The Two 10%

August 9, 2020

by Steve Stofka

In the past three months the stock market has been on a tear. The last time we’ve seen such a rise? 1938. People are day trading on the Robinhood platform. Hop aboard the gravy train and party like it’s 1999, near the height of the dot-com bubble.

According to the Federal Reserve, the top half of households in this country own 99% of the stock market. The top 10% own a whopping 87% of the market. So why do many news outlets broadcast updates on the stock market  every hour?

Share of Equity Ownership by Wealth Percentile

A second group of 10% is unemployed, according to the unemployment report released Friday. House Democrats passed a $3 trillion bill in May. Republicans and the White House have been worried that too many Americans are going to get fat and lazy if the federal government continues to support the unemployed with extra benefits. They have fought among themselves about a stimulus package, and 15 Republican Senators – half their caucus – don’t want to do anything more for the American people. The Senators who are up for election this year do want to pass something but want to appear frugal at the same time – a difficult task.  

The richest 10% are doing fine. This week the NY State’s Attorney General announced a suit to terminate the non-profit status of the NRA and dissolve the organization. Their investigation has been going on for more than a year. In September 2019, House Ways and Means Committee member Brad Schneider revealed several allegations against NRA executives (2019). Whether the IRS had already begun an investigation at that time is unclear.  The NRA has paid exorbitant expenses for their executives, including Wayne LaPierre, the public spokesman and VP of the organization. These include homes, yachts, and private jets for them and their families. The executives billed the “expenses” to the NRA’s ad agency, Ackerman McQueen, who then submitted bills with little detail to the NRA, which paid the ad agency.

Dues to the organization have been declining since Donald Trump was elected president. Gun manufacturers have relied on scare tactics to sell their products and have been big supporters of the NRA. Since the election of Trump, sales have declined. Two years ago, the oldest gun manufacturer, Remington, declared bankruptcy. As NRA revenues fell, the abuses came to light when the organization fell behind on payments to the ad agency. Influential members devoted to the mission of the organization have been appalled at the corruption.

Mr. Trump has signaled his support for the organization. Like all Presidential hopefuls, his financial affairs came under scrutiny. The Trump Foundation was later dissolved because of the same self-dealing practices.

The top 10% are always doing fine because they pay an army of lawyers and accountants to legally dodge the rules. Every week, Mr. Trump’s comments indicate how little he knows about any of the laws of this country because the laws don’t apply to him. He is part of the 10% that owns the stock market. When those markets came under stress a few months ago, the Federal Reserve stepped in with massive infusions of liquidity to preserve the assets of that 10%. They are the fire department for the rich.

Who will come to rescue the homes and families in the unfortunate 10% whose extra UI benefits have ended?  

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Notes:

Photo by Fritz Benning on Unsplash

Schneider, B. (2019, October 09). NRA’s Actions “Absolutely” Raise Questions on Tax-Exempt Status Testifies Non-Profit Tax Expert. Retrieved August 08, 2020, from https://schneider.house.gov/media/press-releases/nra-s-actions-absolutely-raise-questions-tax-exempt-status-testifies-non-profit

The Black Hole of Generational Wealth

January 5, 2020

by Steve Stofka

As we begin this new decade, let’s look at some developing trends. In 2005, the wealth of the Boomer generation (1946-1964) finally surpassed that of their parents (Federal Reserve, 2019). This was the so-called Silent generation born in the years 1925-45. In 2005, each of those two generations owned a quarter of the nation’s wealth for a total of slightly more than half the nation’s wealth. There are about five generations that make up a human life span. Older generations have had more time to accumulate wealth, so this distribution of wealth among the two oldest generations was expected.

Turn the dial forward 14 years to 2019 and the distribution of wealth has changed significantly following the Financial Crisis. The median age of the Boomer generations is now 64 and they own 60% of the nation’s wealth. Even more remarkable is the 25% share of the country’s wealth owned by the oldest generation who are 75 years or older (Federal Reserve, 2017). The median wealth of those oldest households is greater than that of the Boomers.

