Okay, it’s not like the good old days of 2002–2007, but there are some grounds for concern in certain markets. In particular, the Case-Shiller tiered price indexes are showing extraordinary increases in the bottom tier (lowest third of house sale prices) in several markets.
For example, the index shows that in Denver prices in the bottom tier have risen by 16.7 percent over the last year and by 49.8 percent over the last three years. The comparable figures for the top tier are 6.4 percent and 21.4 percent. The CPI owner equivalent rent (OER) index has risen by 19.6 percent over the last three years.
In Portland, the one years increase for the bottom tier has been 16.2 percent and the three year 44.4 percent. For the top tier, the increases have been 9.9 percent and 26.3 percent. Rents have risen 16.3 percent over the last three years. In Los Angeles, prices in the bottom teir have risen 8.9 percent in the last year and 37.8 percent over the last three years. That compares to 7.0 percent and 21.1 percent for the top tier. Rents have risen by 9.9 percent over the last three years.
In Chicago, prices in the bottom tier have risen by 40.7 percent over the last three years and in Miami by 55.6 percent. Rents over this period rose in the two cities by 6.9 percent and 10.4 percent, respectively.
These numbers should provide serious grounds for caution. This is not a story of a bubble whose collapse will sink the economy and cause a financial crisis, but there is a real possibility that a lot of moderate-income homebuyers may get badly burned if prices turn around. The real estate pushers never care, since they make their money on the turnover, but it won’t be a pretty picture for the families affected.
Okay, it’s not like the good old days of 2002–2007, but there are some grounds for concern in certain markets. In particular, the Case-Shiller tiered price indexes are showing extraordinary increases in the bottom tier (lowest third of house sale prices) in several markets.
For example, the index shows that in Denver prices in the bottom tier have risen by 16.7 percent over the last year and by 49.8 percent over the last three years. The comparable figures for the top tier are 6.4 percent and 21.4 percent. The CPI owner equivalent rent (OER) index has risen by 19.6 percent over the last three years.
In Portland, the one years increase for the bottom tier has been 16.2 percent and the three year 44.4 percent. For the top tier, the increases have been 9.9 percent and 26.3 percent. Rents have risen 16.3 percent over the last three years. In Los Angeles, prices in the bottom teir have risen 8.9 percent in the last year and 37.8 percent over the last three years. That compares to 7.0 percent and 21.1 percent for the top tier. Rents have risen by 9.9 percent over the last three years.
In Chicago, prices in the bottom tier have risen by 40.7 percent over the last three years and in Miami by 55.6 percent. Rents over this period rose in the two cities by 6.9 percent and 10.4 percent, respectively.
These numbers should provide serious grounds for caution. This is not a story of a bubble whose collapse will sink the economy and cause a financial crisis, but there is a real possibility that a lot of moderate-income homebuyers may get badly burned if prices turn around. The real estate pushers never care, since they make their money on the turnover, but it won’t be a pretty picture for the families affected.
Read More Leer más Join the discussion Participa en la discusión
That’s the question millions are asking after reading his column noting that both the Democratic and Republican platforms call for re-instating Glass-Steagall. (It is important to note that the Democrats refer to the 21st Century Glass-Steagall Act introduced by Senator Elizabeth Warren. This measure would also address some of the problems created by the shadow banking system by changing rules on repayment in bankruptcy. This would put a check on the ability of troubled institutions to have access to credit markets.) Sorkin indicates that he doesn’t approve of Glass-Steagall.
At one point he tells readers:
“Whether reinstating the law is good idea or not, the short-term implications are decidedly negative: It would most likely mean a loss of jobs as part of a slowdown in lending from the biggest banks.
“There is a reasonable argument to make that it would also put the United States banking industry at a competitive disadvantage relative to international peers, some of which face fewer restrictions.”
It would be interesting to know how Sorkin decided that reinstating Glass-Steagall would reduce lending in the economy or even big bank lending. (It is possible that a reduction in big bank lending would be offset by more lending by smaller banks.) The big banks were supposed to keep a strict separation between their investment bank divisions and their commercial bank operations, so it’s not obvious why a separation would reduce lending if they had been following the law.
It is also worth noting, that according to standard trade theory, if our surplus on banking services is reduced by a new Glass-Steagall, our trade deficit in other areas, like manufacturing, would decline. Many people might consider this a desirable outcome. Of course, this assumes that people follow the trade theory that ostensibly underlies NAFTA, the TPP, and other recent trade deals.
