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Congressional Campaign Spending

I would agree that spending on campaigns seems high and has struck an emotional chord with me.  But put in perspective, is it that high?  I can see both arguments.  The money could do far more good spent in a different fashion.  But so could P&G’s marketing budget; or General Motor’s advertising…

Tim Taylor once again does a superb job putting things in perspective:

Total spending for the 2014 Congressional races looks like it will come in at about $4 billion, quite similar to the amount spent in 2012 and 2010. In the context of a high-income country with a population of nearly 320 million, this is not a large amount. As I point out in my Principles of Economics textbook (which I naturally recommend for its combination of high quality and moderate price), “For example, consumers in the U.S. economy spend about $2 billion per year on toothpaste. In 2012, Procter and Gamble spent $4.8 billion on advertising, and General Motors spent $3.1 billion. Americans spend about $22 billion per year on pet food—three times as much as was spent on the 2012 election.” As another comparison, Americans spend about $8 billion each year celebrating Halloween.  With the US government making decisions that involve $3.5-$4 trillion in spending and taxes, not to mention the nonmonetary effects of other laws regulatory rulings, people are going to allocate resources to try to affect those outcomes.

What about the much-discussed role of “outside money”–that is, outside the candidates and the political parties themselves? Here’s the breakdown. Candidates and parties still dominate campaign spending, although outside organizations surely play a significant role.

Open Secrets also provides a breakdown by party, and by the House and Senate. Overall, Republicans outspent the Democrats by a fair amount in the House, and by a smaller margin in Senate races. However, a glance at the table shows that the Republicans also had more candidates early in the process for the 435 House seats and 36 Senate seats (33 on the regular election, plus three that for various reasons where a Senator did not serve out the complete term had special elections). Thus, some of this total reflects R v. R and D v. D, races, rather than the general election.

He continues:

Finally, what about the role of big organizations? There are a variety of ways of slicing the data on giving by organizations, but here’s a list of the biggest 20 entries in “Top Organization Contributions.” As the website explains: “Totals on this page reflect donations from employees of the organization, its PAC and in some cases its own treasury. These totals include all campaign contributions to federal candidates, parties, political action committees (including superPACs), federal 527 organizations, and Carey committees.” As the list shows, these biggest organizational donors tend to lean to the Democrats. Koch Industries, which seems to get considerable public attention, is 17th in these rankings.

Political Contributions

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Illinois to Mandate I.R.A.’s? Homerun or Strikeout?

Homerun or strikeout?  From the Upshot:

Illinois is taking a novel approach to getting its residents to save for retirement. Starting in 2017, most state residents who don’t already have a retirement plan at work will be automatically enrolled in individual retirement accounts, funded through a 3 percent deduction from their paychecks.

The program will be created under a law signed by Gov. Pat Quinn on Sunday. Participation will be voluntary, but workers who don’t want to save will need to opt out manually. (They will also be allowed to save more than 3 percent if they wish.) An estimate produced by the plan’s backers found that up to two million of the state’s residents may end up with the accounts.

The plan, called Secure Choice, aims at a gap in America’s retirement saving system: Employer-based savings plans are supposed to be an important source of Americans’ retirement income, but large employers are far more likely to offer such plans than small ones. The plan is similar to one President Obama has advocated at the federal level, and if it is successful in getting more people to save, it may end up being a model for other states and the federal government.

According to data from the Bureau of Labor Statistics, 85 percent of Americans who work full time at employers with 100 or more employees have access to a retirement plan at work; just half of full-time workers at smaller organizations do. Lack of access to employer-based plans is one of the reasons middle-income Americans tend to have not saved enough for retirement.

Just 52 percent of households headed by a worker aged 55 to 64 had a 401(k) account in 2013, according to the Center for Retirement Research at Boston College; the median balance among households nearing retirement that had accounts was just $111,000.   More…

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Cafe Hayek: “Making Low-Skilled Workers Illegal”

Don Boudreaux at Cafe Hayek provides a simple perspective on the minimum wage hikes taking effect with the New Year:

Because no employer can afford to pay any employee more per hour than the value per hour that that employee produces, your headline “Twenty states will raise their minimum wage on Jan. 1” (Dec. 26) would be more informative if it instead read “Twenty states will raise the number of low-skilled workers to be priced out of jobs on Jan. 1.”