What happened? Most of that wealth is in real estate. Following the financial crisis, asset prices have recovered. Housing prices have risen sharply on both coasts where most of the country’s population lives. Between the 2013 and 2016 Surveys of Consumer Finances, the median net wealth of the 75+ generation increased 32% while the oldest of the Boomer generation aged 65-74 had a 6% decline.

As these oldest Americans die, their wealth will pass to younger generations but most of it will presumably pass to their immediate heirs, the Boomers. Within five to ten years, the Boomers – less than 25% of the population – will own 70% or more of the nation’s wealth.

The Consumer Survey data shows that approximately 80% of that 70% will be owned by 10% of the Boomers (Federal Reserve, 2017, Figure B). A small percentage of old people will control a majority of the wealth in the country. Wealth buys political influence to protect that wealth. Younger generations have a greater number of votes but have not exercised that vote power in the same percentages as older people. Will the concentration of wealth prod younger people into exercising their power at the ballot box? Older and wealthier Americans have political alliances that give them more electoral power than their vote numbers. In this coming decade younger Americans will have to come out in overwhelming numbers on election days to overcome the power of those alliances. Will we see a generational revolution this decade?

The strength – and weakness – of older people is their predictability. They will counter proposals for fairer wealth distribution with familiar arguments. “These younger people want something for nothing” has been an effective counterargument for several decades. “These policy proposals are socialist and un-American” is another effective ad campaign against policy changes. “How will we pay for this? Higher taxes and less money for working people” is another strategic counterargument that attracts moderate and conservative voters.

The past decade has been historic. We ended the “aughts” or 2000s with the election of a black American for president and the worst financial crisis since the Great Depression. We ended this decade with the impeachment of President Trump. Like President Clinton who was impeached in 1998, both men enjoyed robust economic growth, historically high stock and housing market prices during their terms. Economic well being did not insulate either president from impeachment by the opposite party. Get ready for the next decade. I’m betting that economic disparity and political friction create a maelstrom that makes the past two decades look tame.

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Notes:

Federal Reserve. (2019, December 23). Distribution of Household Wealth in the U.S. since 1989: Wealth By Generation. [Web page]. Retrieved from https://www.federalreserve.gov/releases/z1/dataviz/dfa/distribute/table/#quarter:120;series:Net%20worth;demographic:generation;population:all;units:levels

Federal Reserve. (2017, September). Changes in U.S. Family Finances from 2013 to 2016: Evidence from the Survey of Consumer Finances: Table 2. Family median and mean net worth, by selected characteristics of families, 2013 and 2016 surveys. [Web page]. Retrieved from https://www.federalreserve.gov/publications/2017-September-changes-in-us-family-finances-from-2013-to-2016.htm#xtable2-familymedianandmeannetworthb-c9084a05

Photo by Arnaud Jaegers on Unsplash

High Optimism

June 18, 2017

Last week I looked at two simple rules: 1) don’t bet on which chicken will lay the most eggs, and 2) don’t put all your eggs in one basket. This week I will look at index averages and I promise I won’t mention chickens.  Lastly, I will look at a metric that disturbs me.

When I first started investing in Vanguard’s SP500 index mutual fund VFINX, I thought I was buying the average performance of the top 500 companies in America. Like many index funds, VFINX is weighted by market capitalization. With this methodology, a relatively small number of companies have more influence on the movement in the index than their numbers might warrant.

Let’s turn to Vanguard’s breakdown of the top ten stocks in their VFINX fund. These ten stocks are household names, including Apple, Microsoft, Google (Alphabet), Amazon, and Facebook. These five tech stocks are 1% of the 500 companies in the index but make up 13% of the fund. The ten companies make up 20% of the fund.

For investors who want to cast a wider net, there is an alternative: equal weighted funds. Guggenheim’s RSP is an equal weighted ETF first offered in 2003. Using Portfolio Visualizer, I started off in 2004 with $100,000 and invested $500 a month. Despite the higher expense ratio, RSP had a better return, besting a conventional market cap index by 1% annually.