It is worth noting that Sorkin is right that Glass-Steagall would not have prevented the economic crisis in 2008. The problem was allowing a massive housing bubble to grow unchecked. When house prices collapsed the mortgages, and other assets that depended on house prices, plunged in value. The repeal of Glass-Steagall did not in any obvious way contribute to the bubble.
That’s the question millions are asking after reading his column noting that both the Democratic and Republican platforms call for re-instating Glass-Steagall. (It is important to note that the Democrats refer to the 21st Century Glass-Steagall Act introduced by Senator Elizabeth Warren. This measure would also address some of the problems created by the shadow banking system by changing rules on repayment in bankruptcy. This would put a check on the ability of troubled institutions to have access to credit markets.) Sorkin indicates that he doesn’t approve of Glass-Steagall.
At one point he tells readers:
“Whether reinstating the law is good idea or not, the short-term implications are decidedly negative: It would most likely mean a loss of jobs as part of a slowdown in lending from the biggest banks.
“There is a reasonable argument to make that it would also put the United States banking industry at a competitive disadvantage relative to international peers, some of which face fewer restrictions.”
It would be interesting to know how Sorkin decided that reinstating Glass-Steagall would reduce lending in the economy or even big bank lending. (It is possible that a reduction in big bank lending would be offset by more lending by smaller banks.) The big banks were supposed to keep a strict separation between their investment bank divisions and their commercial bank operations, so it’s not obvious why a separation would reduce lending if they had been following the law.
It is also worth noting, that according to standard trade theory, if our surplus on banking services is reduced by a new Glass-Steagall, our trade deficit in other areas, like manufacturing, would decline. Many people might consider this a desirable outcome. Of course, this assumes that people follow the trade theory that ostensibly underlies NAFTA, the TPP, and other recent trade deals.
It is worth noting that Sorkin is right that Glass-Steagall would not have prevented the economic crisis in 2008. The problem was allowing a massive housing bubble to grow unchecked. When house prices collapsed the mortgages, and other assets that depended on house prices, plunged in value. The repeal of Glass-Steagall did not in any obvious way contribute to the bubble.
Read More Leer más Join the discussion Participa en la discusión
Samuelson told readers that we “can’t borrow ourselves to prosperity.” We can only assume that this is something that his parents told him because it surely has no basis in evidence. If the argument is that excessive borrowing has somehow caused us problems then Samuelson would have some serious work to make that case. The interest rate on 10-year Treasury bonds is 1.6 percent. The inflation rate remains well under the Fed’s 2.0 percent target.
It’s hard to imagine what on earth Samuelson can be thinking of, these are the pieces of evidence that economists would look to as harm from excessive borrowing. Of course, in the Washington Post they don’t give a damn about evidence if the point of the argument is to keep ordinary workers from having jobs and keeping wages down. For this reason, Samuelson will probably be able to get a paycheck for as long as he likes for repeating things that his parents told him.
Samuelson also suffers from a serious lack of historical knowledge. He claims:
“Americans are now said to be “angry” and to demand “change.” This is misleading. In the past two decades, Americans have had more change than they’ve wanted. What they’d really like is to repeal the changes — the economic uncertainties, the physical threats, the geopolitical challenges — and revert to the romanticized world of the late 1990s, when the outlook seemed more tranquil.”
Actually, what is more likely than romanticizing the 1990s is that people think that they should be able to share in the gains of productivity growth rather than living in an economy which is rigged to give all the money to Wall Street types, CEOs, and other elite characters. The normal state of affairs until this rigging was that wages rose roughly in step with productivity. However since 2000, real wages have barely risen for the vast majority of the population. A columnist with a bit more historical knowledge would know that it is highly unusual for wages to stagnate for long periods of time and all income gains to go to those at the top.
Samuelson told readers that we “can’t borrow ourselves to prosperity.” We can only assume that this is something that his parents told him because it surely has no basis in evidence. If the argument is that excessive borrowing has somehow caused us problems then Samuelson would have some serious work to make that case. The interest rate on 10-year Treasury bonds is 1.6 percent. The inflation rate remains well under the Fed’s 2.0 percent target.