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Minimum Wage Increasing in 20 States and D.C.

Much has been made of the fact that a number of minimum wage increases are to take effect January 1, 2015 – in nine states as a result of “cost-of-living” increases, four states that passed legislation in November, and eight states that passed legislation in the last two years.

Before going any further we must return to the facts about minimum wage workers from the Bureau of Labor Statistics:

  • 3.3 million American workers paid minimum wage or less
  • Minimum wage workers represent 2.4% of the total workforce,  4.3% of the hourly workforce
  • Minimum wage worker tend to be younger:
    • 24.2% are ages 16-19
    • 26.2% ages 20-24
  • Roughly 2/3 or 2.1 million were part-time

Please note that these are the facts – and they are undisputed…  Timothy Taylor’s conclusions are logical, simple, and realistic:

Whatever one’s feelings about the good or bad effects of raising the minimum wage, it seems fair to say that those effects will be disproportionately felt by a relatively small share of the workforce, disproportionately young and part-time, and disproportionately in southern states.

It is time to pause and gather your thoughts and emotions…  What are the important questions that need to be answered?  First:

What problem are we trying to solve with a minimum wage?

The Economic Policy Institute’s David Cooper outlines reasons such as:

  • Minimum wage workers make 25% less in inflation-adjusted terms than they did in the late 1960’s.
  • A full-time, full-year minimum wage employee with one child is still left below the federal poverty line.
  • Business paying the minimum wage are not paying workers enough to survive.
  • “For millions of Americans struggling to make ends meet, policies to boost incomes should always be a top priority.”

Everything Mr. Cooper says above is true in his argument to raise the minimum to $10.10.  Currently we are talking about 3.3 million Americans or roughly 1% of the population.  Increasing the minimum to $10.10 will definitely bring more into the fold as minimum wages earners – up to 16.5 million by CBO estimates.  While I empathize with Mr. Cooper’s emotion-driven plea for a minimum wage increase, this is not the answer.

It seems as though Mr. Cooper’s primary concern is to help those left behind.  But what about the CBO estimates of 500,000 to 1 million workers that will lose their jobs as a result of the increase?

CBO Minimum Wage Labor Impact EstimateThat may be worth the cost to Mr. Cooper but rational readers can decide – Mr. Cooper is going help the 3.3 million current minimum wage earners by firing 500,00 to 1 million of them?  To be fair and perhaps more statistically accurate, the $10.10/hr will affect wages 16.5 million people at the expense of those 500,000 to 1 million.  But doesn’t that still seem obtuse?  Isn’t the current argument that we are alienating the few – 3.3 million or 2.4% of the workforce.  So to solve the problem we are going to alienate 3-6% of the 16.5 million?  I thought that’s what Mr. Cooper was moving away from.

What about those with more than one child – 2, 3, or more?  I know it may sound silly, but Mr. Cooper’s emotion-driven plea is geared completely around earnings and survival – not the skills brought to the employer by the employee.  Therefore, you do not have to go far in his arguments to consider minimum levels of earnings based on number of people in the household.  That is why his analysis is fallible – though I empathize – policy cannot be based on his loose, emotional reasoning.

There are other impacts of a minimum wage increase.  While the negative effect on employment is known, the wage increase operates more like an additional sales-tax.  Kudos to Mark Thoma at Economist’s View for directing me to this research study by Peter Harasztosi, “Who Pays for the Minimum Wage?”:

Contrary to theoretical models that attribute the small employment effects of minimum wage changes to monopsonistic wage setting, we find no evidence that the rise in the minimum wage led to lower profitability among low-wage employers. Instead, we find that the costs of the minimum wage were largely passed through to consumers.

Therefore, when the government passes a minimum wage increase employers will pass along a price increase and the American public picks up the tab.