VFINXVsRSP

Why does RSP outperform VFINX?  Funds that mimic the SP500 are heavily weighted to large cap stocks. Equal weight funds have a greater percentage of mid-cap companies which may outperform large caps in a particular decade but that outperformance may come at a price: volatility.

Standard deviation is a statistical measure of the zig and zag of a data series, like measuring how much a drunk veers as he stumbles along his chosen path. The standard deviation (Stdev column above) of RSP is slightly higher than VFINX, and the maximum drawdown of RSP is almost 5% higher during the 2008-2009 financial crisis.  The Sharpe ratio is a measure of risk adjusted return, and the higher the better. As we can see in the Sharpe column, the two strategies are within a few decimal points.  In the past 13 years, an equal weighted strategy produced higher returns with only a slightly higher risk.

If I want to mimic some of the diversity of an equal weight index, I can spread out my investment dollars among large-cap, mid-cap and small-cap funds. As SP500 index products, neither RSP or VFINX includes small cap stocks, but let’s add a small percentage into our mix.

Into my comparison of strategies, I’ve added a portfolio with a 40% allocation to VFINX, 40% to VIMSX, a mid-cap Vanguard index fund, and 20% to VISVX, a Vanguard-small cap value index fund. The performance is almost as good as the equal weight RSP and the Sharpe ratio, or risk adjusted return, is similar.

VFINXVsRSPVsMix

In 2011, Vanguard published an analysis (PDF) of various approaches to indexing that may be of interest to those who want to dive into the topic.

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Household Net Worth

Let’s turn from indexing strategies to stock market valuation. We base our expectations of the future on the recent past. Those expectations are the primary driver of valuation. If we expected an affordable self-driving car in the next few years, the current value of today’s cars would be lower.

I have written before about a store of value compared to a flow of value. Savings are a store of value. Income is a flow. The historical ratio of wealth (store) to income (flow) reveals a trend that should give us caution.  The Federal Reserve charts estimates of  both household wealth and disposable income. The current ratio of wealth to income is now higher than the peaks in 2006 and 2000 when the real estate and dot-com booms inflated wealth valuations.

HouseholdNetWorthPctIncome

The current ratio is far above the 70 year average but a moving ten year average of the ratio may better reflect trends in investment allocation over the past few decades. Using this metric, today’s ratio is still very high. Rarely does the wealth-income ratio vary by more than 10% from its 10 year average.

When the wealth-income ratio dips as low as 90% of its ten year average, extreme pessimism reigns, as in the early 1970s.  A ratio that is 10% more than the ten year average indicates extreme optimism as in the late 1990s, mid-2000s and now. Today’s ratio is 13% above its ten year average.

In early 2000, the ratio was 16% above its ten year average when the enthusiasm of dot-com expectations began to deflate and the price of the SP500 fell from its lofty heights. The ratio reached 14% above its ten year average in 2005 and remained above 10% till mid-2007 when the first cracks in the housing crisis began to surface and the SP500 said goodbye to its peak.

A picture is worth a 1000 words so here’s a chart of the Household Wealth to Income ratio divided by its ten year average. I have highlighted the periods of extreme pessimism and optimism.

HouseholdWealthRatio10Year

If history is any guide, the ratio of wealth to income can stay elevated for a few years. The “haves” keep trading with each other in a game of muscial chairs until people begin to leave the game and move their dollars into other assets, other markets, or bonds and cash. Unfortunately, many slow moving casual investors are left in the game with deteriorated portfolio values.

Economist Robert Shiller, author of Irrational Exuberance and developer of the long term CAPE ratio, recommended a strategy of shifting allocation in response to periods of exuberance and pessimism.  When valuations were historically low or average, an investor might allocate 60% or more of their portfolio to stocks.  As valuations became overextended, an investor might shift their stock allocation to 40%.  The investor is not trying to predict the future. The portfolio remains balanced but the stock and bond weights within the portfolio changes.

Using this wealth-income ratio as a guide, the casual investor might gradually implement an allocation shift toward safety in the coming year.

