Middle Class Political Economist

Mississippi Sets a Record for Unreported Subsidies

2013-05-23T11:04:00.000-04:00

As I have written before, when states announce a major new investment, it is far more likely that the announced subsidy is an underestimate than an overestimate. A new Good Jobs First study commissioned by the United Auto Workers unearths a new example of this, which I believe is the largest underestimate ever: Nissan in Mississippi.

When Nissan announced in 2000 that it had chosen Madison County, Mississippi, just north of Jackson, as the site for a new assembly facility, it was reported that the project had received $295 million in subsidies (at a present value of $289.7 million, as I calculated in Investment Incentives and the Global Competition for Capital). The project also was given the power of eminent domain, and while one family succeeded in avoiding condemnation, it no doubt weighed on voters when they overwhelmingly passed an eminent domain reform initiative in 2011.

It turns out, as Good Jobs First reports, that the announcements left a few things out. While the $295 million package was passed by the state legislature in a one-day session (North Carolina does this sort of thing, too), the project was also receiving incentives from Madison County, and the city of Canton agreed not to annex the plant for 30 years. In addition, it was eligible for huge subsidies under existing Mississippi programs, including Jobs Tax Credits, reductions in its business franchise tax, personal property and sales tax exemptions, as well as Advantage Jobs, which lets employers keep up to 90% of workers' state tax withholdings. This is a type of subsidy of which Good Jobs First is highly critical, as is David Cay Johnston.

Just how much was left out? $867 million, as follows:

Jobs tax credits: $400 million over 20 years
Franchise tax reduction: $72 million over 20 years
Advantage Jobs: $160 million over 20 years
County infrastructure: $25 million
County property tax abatement: $210 million over 30 years

Not only that, but Nissan received a further $68 million for an expansion in 2002, plus about $13 million in miscellaneous subsidies more recently. Finally, Good Jobs First estimates that the state had to spend about $90 million to finance the bonds for the infrastructure at the beginning of the project.

The report notes that employment is around 4500. Counting all the subsidies, but omitting the $90 million for financing, that comes to about a nominal value of $276,000 per job, more than the usual assembly plant project. In addition, about 20% of the jobs there are held by temporary workers, making the value of the project less than if all workers were directly employed by Nissan.

No doubt some of this information was available before. But the fact that it's taken over 12 years to get a full accounting of the costs of the project--and that the subsidy for the initial phase was almost three times the amount advertised--provides a stark warning about how difficult it is to have adequate oversight and accountability for even projects that receive a great deal of press coverage.

Four Easy Fixes for Corporate Taxation

2013-05-14T05:32:00.000-04:00

Everyone "knows" that the corporate income tax is a mess. Ask any company. They pay too much in corporate income tax, face rates higher than in any other OECD country, and are just following the law when they use tax havens to keep profits eternally deferred from taxation and to perform general sleight-of-hand.

Don't believe a word of it. While some economists believe we shouldn't tax corporations at all, the corporate income tax (CIT) is a necessary backstop to the personal income tax (PIT). With no CIT or a rate lower than the PIT, individuals have an incentive to incorporate their economic activities so they aren't taxed on them, or are taxed less. Needless to say, this is something an average wage or salary worker would not have the ability to do. This is another area where we have one tax law for the 1%, and different rules for the rest of us.

So what should we do? The answers are simple, which is not to say that achieving them will be simple. Corporate interests hold a lot of political sway right now, and overcoming them will be anything but easy.

1. End the usefulness of tax havens for secrecy by instituting "publish what you pay." Currently, companies can hide all sorts of transactions because they are only required to publish "consolidated" accounts of their global operations. Thus, Starbucks reports losses on its British tax statements while telling investors how profitable it is in Britain. Apple can get away with leaving its subsidiaries in Luxembourg, the Netherlands, and the British Virgin Islands off its annual report because it classifies them as not "significant." By forcing companies to un-consolidate their reports, we would know where their employees were, where their their sales (both source and destination of products and services) were, where they declared their profits and paid their taxes, etc. Part of the beauty of "publish what you pay" is that it doesn't require the cooperation of the tax havens to obtain the information.

2. End the usefulness of tax havens for avoidance by enacting unitary taxation. Upheld by the U.S. Supreme Court in 1983, unitary taxation treats multinational corporations the same way many states already tax the income of multistate corporations: considering all of a company's subsidiaries as a single entity, and using a formula to determine what portion of its global profits are taxable in your jurisdiction. The most common factors to put in the formula are sales, employment, and assets. Like "publish what you pay," this has the advantage of not requiring the cooperation of the tax havens, which have largely shown themselves to be minimally cooperative at best with global efforts to combat tax evasion and tax avoidance.

A big roadblock is the Organization for Economic Cooperation and Development (OECD), which promotes allegedly "arm's length" transfer prices that companies long ago learned to run rings around. Via the Tax Justice Network, Bloomberg reports that this allows U.S. and European companies to save over $100 billion a year on their taxes. As an indication of how uncertain lost tax estimates are, note on the one hand that this is significantly less than the $189 billion TJN estimates is lost to illegal tax evasion, but at the same time Bloomberg reports that the European Union says it loses EUR 1 trillion ($1.3 trillion) annually to tax avoidance and evasion, far in excess of these other two estimates. We're talking big money here. The OECD has begun a project called Base Erosion and Profit Shifting (BEPS), but there is widespread doubt about how much progress will come out of this. Bloomberg notes a major revolving door where OECD tax officials leave to work for tax avoidance consultants, and documents how many OECD conferences on tax are underwritten by the very enablers of tax avoidance in the accounting and legal professions. Unitary taxation would make the BEPS project unnecessary, but the OECD has long opposed unitary taxation.

3. In the United States, end the deferral of taxes until profits are repatriated. In other words, require companies to pay tax in the year the money is earned, rather than when it comes back home years later, if ever. Tax deferred is tax reduced, at the very least. To show just how difficult this will be politically, Robert Gilpin of Princeton University recommended this in his book U.S. Power and the Multinational Corporation--all the way back in 1975. (By the way, this book was quite influential on my thinking in graduate school and ever since.) Even now, U.S. multinationals are trying to get a "repatriation holiday" that would allow them to bring back $1 trillion in profits at a nominal tax rate, even though the 2004 repatriation holiday was a dud in terms of investment and job creation.

4. Don't cut the corporate income tax rate. There is a big difference between the headline rate of 35%, which is indeed tops in the OECD, and the effective rate of 12.1%, one of the lowest in the OECD. In fact, there is a significant economics literature showing that large countries can charge higher taxes than smaller ones do without suffering for it, just like the federal government can charge a much higher CIT than state governments can. There is no need for the U.S. to content itself with revenue neutral combinations of rate cuts and base broadening when government will actually put the money to work, something companies have avoided doing ever since the beginning of the recession which, need I remind you, began over five years ago.