It’s hard to imagine what on earth Samuelson can be thinking of, these are the pieces of evidence that economists would look to as harm from excessive borrowing. Of course, in the Washington Post they don’t give a damn about evidence if the point of the argument is to keep ordinary workers from having jobs and keeping wages down. For this reason, Samuelson will probably be able to get a paycheck for as long as he likes for repeating things that his parents told him.
Samuelson also suffers from a serious lack of historical knowledge. He claims:
“Americans are now said to be “angry” and to demand “change.” This is misleading. In the past two decades, Americans have had more change than they’ve wanted. What they’d really like is to repeal the changes — the economic uncertainties, the physical threats, the geopolitical challenges — and revert to the romanticized world of the late 1990s, when the outlook seemed more tranquil.”
Actually, what is more likely than romanticizing the 1990s is that people think that they should be able to share in the gains of productivity growth rather than living in an economy which is rigged to give all the money to Wall Street types, CEOs, and other elite characters. The normal state of affairs until this rigging was that wages rose roughly in step with productivity. However since 2000, real wages have barely risen for the vast majority of the population. A columnist with a bit more historical knowledge would know that it is highly unusual for wages to stagnate for long periods of time and all income gains to go to those at the top.
Read More Leer más Join the discussion Participa en la discusión
The NYT had an article on the research lab that uncovered Volkswagen’s cheating on its emissions. Apparently, the lab was run on a grant of $70,000. That would be less than 0.5 percent of your typical CEO’s pay. In fact, it would be less than 10 percent of the pay of the top executives at major foundations that are supposed to care about doing good in the world.
The story is hardly a surprise to anyone who knows the world of research, but still striking.
The NYT had an article on the research lab that uncovered Volkswagen’s cheating on its emissions. Apparently, the lab was run on a grant of $70,000. That would be less than 0.5 percent of your typical CEO’s pay. In fact, it would be less than 10 percent of the pay of the top executives at major foundations that are supposed to care about doing good in the world.
The story is hardly a surprise to anyone who knows the world of research, but still striking.
Read More Leer más Join the discussion Participa en la discusión
Ross Douthat inadvertently told readers much about why large segments of the public in the U.S., U.K., and Western Europe are rejecting the policies pushed by elites. In his NYT column, he complained about Donald Trump’s acceptance speech (which provided much ground for complaint):
“That message was a long attack, not on liberalism per se, but on the bipartisan post-Cold War elite consensus on foreign policy, mass immigration, free trade. It was an attack on George W. Bush’s Iraq war and Hillary Clinton’s Libya incursion both, on Nafta and every trade deal negotiated since, on the perpetual Beltway push for increased immigration, on the entire elite vision of an increasingly borderless globe.”
Actually the United States does not push “free trade.” A major thrust of all trade agreements of the last quarter century has been longer and stronger patent protections. These are “protections” as in not free trade. They raise the price of the affected goods by factors of ten or a hundred, making them equivalent to tariffs of several hundred or several thousand percent.
While the ostensible purpose of thesse protections is to promote innovation and creative work, there is little evidence that the additional incentive provided is justified by the additional cost. The one thing that we know for certain is that they redistribute income upward, forcing ordinary people to pay more for everything from prescription drugs to movies and computer software. The beneficiaries are the high end employees and shareholders of drug companies, software companies and the entertainment industry.
It is also not true that our elites have a vision of a “borderless globe.” In the United States it is illegal to practice medicine unless you complete a residency program in the United States. This means that our elites will have foreign doctors arrested for doing their work. This protectionism raises the pay of U.S. doctors by more than $100,000 a year compared to their counterparts in other wealthy countries. It costs the country around $100 billion a year (@ $700 per family) in higher health care costs.
It is striking that Douthat apparently can not even see these and other protections that redistribute income upward. Perhaps this explains why many people don’t like the elites.
Ross Douthat inadvertently told readers much about why large segments of the public in the U.S., U.K., and Western Europe are rejecting the policies pushed by elites. In his NYT column, he complained about Donald Trump’s acceptance speech (which provided much ground for complaint):
“That message was a long attack, not on liberalism per se, but on the bipartisan post-Cold War elite consensus on foreign policy, mass immigration, free trade. It was an attack on George W. Bush’s Iraq war and Hillary Clinton’s Libya incursion both, on Nafta and every trade deal negotiated since, on the perpetual Beltway push for increased immigration, on the entire elite vision of an increasingly borderless globe.”