If we were talking about the facts and truly helping people, many of Mr. Cooper’s arguments would be considered invalid and we would be discussing the development of skills in those unskilled minimum wage workers.  But taking it further, 50% of the unskilled are 24 and younger meaning that their current employment may be their first job or they are currently enrolled in high school or college.  The fact that 2/3 are part-time provides mild, logical evidence to support the hypothesis.  How much is a first job worth?  The minimum?  Maybe – but it shouldn’t be for long as employees’ skills are developed.  Skills are what are important to the economic future of low earners and new-entrants.  Minimum wages without skills would be similar to establish minimum car prices to help struggling car companies.  Regan Taylor phrased it well:

Minimum wage logic: raising the minimum wage to (at least) $10.10/hr will be good for minimum wage workers. It will put more money in their pockets spurring economic growth.

A few years ago, the federal govt bailed out General Motors. Instead of engaging in such a gross display of corporate welfare, why didn’t we just apply the same logic to help the auto giant? If raising the MW from $7.25 to $10.10 (a 39% increase) helps those who sell their labor at that price, why didn’t the govt pass a law that mandated that all auto firms raise the price of every car, van, SUV, and truck they sell by 39% also – or at least raise by 39% the price of their lowest-priced models? Is there a fundamental distinction between the applications of this logic that says it will help one group but harm another? If the mandated increase benefits those who sell labor at that price why wouldn’t it be beneficial to do the same for those who sell automobiles? Or tennis shoes? Or computers? Or any other industry?

Why do so many people believe that the laws of supply and demand apply to everything that is bought and sold EXCEPT labor?!

And for your information, the oft repeated fact that minimum wage earners earn far less than they once did is a statistical manipulation – usually for partisan purposes.  Since inception, the minimum wage would be roughly be only $4.20 in today’s dollars.  Whenever, you see the 1968 figure, it’s usually for partisan reasons.  See the chart below:

Minimum Wage Adjusted for Inflation

More on this later…

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GDP Revised Up to 5.0%

Driven by personal consumption expenditures, Q3 GDP was revised up from a growth rate of 3.9% to 5.0% in a solid report released by the Bureau of Economic Analysis.  From the release:

Real personal consumption expenditures increased 3.2 percent in the third quarter, compared with an increase of 2.5 percent in the second.  Durable goods increased 9.2 percent, compared with an increase of 14.1 percent.  Nondurable goods increased 2.5 percent, compared with an increase of 2.2percent.  Services increased 2.5 percent, compared with an increase of 0.9 percent.

The consensus was 4.3% with a range from 4.0% – 4.5%.  This was a strong report that clearly exceeded expectations.

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Demographic Dynamics and the Unemployment Rate

Doug Short delivers a great post detailing America’s evolving workforce demographic makeup.  Along with Doug, Bill McBride at Calculated Risk has been focusing on demographic shifts in explaining the dynamics of the American workforce.

From Doug Short at Advisor Perspectives:

At this year’s Jackson Hole Symposium, Fed Chair Janet Yellen delivered an extended analysis of “Labor Market Dynamics and Monetary Policy”. Her speech essentially reviewed the ongoing debate over the mix of cyclical versus structural factors in employment since the Great Recession.

I’ve updated a series of charts illustrating some structural changes in the workforce that are far more significant than the cyclical impact of a recession — even the so-called “Great Recession”.

The Unemployment Rate: Between 2.1 and 3.0 Million Jobs Shy

The closely watched headline unemployment rate is a calculation of the percentage of the Civilian Labor Force, age 16 and older, currently unemployed. The indicator slightly improved in October, dropping from 6.9% to 5.8%. Let’s put that into its historical context. The first chart below illustrates this monthly data point since 1990. Today’s Civilian Employed would require 2.1 million additional job holders to match its interim low in 2007, and we would need 3.0 million to match the lowest rate in 2000.

Unemployment-Rate-since-1990-All

Focus on the Prime Employment Age Cohort

Let’s look at the same statistic for the core workforce, ages 25-54. This cohort leaves out the employment volatility of the college years, the lower employment of the retirement years and also the age 55-64 decade when many in the workforce begin transitioning to retirement. In October this indicator was unchanged at one decimal at 4.9% — hovering at its post-recession low. Today’s age 25-54 labor force would require the additional employment of 1.5 million age 25-54 to match its interim low in 2006 and 2.0 million to match the lowest rate in 2000.