While the road to truly fixing corporate income tax will not be easy, we seem to have reached a promising juncture in the battle with government initiatives like the Foreign Accounts Tax Compliance Act (FATCA) and the massive International Consortium of Investigative Journalists (ICIJ) tax haven investigations. Last week (via markthshark at Daily Kos), the U.S., British, and Australian tax agencies reported that they had received an even larger data leak than ICIJ had, and that one was gigantic. We certainly can't count our chickens yet; instead, we need to redouble our efforts to force governments to stamp out tax abuse by corporations and the wealthy.

Cross-posted at Angry Bear.

My appearance on "The Big Picture" with Thom Hartmann

2013-05-03T13:58:00.000-04:00

Here is a link for my appearance on Thom Hartmann last night.

One of the things brought up was a new study by the Institute for Policy Studies and Campaign for America's Future showing that the CEOs behind "Fix the Debt" have benefited from tax breaks for executive compensation to the tune of about $1 billion in 2009-11, for just those companies. This tax break lets companies count pay using stock options -- which doesn't cost the companies anything -- as if it were cash pay and thus deduct it against corporate income. According to Citizens for Tax Justice (via Common Dreams and Huffington Post), the Fortune 500 saved $11.2 billion with this loophole in 2012. Apple alone profited by $3.2 billion from 2010 to 2012 from this tax break.

Appearing tonight on "The Big Picture" with Thom Hartmann

2013-05-02T16:54:00.002-04:00

I will be talking austerity tonight with Thom Hartmann on his show, "The Big Picture." The program reaches 50 million homes in the United States, and you can look for a station here. Alternatively, you can watch it online here. The show starts at 7:00pm Eastern Daylight Time, and I am told my segment will begin about 7:15.

The European Union released its unemployment figures this week. Eurozone unemployment increased from 12.0% in February to 12.1% in March, up from 11.0% in March 2013. Greece reached 27.2% unemployment in January 2013 (most recent data available), while according to Eurostat's harmonized unemployment measure, Spain reached 26.7% in March.

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Tell me again why we want austerity here in the U.S.?

Bad Economic Development Ideas from Conservatives

2013-05-01T04:43:00.000-04:00

Good Jobs First today released a new study debunking so-called “business climate indexes” and showing them to be cover for an ideological agenda of cutting taxes and cutting wages.

“Grading Places: What Do Business Climate Indexes Really Tell Us?” is written by University of Iowa emeritus professor Peter Fisher, a well-known expert on investment incentives and fiscal policy, with a preface by Good Jobs First director Greg LeRoy.

This is an ambitious study that analyzes six different indexes published by five different groups. Four are simple combinations of a wide variety of policy variables, each with its own idiosyncratic weighting systems, all of which are published by conservative organizations such as the Tax Foundation or the American Legislative Exchange Council (ALEC).

Two use “representative firm” models to attempt to calculate the tax burden on different types of companies in each state. One is sponsored by the Tax Foundation, the other by the Council on State Taxation.

Since Good Jobs First just knocked out the ALEC study in December, and because the Tax Foundation index is far more widely cited (at least 3 times as much, according to searches of the premium Nexis news database; subscription required), I am going to focus primarily on the critique of the Tax Foundation’s State Business Tax Climate Index (SBTCI).

The SBTCI measures 118 features (p. 49) of state tax law grouped in five categories (p. 50): personal income tax (33.1% of the index), sales tax (21.5%), corporate income tax (20.1%), property tax (14.0%), and unemployment insurance tax (11.4%). As the study shows, these weightings are the source of the most mischief. They are based on the variability of each factor among the states; that is, personal income tax varies the most, and so on.

However, a study by Ernst & Young for the Council on State Taxation determined the actual percentages that businesses pay in state and local taxes, based on analyzing tax returns. Counting the five taxes listed above, the costs are: property tax, 45.9%; sales tax, 30.8%; corporate income tax, 8.7%; unemployment insurance tax, 7.7%; and personal income tax, 6.7% (p. 51).

It won’t surprise you that using the Tax Foundation data with the Ernst & Young weights gives you a very different ranking of the states, with “six states’ ranking changing 20 or more positions, and another 11 states by 10 to 19 positions” (p. 51). In fact, there is essentially no correlation between the Tax Foundation’s ranking and the one constructed by Fisher (-.05, to be exact). In other words, the Tax Foundation’s tax ranking tells you literally nothing about business taxes paid as a percentage of gross state product.

If that is so, what is the whole point of the Tax Foundation exercise? Fisher does not mince words (p.51):

But the TF sticks with its system because it enables the Foundation to heavily penalize states with more progressive tax systems above all, while concealing this objective in an arbitrary system of scaled and weighted numbers.

As if this were not enough, the four simple indexes produce widely varying scores: Massachusetts ranks from best on the Beacon Hill Institute’s State Competitiveness Index, 22^nd on the Tax Foundation’s State Business Tax Climate Index, 26^th on ALEC’s Economic Outlook Ranking, and 38^th on the Small Business and Entrepreneurship Council’s U.S. Business Policy Index (p. 68).

In some ways, this could be considered a feature, and not a bug. As Peters explains (p. 68), “Conversely, those arguing for lower taxes could find, in 39 states, a measure that ranks them in the highest 15 states, and 27 could find a measure placing them in the highest 10.”

The bottom line is that, like the ALEC report analyzed in December, these indexes are designed to pressure state governments into lowering taxes, even if that requires cutting spending that benefits business throughout the state (such as a university system); and putting downward pressure on wages, even though it is hard to see how you create a prosperous state based on low-wage jobs.

New Domain Name

2013-04-26T17:00:00.000-04:00

I have moved the site to www.middleclasspoliticaleconomist.com. No more "blogspot" in the address. This should not affect how you view the site, nor the feed. Please let me know if you do experience problems, of course.

It does affect some of the statistics. For example, all the tweets recorded at the old domain no longer show up, and all the votes in the poll from before the changeover have disappeared. Hopefully, that will be the extent of it.

Thanks for your support!

Unemployment Hits New Highs in Spain and France

2013-04-25T17:56:00.000-04:00

As if there were not already abundant proof of the failure of austerity in the eurozone, the BBC reports today that both Spain and France have hit new unemployment milestones.

In Spain, unemployment has jumped from February's 26.3% to a first-quarter rate of 27.2% (implying an even higher figure for March). In March 2012, it was "only" 24.1% (see source in table below).

In France, there are now 3.2 million unemployed, more than at any time since the country began keeping records in 1996. Complete EU unemployment data for March should be released in early May.

For a fuller picture of the continuing deterioration of the situation in the European Union and the eurozone, the unemployment rates tell a stark story.

Date     Eurozone     Spain     Greece     Portugal     Ireland     UK     USA   EU-27

3/2012   10.8%       24.1%    21.7% 15.3%    14.5%    8.2% 8.2%   10.2%
2/2013   12.0%         26.3%    26.4%     17.5%      14.2%    7.7% 7.7%   10.9%

Note: Greece and UK figures are for January 2012 and December 2012, rather than March 2012 and February 2013
Sources: Eurostat, 2 May 2012, for March 2012; Eurostat, 2 April 2013, for February 2013; Bureau of Labor Statistics for U.S.