Actually the United States does not push “free trade.” A major thrust of all trade agreements of the last quarter century has been longer and stronger patent protections. These are “protections” as in not free trade. They raise the price of the affected goods by factors of ten or a hundred, making them equivalent to tariffs of several hundred or several thousand percent.
While the ostensible purpose of thesse protections is to promote innovation and creative work, there is little evidence that the additional incentive provided is justified by the additional cost. The one thing that we know for certain is that they redistribute income upward, forcing ordinary people to pay more for everything from prescription drugs to movies and computer software. The beneficiaries are the high end employees and shareholders of drug companies, software companies and the entertainment industry.
It is also not true that our elites have a vision of a “borderless globe.” In the United States it is illegal to practice medicine unless you complete a residency program in the United States. This means that our elites will have foreign doctors arrested for doing their work. This protectionism raises the pay of U.S. doctors by more than $100,000 a year compared to their counterparts in other wealthy countries. It costs the country around $100 billion a year (@ $700 per family) in higher health care costs.
It is striking that Douthat apparently can not even see these and other protections that redistribute income upward. Perhaps this explains why many people don’t like the elites.
Read More Leer más Join the discussion Participa en la discusión
The NYT, like much of the rest of the media, feel the need to argue that our trade policies could not possibly be hurting manufacturing workers. Its latest effort in this direction was a piece arguing that China could not possibly be “stealing” U.S. jobs because it is losing jobs itself to other countries.
The basic story is that China has seen a sharp rise in its wages (29 percent over the last three years, according to the article) so it is no longer the low cost producer for many items. The article points out that wages are now far lower in countries like India, Vietnam, and Bangladesh, and that many firms now operating in China are moving production to these countries. Some companies are even looking to reshore operations to the United States.
While the NYT obviously does not like Donald Trump, this argument is just silly on its face. Suppose the United States had a 20 percent tariff on imported textiles that was angering our trading partners. The NYT would then go to factories in North Carolina and elsewhere that were laying off workers, and then ridicule people who said that the tariffs were reducing textile imports.
That would obviously be absurd, but that is the logic of the NYT piece. The issue at hand is whether China’s policy of deliberately keeping down its currency against the dollar has increased its trade surplus with the United States and thereby cost the U.S. manufacturing jobs. The fact that China itself might now be losing jobs, does not in any way disprove the argument that its currency policy did and still does cost the U.S. jobs.
The NYT, like much of the rest of the media, pursues a policy of selective protectionism. It either ignores or supports protectionist measures that tend to benefit higher income people. For some reason, it never discusses the laws that require doctors to complete a residency program in the United States to practice in the United States, as though there were no other way for a person to be a competent doctor. Our protectionist measures for doctors costs the country roughly $100 billion a year in higher health care costs (@ $700 per year per household). There are comparable measures in place for other highly paid professions.
The U.S. also demand stronger and longer copyright patent protection as part of its trade agreements. Protectionism in prescription drugs alone costs the public more than $300 billion a year (@ $2,500 per family). For some reason the NYT doesn’t take note of this protectionism either.
It is only measures that would benefit less-educated workers that earn the wrath of the NYT and the rest of the media. Ironically, pushing a policy that would prevent currency management of the type pursued by China is actually a free trade policy. But the NYT apparently cares much more about who benefits from a policy that the logic behind it.
The NYT, like much of the rest of the media, feel the need to argue that our trade policies could not possibly be hurting manufacturing workers. Its latest effort in this direction was a piece arguing that China could not possibly be “stealing” U.S. jobs because it is losing jobs itself to other countries.
The basic story is that China has seen a sharp rise in its wages (29 percent over the last three years, according to the article) so it is no longer the low cost producer for many items. The article points out that wages are now far lower in countries like India, Vietnam, and Bangladesh, and that many firms now operating in China are moving production to these countries. Some companies are even looking to reshore operations to the United States.
While the NYT obviously does not like Donald Trump, this argument is just silly on its face. Suppose the United States had a 20 percent tariff on imported textiles that was angering our trading partners. The NYT would then go to factories in North Carolina and elsewhere that were laying off workers, and then ridicule people who said that the tariffs were reducing textile imports.