Piketty’s Capital

May 25, 2014

No graphs this week!  Awwww!

A few months ago, Thomas Piketty, a French economist, released Capital in the 21st Century, a book that I mentioned to readers back in January before its publication.  Piketty’s book has aroused much interest, praise and denunciation.  What could arouse such fire in the hearts of men, you ask?  Inequality.  We humans are a social bunch and, like our chimpanzee cousins, are especially sensitive to inequality.  “She got more chocolate milk than me!  It’s not fair!” is a familiar lament to many parents.

To understand Piketty’s thesis, let’s review some fundamental concepts of capital and income.
“Income is a flow…the quantity of goods produced and distributed in a given period…Capital is a stock…the total wealth owned at a given point in time.” (p. 50)  Piketty’s thesis is based on a ratio of the capital of a nation to the national income.  His definition of capital is so encompassing that my immediate suspicion was the accuracy of estimates of the total wealth of a nation, a flaw that Piketty acknowledges.

The main thesis of Piketty’s book is: as the capital wealth of a nation accumulates, capital’s share of annual national income increases.  For long periods, the rate of growth of accumulated capital is larger than the growth of the economic output/income of a nation.  The process is self-perpetuating, so that capital takes an ever increasing share of national income.  The higher the capital/ national income ratio the more inequality of wealth and income.  Piketty estimates that, in 2010, the capital/income ratio was 450% for the U.S., a bit above Germany and Canada’s ratios, and far below those of France and Great Britain. Piketty proposes a solution to this inexorable process:  a progressive tax on wealth.  Mount up your steeds, men!  The Marxists are coming!

Wealth = Capital

I’ll begin a review of some criticisms of Piketty’s methodology with a brief primer on some measures of capital.  Economists and accountants often analyze the flow generated by a store of capital, but it is capital that can be more easily counted. In finance, there is a metric called Working Capital Turnover Ratio which calculates the flow of sales from the working capital of a firm, and is used to assess both the value and liquidity of a firm.   Piketty rarely uses the term liquidity in his book, but I think it may be an unstated implication of his work.

ROIC, or Return On Invested Capital, is frequently used to measure how well a firm uses the capital and debt invested in the firm to generate a profit.  These measure net after tax profits as a percentage of the stock of capital and debt in a business.  Piketty also measures flow but it is sales, not profits that is his primary focus.  Profits are of course an intrinsic component of sales since they are that portion of sales income that is left over after all expenses.  The change in real GDP is the percent change in that flow.  Piketty’s concern is the accumulation of the residual of past economic flows, the stock of wealth that he claims earn a greater rate of return than the increase in the annual flow of economic activity.  Capital is a key component of economic growth but Piketty raises concerns that Capital can become too large relative to the flow of economic activity.
  
Hopefully, this brief background will enable the reader to appreciate the criticisms of Piketty’s thesis.  Charles Gave is a forty year veteran of investment management and cofounder of the international investment firm GaveKal.  Coming from the world of finance, Gave understands capital as meaning invested capital or working capital. Keep that in mind as you read Gave’s denunciation of Piketty’s thesis:

The extraordinary thing is that Piketty’s analysis is based on a massive logical error. His thesis runs as follows: if R is the rate of return on invested capital and if G is the growth rate of the economy, since R is greater than G, profits will grow faster than GDP, and the rich will get richer and the poor poorer. This is GIGO (garbage in, garbage out) at its most egregious. Piketty confuses the return on invested capital, or ROIC, with the growth rate of corporate profits, a mistake so basic it is scarcely believable. [Gave’s emphasis]

On page 46 of his book Piketty writes: “In this book, capital is defined as the sum total of nonhuman assets that can be owned and exchanged on some market.”  While this includes invested capital, it is not solely invested capital, for it includes residential real estate, government capital, land and natural resources, some of which are very difficult to value.

In short, Gave read “invested capital” when Piketty wrote just “capital.”  Gave read “corporate profits” when Piketty wrote “return on capital, including profits…” (p. 25).

