End of the Year Market Dis

(The stock picks and plays are at the end.) 2005 was a flat year for stocks. Why? The Right Wing spin machine tells us the economy is booming. The president has done all he can to promote Wall Street. Beginning tomorrow, January 1, for example, a couple of new tax breaks cut in for the rich, and as we learned here before the top ten percent owns nine-tenths of all stocks.

Before we get to our answer to why stocks are flat and where they may be going, context is necessary. This corner is Demand Side economics. We do not believe stocks are priced exclusively according to their "fundamentals," nor that the true value is computed by the magic mind of the market in response to each new mote of information. This latter contention is promoted by some of the most prominent academic departments in the country, under the rubric Efficient Market Hypothesis, in spite of all evidence to the contrary.

The joke was, "How many economists does it take to screw in a light bulb?" Answer: None. If the light bulb had needed screwing in, the market would have already done it. All information was supposedly factored in immediately. It was impossible to outguess the market.

It is a theory that belongs on the scrap heap of history, along with Monetarism and next to the predictions of Dow 36,000 and the Great Depression of 1990. Unfortunately, once a theory gets into the halls of academia, it is impossible to dislodge it with facts, such as the dramatic boom and bust we have witnessed over the past decade.

Make no mistake, the market does factor in information, with alarming efficiency, but that information is often:

Wrong, as with the scandals of WorldCom and Enron, where the books were cooked with creative accounting to gin the stock price.

Irrelevant, as with parts of the dot.com bubble, where for example, market share was translated into high stock values, even when it was bought by untenable business models. Amazon, for example, basically gave away ten dollar bills with every order and dominated its niche. The market rewarded it with stock prices over the top. Now that it is profitable, its stock price is 4 percent of what it once was.

Serves only to price things relatively, as putting GE above Global Crossings, for example. The absolute value, for the sake of our discussion here, is determined by demand for the stock.

There are two crude and inexact dynamics at work in the judging of stocks and the prospects for the future. Regarding prospects, the dominant prognostication is that the trend of the past three years or so will continue into the dim future, barring any explicit information to the contrary. Regarding the judging of stocks, beating the market is similar to winning a certain type of beauty judging contest. Both were proposed by the great economist John Maynard Keynes (pron. KANES, get it right).

The first is relatively self-explanatory. We assume that, for example, we can continue to run $500 billion deficits as we have at the same interest rates and underfund education and infrastructure and so on.

The second involves a metaphor familiar to Keynes that needs some explanation. In the 1920s and 30s, newspapers ran contests involving the photographs of 100 or so pretty girls. The winner of the contest was the one who could pick out the five or six prettiest girls -- as judged by all contest entrants. That is, it was not the individual's perception of who was prettiest, but the ability to tap the perception of the herd. Fundamentals were and are beside the point, because speculators are primarily concerned with liquidity, the current market value. This is no place for patience. (One of the interesting implications is that the most unanimous market is also the most unstable.)

So, I am not going to bore you with which sector is sexiest, or which company has the best prospects, I am going to bore you with Demand Side keys to stock prices.

* More people buy stocks when the prices go up consistently. Prices go up consistently when more people buy stocks.

* People who are getting older buy stocks. During the 1990s, the baby boomers, the so-called demographic pig in the python, bid up the price of stocks in anticipation of retiring.

* People who have dollars buy stocks. Who is this? The rich! you say, remembering the beginning of this post and the billions of dollars in tax cuts. Wrong. Well, not wrong, but the net amount of tax cuts in the Bush economic blunder scheme needs to be borrowed back to finance the government. Conceptually, it is the same money, we're just paying interest on it under Bush.

The people who have the dollars I'm talking about are the Asians who are financing our trade deficits. We are giving them dollars in trade for their goods. In normal times we would be trading our goods for their goods through the medium of currency. Now we are running massive trade deficits and trading dollars for goods. Dollars don't spend so good there. Not like they do here, anyway, so they are buying American stocks and government bonds, liquid assets priced in dollars.

Which brings us to the last category.

* Outsiders who like the dollar buy stocks. This is the George Soros play. When you buy a stock, you are also buying the currency that underlies it. If you hold it a year or two and it does nothing, but the underlying currency appreciates, then when you sell you have still made a profit. (The strong and stable dollar was another reason people put money in American stocks in the 1990s. It seemed like a continent of sanity in an ocean of currency chaos.

So during 2005 the stock market was flat. It was dull. What does that mean? One thing, obviously, people have moved from stocks to bonds and real estate. Notice the relatively low return on bonds in spite of the immense federal deficits, indicating demand. Notice the high prices of homes, the housing bubble which I have posted so much about.

Another thing, it means stocks are not getting bid up by baby boomers, foreign investors, or people who like the dollar. This is weakness. It means other things, but the 14 people who actually reached this point on a New Year's Eve need to be rewarded, not punished, so I'll save the rest.

Beware! Republicans are no good for stocks, because they are no good for business. But, you say, Republicans provide all those tax breaks and roll over for Corporate America at every opportunity. The corporatization of the government is reaching the level of Benito's Italy.

It is because the business of "business" is demand. "How's business?" means "How much are you selling?" Democrats supply only one thing for business. Customers. Democrats mean jobs. Jobs means customers. Always remember, the budget has never been balanced except at full employment, and the economy has always grown best at full employment. That is the definition of "a healthy economy." Everybody is contributing. People have money and purpose.

Now, the sexy market plays

Buy Boeing on the weakness of the dollar against the euro. Boeing's competition is Airbus. The people with dollars above like airplanes. When the euro appreciated against the dollar, Boeing made advances against Airbus. The euro ran up to $1.30 and higher a year ago at this time, but has stalled and is down in the $1.17 neighborhood. (If they ever start making planes in Asia, sell, sell, sell.)

Buy natural gas futures based on the price of oil. Oil leads all energy prices by 3-12 months. When oil goes up, natural gas is sure to follow, and the reverse. It's true for electrical energy, coal and alternative energy as well. This play is tired right now, but watch in the future.

A sad catastrophe is brewing

Thursday, December 29, 2005

The current federal debt is $8.1 trillion. Yes, $8.1 trillion. $8,100,000,000,000. Eight trillion one hundred billion dollars. This is the principle on which we are paying interest every year. See it to the penny at Bureau of the Public Debt.

The on-budget deficit, that is, the amount we are adding to the debt by borrowing from all sources including Social Security trust funds, was $567 billion in 2004. It will be at least $500 billion this year, next year, and every year until a change is made. Half a trillion dollars a year we are borrowing. At 5% interest, four years from now, that half a trillion will only pay debt service. At 10% interest? (Ten percent is conceivable, because who will lend us money with these kinds of books?)

Net interest is currently about one-tenth of federal spending. This is largely a legacy of the policies of Ronald Reagan and the first George Bush. Dubya is making them look like pikers. Inevitably the debt service will be crippling.

The Iraq War, the culture of corruption, the torture and habitual lying, the burning of the Bill of Rights, these are examples of a betrayal of America by the Radical Right under Bush and Cheney. Baffling in their audacity. Magnets for outrage. But the crime that is being committed on our economy.... Unless we all die before we want to, the burden will not fall solely on our children.

