts with every election cycle.

Pay Up

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February 10, 2019

by Steve Stofka

When I was growing up in New York City, each kid’s name was shortened to one syllable, two at the most. New York is a busy town; people didn’t have time to pronounce long names. Guillermo became Will or Bill.  An exotic name like Anastasia was shortened to a rather pedestrian Ann. Melodic names like Florinda became Flo. In a sign of the changing times, N.Y. Representative Alexandria Ocasio-Cortez has became known as AOC. That’s a generous three syllables!

She has proposed a 70% Federal income tax on Adjusted Gross Income over $10 million. That’s a straight 70% haircut on only the income above that threshold. Deductions, credits and favorable tax treatment for capital gains could apply to income below $10 million but everything above that is a bada-bing-bada-boom 70%.

How much revenue would that generate? I used IRS sample data from 2016, the latest available (Note #1) and calculated an extra $218 billion collected on 15,000 returns for tax year 2016 (Note #2). This would have been an additional 14% over the $1550 billion collected in individual income taxes that year (Note #3). It would make up for the corporate taxes that are not being collected because of the 2017 Tax Act.

If AOC’s proposal were passed by the House, it would not make it out of the Senate Finance Committee, which is controlled by Republicans. If it did become law, it would incentivize the accountants and lawyers of the super-rich to craft clever solutions to avoid the tax. Most of them can buy citizenship in another country. They can put income in tax havens (Note #4). They can make hefty political campaign contributions to buy loyalty in Congress.

The rich complain about taxes. Yes, they do pay much of the income taxes collected. It should be all of the income taxes. The 16th Amendment was “sold” to the American people as a tax that would apply only to the rich, the top 1% of incomes. When the amendment was passed in 1913, half of the population worked in farming and thought that the tax would never impact their lives. It didn’t until a few months after the U.S. entered World War 2.

Under FDR, the tax base increased ten-fold and now affected 42% of the population. FDR called it the “greatest tax bill” (Note #5). The American people didn’t think so. Many were not paying their income taxes. As the fate of nations lay bloody on the altar of history, FDR regarded tax delinquency as a personal disloyalty. He turned to economist John Kenneth Galbraith who suggested that employers should be forced to become the tax collector for the government. In 1943, Congress passed legislation requiring that employers withdraw taxes from their employees’ paychecks. Employing more than 7% of the workforce, the Federal government was the largest employer (Note #6). Before employees could feed their families or pay their rent, the government had its taxes.

It’s time for Democrats and Progressives to undo what they did under FDR. World War 2 ended 75 years ago. Let’s return to the original intent of the 16th Amendment and impose most of the income tax burden on the rich.

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Notes:
1. 2016 IRS tax data by adjusted gross income
2. A screenshot below of the IRS spreadsheet with my calculations of revenue collected.
3. A breakdown of 2016 federal revenue
4. The Rolling Stones, Bono, and Mark Knopfler of Dire Straits took advantage of tax havens to avoid paying hefty U.K. taxes on royalties
5. Highlights of IRS history
6. Federal Employees CES9091000001 series / PAYEMS (All employees) series in the FRED database

IncTaxbyAGI2016.xls

The Tug of History

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February 3, 2019

by Steve Stofka

As we receive our income tax forms, we can be reminded of the reach of history into our daily lives. Over a hundred years ago, the 16th Amendment was passed as a way of paying Civil War debts and pensions. We are paying income taxes because of a horrific war that occurred 150 years ago (Note #1).

Since the recession, politicians on both sides of the political aisle have proposed some version of a universal basic income (UBI) that would replace many individual federal assistance programs. New idea? No. Fifty years ago, President Nixon and more than a thousand economists proposed an income plan to replace the existing welfare plan (Note #2). Democrats opposed the idea because they feared that the proposal would divert some aid from black families in the North, who were Democratic constituents, to white families in the South. Many southern Democrats switched parties in reaction to the “imposition” of civil rights legislation passed by northern Democrats in the 1960s (Note #3). The North and South have traded political parties since the Civil War but the animosities of that war guide current legislation and the fortunes of American families.

The recent government shutdown halted paychecks for many thousands of federal employees. The legislation that enables Congress or the President to shut down government was a budget act passed in 1974 by a Democratic Congress. Following President Nixon’s refusal to spend money allocated by a Democratic Congress, Democrats wanted more control of the budget process. Nixon was afraid that the additional spending would further fuel inflation (Note #4).

Two years later, Jimmy Carter was elected President and had to fight with his own Democratic party for budget control. The government was shut down five times during Carter’s four-year tenure, the most of any President. The legislation that emerged from a battle between a Republican President and a Democratic Congress 45 years ago laid the groundwork for today’s battle between a Republican President and a Democratic House. As the families of some Federal workers waited in line at food pantries last month, they might not have appreciated being victims of a historical political feud.

Prompted by the prejudices, concerns and animosities of past generations, we walk through our lives with a legal leash tied around our necks. According to the utopian rhetoric of the Declaration of Independence, our leashes should all be same length. Political and economic realities contradict those sentiments, and underlie the long history of housing, job, voting and regulatory discrimination in this country.

If my family or group enjoys a longer leash, another group must endure a shorter leash. Any equality we reach is a temporary balance in the tug of war for a longer leash. Equality is a happenstance, not a permanent right we have. “But it shouldn’t be that way!” an idealist might protest. It is that way. That’s history.

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Notes:
1. A history of 19th century income tax legislation following the Civil War, and the court decisions which nullified them.
2. Family Assistance Program proposed by Nixon. He and other economists like Milton Friedman called it a “negative income tax”
3. A timeline of the Presidential electoral map
4. A short account of the political impetus behind the act . A summary of the 1974 Budget Act.