The economist James Galbraith takes issue with Piketty’s all inclusive  definition of capital: “he conflates physical capital equipment with all forms of money-valued wealth, including land and housing, whether that wealth is in productive use or not.”

Piketty anticipated his critics: “some definitions of ‘capital’ hold that the term should apply only to those components of wealth directly employed in the production process…Capital in all its forms has always played a dual role, as both a store of value and a factor of production.  I therefore decided that it was simpler not to impose a rigid distinction between wealth and capital.” (p. 47) 

Let me rephrase the ” R is greater than G” formula that piqued Gave’s derision.  Picketty uses small ‘r’ and small ‘g’ so I will adhere to that: the annual income r derived from capital, as a percentage of that capital stock, will be more than the annual percentage change in real, or inflation adjusted, income/output g.  As Piketty writes: “the inequality implies that wealth accumulated in the past grows more rapidly than output and wages.”

An example:  In the teeny tiny kingdom of Miniscule, the total nonhuman capital stock at the beginning of this year is $100.  It  generated output/income of $10, or 10%. That is r, the return on capital.  This income from capital was part of Miniscule’s total output/income of $30, an increase of $2 over last year’s income/output of $28. To keep the math simple, let’s pretend there was no inflation or depreciation in that year.  The growth in total income/output is about 7%, or $2 / $28.  That is g, the growth rate of output/income.  To recap,  r = 10%, g = 7%.  “r can be significantly higher for long periods of time than the rate of growth of income and output, g.” (p. 571) Is this true?  That’s what Piketty claims to show.

Like Galbraith, I question Piketty’s inclusion of many different forms of wealth which are difficult to measure.  Piketty acknowledges the difficulties in the appendix to a paper he co-authored with Gabriel Zucman in December 2013, “Capital Is Back” and is included as one of the data sources for his book.  Piketty’s thorough explanation of the shortcomings of capital measurements led me to scratch my head and wonder why he decided to include them.

Piketty has no control over accounting conventions adopted by international bodies, yet I’m sure he and his team will be taken to task for the computation of the data that is the responsibility of the various nations included in the study.  A big shout out to Piketty and his collaborators for making the data available.

Back to our tiny kingdom of Miniscule. What if we missed some capital in our tally?  If the capital stock were closer to $120, not $100, then ‘r’, the return on capital would be 8%, not $10% and approximately the same rate of growth as the economy as a whole.

How accurate are the public, or government, capital computations?  In the U.S., the Comptroller General is responsible for auditing the financial statements of the country as part of the Federal Budget.  For ten years, from 1998 – 2008, Comptroller General David Walker refused to certify the financial statements,  listing a number of accounting problems: inadequate  monetary controls, poorly supported adjustments, outdated computer systems, unsupported cash disbursements, an inability to track internal or external fraud and a poorly documented inventory system.  These flawed financial statements are the basis for the capital computations in Piketty’s book.  In the appendix to Capital Is Back, Piketty explains the methodologies used by different nations.   Implicit in these standards is that public capital is understated in the national accounts.  This undervaluation decreases the capital/income ratio while increasing the r, or rate of return, of the capital stock.  Piketty notes the deviations in the various computations of land capital.  In the U.S. only the value of agricultural land is measured (Appendix p. 15).  A vast store of capital in 770 million acres of range land (Source) , more than half of which is private, is thus uncounted, further inflating the r, or return on capital.  70% of the land surface in the U.S. is devoted to livestock grazing (Source). A fundamental weakness in cross country valuations is the assumption that developed countries are more or less similar in most respects.  Key differences in the composition of economies are  factored out of the models.

Human Capital

Piketty separates capital into two categories: human and non-human, including only that non-human capital that can be traded on a market.  This exclusion of human capital may be an appropriate methodology in an analysis of an agrarian economy but is not so when applied to the developed economies of today which rely much more heavily on the human capital amassed through education. This point has been raised by economists Robert Solow and Robert Gordon and Piketty acknowledges this on page 586, note 35.

What are the implications of including educational capital?