Moreover, it is important to note that despite drastic budget-slashing, in none of the EU countries did debt come under control, even for Ireland and the UK, which have managed some slight growth over the 11-month period. Using this handy BBC interactive tool, we can see that Spain's debt/GDP ratio increased from 69.3% in 2011 to 84.2% in 2012 (Wait, that's under 90%! What's happening?), Greece declined from 170.3% to 156.9%, Portugal increased from 108.3% to 123.6%, Ireland increased from 106.4% to 117.6%, and the U.K. increased from 85.5% to 90%. In fact, just six short years earlier, Ireland had a debt/GDP ratio of just 24.6%. The Celtic Tiger, favorite of conservatives everywhere, has truly crashed and burned.

Given the Spanish and French figures, look for bad news for EU unemployment next week. Despite the continuing austerity fail, Republicans and some Democrats continue to push for deficit cutting here, and will maintain a steady drumbeat. But, like Reinhart and Rogoff, they all deserve the Colbert treatment.

Cross-posted at Angry Bear.

April Taxcast from Tax Justice Network

2013-04-25T04:38:00.000-04:00

This month's Taxcast from the Tax Justice Network highlights the International Consortium of Investigative Journalists' major data dump from leaked documents, the agreement of the Group of 20 that automatic exchange of tax information should be the global standard, the imminent collapse of banking secrecy in Luxembourg (yes, you read that right!), and phantom foreign direct investment into India.

Enjoy the podcast!

Reinhart/Rogoff Gets the Colbert Treatment

2013-04-24T17:46:00.000-04:00

Via Paul Krugman, Steven Colbert takes on Reinhart and Rogoff. Also be sure to check out his interview with Thomas Herndon.

German tax enforcement paying dividends

2013-04-24T17:34:00.000-04:00

I have long advocated that the United States should follow Germany's example of aggressive pursuit of tax evasion, in particular its practice of paying informants for account information from secrecy destinations like Liechtenstein and Switzerland. The German Parliament's upper house (Bundesrat) rejected a deal in November that Prime Minister Angela Merkel was willing to sign with Switzerland that would have allowed German account holders to pay tax anonymously. (As I reported on April 12, automatic exchange of information is rapidly becoming the standard to which even Luxembourg will adhere, so Switzerland will come under great pressure to do the same, thus ending bank secrecy.)

Now, Naomi Fowler of Tax Justice Network points me to new enforcement actions based on leaked account information. Last week the southwest German state of Rhineland-Palatinate conducted searches of over 200 homes in connection with alleged tax evasion. The raids were based on a CD with data on thousands of German citizens with Swiss bank accounts, for which the state had paid an informant 4 million euros ($5.2 million). However, tax authorities estimated that they would have an over 100-fold return on this investment, expecting to collect 500 million euros ($654 million) as a result of the investigation.

Investigators in Rhineland-Palatinate stated that they were investigating Credit Suisse and its German subsidiaries for assisting in tax evasion as a result of data on the CD. This comes on top of a 2011 settlement by the bank to pay 150 million euros for facilitating German tax evasion.

How often do governments get a 100-fold return on investment? The U.S. routinely pays drug informants; it should be more aggressive in finding tax evasion informants.

Cross-posted at Angry Bear.

Now a Blogger-Columnist at US News and World Reports

2013-04-17T13:45:00.000-04:00

I now have a column at the US News and World Reports "Economic Intelligence" blog. I will be covering issues of interest to the middle class every Wednesday. Here are the links to my first two articles:

"Want Jobs Back? Axe Tax Subsidies"

"The Tide is Turning Against Tax Havens"

Enjoy!

Breaking: Reinhart/Rogoff Shot Full of Holes UPDATED X3

2013-04-16T16:01:00.000-04:00

This story is rapidly making the rounds in the blogosphere today, and it is indeed a big deal. One of the most significant economics papers underlying the argument for why high government debt (especially over 90% of gross domestic product) is bad for growth was published in 2010 by Carmen Reinhart and Kenneth Rogoff, "Growth in a Time of Debt" (ungated version here).

The basic finding of this paper was that if debt exceeds 90% of GDP, then on average growth turns negative. But as Thomas Herndon, Michael Ash, and Robert Pollin report in a new paper (via Mike Konczal at Rortybomb), there are substantial errors including data omitted for no reason, a weighting formula that makes one year of negative growth by New Zealand equal to 19 years years of decent growth by the UK, and a simple error on their spreadsheet that excluded five countries from their analysis altogether (see Rortybomb for the screen shot).

The authors say that with these errors corrected, the average growth rate for 20 OECD countries from 1946 to 2009 with debt/GDP ratios over 90% is 2.2%, not the -0.1% found by Reinhart and Rogoff. This is a huge difference. We still have a negative correlation between debt/GDP and growth rate, but it is much smaller, as we can see from Figure 3 from their paper:

Debt/GDP Ratio     R/R Results     Corrected Results

Under 30%            4.1%               4.2%
30-60%                 2.8%               3.1%
60-90%                 2.8%               3.2%
Over 90%           -0.1%               2.2%

As Paul Krugman (link above) argues, what we are likely seeing is reverse causation: slow growth leads to high debt/GDP ratios. That is certainly what EU countries are finding as they implement austerity measures and slip back into recession. But even if high debt/GDP did cause slower growth, we can see it is nowhere near the crash that Reinhart and Rogoff's paper made it out to be.

The bottom line here is simple: the focus on deficits and debt that have dominated our political discourse is completely misplaced. We need to do something about the unemployment crisis by increasing growth, something that is even truer in the European Union where the unemployment rate in Spain and Greece exceeds 26%.

Update: Reinhart and Rogoff have responded in the Wall Street Journal. They emphasize that there is still a negative correlation, and that having debt/GDP above 90% for five years or more reduces growth by 1.2 percentage points in developed countries, which is still substantial for developed economies.

Update 2: Paul Krugman's response to Reinhart and Rogoff is here. He pronounces it very disappointing, saying they are "evading the critique."

Update 3: Reinhart and Rogoff have a new response in the Financial Times (registration required). Here, they admit they committed the Excel error, but claim there was nothing nefarious in their disputed data choices:

The 'gaps' are explained by the fact there were still gaps in our public debt data set at the time of the paper. Our approach has been followed in many other settings where one does not want to overly weight a small number of countries that may have their own peculiarities.

This is a very odd response from two authors who equated one year of New Zealand to 19 years of the far larger UK economy. Worse still when you add the fact that by excluding several years when New Zealand had a debt/GDP ratio over 90%, they got an "average" (actually only one year) growth rate of -7.6%, when the correct average, with all relevant years over 90% included, was 2.58%, a 10.18 point swing!

It's obvious that the austerity crowd is still going to defend this paper, but that doesn't mean anyone else should be taken in by them.

Cross-posted at Angry Bear.