Bush and the Republican Congress are poisoning the future. They are playing war with other people's lives and gambling with other people's money. The Right Wing is ensuring the demise of popular (as in "of the people") social programs by these deficits, but the damage will not be confined to the structures we expected to carry us in dignity, but to the whole fabric of the economy.

It's worse than you think. See the Congressional Budget Office projections.

Payback for Arctic Refuge filibuster?

Ted Stevens, I'm coming to your state on this one. The minute they could no longer use it as a bargaining chip, Republicans in Congress cut badly needed help for low-income households to heat their homes this winter. The director of CBPP Robert Greenstein called it:

"Even though there is bipartisan support in Congress for providing LIHEAP [Low-Income Home Energy Assistance Program] funds, congressional leaders stripped those funds out of the defense bill the minute they could no longer use them to help get ANWR enacted."

While a small piece of the LIHEAP money was attached to Arctic drilling, $2 billion was not. Both were stripped.

The Republican leadership may be delivering payback. They sure lined up to blow smoke over cutting vital assistance just before Christmas. Senator Rick Santorum's office said, "Democrats stripped out the $2 billion in LIHEAP money because it would have been funded by revenues from oil drilling in ANWR." Does this guy have any credibility left?

Senator Charles Grassley (R-Iowa)was quoted as saying ANWR drilling was the source of funds for the entire utility assistance. Senator Judd Gregg (R-N.H.), chairman of the Senate Budget Committee, said the only way Congress could have found extra money was through a new revenue source. What is it called when people who know better make statements that are not true?

A spokesman for Dennis Hastert attacked Senate Democrats for delaying passage of a separate piece of legislation — the budget reconciliation bill that would cut Medicaid, student loans, child support enforcement, and other programs — by procedural means which forces another vote in the House. The Hastert spokesman, Ron Bonjean, said this action would delay the provision of money to help low-income families pay their heating bills. Bogus. The only money for heating assistance contained in the budget reconciliation bill is funding for 2007.

The Republicans blocked LIHEAP from other bills, preferring to use it as a sweetener, first for the budget reconciliation bill then, when that passed the House floor, moving the money to the defense appropriation bill with ANWR. Two weeks ago Bush & Co. rejected attempts to update food stamp benefits to reflect higher heating bills and hence less money for food, claiming the adjustment was unnecessary because more LIHEAP funds were on the way. Sure, George.

Now Congress has left town with no action. Worse, because of the 1% across-the-board cut in discretionary funding, there will actually be LESS MONEY IN THE LIHEAP FUND, PRECISELY WHEN HEATING BILLS ARE SPIKING.

These people are running the country!

See the whole sick thing at the Center on Budget and Policy Priorities.

Upside Down at the Fed

Sunday, December 25, 2005

I despised Alan Greenspan long before it was fashionable. Most recently it was for his disingenuous explanation of why the Bush tax cuts for the rich were okay. We might run out of safe investments, he said, if we paid off the debt too fast. Horrors! The government would be forced to purchase equities. Imagine the temptation to corruption. Well, the retirement of the federal debt has been pushed off for another millennium, anyway. Problem solved, thanks to Greenspan and the Bush economic blunder machine.

Before that was his hiking of interest rates in the late 1990s at the same time energy prices were spiking. This caused the economy to stall as much as the bursting of the stock market bubble, and far more than 9-11.

It was back in the 1980s, though, when I first learned to distrust him. Greenspan chaired a Social Security Salvation Committee (not its true title) which pompously proposed hiking payroll taxes to protect social security from the coming demographic aging of America. Simultaneously fellow Republican Ronald Reagan was cutting income taxes. The result was a shift of the tax burden down onto working people. (And as we now see Social Security is no safer.)

But the thing that really gives me a rash every time he does it is Greenspan's use of the interest rate to fight inflation. This practice is likely to continue under the next chairman, unfortunately. It's like treating a hangnail with doses of radiation.

There are two basic kinds of inflation, cost-push inflation and demand-pull inflation. Cost-push is where producer costs go up and suppliers are forced to pass these costs along to their customers. The classic case is with energy prices. Transportation and production costs are directly tied to energy prices. These costs get embedded in everything from airline fares to the price of bread. (Only direct purchases of fuel are excluded from the so-called "core inflation" calculations.) Not surprisingly, cost-push inflation is associated with stagnation. Stagflation.

The second type, demand-pull inflation, occurs when there are too many dollars chasing too few goods. This occurred after World War II when pent-up demand rushed into a private marketplace that was not geared up for it. It occurred again during Viet Nam, when Lyndon Johnson ran his Great Society projects at the same time as the war. ("Guns and butter," it was called then.) Demand-pull is where buyers essentially bid up the price of goods. Not surprisingly, demand-pull is associated with booms in the economy.

Raising interest rates is useful only in the case of demand-pull inflation, since it increases costs and suppresses demand. Yet the Fed uses it for both. This was a great tragedy in the massive recession of the early 1980s. The Fed's hike in interest costs combined with the OPEC spike in oil prices to send the country into the deepest recession since the Great One. But increasing interest in cost-push situations only increases costs, and thus adds to, rather than subtracting from, the inflation phenomenon. [Before you start yelling, yes, I know the mechanism the Fed used was restricting the money supply, but the effect was felt in interest rates.]

At the end of that day in the 1980s, inflation did fall, but only after oil prices had fallen. Left on the battlefield were millions of unwilling inflation fighters, an army of jobless men and women whose lives would never be the same. The period of high interest and expensive dollars that began then led directly to the de-industrialization of America and the loss of millions of manufacturing jobs. In Washington, generals Reagan and Paul Volcker (Fed Chairman) congratulated themselves on their sacrifice. Of course, neither had been out of a job for a single day.

Alan Greenspan took the reins of the Fed from Volcker in the mid-1980s, and since then (insofar as he has been consistent) Greenspan has continued the tradition and raised interest rates whenever his tea leaves tell him inflation is coming. For many years this was when unemployment got too low. Yes, this was the explicit official position, that low unemployment would create demand that would drive up prices. The theoretical formula was NAIRU -- the "non-accelerating inflation rate of unemployment," a rate which if crossed would somehow loose the demons not only of inflation, but of accelerating inflation. Once upon the land these demons would create grisly outcomes, which never quite clearly identified.

The concept of NAIRU was thoroughly debunked by Nobelist Robert Eisner in the early 1990s and subsequently exposed by the experience of the late Clinton years, when unemployment tickled its historic lows and yet inflation stayed dormant. Yet this period also corresponded with the height of Greenspan's popularity, when he was touted as Maestro. Periodically he messed with the rate and when no inflation occurred he pronounced himself pleased, and the public congratulated him for the result. It was not unlike the man who wore cabbage leaves in his hat and when asked why, replied "To repel elephants." "There are no elephants around here," he was told. "Works pretty good, eh?"

In the end we were to discover, however, that Maestro Magoo relies only on the politically expedient theory and his obtuse remarks are often no more than camouflage, or more aptly, smoke. Over time, the exercise has worked well for Greenspan personally, resulting in a record term in office. Unfortunately, in combination with the Bush evisceration of common sense, it has not been such a happy result for the economy as a whole. The current system is dangerously imbalanced, domestically and globally. Like the retirement of the federal debt, the prospect of economic stability and a society that relies on earning, not borrowing, lies far, far in the future.

Leadership has arrived.