Today a person may spend $40,000 to $150,000 to get a college education and expects an inflation adjusted return on that investment  that is greater than the 4% one could get investing in long term Treasury bills.  Developed economies depend greatly on the capital investment that they make in educating most of the young people in a society.  An educated mind is both a capital investment and a leaseable, if not outright tradeable, commodity.  While an employer can not buy an employee’s brain the way one can buy a machine, an employer does lease the knowledge, the output from that brain, by paying a compensation premium to that employee.  Income data from the Census Bureau, the IRS and the Bureau of Labor Statistics enables us to quantify the implied store of value of a college education.  If Piketty’s expansive definition of capital were to include educational capital, what would the resulting capital/income ratio look like?

The Bureau of Labor Statistics estimates an annual return of approximately $24,000 in 2013 for a bachelor’s degree. In 2011, the Census Bureau estimated the number of people in the U.S. with college degrees at 63 million, or 40% of the workforce.  If we guesstimate an average cost of $50K per degree, that is over $3 trillion of capital investment not counted, almost 20% of the $17 trillion in GDP (BEA News Release)  If we were to use the international standard (System of National Accounts) method of computing the present value of a college degree using an average 4.5% return (p. 572), then the capital value of a college degree over a working period of 35 years is over $400,000 per degree and the total is $26 trillion in uncounted capital, 150% of the nation’s GDP.   That inclusion would add $26 trillion to the $65 trillion capital base of the U.S. (p. 151)

If educational capital were included,  the capital/income ratio in the U.S. in 2010 would rise to 620%, far above the 450% calculated by Piketty’s team.  The higher this ratio, the greater the inequality in income and wealth.  By excluding educational capital, Piketty has understated his thesis.  Like Galbraith, I would exclude land and natural resources that are impossible to value.  Unlike Piketty and Galbraith, I would include educational capital, since it is a productive capital.

If we use the BLS figures and guesstimate that 63 million people with college degrees earn an additional $24K per year, then the share of income attributable to capital would increase by $1.5 trillion, from $4 trillion to $5.5 trillion.  As a share of national income, the income from capital would increase to 38% from 28% (p. 222)  The return on capital, r, would stay about the same at a bit over 6%, and more than twice the growth rate of national income in the U.S.

Liquidity

Piketty does not mention the liquidity of a national economy but implies it.  As the capital of a nation becomes more concentrated in a rather small group of families, individuals, and endowments, the trading of capital takes place within a small pool.  The onset of the 2008 financial crisis revealed that a small coterie of investment firms, sovereign funds and mega-banks traded financial instruments among each other.  Contagion in one class of asset – mortgage backed securities – poisoned the financial pool.  Like a gene pool, diversity is the key to survival.

As capital’s share of national income becomes greater, the buyers of capital as a percent of the population shrinks.  Fewer buyers = lack of liquidity.  A nation does have an abiding interest to reduce threats to the stability of its financial system.  The mobility of capital in the global world of finance may be hiding an underlying lack of liquidity.

Solutions

To offset the increasing accumulation and concentration of wealth, Piketty recommends (p. 517) a progressive wealth tax, ranging from .1% to .5% for most Americans, those with assets of less than 1 million euros, $1.36 million dollars at today’s exchange rate.  Piketty is not done yet.  He notes that the progressive income tax taxes only the income from inherited wealth.  In some countries in Europe, that capital income is exempt from the income tax (p. 496).  Piketty advocates a return to the confiscatory income tax rates of the early half of the 20th century (p. 512 – 513), citing an optimal top tax rate at above 80%.  Bill Gates and Warren Buffett have both pledged to give away most of the billions they have amassed.  Why bother, guys?  If Piketty’s solutions were implemented, the politicians bickering on C-Span every night will take care of that for you guys.  In the U.S. the Constitution would have to be amended if the Federal Government were to enact a wealth tax because the 16th Amendment allows only a tax on incomes.  However, that does not prevent the States from enacting such a tax.