Good News on Tax Havens

2013-04-12T04:18:00.001-04:00

The mega-research project on tax havens I told you about in November has borne its first fruit. In a data dump 160 times the size of that which put Bradley Manning and Julian Assange in jail, the International Consortium of Investigative Journalists (ICIJ) has used over 2.5 million documents to publish the names of beneficial owners of numerous offshore accounts, based primarily in the British Virgin Islands.

According to the New York Times, the report "disclosed confidential information on more than 120,000 offshore companies and trusts and nearly 130,000 individuals and agents, including 4,000 Americans." The headlines at the ICIJ website tell the story (though you should read them yourself):

"Dutch Banking Giants Help Clients Go Offshore"
"Billionaires Among Thousands of Indonesians Found in Secret Offshore Documents"
"The Swiss Lawyers Who Help Europe's Richest Families Park their Wealth Offshore"
"French Banks Traded in Secrecy"
"Lawyers and Accountants Help Rich Manage Their Money"

The list goes on and on. Besides naming the names of the clients, however, the stories frequently highlight the enablers -- global banks, accounting firms, tax lawyers, and so forth -- without whom none of this would be possible.

This story is having special resonance in France, long a critic of tax havens and low-tax jurisdictions like Ireland. Prior to the ICIJ release, the country's budget minister, Jérôme Cahuzac, had been forced from office after it was revealed that he had offshore accounts and lied about it. Bad as it was to have the minister in charge of investigating tax fraud himself be a fraudster, the ICIJ release revealed that President Francois Hollande's campaign treasurer, Jean-Jacques Augier, had secret accounts in the Cayman Islands, though Augier denied any wrongdoing.

In response, Hollande on Wednesday announced a series of steps to deal with the scandals (via Tax Research UK), ordering his cabinet ministers to disclose their finances, appointing a special prosecutor, demanding country-by-country financial reporting by French companies (long proposed by the Tax Justice Network), and calling for the "eradication" of tax havens "in Europe and worldwide."

The data dump and French initiatives are not the only good news on tax havens. Luxembourg, one of the world's pre-eminent secrecy jurisdictions, announced that it would begin automatic account information exchange with the European Union, and that it was negotiating the same thing with the United States under the Foreign Account Tax Compliance Act (FATCA). Previously, Luxembourg had only been willing to withhold taxes on foreigners' accounts and pay them anonymously to their respective EU national tax authority.

Tuesday, France, Germany, Italy, Spain, and the United Kingdom announced that they would begin automatic account information exchange with each other.

Finally (via Tax Research UK), the European Union agreed to country-by-country reporting for EU companies in the extractive industries worldwide. According to the report, this is similar to, but stronger than, Dodd-Frank rules requiring publicly-held oil, gas, and mining companies to report all payments to foreign governments above $100,000 to be reported to the Securities and Exchange Commission. The EU rules go further by including the logging industry as well as privately-held companies.

As if all this news weren't good enough, Richard Murphy at Tax Research UK says "there is more to come next week." Stay tuned.

How High Does Senior Poverty Have to Go?

2013-04-10T21:05:00.000-04:00

It's official: President Obama has proposed cutting Social Security by replacing the program's current inflation adjustment with the stingier "chained" Consumer Price Index. As I've discussed before, this risks undoing all the progress made against senior poverty since the passage of Medicare and Medicaid in 1965. 25% of seniors were poor according to official poverty line in 1968, compared to just 9.4% in 2006. Note, however, that the Supplemental Poverty Measure, which includes things like out of pocket health care expenses which hit seniors disproportionately, already shows a 16.1% rate by 2009. And our senior poverty rate, measured by the international standard of 50% of median income, is already 25%, much higher than most developed countries, more than three times Sweden's rate and over four times as high as Canada.

Why is Obama doing this? We just rejected the candidate who wanted to cut Social Security and Medicare. Perhaps, as Krugman (link above) suggests, he chasing the fantasy of "being the adult in the room," but this is a losing proposition. As Brian Beutler points out:

Just like that, Chained CPI morphs from a thing President Obama is willing to offer Republicans into a thing Republicans dismiss as a “shocking attack on seniors.”

We've seen this game before. The Heritage Foundation's health care plan became "death panels" when President Obama endorsed it. And, as Beutler's title makes clear, we have plenty of examples of the President negotiating with himself to bad effect, most notably in the 2011 debt ceiling battle.

If this cut really happens, Social Security benefits will steadily fall in true inflation-adjusted terms due to the magic of compounding. Moreover, with 49% of the workforce having no retirement plan at work and another 31% with only a grossly inadequate 401(k), the cuts will worsen the coming retirement crisis. The only question will then be: how high will senior poverty have to go before we do something about it?

Cross-posted at Angry Bear.

Trans Pacific Partnership Bad for the Middle Class: Just How Bad is the Question

2013-04-03T02:02:00.000-04:00

What you don't know can hurt you. I think that's a clear lesson of some so-called trade agreements the United States has signed over the last 20 years, and illustrated further by the few that have been defeated, most notably the Multilateral Agreement on Investment, negotiated by the Organization for Economic Cooperation and Development from1995 to 1998, but then abandoned in the face of ever growing protests.

Haven't heard of the Trans Pacific Partnership? That's no surprise: while the negotiations are not really being conducted in secret (the Office of the US Trade Representative provides periodic updates here), the level of disclosure from the USTR office rarely ventures beyond bland statements like this:

On November 12, 2011, the Leaders of the nine Trans-Pacific Partnership Countries - Australia, Brunei Darussalam, Chile, Malaysia, New Zealand, Peru, Singapore, Vietnam, and the United States - announced the achievement of the broad outlines of an ambitious, 21st-century Trans-Pacific Partnership (TPP) agreement that will enhance trade and investment among the TPP partner countries, promote innovation, economic growth, and development, and support the creation and retention of jobs.

The USTR website continues by claiming that the agreement will be "increasing American exports, supporting American jobs." This is all too similar to the Clinton administration's reporting on NAFTA, which would point out all the gains from increased exports while omitting any mention of increased imports (Journal of Commerce, Nov. 18, 1994, via Nexis, subscription required) which quickly turned a small trade surplus with Mexico into a huge trade deficit.

How do we evaluate the TPP? We have to see it as having at least three major elements: a trade agreement, an investment agreement, and an intellectual property agreement.

From the trade agreement alone, we can conclude that it is a bad deal for the middle class. As I explained last year, the Stolper-Samuelson Theorem in economics tells us that more trade is actually bad for labor in this country, because by global standards, the U.S. is labor-scarce (low population density), meaning that we expect trade to lead to more intense competition in labor-intensive goods, putting downward pressure on wages. Alas, that isn't the end of it.

There is a lot of controversy about the investment side of the agreement. As discussed by my fellow contributor at Angry Bear (I repost many of my posts there), Daniel Becker, the investment chapter was leaked and published by the Citizens Trade Campaign. Before I discuss the TPP investment provisions, a little context on investment agreements first.