Chris Gregoire is a much better governor than the last one we had. Her new budget is responsible, forward-looking, and on point. There has been some whining in the press about the general absence of strong leadership among Democrats. They aren't talking about this state's governor.

I haven't gone through the whole budget document yet, but it looks to me like she's picking up where she left off last session. If politics is the art of the possible, she's a great politician, because she got everything possible out of that legislature. She took revenue where it was politically feasible and funded the class size and teacher COLA initiatives. That was the right thing to do, for the voters, for the teachers, for the kids, and to set up the next advances.

I don't want to say, "Shame on Gary Locke for not doing that," but I do want to say there is new strength and purpose now sitting in the Governor's mansion.

The new budget is responsible. Of an anticipated $1.4 billion surplus, almost $600 million goes into reserve accounts for pension, health care and education costs. Over $300 million goes to more and less restricted reserve accounts. An additional $38 plus million goes to help high schoolers graduate. The budget creates a cabinet-level Department of Early Learning. This, plus the attention to health care and the action on transportation from last session demonstrates she is sticking to the core missions of state government.

The "strong economy" which generated these numbers was tardy in arriving (three years into the "recovery") and is based on housing construction, which feeds the revenue stream pretty good. The governor's caution in spending the surplus is well-placed, because it may not happen, and if it does, it could well be followed by a large popping sound. (housing permits were up 18% in 2005. Next year, even the Forecast Council's optimistic forecast is for only a 2.5% rise. Pessimistic, a drop of nearly 15%.) Add to this the fact that the revenue architecture itself is structurally inadequate to the foreseeable demands, and caution is definitely called for.

The biodiesel project got a lot of ink, and it's a good concept economically. It substitutes Washington-made product for Alaska-made product. I understand it is not an environmental program, since the same greenhouse gases are produced, but it should be good economically for Eastern Washington. A better plan economically and environmentally would be to expand and develop rail capacity, substituting efficient infrastructure for oil.

Cleaning up Puget Sound. What a concept. This is a leadership move, mobilizing pride and conscience to do what citizens know is right. Gregoire seems to have her ducks in a row on the plan. It's something that could generate a culture of environmental responsibility. Inspiring.

Comment: This is government cleaning up after private property owners and commercial enterprises. If the market were working right, the costs of this clean-up would have been generated by the actors who caused the problem, but the market doesn't work so good that way. The market transactions are long over with, the cash is in someone else's hand, and the government has to come along and pick up the tab. Who do you think whines most about taxes? Business and property owners.

A similar situation exists on a much larger scale with the burning of fossil fuels. Climate change and pollution mitigation costs will be enormous. But the transaction includes nothing for that. The price of a gallon of gas pays Exxon for the extraction, refining and distribution and pays the government for building roads. The easily anticipated and tremendous environmental costs completely escape the market transaction. If they were included, gas would be as expensive as it is in Europe, but the market would function. Otherwise we are simply subsidizing destructive activities.

I'm not sure about the Life Sciences Discovery Fund. It sounds a little like picking winners and losers. I haven't read the details, but the more it benefits existing state-operated research and facilities and the less it gives tax breaks to the sexy industry du jour, the more I will like it.

Real Tax Reform

Washington's B&O tax is so bad that lawmakers won't touch it for fear it will fall apart completely.

The Business & Occupation Tax is a gross sales tax, meaning it is charged on the full value of every transaction, regardless of anything. Regardless of cost, so the effective tax on income is different for every business. Regardless of how many times the product has already been taxed, so this pyramiding overtaxes in-state companies and undertaxes out-of-state and large, vertically integrated companies. Regardless of investment or market position, so new and developing and investing companies are penalized, as well as small, homegrown companies. Just the thing for economic development, don't you think?

The first recommendation in the 2002 Washington State Tax Structure Study (Gates Commission) was to scrap the B&O entirely and replace it with a subtraction method value added tax. This recommendation preceded the much-ballyhooed call for a personal income tax. The Washington State League of Women Voters' State Tax Reform Update calls for a switch from gross sales to net sales. Both are designed to eliminate the pain and economic problems of taxing gross sales.

This can be done. It can be done in the context of reforming the B&O. It can be done and result in a relatively painless net increase in revenue of perhaps $1 billion per year. It can be done without major new bureaucracy. It can be done in a way that could eliminate the current special tax exemptions, or at least the rationale for them.

A full and detailed outline of just such a plan, developed by yours truly and Don Hopps, of the Institute for Washington's Future, is available online at the Effective Fiscal Policy Project. I wish I could tell you it was a work of genius, but it is really just the shortest distance between two points. The reason it hasn't been picked up in Olympia has more to do, I think, as much with the radioactive nature of the word "tax" as anything.

The B&O is a business tax. This reform makes it a rational business tax. As a business tax, it ought not to be as vulnerable to attack from the Eyman vigilantes. This would make the weakest link in Washington's tax structure into the strongest. It would be pro-competitive for Washington-based businesses. It would raise revenue largely by closing down the advantages now enjoyed by out-of-state suppliers and vertically integrated megaretailers like WalMart. And believe it or not, it is simple, as simple as significant tax reform can be. We simply subtract purchases from other tax-paying businesses from the current gross sales base. The six different rates of the current tax become one. The tax becomes rational. We don't even have to change the name.

Progressive Candidate Alert! This plan is good for small business. The current form includes a $100,000 standard deduction that would drop most small businesses from the tax rolls. Being independent would no longer mean having a higher effective tax rate.

Currently small business groups seem to be captive to the anti-tax conservative right that really serve larger businesses. Under this proposal tax incentives would be available for beneficial activities, not to the actors who are able to marshal political backing in Olympia.

Budgetary "martial law" means we still don't know how bad it is

Oil drilling in ANWR is only the most obvious threat from the budget bills rammed through by House Republican leadership early this morning, but it may not be the worst. Because the passage of the defense appropriations and budget-cut reconciliation bill was done under the "martial law rule," much of the fine print has yet to be read. This rule allows the leadership to force a vote without waiting until the next legislative day. The one-day procedure is designed for legislators to have an opportunity to look at what they are voting on. Didn't happen this time.

The martial law rule was invoked just before midnight Sunday. At 1:12 a.m. the 774-page conference report was filed in the House. At 5:43 a.m., after less than 40 minutes of debate, the House began its vote. Consequently we really don't know what was passed.

Major media accounts focused on the ANWR drilling in the defense appropriations bill. Was it proper to attach this unrelated and controversial measure to a defense bill in time of war? [Insert your answer here.]

It may be the phrase "unnoticed at the time of its passage" that will end up hurting most, because those words may apply to land mines packaged in the secrecy of the Republican caucus.

What we do know of the reconciliation bill is Scrooge-like cuts at the low end contrast with some Santa-sized giveaways to corporations at the upper end. Look for increases in Medicaid co-payments and premiums along with simultaneous reductions in some benefits. Watch the Senate-proposed increases in rebates from pharmaceutical companies disappear. (The Senate expected $10.5 billion in increased rebates from the drug manufacturers so beloved of Republican campaign finance managers. The "compromise" was $720 million.)

Other measures trumpeted as "fiscal discipline and limited government" by Mike Pence, R-Ind., include cuts in child support enforcement, new costs on student loans, slower SSI payouts, major cost increases to states for child care, and reductions in foster care benefits to some grandparents.