Will a wealth tax solve the problem of growing inequality?  In principle, in a mathematical utopia – the kind of world that economists assume in their models – governments would take corrective action by taxing wealth, thereby offsetting the growing accumulation  and concentration of capital and its increasing share of national income.  Unfortunately, we don’t live in that world.  In the real world, politicians – real people that you and I know – would say “Hey, this is a great excuse to grab more money from the private sector to solve problems!  Solving problems wins votes!  Votes get me re-elected!”  Politicians love problems, and solving them.  That’s why they create so many of them with their policies.

If people think income tax reporting and accounting is a nightmare, wait until they see the wealth tax forms.  Since the rich would pay a progressively higher tax, they would be highly motivated to develop ways of sheltering assets.  The hiding of wealth will become a national pastime.  Gold miners and dealers are shouting “Huzzah!”  Accountants and lawyers will cook up complicated investment vehicles that offer rapid depreciation of assets to reduce the amount of notional wealth one has to report.  Insurance companies will lobby for the purchase of annuities that are then excluded from one’s wealth.  The lobbyists are singing in the streets.  Strike up the band and join the tax parade!

In short, I heartily endorse this proposal just as soon as I sell my house, convert any assets to gold and find a private island in the Caribbean where I can bury my assets in the sand. I do heartily recommend this book, though. The book contains far more that caught my interest than I can touch on – public and private debt and capital, a survey of income taxes in developed countries, to name a few. The author has taken great pains to lay out historical trends in the data, acknowledging and anticipating many objections.  But, like the old country doctor, Dr. Piketty has but one solution. Got a problem?  Add another tax and call me in the morning. I also salute the translator, Arthur Goldhammer, for the flow and grammatical construction of his  English translation.

Next week I’ll look at another disturbing and related topic – education.  A recent analysis suggests that the financial advantage of a college education may be eroding.

Tidbits

It’s the beginning of the year and I am cleaning up – not the house, but my notes – scribbles of factoids which I, and maybe you will as well, find interesting.  Those of you who like graphs will be disappointed this week.  😦

In 2009, 55% of income in the S&P500 companies was generated overseas.

The Eurozone is set up very similar to the Senate in the U.S.  Despite being 30% of the Euro economy, Germany only has one vote. 

It will cost an estimated $175B for the payroll tax cut in 2012.

A rule of thumb that the Congressional Budget Office (CBO) uses – 1/10% of GDP growth over 10 years = $300B in revenues over 10 years to the Federal Government.

One of the problems with the federal mortgage agencies FHA, Freddie Mac and Fannie Mae is that they buy mortgages which originate in states where there is little or no regulation.  If people want a government agency buying mortgages, why don’t the various states institute such agencies?

A CNN article about doctors going broke:
http://money.cnn.com/2012/01/05/smallbusiness/doctors_broke/index.htm?iid=Popular

This year, 2011, the USDA estimates that for the first time, this country will produce more corn for fuel than for food.

In 2009, total lending by U.S. banks fell 7.4%, the steepest drop since 1942. As of March 15, 2010, approximately half of Obama’s $787 billion stimulus program had been distributed but the flow of federal money into the economy could not keep up with the $700 billion that banks pulled out of the economy in the 6 months from mid-September 2008 to mid-March 2009.

Small companies, those with fewer than 100 employees, accounted for 45% of net jobs created from 1992 through the end of 2007, according to Labor Dept data.

In the U.S., diabetes costs about $174 billion annually in medical costs and lost production In the U.S., according to the American Heart Association.  That is a little more than a 1% impact in a $15 trillion economy, or about 25% of the defense budget.

This past week, Standard and Poors downgraded the credit ratings of nine countries in the Eurozone.  In assessing sovereign credit, Moody’s, another leading credit ratings firm, uses a metric called “debt reversibility margin.”  This measures a government’s ability and willingness to get their debt level under control over the next five to seven years.  Generally, it is the ratio of interest payments on a country’s debt to their revenues with a “benefit of the doubt” margin of 1 – 4% based on the resilience of the country’s economy, its politics and tax policies  When this metric rises above 10%, Moody’s considers a downgrade to the country’s credit rating. 