According to the United Nations Conference on Trade and Development (UNCTAD),at the end of 2011 there were 3190 international investment agreements, of which 2860 were between two countries, usually known as bilateral investment treaties or BITs. Investment agreements can also be part of larger agreements, such as the investment chapter of NAFTA, the WTO's Agreement on Trade-Related Investment Measures (TRIMS), and various regional trade agreements. Since the TRIMS agreement, in force since 1995, applies to all WTO members, it is a global benchmark; thus, people will refer to agreements with stronger provisions as "TRIMS+."

The purpose of investment agreements is to protect foreign investors, which are by definition multinational corporations (MNCs). At the same time, they place no corresponding duties on investors, only on the host government. Most significantly, these agreements remove dispute settlement from the host country's court system to binding arbitration in an outside body, most commonly the World Bank's International Center for the Settlement of Investment Disputes (ICSID). As with domestic arbitration clauses, this removal from the courts favors the business interests involved. So the investment agreement element of the TPP will tend to be bad for host governments (the U.S. is host to more foreign investment than any other potential TPP country) and by extension the middle class.

But "how bad" is the question. This depends on what restrictions the agreement puts on governments. Originally, MNCs wanted to be protected against having their property nationalized ("expropriated") by the host, but more recent agreements such as NAFTA's investment chapter (Chapter 11; text here) have opened the way to defining "expropriation" in ways that include regulatory actions that may reduce the value of the investment, even if they are non-discriminatory among firms and taken in the public interest. This is why I say above that investment agreements are bad for the middle class, because it normally benefits from public interest regulation.

For these reasons, there is in fact significant pushback regarding the content of investment agreements. Three good sources for this are UNCTAD, the Vale Columbia Center on Sustainable International Investment, and the International Institute for Sustainable Development.

So what's in the TPP investment chapter? As far as I can tell, nothing that isn't already in NAFTA, other U.S. free trade agreements, or a U.S. bilateral investment treaty. The problem is, that's bad enough. Under NAFTA, for example, Metalclad won a dispute against Mexico over a local government's refusal to grant it a permit to open a hazardous waste facility, and was awarded $16.7 million. Ethyl Corporation successfully challenged a Canadian ban on the import of gasoline additive MMT, leading Canada to withdraw the ban and pay the company $13 million in compensation. To have unelected bodies that (in the words of Citizens Trade Campaign) "would not meet standards of transparency, consistency or due process common to TPP countries’ domestic legal systems" overturning democratically adopted laws or regulations is profoundly undemocratic.

At the same time, I think Becker reads a little too much into some of the language. He quotes section 12-6bis (Becker's emphasis):

Notwithstanding Article 12.9.5(b) (Non-Conforming Measures, subsidies and grants carveout), each Party shall accord to investors of another Party, and to covered investments, non-discriminatory treatment with respect to measures it adopts or maintains relating to losses suffered by investments in its territory owing to armed conflict or civil strife.

He goes on to speculate that this could give rise to compensation claims due to interpreting protests against the Keystone pipeline, or even strikes, as "civil strife." However, the exact same language is in NAFTA's investment chapter, and there have been no such claims in its entire history. Moreover, this is what we would expect since the language only pertains to government behavior ("it adopts"), not private behavior.

So, that's two strikes against the agreement. The third strike is intellectual property, something Matt Yglesias caught over a year ago. As I analyzed then, the TPP "would ban government health services from negotiating prices with pharmaceutical companies." Given that many countries already do this and the U.S. ought to do it to help rein in health costs, if these provisions stay in the final agreement it will be a very bad development.

Hooray for baseball season, but that's three strikes against the TPP. This is a bad deal that will put further downward pressure on real wages which have gone 40 years since reaching their peak, that will undermine governments' ability to regulate, and will strengthen a small group of pharmaceutical, software, entertainment, and publishing companies at the expense of the rest of us.

Cross-posted at Angry Bear.

EU Proposes Tighter Rules on Investment Incentives

2013-03-27T13:19:00.002-04:00

The European Commission's Directorate-General for Competition is the EU equivalent of the U.S. Department of Justice Anti-trust Division plus units for controlling domestic subsidies to industry. According to a new policy briefing from the European Policies Research Centre at the University of Strathclyde, DG-Competition has released a draft of new regulations on "regional aid" (subsidies to firms in poorer regions of the EU) that, among other things, includes tighter rules on investment incentives.

EU rules on subsidies to business have long fascinated me because they present a stark contrast to the totally unregulated bidding wars for investment we see here in the United States. As I have shown, EU Member States have been able to obtain investments with far lower subsidies than U.S. states have, even for the same company! A big part of this is due to the rules on regional aid, which specify the maximum subsidy each region can give to a business, and reduce that maximum for investments over € 50 million. The proposed rules for 2014-2020 go further than ever before.

The big change is that large firms would only be eligible for regional aid in areas with gross domestic product per capita below 75% of the EU average, that is, only in the poorest areas of the European Union (plus so-called "outermost regions" like French Guyana). Currently, countries are allowed to give subsidies in regions that are only poor relative to national standards, and every Member State has areas that qualify to give investment incentives to large firms.

This would be a gigantic change, as many whole countries would no longer be able to give investment incentives to large firms. These countries are:

Belgium
Denmark
Germany
Ireland
France (except for outermost regions)
Cyprus
Luxembourg
Malta
Netherlands
Austria
Finland
Sweden

These countries would still be able to give regionally based investment subsidies to small and medium sized enterprises, which are defined as companies with fewer than 250 employees and either sales of less than or equal to € 50 million annually or a balance sheet of less than or equal to € 43 million.

If we did this in the United States, it would be the equivalent of saying that every part of the country with at least 75% of average per capita income would be barred from giving investment incentives, which of course would mean the poorest areas could give less than they do currently. This is obviously a political non-starter; we have to focus now on transparency and ending subsidized job piracy. But it's interesting to look ahead sometimes and see what kind of controls on subsidies are technically feasible.

Thanks to Fiona Wishlade, director of the European Policies Research Centre, for sending this report to me.

Speaking of Inequality (with correction)

2013-03-26T14:41:00.000-04:00

Travis Waldron at Think Progress pointed out this excellent article by David Cay Johnston. It dovetails well with my last post, which showed the fall of individual real wages and their failure to regain their peak fully 40 years after it was reached.

Johnston writes:

Incomes and tax revenues have grown from 2009 to 2011 as the economy recovered, but an astonishing 149 percent of the increased income went to the top 10 percent of earners.
If you wonder how that can happen, the answer is simple: Incomes fell for the bottom 90 percent.

While this data is at the level of tax filing households, it is consistent with what we see at the level of the individual. More nuggets from Johnston:

From 1966 to 2011, adjusted gross income in the bottom 90% grew a total $59 (2011 dollars, not the 1982-84 dollars I used in my last post) in 45 years, from $30,378 to $30,437.

"Candidate Bush said his tax cuts would make everyone prosper. But the real average pretax income of the bottom 90 percent in 2011 was $5,340 less than in 2000, a decline of more than $100 per week, or 15 percent, in pretax income."