The fiscal discipline in continuing the enormous budget deficits and in granting ridiculous tax bonuses to the rich in time of war is similar to the personal discipline of a drunk in Las Vegas. We only wonder what the Republicans forgot to mention as they delivered their little present in the middle of the night.

Congratulations to Rep. Brian Baird for pegging it correctly, in part:

“The people’s elected representatives deserve time to read and debate legislation that will have such an enormous impact on our national defense and domestic programs,” said Congressman Baird. “It is a shame, a disgrace, and an embarrassment that these critically important bills were brought up in the dead of the night, laden with unrelated provisions, and passed by sheep-like Members who had but the slightest idea what was in them.”


Also see the CBPP discussion.

The economic tide is going out, not up

What struck me most about the workshop I went to last Saturday ("The Growing Divide -- Inequality and the Roots of Economic Insecurity") was not the facts, but the general ignorance of those facts. The past three decades have been a period of stagnation for most of America, while an an obscene concentration of wealth has grown for the few at the top. At the same time these past three decades have been a period of low growth overall. (Had it not been for the 1990s, it would have been worse.) Contrast this to the three decades prior to 1980 when there was a general sharing of prosperity and a simultaneous enormous increase in overall total growth.

Between 1947 and 1979 real family income doubled for every quintile (one-fifth). In fact, it was better at the bottom ( 116%) than at the top (99%). In the years since 1979 virtually all the growth has been at the top. The bottom quintile even lost 2%. The top gained only 51%, but that was more than the other four-fifths combined.

What struck me most at the workshop, as I said, was not the facts themselves. What struck me was that most of the people attending were largely unaware of them. Why? Part of the reason, I think, is that as we get older, our incomes tend to go up as a result of promotions and increasing skills. The general stagnation is masked by our individual advancement. The fact that the lower end seems to keep dropping has been concealed by the migration of people upward and we don't realize people are starting out further and further behind. Previous to 1980, young people had a significant head start on their parents. But even mobility over one's lifetime is now decreasing, and people are more and more stuck.

This is part of the reason for the lack of awareness, but I'm convinced that most it is our quaint American way of blaming ourselves. The better education, more strategically positioned manufacturing, and generally weak international competition of previous times are ignored in favor of the idea that "I screwed up." (Many of our families assist us in this evaluation.) But I can tell you the comfort level has dropped significantly since I came up. As a kid in the 1960s and 1970s I traveled around a lot "getting experience." It was pretty easy to find work that paid. If I tried to do the same thing today, I'd be sleeping on a grate and living out of the mission.

Be that as it may, and before I list some of the interesting factoids from the workshop, one connection needs to be repeated and reemphasized. The "winner take all" economic mentality that is today's accepted wisdom has not led to overall prosperity, while the "share the wealth" tendency that followed World War II created strong, consistent and widespread growth. Everybody did better, even the top (in terms of income). It's just that they didn't do exponentially better than the rest of us.

Material for the workshop I attended is available at United for a Fair Economy. Another set is at the Economic Policy institute. Their The State of Working America is the definitive publication. There is a list of fact sheets excerpted from the book there on income, wealth, poverty, CEO pay, and so on.

Did you know?

At the same time that income has risen to the top, taxes have fallen to the lot of the middle class. Today federal taxes paid by a middle quintile family are 50% more than they were in 1948. For the top 1%, federal taxes are one-third of their 1948 level.

The share of income held by the top 1% in 2000 was "the largest since the run-up to the Great Depression," according to EPI.

CEO pay in large US corporations was 42 times that of the average worker in 1980. In 2004, CEOs carried off 431 times as big a paycheck as the average worker.

38% of all household wealth is held by the top 1%. The top 10% own 85% of all stocks and mutual funds. (Fit that into dividend and capital gains tax cuts and see who benefits.)

These are only a few. Check out the links for more. Be aware, we are in transit. This is not a static situation, it is a historical trend, a tide. Things are getting worse. They could get much worse before they turn around.

Sports economics, a lesson in getting jobbed.

As much as I like sports, we have to stop getting mugged by these guys. The latest is the Sonics want a $20 to $200 million upgrade to Key Arena or they're going to have to take offers from other cities.

What's wrong with this picture? Sporting events are not public goods; and it's not right to support them with tax money. I don't care how many times we've done it. In Washington we already support our millionaire ballplayers in a very real way by not having an income tax. This puts us in the company of Florida and Texas among states with major sports. Since half the games are at home, that's a 3% to 6% advantage for our players. Don't think they aren't aware.

Plus, every new arena or upgrade is focused on fancy new luxury boxes, leased by companies who write off the pleasure on their taxes. The average fan can't even afford the parking, let alone a ticket. And don't talk about a beer and a hotdog. The media rights, the team apparel, through the roof.

But the "economic benefit" to the neighborhood of the venue must be worth the whole thing. Right? Well, No. That benefit is made of mist and it dries up under even the faintest light. Those restaurants in the area and the private parking lots may well get a bump, but it is borrowed from other areas where fans would have spent their money in the absence of the franchise.

A public good has two attributes, to a greater or lesser degree, that make it appropriate for tax financing. First, it is not depletable, and second, it is not excludable. A road, for example, is a public good. It is as good for the 100th car as for the first. Not depletable. A road is difficult to keep people from using. Not excludable. Not being depletable means the public good is often much more valuable than private goods. A golden goose. Not being excludable means you have to have different financing than pay-for-use, and the honor system doesn't work. Hence taxes, payments which are compulsory not because the good is worthless, but because if they weren't compulsory many people would not pay. The free rider, is the technical term.

An arena is most definitely excludable, and all the more so for the luxury boxes. It is also depletable on a per-show basis; a limited number of tickets can be sold.

So why are franchises so adept at getting public funding, even in the face of the hundreds of millions in salaries paid out each year for ballplayers? When an NBA player signs up for his multi-millions, he has the answer. "It's a business."

It is a business. A monopoly business. Franchise owners and players are busy splitting the take in one of the most egregious monopoly businesses in America.

We could analyze it at more length, but I hope there's no disputing it's a monopoly. Without a significant "market imperfection," you couldn't get $10 million a year to play a kids' game. If you aren't in the NBA, your pro team is nowhere. There is no alternative. Owners like it that way. It means their investments are no-lose situations. Don't listen to their whining about player salaries. Even a losing franchise can make back the investment, the entire loss in player salaries, and put a bunch in the pocket of the owner besides. Just sell it to the next city. It's value only goes up.

The problems for politicians in dealing with this issue are not small. The first one is basic ignorance. But that is only the first. Sports teams are owned by influential and monied people. The teams have an immense and easily manipulated fan base who will attack unwary politicians. I'm hopeful one or another of our leaders will take this opportunity of the Sonics to raise awareness. (I personally am not sure Howard Shultz, the majority owner of the Sonics and head of Starbucks, really wants the publicity of moving the franchise, but the initial noise is in the opposite direction.) The solution is not to get rid of the sports. We just need to regulate it like the monopoly it is. At its root it is a national problem.

Twenty million dollars -- the low end of the Sonics' plans -- would be a huge subsidy to home grown civic and cultural groups. Yet look at the public reception for a package of King County Council subsidies to local orchestras and community centers. It was only $3.5 million, and "cool" would be an understatement of its reception.