In 2008 New York spent $16K per student, top in the nation.  It’s student-teacher ratio of 13.1 was the eighth lowest among the 50 states.  From 2000 to 2009, the state added 15,000 teachers as student enrollment fell by 121,000 students.

Global warming is the latest in a series of hoaxes on the American people.  Earlier scams include: smoking can kill you, lead in gasoline and paint is bad for children’s brains, chemical discharges in rivers and lakes are bad for your health, cholesterol is bad for your heart, smog is bad for your lungs, and acid rain is bad for trees and plants. In my lifetime, all of the above have been dismissed by critics at some point as scams on the American public.

In 2010, a USA Today analysis of data from the federal Office of Personnel Management showed that a federal worker makes 77% more than a private sector worker when benefits are included.

In 2010, the Boston Consulting Group issued its Global Wealth Report which found that the top 0.5% of households (those with $5 million or more) owned 21%, or $23 trillion, of global wealth, up from 19%.

A Goldman Sachs analysis of mortgage refinancing found that homeowners took out $358 billion in home equity loans in 2005, the most of any year.

J.P. Morgan Chase and two other banks now hold more than 33% of all U.S. deposits.

Based on 2007 data, the Energy Information Administration reported the various U.S. government subsidies per megawatt hour for the different sources for generating electric power.  Coal got $.44, natural gas received $.25, nuclear enery $1.59 and the whoppers were solar at $24.34 and wind at $23.37 per MWH.  Over the course of a year, at an average consumption of 10,000 KWH per year, a 100 homes will consume a MWH.  In 2010, Google used the equivalent of 260 million homes of electricity.

When enacted in 1916, the income tax affected only the top 2% of incomes.  With the popularity of beards and other creative facial hair statements among younger men, it might be time to resurrect an old Russian revenue raiser – a beard tax.

New York bills Medicaid about $2 million per year for each mentally disabled patient.  The governor is reviewing the state’s billing procedures.

How much do all the tax breaks – or tax expenditures – cost the federal government?  Health Insurance premiums not taxed – $659 billion, mortgage interest deduction – $484 billion, capital gains and dividends taxed at lower rates – $403 billion, pensions – $303 billion, earned income tax credit – $269 billion, charitable donations – $241 billion, state tax deductions – $237 billion, 401K plans – $212 billion, capital gains basis adjustment at death – $194 billion, social security benefits not taxed – $173 billion.  The total is over $3 trillion, or almost the entire federal budget.  If tax breaks were eliminated, the federal debt would be gone in 5 years.

Concentrated Wealth & Taxes

As the new year gets under way, it’s time to visit everyone’s second favorite topic after death: taxes. Conservative commentators and politicians have pointed to a disturbing trend in the past two decades: the increasingly smaller percentage of taxpayers paying an ever increasing share of income taxes in the U.S.

The Tax Foundation reviewed a mid-year IRS report on income and taxes. In 1980, the top 1% of income earners paid about 20% of total personal income taxes. In 2007, that same top 1% paid 40% of the tax bill. (Table 6) It is a concern when the tax burden is shared disproportionately by a small percentage of the population. A dangerous trend is that the bottom half of income earners pay almost nothing in income taxes. Why the danger? An ever increasing number of taxpayers who pay little in taxes will be more likely to vote for more government spending and more entitlements. Why not? It doesn’t cost them anything.

As valid as those concerns are, there is an equally alarming increase in the disparity of incomes. In 1980, the top 1% of earners in the U.S. reported 8.5% of the total income (AGI). In 2007, almost thirty years later, that top 1% reported almost 23% of total income. (Table 5) That three-fold increase in the proportion of income earned by the top 1% is overshadowed by another startling statistic in the IRS income tables: that the top 5% earned 60% of the total income in this country in 2007.

The increasing concentration of wealth in any country has been a harbinger of a downfall in a dominant economy. In “Wealth And Democracy” Kevin Phillips examined the history of the financial empires of Spain, Holland and England, which all lost their economic dominance as the wealth concentrated in the hands of the few. The U.S. is on the same path as those previous dominant economies. Will history repeat itself? Probably.