The income share of the bottom 90% fell from 66.3% to 51.8% over the 1966-2011 period.

So we have seen inequality increase in pretax income plus changes in tax policy that have reduced the effective tax rates on corporations and capital gains, income which goes overwhelmingly to the rich. Thus, post-tax inequality is even worse than pretax inequality.

Johnston's report builds on the work of economists Emmanuel Saez and Thomas Piketty. Together with Facundo Alvaredo and Tony Atkinson, they have created the World Top Incomes Databases, very much worth checking out for a comparative look at U.S. inequality.

Correction: I initially saw Johnston's article linked from Think Progress, not Daily Kos, as I realized almost immediately after I hit the "publish" button. Apologies to Travis Waldron.

Real Wages Decline; Literally No One Notices

2013-03-24T03:10:00.000-04:00

Your read it here first: Real wages fell 0.2% in 2012, down from $295.49 (1982-84 dollars) to $294.83 per week, according to the 2013 Economic Report of the President. Thus, a 1.9% increase in nominal wages was more than wiped out by inflation, marking the 40th consecutive year that real wages have remained below their 1972 peak.

Yet no one in the media noticed, or at least none thought it newsworthy. I searched the web and the subscription-only Nexis news database, and there are literally 0 stories on this. So I meant it when I said you read it here first. In fact, there was little press coverage of the report at all, in sharp contrast to last year.

Below are the gory details. The data source is Appendix Table B-47, "Hours and Earnings in Private Non-Agricultural Industries, 1966-2012." The table has been completely revised since last year's edition of the report. The data is for production and non-supervisory workers in the private sector, about 80% of the private workforce, so we are able to focus on what's happening to average workers rather than those with high incomes.. I use weekly wages rather than hourly because there has been substantial variation (with a long-term decline) in the number of hours worked per week, from 38.5 in 1966 to 33.7 in 2012. The table below takes selected years to reduce its size.

Year     Weekly Earnings (1982-84 dollars)

1972     $341.73 (peak)
1975     $314.77
1980     $290.80
1985     $284.96
1990     $271.10
1992     $266.46 (lowest point; 22% below peak)
1995     $267.17
2000     $285.00
2005     $285.05
2010     $297.79
2011     $295.49
2012     $294.83 (still 14% below peak)

This decline is especially amazing when we consider that private non-farm productivity has doubled in this period:

But, if you've been paying attention, you know the drill: higher productivity plus lower wages = greater inequality. The question is, why aren't our media paying attention when real wages fall, yet again?

Cross-posted at Angry Bear.

EU Chooses Bank Runs Over Fighting Tax Haven Cyprus

2013-03-19T01:51:00.000-04:00

NPR's "Marketplace" reported Monday that the European Union planned to impose a tax on bank deposits in Cyprus of up to 10% to bail out the country's banks. This unprecedented action threatens to undermine confidence in banks throughout the eurozone periphery, Greece, Italy, Spain, Portugal, and Ireland. As Louise Cooper told Marketplace, “(This move) says that your savings are not necessarily safe in a bank. What this risks is bank runs." Indeed, we could be literally hours from seeing bank runs in one or more of them.

What's the motivation for introducing such a risky policy? Cyprus is a tax haven; in fact, it's a favorite destination for the Russian mafia. Therefore, it's not enough to simply impose austerity on Cyprus; ordinary Cypriots have to give up some of their bank savings, too. So says the EU.

Methinks they doth protest too strongly. It's not like there aren't already tax havens in the EU, starting with the City of London and Luxembourg. Plus, for varying purposes, Austria, Belgium, the Netherlands, and Ireland. This is not to discount Germany's efforts to pierce Swiss banking secrecy, which the United States should emulate (i.e., it should pay more informants to cough up information on U.S. tax evaders). Nor do I underestimate the difficulty the EU has had in getting its Savings Tax Directive passed in order to help stamp out intra-EU tax evasion, and the long way it still has to go.

Here's the thing: Cyprus was already a tax haven when it joined the EU in 2004. Germany, and the other 14 members of the EU at the time, knew this when they voted to approve Cyprus' membership (new members require a unanimous vote). If they didn't want to mess with another tax haven in their ranks, any one of them could have stopped it. But they didn't, so they are in no position to claim innocence now. Instead, they are going to try to extract money from ordinary Cypriots (potentially exempting the first 100,000 euros for each depositor) rather than going after the bankers like Iceland did.

Let the bank runs begin!

Cross-posted at Angry Bear.

Job Piracy Marches On in Alabama (Updated)

2013-03-03T03:09:00.000-05:00

Unmentioned in the recent Good Jobs First report on job piracy, it turns out that both relocation subsidies and retention subsidies are commonplace in Alabama. Greg Varner (@varnergreg) directs me to this report on how a Birmingham auto dealership, Serra Automotive, is demanding a multimillion incentive deal to keep it from relocating to another municipality in the metro area. As Birmingham News columnist John Archibald tells the story:

Across the Birmingham area cities spend tens of millions of dollars on incentives. Sadly, it is rarely to draw new opportunity or gain new blood. Instead we spill blood, as competition for existing businesses in the region pits city against city.
It happens all the time.
Birmingham commits millions to steal a hospital from Irondale, and St. Clair sweetens a deal to lure a coffee maker out of Jefferson County. Birmingham outspends the suburbs to take a Walmart, and the escalation continues.
We love the smell of industrial recruitment in the morning. And it gets us frustratingly nowhere.
We beat each other senseless. For a zero-sum game.
Because the city – the cities across the Birmingham area – pay to keep what they already have. Taxpayers lose and the region gains no jobs.

Here we have an example of the intra-metro area job piracy that Good Jobs First covered in its 2011 report on the Cleveland and Cincinnati metro areas, Paid to Sprawl. It would be interesting to see if Birmingham shows the same tendencies as those two regions, where most moves, even from one suburb to another, put facilities further from the city center. My guess is that's exactly what we would find.

And I should emphasize, as the most recent Good Jobs First study does, that the state of Alabama knows how to put anti-piracy provisions in state subsidy programs. The very first entry on p. 45 of The Job Creation Shell Game shows Alabama's Enterprise Zone Credit program as containing no-raiding language. Since cities are legally the creation of states, it's time for Alabama to clip its cities' wings and force them to stop this completely indefensible intra-state job piracy. The same holds true in many other states.

UPDATE March 7th: Greg Varner writes to tell me that two more Birmingham car dealerships have gotten deals for retention subsidies. Though their names have not yet been announced, the new article has more details on the Serra retention package. In addition to staying put in Birmingham, the dealership will add 35 jobs to its current 210, at a cost of $5.27 million over 7 years, a nominal cost of $150,000 per job. For $150,000/job, you can get auto assembly plant jobs, so this is not very impressive as an expansion subsidy. Again, it is the threat to move that is paying off handsomely.

Cross-posted at Angry Bear.