There is no end to the appetite of this particular beast, partly because of the power of sports in the national psyche and partly because the reward for winning it all is so enormous. (Make no mistake, there is fierce competition. Otherwise sane and sober human beings would not demand this sacrifice from a society which needs other, truly public goods much more desperately.)

It's only a game. We have to walk by homeless beggars to get inside. Pro sports were better when money wasn't the key to winning. Us real people are losing when we subsidize it because of its monopoly leverage.

More wartime tax cuts from Bush

If Tim Eyman is the poster boy for deadbeat dads, George Bush surely must be their king. The latest arrogance of another tax cut for the rich in a time of war while cutting social programs is nothing less than George playing poker with the mortgage payment, the kids college fund, and the grocery money.

See the breakout of the new tax cuts, at EPI's snapshot. More than $16 billion in new business tax cuts, $20 billion in capital gains tax cuts, and over $30 billion in tax cuts on dividends.

It doesn't bother him. I wonder where he'll be when the bills come due? For Medicare, for education, and for our social security. The social safety net may still be there, but it's now only a few inches off the ground. If you hit it, it's not going to save you any broken bones.

Up until George, I objected when people dismissed our social security system. It was phenomenally successful in its time. It raised millions of seniors from poverty and humiliation almost immediately when it was enacted. Later revisions lifted even more. Its financing is impeccable in terms of internal sufficiency. But social security is now the house, and the mortgage payment is going to the rich in the form of tax breaks.

I can think of two possibilities: (1) Bush doesn't know what he's doing and imagines like the Queen of Hearts that reality is determined by decree, or (2) He knows exactly what he is doing, and he is purposely dismantling the social programs that make us a civilized society. Maybe it's a combination, Bush is #1 and the people who maintain him in power are #2.

But there is a third. The enabler. The compliant, supine press, who faithfully report his lies as matters of opinion and the facts as contrary opinions. To the press he is not the deadbeat dad, but a man of strong principles, and if not principles, at least appetites. They are his poker buddies, his "friends on the force."

In the end, all will suffer. Even the deadbeat dad. If things aren't righted, it will be a tragedy. If things are righted, it will leave a scar. Better we should have done the right thing to begin with.

Pensions and prospects for the boomers.

I didn't realize I was breaking news in my Thursday post until Friday's Seattle PI came out. The top of page one: "State pension fund billions in red." Subhead: "Gregoire vows to put money into system, 'stand by obligations.'" I fully expect today's paper to tell us, "Eleventh planet found at the edge of the solar system."

Now if we could only get them to "discover" the fraud in the Ohio elections.

As I pointed out on Thursday, in spite of new revenue forecasts, there is no big surplus for Olympia to spend, largely because lawmakers have to cover the accounting gimmicks they've used to balance the budgets of the last four years. The chief account that's been gimmicked is pensions.

At least it's a good thing the mainstream press is publicizing the problem, right? Here it is on the front page of the PI.

Unfortunately, as the media spotlight moves to illuminate this event in the long-term budget squeeze, other crimes pass into the dark. The PI article, for example, puts the onus for pension problems on the stock market bubble, which made funding them easy in the 1990s and hard afterward. Forgotten in the shadows is the loss of the motor vehicle excise tax, 7% of state revenue. This is the real reason we needed to raid pensions in the first place. Were that 7% still in the budget, there would not only be fewer Hummers on the road, there would be no need for accounting gymnastics in Olympia. This selective memory by the media amounts to distortion, a fun house mirror, remembering things we couldn't control and forgetting things we could. It hides the mechanical procession of cause and effect, which we need if we're going to learn from our mistakes.

(You wonder how many state, county and city employees would have voted for the anti-tax initiatives if it meant putting their pensions in trouble. Timmy didn't mention that when he promised government would find the money somewhere.)

This is the model, the recipe, for the demise of social security. True, the trust funds aren't literally left even partly empty as the state pension accounts were, but this is more a difference between being able to run deficits and print bonds (the feds) and having to balance your budget (the state). By being able to run the astronomical deficits, the federal situation is, in fact, far worse.

Imagine with me and economists like Paul Krugman, if you will, the day we have to start paying out to cover the social security retirement benefits for the boomers. Those government bonds that fill the trust fund accounts now need to be honored. Thus there arises the need to raise taxes. Uh-oh, taxes are evil. We may have a problem. Now imagine the economic climate has gone cold. Raise taxes or opt out on pension obligations? Now factor in the possibility that rest of the world has gotten tired of loaning us money. Maybe it wants, say, 10% or 15% interest instead of 5%. It does not require Nostradamus to see an amount far exceeding the current level of the entire federal budget going out in just debt service and social security payments.

This is the true danger to social security, not those concoctions drawn up at the behest of our beloved W to justify his privatization schemes.

That is, to be perfectly clear, social security is well a run and solvent program, but it depends on the integrity of "the full faith and credit of the federal government." Will taxpayers in twenty years be as generous as we imagine? Will they say, "Sure, we recognize our obligation, our intergenerational contract. Even though you were not willing to balance your budgets, even though you shifted your tax burden to us by your borrowing, we are going to go ahead and bite the bullet for you?"

Will legislators spend the surplus on Christmas?

November's revenue forecast put an additional $304.9 million in the state's bank account, and the op-ed page is abuzz with talk of profligate legislators who are certain to spend the bonanza like drunken sailors.

No. They won't.

Reason One: There is no bonanza. As the chief forecaster correctly points out, the economy's strength is in the housing market. With mortgage rates beginning to rise, homebuyers have accelerated their purchases. When – not if – the housing market cools, it will hit state revenue immediately. (Note: This is not from any effect on property taxes, but from effects on sales and B&O of reduced construction activity.)
Reason Two: They need to cover the accounting gimmicks they've used to balance the budgets over the past four years. Pension accounts need filling, in particular.

Reason Three: The state is in a long-term hole. Every legislator has seen the OFM chart showing tax revenues rising at 90% of personal income. The revenue base has been corroded by anti-tax initiatives at the same time that budget drivers, particularly health care costs, mean demands will grow faster than personal income. The gap is there. It's growing. The state needs every penny.

Reason Four: These are Democrats. The evisceration of the motor vehicle excise tax was facilitated by Democrat Gary Locke after I-695 had been thrown out by the courts. That was a big mistake, but a rare one. And this is a different governor. Chris Gregoire may not have the financial expertise of her predecessor, but she has the guts to do the right thing. And that right thing is much more obvious now than it was in the fat days of the late 1990s.

Gregoire's response to the revenue projection shows she is aware. Here, in particular, from the official release:

The Governor said she wants to save a substantial portion of the new revenue to help state government cover an expected shortfall in the next, two-year budget beginning in July 2007. She also is concerned that the national economy may weaken due to continuing high fuel prices and possible cooling of an overheated housing market, among other forces.

"I'll make budget decisions that set aside the dollars we will need tomorrow, while still taking care of real needs we have today," she said.

Victor Moore, Governor Christine Gregoire's budget director, said he was pleased that Washington's economy continues to improve. But he also noted that rising health care costs and pension obligations for the coming biennium mean that money must be set aside to avoid future tax increases.

Lastly, everyone congratulates Washington's economy on its strength. Let us note, please, that Republican predictions notwithstanding, the tax increases of the last session did not lead to economic weakness. Quite the opposite.