That would obviously be absurd, but that is the logic of the NYT piece. The issue at hand is whether China’s policy of deliberately keeping down its currency against the dollar has increased its trade surplus with the United States and thereby cost the U.S. manufacturing jobs. The fact that China itself might now be losing jobs, does not in any way disprove the argument that its currency policy did and still does cost the U.S. jobs.
The NYT, like much of the rest of the media, pursues a policy of selective protectionism. It either ignores or supports protectionist measures that tend to benefit higher income people. For some reason, it never discusses the laws that require doctors to complete a residency program in the United States to practice in the United States, as though there were no other way for a person to be a competent doctor. Our protectionist measures for doctors costs the country roughly $100 billion a year in higher health care costs (@ $700 per year per household). There are comparable measures in place for other highly paid professions.
The U.S. also demand stronger and longer copyright patent protection as part of its trade agreements. Protectionism in prescription drugs alone costs the public more than $300 billion a year (@ $2,500 per family). For some reason the NYT doesn’t take note of this protectionism either.
It is only measures that would benefit less-educated workers that earn the wrath of the NYT and the rest of the media. Ironically, pushing a policy that would prevent currency management of the type pursued by China is actually a free trade policy. But the NYT apparently cares much more about who benefits from a policy that the logic behind it.
Read More Leer más Join the discussion Participa en la discusión
Catherine Rampell correctly points out that the Donald Trump Republicans want a nanny state, going through various ways in which they want government to intervene in people’s lives and the economy to make life better for them. You can add some important items that Rampell left out, like stronger and longer copyright and patent monopolies, to redistribute money from people who work to people who own patents and copyrights. They also seem fine with the protectionist barriers that keep our doctors and other highly paid professionals from having to compete with their lower paid counterparts in the developing world or even Western Europe. But she does get one item badly wrong.
Rampell lists breaking up the big banks as an intervention. Actually the opposite is the case.
The reason to break up the big banks is that if their highly paid CEOs push them into bankruptcy through incompetence, the government will invariably bail out them out. The Treasury and/or Fed will give them money at below market interest rates to ensure they survive. Such bailouts will almost certainly always get political support because folks like Rampell’s employers at the Washington Post will furiously denounce anyone who doesn’t support saving the big banks. The opponents will be called all sorts of names and face bleak political prospects if they don’t come through with the money for Wall Street.
Since market actors know that the big banks will be bailed out by the government if they get in trouble the banks can borrow at a lower cost than smaller competitors in the same financial situation. This amounts to a government subsidy to their top executives and shareholders. The I.M.F. and others have estimated the size of this subsidy as being between $25 billion and $50 billion a year. That is not a free market.
Catherine Rampell correctly points out that the Donald Trump Republicans want a nanny state, going through various ways in which they want government to intervene in people’s lives and the economy to make life better for them. You can add some important items that Rampell left out, like stronger and longer copyright and patent monopolies, to redistribute money from people who work to people who own patents and copyrights. They also seem fine with the protectionist barriers that keep our doctors and other highly paid professionals from having to compete with their lower paid counterparts in the developing world or even Western Europe. But she does get one item badly wrong.
Rampell lists breaking up the big banks as an intervention. Actually the opposite is the case.
The reason to break up the big banks is that if their highly paid CEOs push them into bankruptcy through incompetence, the government will invariably bail out them out. The Treasury and/or Fed will give them money at below market interest rates to ensure they survive. Such bailouts will almost certainly always get political support because folks like Rampell’s employers at the Washington Post will furiously denounce anyone who doesn’t support saving the big banks. The opponents will be called all sorts of names and face bleak political prospects if they don’t come through with the money for Wall Street.
Since market actors know that the big banks will be bailed out by the government if they get in trouble the banks can borrow at a lower cost than smaller competitors in the same financial situation. This amounts to a government subsidy to their top executives and shareholders. The I.M.F. and others have estimated the size of this subsidy as being between $25 billion and $50 billion a year. That is not a free market.
Read More Leer más Join the discussion Participa en la discusión
No, that is not some new concession that the Speaker made to appease Donald Trump, this is his budget wonkiness. According to the analysis of Ryan’s budget by the Congressional Budget Office, he would reduce the non-Social Security, non-Medicare portion of the federal budget, shrinking it to 3.5 percent of GDP by 2050 (page 16).
This number is roughly equal to current spending on the military. Ryan has indicated that he does not want to see the military budget cut to any substantial degree. That leaves no money for the Food and Drug Administration, the National Institutes of Health, The Justice Department, infrastructure spending or anything else. Following Ryan’s plan, in 35 years we would have nothing left over after paying for the military.