Europeans Dreaming Up New Ways to Destroy the Global Economy; Republicans Follow Suit

2013-02-26T15:45:00.000-05:00

While we are busy paying attention to the 550th edition of Republican-caused fake crises (aka the sequester), a much more real crisis is brewing in the Eurozone. Richard Field at Trust Your Instincts flags a Reuters report that that Eurozone regulators are strongly considering a proposal to make not just investors in Cyprus banks pay for part of their bailout, but bank depositors as well.

Cyprus is a tax haven, and deposits in the banks there come to some 70 billion euros, more than 3 1/2 times the tiny country's 18 billion euro gross domestic product. One proposal under consideration would be to hold all deposits over 100,000 euros in escrow -- for up to 30 years! Another proposal, says Reuters, would "impose a retroactive tax on all deposits over 100,000 euros..." If either of these options looks like it is close to being approved, it is likely to cause a run on banks in Cyprus. As Field argues, if one of these plans is established, depositors will likely wonder if it could be applied to other debtor countries like Spain or Italy, causing even more turmoil. (Note: 100,000 euros is the maximum that can be covered by deposit insurance programs similar to the FDIC in the U.S.)

While European leaders seem to want to blunder into a new way of creating a euro crisis, the evidence continues that their preferred austerity policies are failing. The European Commission has announced that the eurozone will remain in recession throughout 2013, according to a separate report by Reuters. Previously, the Commission had predicted that the recession would end this year. As Paul Krugman shows, the countries that have had the severest austerity have had the largest contractions in their economy. Based on International Monetary Fund estimates of the policy change in a number of European countries, he plots this against the change in their real gross domestic product from 2008 to 2012:

Source: Paul Krugman (link above). Key: AUT-Austria; BEL-Belgium; DEU-Germany; ESP-Spain; FIN-Finland; GRC-Greece; IRL-Ireland; ITA-Italy; NLD-Netherlands; PRT-Portugal

So, for example, Greece has imposed austerity equal to about 15% of potential GDP, and seen its actual GDP shrink by about 18%.

Despite the clear failure of austerity policies in the eurozone and Great Britain (where 9 months of recession were followed by one quarter of growth but a renewed slump in the last quarter of 2012, and Moody's just downgraded the country's debt), Republicans are still trying to impose budget cuts on the country that we voted against in November. As I discussed then, the sequester's discretionary budget cuts will be unambiguously bad for the middle class. Now, Republicans are trying to convert the defense cuts of the sequester into further slashing into middle class programs, while President Obama has offered to convert Social Security's inflation adjustment to so-called "chained CPI," which will slowly but relentlessly cut into benefits year after year through the magic of compounding. According to Dean Baker at the link above, the reduction would be about 0.3% per year, so benefits will be 3% lower after 10 years, 6% after 20 years, etc.

Considering how bad middle class retirement prospects are already looking, the President's offer would be disastrous for millions if implemented. The right course of action is simple: cancel the sequester, forget about cutting Social Security (which is not part of the so-called debt problem anyway), and focus on jobs and growth. As Paul Krugman says, "End this Depression Now!"

Cross-posted at Angry Bear.

Minimum Wage a Winner Both Politically and Economically

2013-02-17T20:57:00.001-05:00

President Obama's proposal to raise the minimum wage to $9.00 per hour puts the Republicans between a rock and a hard place politically. Paul Krugman echoes the point that a big majority of the population supports a minimum wage increase, including a majority of Republicans (his linking to the original poll source appears to have crashed that website, but I will update later). Yet the Republican leadership remains trapped because it opposes this increase as well as any alternative policy that might make the poor better off, such as increasing the Earned Income Tax Credit or endorsing a Guaranteed Minimum Income (points Matthew Yglesias makes in the link above). As further evidence, the minimum wage increase Proposition B in Missouri in 2006 passed 76-24, probably helping Senator Claire McCaskill to her first Senate victory with under 50% of the vote.

Moreover, much recent research (via Think Progress) shows no "job killing" effects from raising the minimum wage. As originally shown by David Card and Alan Krueger, there was strong evidence of "publication bias" in the studies underlying the former economists' consensus that the minimum wage reduced jobs. That is, economics journals tended to prefer to publish studies with statistically significant results and not publish those showing no effect from the minimum wage. Researchers thus adjusted their statistical specifications until they achieved statistical significance, thereby generating a mass of studies that all barely reached statistical significance despite larger volumes of data which should have produced stronger results. As the Schmitt paper emphasizes, more recent studies of studies ("meta-analysis") continues to support the conclusion that the purported job killing effect was a mirage.

As I have pointed out before, cross-national comparisons of the minimum wage and unemployment rates also do not support the view that the minimum wage is the job killer Republicans claim it is. Indeed, as in my September 2011 post, nine OECD countries have higher minimum wages rates than the U.S. does on a purchasing power parity basis that adjusts for the cost of living, yet only two have higher unemployment rates (France and Ireland), while the U.K.'s unemployment rate is the same. The table below illustrates this and underscores the point that the minimum wage is a winner for the middle class.

Country	2011 Min Wage (PPP$)	Unemployment Rate % Dec. 2012

Australia	9.54	5.4
Belgium	9.52	7.5
Canada	8.04	7.1
France	10.02	10.6
Ireland	10.81	14.7
Luxembourg	11.36	5.3
Netherlands	10.23	5.8
New Zealand	8.63	6.9	(Q4)
United Kingdom	8.53	7.8	(Oct 2012)
United States	7.25	7.8

Source: http://stats.oecd.org/index.aspx

For 2011 real minimum wage at PPP, click on "statistics by theme," then "labour," then "Real hourly minimum wages," then adjust the series to "In US$ PPP." For unemployment, click on "statistics by theme," then "general statistics," then "key short-term indicators," then "harmonized unemployment rates."

Cross-posted at Angry Bear.

Solutions to the Middle Class Retirement Crisis

2013-02-06T05:45:00.000-05:00

As I have noted in three recent posts, retirement security for those currently or recently in the middle class is no sure thing. 49% of the private work force has neither defined benefit (traditional pensions) or defined contribution (401(k)) retirement plans, while public sector pensions are coming under increasing attack. The United States has the highest elder poverty rate, 25% (measured as 50% of median income), of any industrialized nation bigger than Ireland. An estimated $6.6 trillion shortfall in retirement savings shows how the shift from traditional pensions to 401(k) plans has been totally inadequate to meet people's future needs.

Yet what passes for wisdom among the Very Serious People (VSP) is that we need to make a stealth cut to Social Security via a less generous inflation adjustment, while Republican plans for Medicare would shift an astounding $34 trillion in medical costs on to seniors whose income would be falling in real terms. This is a recipe for disaster.

So what do we really need to do now? Several different proposals are currently in the mix, all of which would address the income shortfall to varying degrees.