Thursday, December 08, 2005

Tax Reform in Tacoma?

The city services assessment scheme proposed by Tacoma's first-year city manager will go to a citizens advisory panel in the next few weeks. Is it reform? Does it offer any hope for other Washington cities squeezed by the anti-tax dynamics of the past decade?

Outline of the Plan: The proposal put forward by city manager Eric Anderson would cut regular property taxes for all by eliminating the city's portion of the regular levy. It would eliminate utility taxes for all, as well as taxes on businesses, the city's B&O and gross revenue tax. In their place would be a probably bimonthly assessment, a tax based on property values, dedicated to the core city services of police, fire and libraries. Under Anderson's preferred option, the assessment would apply to all property owners other than houses of worship. A biannual referendum would set the level of the assessment. The remaining non-utility city operations would be financed by the existing local option sales tax, which would be retained.

Advantages: To many, the chief advantage would be the initial cut in effective taxes if the shift of some of the burden to nonprofits goes through. Utility bills would be smaller. Regular semi-annual tax bills would be 25% smaller, reflecting the shift of the city's portion. The new assessment would likely come every other month, staggered with the combined utilities bill.

If the nonprofits were left out of the tax base, average tax burdens would stay the same, but it might still be preferred by Tacomans. The new assessment would make a structure that is slightly less "lumpy," since it would reduce the regular property tax bill. Voters tend to prefer taxes that are not "lumpy." They prefer sales taxes to income taxes partly on this count. The bill is small and frequent, rather than large and infrequent.

To Anderson, the chief advantage is clarity. Citizens can support the city's services or not, in a simple vote. He doesn't have to be the bad guy. His reduction of 41 positions in the current budget was not as painless as it has been portrayed.

One advantage to getting the hidden taxes off the books is administrative simplicity, both for businesses and government. Another benefit may be in avoiding difficulties should some telecommunications sources be legislated away in the US Congress, as has been threatened recently.

Improvements in clarity and simplification may be modest reforms. There may also be some improvements in progressiveness, since property values relate generally to income and wealth.

The greater reform could be to adequacy. When people see directly the public good they are financing, they tend to step up to the plate. Andrew of NPI did research some time ago showing that, statewide, 75% of local levies passed, for parks, schools, libraries, fire and so on. Anti-tax deadbeats have a more difficult time distorting the situation in local elections. Their bureaucratic bogeymen and voodoo black holes play better in statewide elections where the direct public good is not explicit.

If that pattern of success for local levies continued, it would be good news. It has to be the calculus Anderson is contemplating. The city's revenue architecture has been crippled by anti-tax initiatives, and it cannot support projected demand for services past the next biennium. Over ten years the shortfall grows to $100 million. Police, fire and libraries comprise two-thirds to three-quarters of all tax supported services.
But it is a vote. And the prospect for failure could well increase should economic times get harder. Note, the referendum would be on increases from a base level carried forward from the previous vote.

Is the city council be abdicating its function as a representative body by putting basic city budgeting to a vote? Anderson believes it is "too late" for government representatives to get control of revenues. The sequence of anti-tax initiatives which occasioned the current contortions, he thinks, also removed effective control.

It is true that Tim Eyman and his anti-government fellow travellers in the Republican party have intentionally eroded confidence in representative government as a campaign tactic. This is very unfortunate. The complex issues facing our society need to be decided by careful study and deliberation at each level, not by knee-jerk reactions to hot button campaigns.

Making the citizens face a vote which is explicit can only help in getting the public's concept of government back closer to reality. Government is schools, police, libraries, parks, fire protection, roads, courts, and so on. It is not the caricature of bureaucrats and lazy clerks painted by the wingnuts.

Most councilmembers have been cautions in their support. One, Mike Lonergan, was adamant in his opposition. In his comments he made the case for representative government, but only in passing. He is much more alarmed by the prospect of taxing nonprofits. He is past head of the Tacoma Rescue Mission and current executive director of a private school.

Is taxing nonprofits regressive? This is not clear. One can envision opponents of the assessment wheeling nursing home residents into the council chambers. But prosperous hospitals and schools would reap a windfall should they not be included in the tax base, since their utility and business taxes would disappear. Nonprofits are receiving city services without paying full price now, a de facto subsidy by taxpayers.
The question may turn on the magnitude of net effect, the difference between current business and utility taxes and the contemplated property assessment. And remember, the entire scheme needs to be authorized by the state legislature. The precedent for taxing nonprofits currently lies only in special fire districts.

Personally, I am in favor of broadening the tax base as much as possible. While there are many nonprofits who might feel a pinch, there are plenty of others who are hiding from taxes in their nonprofit status. In any event, there ought to be ways to tweak the categories or assessment criteria to meet the worst situations.

For those who may worry that the loss of business taxes means the contribution of non-city residents will be diluted -- Don't. Commercial property values directly reflect their access to customers outside the city limits.

The specific effects will need to be sorted by the task force.

No other action on the fiscal plight of Washington's cities is in sight. Virtually all face the same grim future as Tacoma. Any public debate is better than none. This alone is a compelling argument for going forward with the process.

The last word needs to be, This is not about taxes. It is about responsibility. Funding city services cannot be a matter of good luck and accounting gimmicks. Tacoma is one place where they are doing more than sitting and wringing their hands. They are looking for answers. The rest of the state is watching.

The economy is doing great. Right. Look out the window.

Dubya trotted out into the Rose Garden the other day so he could get one number on the nightly newscasts: 4.6% GDP growth in the previous six month period (annual rate). He bubbled a little bit, muttered something about keeping taxes down, and retired (don’t we wish) to the spin room.

Look out the window. It's still raining. And Dubya’s poll numbers on the economy show America isn’t listening anymore.

Before I show you my secret chart on GDP, let it be known that it’s jobs that matter. Check out the Economic Policy Institute’s work on this. Jobs Picture shows a pathetic 2.6% more jobs four years into the current “recovery,” jobs which cost us $860 billion in tax cuts. The next lowest performance over a similar period is 7.6% in the 1990s, after taxes were raised. EPI’s The Boom that Wasn’t will depress you even further.

[At this point I begin a long digression on why jobs matter more than GDP and how we used to do better. For the sake of flow, I’ve saved it for a sunny day.]

GDP can be spun in a lot of ways. It can be bought by trucking Chinese goods halfway across the country, past closed factories and abandoned storefronts into the WalMart at the edge of town. Jobs can’t.

GDP can be generated by borrowing against our future, shifting spending to us today from us tomorrow. You can do the same thing with a credit card. Borrowing is not earning. Are you feeling good when you borrow five percent of your income so you can buy three percent more stuff?

So, now, the following chart needs some explanation.

First, it should be titled “Average Annual Real GDP Growth,” instead of just “Average Real GDP Growth.” It shows average growth per year.

Second, the concept is to produce GDP net of borrowing, that is, taking our spending (GDP) and deducting federal deficits, what we put on the credit card. Surely if we’re priming the pump we can’t count the water we put in as part of the product.

Lastly, the deficits used as the minus are not the deficits of the unified budget that you most often see. I have used the deficits of the operating budget. This leaves social security out of the financing of general government.