As I have pointed out here in the past, this was not some offhanded gaffe where Ryan might have misspoke. He supervised the CBO analysis. CBO doesn’t write-down numbers in a dark corner and then throw them up on their website to embarrass powerful members of Congress. As the document makes clear, they consulted with Ryan in writing the analysis to make sure that they were accurately capturing his program.
For some reason, the media refuse to give Mr. Ryan credit for the position he has openly embraced. The NYT followed this pattern in its editorial implying that Mr. Ryan had compromised his respectable wonkiness in his endorsement of Donald Trump. Ryan has made his career by arguing an extreme position that is far to the right of even most of the Republican party. It is long past time that the media take seriously the position he is advocating.
No, that is not some new concession that the Speaker made to appease Donald Trump, this is his budget wonkiness. According to the analysis of Ryan’s budget by the Congressional Budget Office, he would reduce the non-Social Security, non-Medicare portion of the federal budget, shrinking it to 3.5 percent of GDP by 2050 (page 16).
This number is roughly equal to current spending on the military. Ryan has indicated that he does not want to see the military budget cut to any substantial degree. That leaves no money for the Food and Drug Administration, the National Institutes of Health, The Justice Department, infrastructure spending or anything else. Following Ryan’s plan, in 35 years we would have nothing left over after paying for the military.
As I have pointed out here in the past, this was not some offhanded gaffe where Ryan might have misspoke. He supervised the CBO analysis. CBO doesn’t write-down numbers in a dark corner and then throw them up on their website to embarrass powerful members of Congress. As the document makes clear, they consulted with Ryan in writing the analysis to make sure that they were accurately capturing his program.
For some reason, the media refuse to give Mr. Ryan credit for the position he has openly embraced. The NYT followed this pattern in its editorial implying that Mr. Ryan had compromised his respectable wonkiness in his endorsement of Donald Trump. Ryan has made his career by arguing an extreme position that is far to the right of even most of the Republican party. It is long past time that the media take seriously the position he is advocating.
Read More Leer más Join the discussion Participa en la discusión
There have been many pieces in the media noting that the Republican platform calls for restoring Glass-Steagall and arguing that this is stealing an item from Elizabeth Warren’s agenda. While the Republican proposal would presumably restore the separation of investment banks from commercial banks that take government guaranteed deposits, the 21st Century Glass-Steagall Act being pushed by Senator Warren goes well beyond this.
Most importantly, the act would change the priority given to derivatives in bankruptcy. As current law is written, various derivative instruments have priority in bankruptcy proceedings over other liabilities. This allowed non-bank institutions like Lehman to continue to carry through normal business even as their financial situation was deteriorating due to bad mortgage debt. By taking away the priority for derivative contracts, market actors would have serious incentive to evaluate the financial situation of an institution like Lehman. This would likely prevent it from developing the same sort of massive uncovered liabilities that Lehman did in the housing bubble years.
There have been many pieces in the media noting that the Republican platform calls for restoring Glass-Steagall and arguing that this is stealing an item from Elizabeth Warren’s agenda. While the Republican proposal would presumably restore the separation of investment banks from commercial banks that take government guaranteed deposits, the 21st Century Glass-Steagall Act being pushed by Senator Warren goes well beyond this.
Most importantly, the act would change the priority given to derivatives in bankruptcy. As current law is written, various derivative instruments have priority in bankruptcy proceedings over other liabilities. This allowed non-bank institutions like Lehman to continue to carry through normal business even as their financial situation was deteriorating due to bad mortgage debt. By taking away the priority for derivative contracts, market actors would have serious incentive to evaluate the financial situation of an institution like Lehman. This would likely prevent it from developing the same sort of massive uncovered liabilities that Lehman did in the housing bubble years.
Read More Leer más Join the discussion Participa en la discusión
See, it’s all very simple. If a father pays his kid $10 to mow his lawn, no one expects the kid to pay Social Security taxes on the money. It’s the exact same thing when people work 40 hours a week for an employer, why would we expect them to pay Social Security taxes on their wages?
That is the nature of the argument Steven B. Klinsky, the founder and chief executive officer of the private equity firm New Mountain Capital, gave in a NYT column in defense of the carried interest deduction. This deduction allows hedge fund and private equity fund mangers to pay taxes at the capital gains tax rate (20 percent) instead of the 39.6 percent tax rate they would pay on normal income.