Iowa Senator Tom Harkin, chair of the Health, Education, Labor and Pensions (HELP) Committee, released a report in July 2012, "The Retirement Crisis and a Plan to Solve It." It proposes a fairly small increase to Social Security benefits (about $60 monthly to the lowest earners) and replaces the current inflation factor (CPI-Urban wage earners) not with the chintzy "chained CPI" the VSP want, but with the more generous CPI-Elderly, which recognizes that seniors consume a larger share of rapidly rising cost products, most obviously health care. The other innovation in the Harkin plan is the introduction of "USA" (Universal, Secure, and Adaptable) retirement funds which would require both employer and employee contributions, with special tax credits for low-income workers. These funds would provide what might be called a "semi-defined benefit" that could be adjusted downward if there were a prolonged stock market slump, but otherwise would provide a predictable level of benefit to its recipients.

As pension expert Jane White contends, this proposal is vague when it is not simply inadequate. She argues for a plan like the Australian "Superannuation" plan, where employers are required to put in 9% of the worker's income. Her proposal for the U.S. would be a 9% contribution for large companies and 6% for small firms. It would be portable among companies, and employees would immediately own their employer's contribution (vesting), in contrast to the current situation where that can take years. She argues that the big problem with U.S. pensions isn't that not enough people have 401(k)'s (though with 49% of private workers not having one, I'm not sure I'm persuaded), but that the employer contribution is so small. By contrast, Harkin's USA plan does not specify a level of employer contributions, which is definitely a drawback when the savings shortfall is so severe.

Of course, White's proposal still subjects retirement funds to market risk that Social Security does not, and gives Wall Street a huge new pool of funds to play with. One logical alternative is simply a dramatic expansion of Social Security. Obviously, it is already portable between employers, and companies already have to deduct FICA and Medicare taxes, so there would be no difference administratively from what firms already do.

The funding would come from an end to the cap on earnings subject to the Social Security tax, currently $113,700 for 2013. A little-known fact is that while the payroll tax is regressive (flat to the cap, then 0), the payout structure counteracts this by reducing the share of earnings replaced in retirement the greater the person's income. As the Harkin report explains:

The replacement factor for a person’s first $767 of Average Indexed Monthly Earnings (“AIME”) is 90%. The replacement factor drops to 32% for AIME between $767 and $4,624 and 15% for AIME between $4,624 and $8,532.

The report goes on to propose a replacement factor of just 5% for income over the current cap. It further reports that Social Security only replaces an average of 40% of people's pre-retirement income, rather than the 65-85% that is widely recommended for retirees.

This suggests an obvious solution: increase the replacement factor substantially for middle-income people. While the numbers would need to be worked out precisely, middle class workers would be much more secure with, for example, 100% replacement of their first $2000 per month in income, 50% replacement of their next $2000 per month in income, 25% for the rest up to the current cap, and then Harkin's proposed 5% over the current cap.

When I say "obvious," that's not to say that it will be easy. Republicans still want to gut Social Security, even though it is supported by most Americans. But a deeper problem is that few people realize just how severe the retirement crisis will be, first for younger Baby Boomers, but much more so for their children and grandchildren. As a first step, you should follow White's suggestion to contact Harkin's committee asking for hearings on the coming crisis. The email is Retirement_Security@help.senate.gov

But we will need many more steps to ensure that the crisis is solved in our lifetimes.

Cross-posted at Angry Bear.

Billions for Job Piracy Despite State Budget Cuts

2013-01-29T17:42:00.002-05:00

According to Center on Budget and Policy Priority data cited by Louise Story, in 2011 the states enacted $156 billion of austerity measures, between budget cuts and tax hikes. Despite their budgetary woes, however, this did not stop them from throwing billions of dollars a year into the worst kind of corporate subsidy, relocation incentives that move existing facilities from one state to another without creating any new jobs. A new report from Good Jobs First documents their widespread use, which is far more common than most people would imagine.

One great aspect of this report is that it goes beyond the two examples of interstate border wars we hear the most about, New York-New Jersey-Connecticut and Kansas-Missouri. We learn about Texas and Georgia vs. the world, North Carolina-South Carolina (especially in the Charlotte metro area), Tennessee-Mississippi (particularly with Memphis as target), and Rhode Island-Massachusetts. In addition, we learn more about the flip side of job piracy, retention subsidies, of which Sears' two in Illinois are the most egregious.

For example, Continental Tire moved its North American headquarters and 320 jobs from Charlotte to Lancaster County, South Carolina, in 2009. Georgia gave Ohio-based NCR Corp. (formerly National Cash Register) $109 million to relocate that same year. In 2010, Hamilton Beach received at least $2 million to move from Memphis to Olive Branch, Mississippi, while in 2009 McKesson received $4 million from Mississippi in addition to local incentives to move from Memphis to neighboring DeSoto County. Rhode Island, in a widely publicized move, gave Boston Red Sox pitcher Curt Schilling's video game company 38 Studios a $75 million loan to move from Massachusetts in 2009, only to see the firm go bankrupt in 2012. There are many more examples in the report, but you get the idea.

The existence of relocation subsidies makes it possible for companies to demand incentives to stay in a particular state, i.e., retention subsidies. Two of the three largest ones went to Sears in Illinois, $168 million in 1989 and another $275 million in 2012 when the 1989 deal expired. The second largest was $250 million to Prudential Insurance from New Jersey in 2011. But many more states have had to shell out retention subsidies on a regular basis.

The report notes that at least 40 states know how to write no-raiding language into their subsidy programs, because they already have such language banning intra-state relocations from receiving subsidies under various programs. However, as far as I know, far fewer states prevent their cities from giving relocation subsidies to in-state firms, though the report shows that Maine's Employment Tax Increment Financing rules do provide that.

What is necessary, the report argues and I wholeheartedly agree, is that states need to tweak their program language to stop rewarding interstate job relocation as well. They need to stop efforts to directly poach existing firms, something Texas is heavily engaged in. The report says there is a "possible" federal role here, to withhold some Department of Commerce monies from states that engaged in job piracy. I, on the other hand, think that federal action is the only way it will happen. As I've written before, voluntary state efforts in the 1980s and 1990s to end job piracy have been utter failures, and the states clearly need an outside enforcement mechanism, which can only be provided by the federal government.

With such extensive documentation of how widespread relocation and retention subsidies are, hopefully more people can be mobilized to get the federal action we need.

Cross-posted at Angry Bear.

News of Note: Job Piracy, Tax Havens, Filibuster Reform

2013-01-25T20:47:00.000-05:00

A lot has happened during my busy first week of classes, so I want to flag a couple of the most important pieces of news from the week.

1. Good Jobs First has a blockbuster report on relocation subsidies. I will have a full post on this report as soon as I have time to digest it.

2. Tax Justice Network's January Taxcast is out, with reports on Dell in Spain, an EU threat to blacklist Switzerland, and a look at "Google Capitalism."

Hear it here.

3. Filibuster reform was less than hoped. Recall how overrepresented rural states are in the Senate in the first place. Here are Ezra Klein's pessimistic take and Chris Bower's somewhat more optimistic take on the changes.