Explanation of this last point: Social Security is a retirement benefits program that is operated very well and is financed by payroll taxes. Tax revenue goes into a trust fund for future use. The trust fund buys only special federal bonds. If social security were a private or independent program obeying the same rules, the government could not count the receipts from the bonds it against its operating shortfalls. For some reason, in the “unified” budget, this is allowed. The reason, of course, is so the numbers won't look as bad as they are. I don’t allow the theft in the chart below. This is simply growth minus federal debt.

These data go through 2004. They would be roughly the same today, however, since the pace of borrowing has only picked up.

Economic development vs. tax giveaways

While I have great respect for Chris Gregoire, and was enormously impressed with the outcome of the last legislative session, I worry that her economic development plan is not very sophisticated. I saw the coordinator of her GMAP process on TVW talking about economic prosperity (is there another kind?), and she seemed to indicate it the Governor’s efforts are the usual parade of officials showing corporate potentates around the local industrial sites and promising to "work with them."

There is a certain intuitive attraction to the notion that economic development means luring new companies to your shores, but the idea fails the direct look test. Every other state is doing the same thing, the tax breaks and siting bonuses tend to compete away any net positive economic impact. Most problemmatic may be that in order to get the concessions, you need to move your company (or threaten to move, as with Boeing).

State incentives ought not to be targeted to individual companies, or even industries, but to activities that are beneficial. Let the state reward investment in human or physical capital – the activity itself. Let the market invest where the entrepreneurs see the advantages coming.

If we could ever get the small-minded, me-first anti-tax vigilantes out of the way, the state itself could invest to great effect. Transportation infrastructure, for example, is a public good that yields many times its purchase price in real money to real businesses and real individuals from reduced costs and increased opportunity. (The opposition to the gas tax in the recent election was numbing in its stupidity.) A major advantage of infrastructure is that it is not portable, as for example, are the proceeds of a tax break. Infrastructure is here for anyone who wants to be in Washington.

Education is great. Excuse me. Good education is good, great education is great, economically. Employment is high. It improves individuals’ lives. Reduces burdens on other state services. Provides spin-off possibilities. Draws revenue from other states. Focuses communities. Supports local trades and industries. (I get teary-eyed.)

Aside from direct investment, there are three other mechanisms for the state to increase the number and quality of jobs and thus the climate for business: (1) direct hiring, (2) reducing the cost of Washington-made goods, and (3) progressive tax reform.

Direct hiring may seem too obvious, but there is a debate. The Heritage Foundation will tell you that the taxes necessary to fund government programs are themselves obstacles to economic development. The facts are arithemetically and logically conclusive, but lie in the opposite direction.

A dollar spent in taxes hires a worker in the taxing jurisdiction. A dollar spent by a private individual buys a product or service that may be, but often is not, in the taxing jurisdiction. This dilution of the first dollar spent echoes through the economy. (Notice that the person of part one then becomes the person of part two, so nothing is lost, only the government job is gained. This is the root of the concept of the economic multiplier.) The Governor’s insistence in fulfilling the class size and COLA mandates for teachers will do more for Washington’s economy than any number of fenced assembly plants.

[I’m getting off the point here, but one thing that really bugs me is when construction projects are treated as "job producers" and cutting teachers salaries or laying off people in government is called "management efficiency." Maybe this is purposeful spin, maybe it is sincerely believed, but it is wrong.]

Quickly! (Economist rants are so dull)

Reducing the cost of Washington products means more will be bought and production will go up. State government can do this by favorable taxation and by efficient regulation, as well as by infrastructure. The state’s B&O tax is really, really bad at this, since its pyramiding burdens in-state firms while letting out-of-state firms and big, vertically integrated corporations (Wal-Mart) skate.

Progressive taxation. Poor people spend all their income. If they get more income, they will spend more. It’s the multiplier again. The three most fundamental problems (it’s always three, isn’t it) with the our state's notoriously regresssive tax system are: it’s morally offensive, the poor can't produce enough revenue anyway, and it reduces spending in the local economy. Better we should tax people who have the money and let low-income people help local businesses by buying what they need to survive.

Economic development cannot be accomplished by competing with other states. It's a race to the bottom. Promote investment in human and physical capital, emphasize our natural advantages, and do what we can internally to create good jobs and an attractive base of demand.

Sunday, December 04, 2005

Maestro Magoo, you’ve done it again!

Alan Greenspan, Fed chairman and master of scatterspeak, addressed again this week the dangers of the huge debt overhang and the federal deficits.

He spoke to the Group of 7 finance ministers Friday, yesterday, saying among other things, the current course of trade deficits is “a pernicious drift toward fiscal instability.” He wants a return to the “procedural restrains on the budget making process” that have been “violated with increasing frequency.”

"Federal operating deficits have cooked us good. The president and Congress did the wrong thing when they got rid of Clinton era tools, pay-go, for one. And Bush and his compliant Congress have thrown away not only fiscal responsibility, but moral responsibility."

[Oops, not quite his words. Forget the quotes.]


What Greenspan doesn’t say and never says is that he’s the one who is driving the bus. As the most powerful non-elected government official in any democracy anywhere, this Fed chairman has set the policies that have allowed us to get to this sorry state.

Emblematic of the Maestro’s competence, and perhaps comforting for those who now worry that he has some forecasting ability, is a speech of mid-2001:

“While the magnitudes of future federal unified budget surpluses are uncertain, they are highly likely to remain sizable for some time.” [emphasis added]

He went on in this speech to worry about what the government will do with its bountiful surplus, and he concluded it would be okay if Dubya’s tax cuts went through. This was support Bush needed.

We can’t even see that day in 2001 from here, the pile of federal debt has grown so big. If you think I'm taking him out of context, here's the speech.

Recently Greenspan worried about the financial health of Fannie Mae, the nation’s mortgage lender. Too much debt. The next day he cautioned about the huge burden we have left future generations: we’ve promised the baby boomers more than the economy can produce.

Where was he when this was going on? Pedal to the metal on interest rates. No restriction on the off-the-wall financing instruments like interest-only mortgages. This massive debt, both public and private, is his creation as much as anyone's. The economy can produce much more efficiently and at a higher level if the driver can see where he's going.

The surplus-debt whiplash is very similar to the historic high-historic low interest rate phenomenon. In the late 1990s Greenspan had promoted rates of interest to their highest levels in post-war history. By 2003 they were at their lowest. Four years.

The interest rate is his only tool. It’s amazing. He uses it to motivate the economy, to discourage stock speculation, to combat inflation, whatever. In the post-war period, the economy has always done best when interest rates were stable and the cost of money was predictable. Poeple can plan. Businesses can know what their costs are going to be. Since he’s been in office, Greenspan has ridden the interest rate like a pogo stick and done nothing with any other tool.

After he is replaced at the Fed next year by Ben Bernanke, Greenspan and his wife Andrea Mitchell may no longer be on the A-list in Washington society, but I’m sure he’ll show up in cap and gown from time to time to receive the plaudits of the children of Wall Street.

“Ah, Magoo, you’ve done it again!”

Tacoma to study maverick revenue scheme

In a special budget meeting Wednesday night, the Tacoma city council agreed to explore a singular remedy for its projected revenue shortfalls. The idea, which was put up by first-year city manager Eric Anderson, would connect key city services to a new tax at levels explicitly determined by the voters. The council agreed to convene a citizens advisory group to examine the plan.