Klinsky argues that this carried interest loophole really is no loophole at all:
“Let’s say a father and a son go into business together to buy the local lawn mowing company for $1,000. The father puts up the money and the son does all the work of having the idea, managing the partnership and so on. They agree to split the partnership’s future profit 80 percent for the father (as the passive, money limited partner) and 20 percent for the son (as the active, hands-on general partner). If years later, the partnership is sold for a profit, there would be long-term capital gain on that profit. The father would own 80 percent of the profit and pay 80 percent of the capital gains taxes. The son would own 20 percent of the profit and pay 20 percent of the capital gains taxes.”
See, when folks like Mitt Romney and Peter Peterson get hundreds of millions of dollars a year from their earnings as private equity fund managers it’s just the same as kid who goes into business with his father. There’s no reason these people should be taxed like ordinary workers.
As a practical matter, the relevant examples here are realtors, car salespeople, and other workers who get paid on a commission. In all these cases, workers’ pay depends on the profit to the owner of the business or the customer. In all of these cases, workers are taxed on their commissions in exactly the same way that other workers are taxed on salaries. This is really not a tough call. There is no reason for the I.R.S. to give workers a tax break just because they are paid on commission.
Apparently, Klinsky thinks that the rules that apply to ordinary workers shouldn’t apply to the very rich people who run private equity and hedge funds. At least, that is the only thing that we can reasonably infer from his argument.
Of course, the son in his case should, in principle, have to pay normal taxes on the earnings from his labor just as the kid mowing his dad’s lawn should in principle pay Social Security tax on his $10. However, because trivial sums are involved and the enforcement issue would be extremely difficult, we don’t worry about these cases. When some of the richest people in the country can get away with paying a lower tax rate than a school teacher or firefighter, it is something worth worrying about.
See, it’s all very simple. If a father pays his kid $10 to mow his lawn, no one expects the kid to pay Social Security taxes on the money. It’s the exact same thing when people work 40 hours a week for an employer, why would we expect them to pay Social Security taxes on their wages?
That is the nature of the argument Steven B. Klinsky, the founder and chief executive officer of the private equity firm New Mountain Capital, gave in a NYT column in defense of the carried interest deduction. This deduction allows hedge fund and private equity fund mangers to pay taxes at the capital gains tax rate (20 percent) instead of the 39.6 percent tax rate they would pay on normal income.
Klinsky argues that this carried interest loophole really is no loophole at all:
“Let’s say a father and a son go into business together to buy the local lawn mowing company for $1,000. The father puts up the money and the son does all the work of having the idea, managing the partnership and so on. They agree to split the partnership’s future profit 80 percent for the father (as the passive, money limited partner) and 20 percent for the son (as the active, hands-on general partner). If years later, the partnership is sold for a profit, there would be long-term capital gain on that profit. The father would own 80 percent of the profit and pay 80 percent of the capital gains taxes. The son would own 20 percent of the profit and pay 20 percent of the capital gains taxes.”
See, when folks like Mitt Romney and Peter Peterson get hundreds of millions of dollars a year from their earnings as private equity fund managers it’s just the same as kid who goes into business with his father. There’s no reason these people should be taxed like ordinary workers.
As a practical matter, the relevant examples here are realtors, car salespeople, and other workers who get paid on a commission. In all these cases, workers’ pay depends on the profit to the owner of the business or the customer. In all of these cases, workers are taxed on their commissions in exactly the same way that other workers are taxed on salaries. This is really not a tough call. There is no reason for the I.R.S. to give workers a tax break just because they are paid on commission.
Apparently, Klinsky thinks that the rules that apply to ordinary workers shouldn’t apply to the very rich people who run private equity and hedge funds. At least, that is the only thing that we can reasonably infer from his argument.
Of course, the son in his case should, in principle, have to pay normal taxes on the earnings from his labor just as the kid mowing his dad’s lawn should in principle pay Social Security tax on his $10. However, because trivial sums are involved and the enforcement issue would be extremely difficult, we don’t worry about these cases. When some of the richest people in the country can get away with paying a lower tax rate than a school teacher or firefighter, it is something worth worrying about.
Read More Leer más Join the discussion Participa en la discusión