The scheme is basically a monthly city property tax dedicated to police, fire and library services -- the core of city government. Current B&O, utility and other taxes would be eliminated -- including the city's portion of the existing property tax. In Anderson's initial outline, the tax would extend to all property holders other than houses of worship, which would include private schools and universities, nonprofit hospitals, charities, and others. A base level would be set by a city-wide vote, and any subsequent increase would go to a referendum.

While it is not exactly an act of desperation, Anderson's idea is definitely, as Mayor Bill Baarsma said, "a long shot."

The referendum element means that citizens will have the means to decide if they want the tax or not, and if they don't, they will see the effect in services. It thus makes voters responsible for balancing the budget. When Anderson was asked if this wasn't giving up on representative government, he said, "it's too late," meaning that the state initiative process has already degraded the role of city councils and legislatures in this area.

In Tacoma, councilmembers were careful to limit their support to the process of exploration, not the plan itself. A task force of as-yet-to-be-named stakeholders and citizens will be convened early in 2006. Should the idea pass muster there, an advisory referendum is targeted for June.

Should that pass, the result would then have to go through Olympia. Cities are creatures of the state and they cannot unilaterally institute taxes, and Tacoma would need enabling state legislation.

Virtually all cities have been squeezed since the passage of I-695 and I-747, the anti-tax, anti-government initiatives of the late 1990s. This effort will be watched with interest from both sides of the mountains.

COMMENT:

The state had better be free with its authorization, should it ever get to that point. They have no business obstructing any effort of a city to address its fiscal problems. It was the state through initiatives and by legislative action that opened these wounds.

Something has to be done. Cities are in an impossible position long-term. And we've gotten to the long term. It's a shame Tim Eyman doesn't have to figure this out.

I'll have a more complete take on it for you next week, including a note on the issue of abdicating representative government.

True tax reform

"Reforming" taxes under Dubya has been like reforming the number of limbs on your body or reforming the number of apertures in your head. The budget, the economy, and the truth have been bludgeoned all out of shape by tax "reform" from the Republicans. Dubya and his compliant Congress have rammed through giveaways that have, to put it mildly, exacerbated the disparity between the rich and the rest of us.

With tax cuts, as with the War in Iraq, the rationale changes to fit the changing PR requirements. Originally it was "because it's your money" (and the government shouldn't be running surpluses with your money). Then the economic downturn of 2001 offered the chance to say, "to stimulate the economy." The design of the tax cuts did not follow that stated goal, since they were targeted to the rich and not to the middle or lower classes. And the effect certainly has not been a stimulated economy. See the Economic Policy Institute's "The Boom that Wasn't" at epi.org.

A real reform comes from the Progressive Policy Institute's tax man Paul Weinstein, Jr. See "Family Friendly Tax Reform" at ppionline.org. (I have some difficulties with PPI, the "Third Way" descendent of Clinton's Democratic Leadership Council, but they're right on track here.)

Progressive candidate alert: Weinstein's scheme is politically do-able. When the pendulum swings back this way, people will want to see real change. This is not extreme. It's a first step. And it's an object lesson on the differences between the political sides. It's simple. It's economically sound.

The PPI proposal would eliminate 68 tax breaks and replace them with four new tax incentives that would come in "above the line" and thus be available to substantially more taxpayers. The $436 billion in net new tax relief to American families would come from consolidating current breaks and cleaning up some of the bias in the code toward wealth and privilege. There's plenty more to be done to make taxes adequate, but this goes a long way to making it more fair.

The four basic elements are easy to understand: college, homes, families and pensions.

1. A refundable college tax credit would provide up to $3,000 per year to students. This is more generous and simpler than the current system.
2. The home mortgage deduction would move to the front page of the tax form. Currently only one-half of the 72 million homeowners itemize, and thus are able to take the credit.
3. A family tax credit would replace three existing incentives and provide greater benefits to more families. Right now a taxpayer has to sift through more than 200 pages of instructions and other material to apply for the several different breaks.
4. A universal pension would replace IRAs and the other 15 existing accounts with one simple, portable retirement account for all. It would even provide a $500 stake to get people into the UPs.

The tax code has been abused, not reformed by Republicans. Tax breaks during wartime, in itself, is a concept which demonstrates Dubya's Queen of Hearts mentality.We are on the cusp of going from a bell curve economy, with a strong middle class, to a barbell economy, with wealth at the top and poverty at the bottom and a middle class that is stressed, thin and unable to support the kind of society we have long taken for granted as our right. Weinstein has rooted out some of the most egregious giveaways to the rich and used them to pay for the net cost of real "reform" and "relief."

GM's shutdowns abetted by Bush budgets

GM's announced shutdown of a dozen plants and layoff of tens of thousands of workers has set off intense handwringing and even more vilification of the corporate giant. Some of it is justified. Some of it is national policy. Universal health insurance would reduce stress on businesses by reducing the cost of benefit for workers, for example. More important is the value of the dollar.

"The de-industrialization of America" is a tag on the Reagan era, when half the auto industry was exported to Japan. It was not a happy time. Fingers were pointed in every direction. Councils on competitiveness were convened. Trade protection was demanded. Then, as now, the cost of the dollar was ignored because it was not understood.

When trade goods are translated through a high dollar, imports are cheaper and exports more expensive. Wal-Mart booms and Hundais rule. The dollar gets higher when the federal government does not balance its budget and has to offer a higher interest rate (price) for debt financing. It is higher, too, when other countries purposely maintain a weak currency.

Dubya's outlandish deficits are even bigger than Reagan's. Balance the budget by returning taxation to the rich. Then let's go to work on a sensible exchange rate system.

PS: Don't be surprised when the Chinese come in and buy up the neighborhood. What else are they going to do with dollars? The greenback doesn't spend good in China. We should be happy our debt isn't denominated in yuans. And notice that Boeing will continue to do well because its competition is in Europe. The dollar is weak against the euro.

Housing weakness portends economic bad times

The AP reports that mortgage lenders are seeing a slowdown in re-fi's and home buying. This is bad news for Washington's economy, as well as for the whole country. Residential construction, remodels, and attendant purchases have floated the economy for the past four years. Re-fi's have brought equity out of houses and into the consumption economy. It had to end. The question is, How hard will we fall?

The economy of Western Washington ought to be rising with its big exporters like Boeing, Microsoft and Paccar. Instead, we like the rest of the country, have been floating on the sea of red ink in residential construction and housing-related activities. (The red ink from the Feds, funneled into the pockets of the rich and into the war in Iraq, doesn't do much for the economy.)

The state's chief forecaster Chang Mook Sohn has been warning for some time that the improvement in the state's finances he projects depends on housing, and when it falls, it could take the state down with it.

Historical trends analysis developed by Dean Baker of the Center for Economic and Policy Research (www.cepr.net) says the correction could be sharp. Baker was one of the few economists to call the stock market bubble bursting while others were blithely predicting the New Economy would carry us up to Dow 36,000. For the past several years he has predicted a similar bursting of the housing bubble.

When it happens it will kill the jobs picture here in Washington and will absolutely crunch the revenue situation for all levels of government. With the Rube Goldberg revenue archetecture we've got, and the general ignorance purveyed by the anti-tax right wing, the outcome is not pretty to contemplate.