Unemployment-Rate-since-1990-25-54

Labor Force Participation Rate: A More Sobering Measure

A wildcard in the two snapshots above is the volatility of the Civilian Labor Force — most notably the subset of people who move in and out of the workforce for various reasons, not least of which is discouragement during business cycle downturns. The chart below continues to focus on our 25-54 core cohort with a broader measure: The Labor Force Participation Rate (LFPR). The LFPR is calculated as the Civilian Labor Force divided by the Civilian Noninstitutional Population (i.e., not in the military or institutionalized). Because of the extreme volatility of the metric, I’ve included a 12-month moving average.

LFPR-25-54-since-1990

Based on the moving average, today’s age 25-54 cohort would require 2.8 million additional people in the labor force to match its interim peak participation rate in 2008 and 4.0 million to match the peak rate around the turn of the century. Why are so many more labor force participants needed for a complete LFPR recovery? When the economy is going gangbusters, as in the late 1990s, jobs are abundant, which encourages the population on the workforce sidelines to join the ranks of the employed. Today’s economy doesn’t offer that sort of encouragement.

Employment-to-Population Ratio: Off Its Post-Recession Low

The next chart below, again focused on our ages 25-54 cohort, is calculated as the Civilian Employed divided by the Civilian Noninstitutional Population. Again I’ve included a 12-month moving average. A significant feature of the Employment-to-Population Ratio is that isn’t affected by the volatility of labor force participants who, for various reasons, are unemployed.

Employment-to-Population-25-54-since-1990

First the good news: This metric began to rebound from its post-recession trough in late 2012. However, the more disturbing news is that the current age 25-54 cohort would require an increase of 4.4 million employed prime-age participants to match its ratio peak in 2007. To match its mid-2000 peak would require a 6.3 million increase.

A Structural Change in the U.S. Economy

The charts above offer strong evidence that our economy is in the midst of a massive structural change. The three mainstream employment statistics — unemployment, labor force participation and employment-to-population — all document an ongoing economic weakness far deeper than the result of a business cycle downturn.

In order to discount the general belief that the aging of the baby boom generation is a major factor in weak employment, I have focused on the 25-54 age group. Also, by excluding the age 55-64 decade associated with early or pre-retirement, I’ve eliminated a cohort that might include a major source of discouraged or less-determined workers.

The Growth of the Elderly Workforce and Its Causes

I’ll close this analysis with a chart that essentially demolishes the prevailing view of our aging population as a demographic drag on labor supply. Here is the ratio of the 65-and-over cohort as a percent of the employed civilian population all the way back to 1948, the earliest year of BLS employment data. Mind you … these people are not only in the workforce, but also actually employed.

Percent-of-Employed-Age-65-plus

The percentage of elderly employment is hovering at its historic high — now double its low in the mid-1980s. This is a trend with multiple root causes, most notably longer lifespans, the decline in private sector pensions and frequent cases of insufficient financial planning. Another major cause, I would argue, is the often surprising discovery by many of the elderly that the “golden years of retirement” might be less personally satisfying than productive employment. Note that the growth acceleration began in the late 1990s, prior to the last two business cycle downturns (aka “recessions”)….

In Conclusion…

We are clearly experiencing a structural change in employment, one that is a major drag on the overall economy. The fact this change was exacerbated by a business cycle downturn should not blind us to its structural nature.

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Quote of the Day

Teddy Roosevelt:

“It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.”

Work, strive, and achieve today. Have a great day!

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USA Today: Can you retire on a million?

John Waggoner writes about how much is enough to retire – a million?  His answer is a qualified “yes.”  How much do you withdraw each month and where are your funds invested?  He echoes my prior sentiments from my post, “The Value of a Million Dollars Today… Back Then…”, stating the most glaring caveat is inflation.  In that post, I noted that even though we have been using the term “millionaire” for some time now, the buying power of a million dollars dwindles every passing day.  For example, $1 million dollars in 1960 would have the same purchasing power as $8 million today.

Value of a Million Today

Figures calculated during Q3 of 2013 using CPI data.

Waggoner then provided some interesting circumstance laying out how your retirement would have fared in various investments had you begun your retirement with $1 million in October of 2004.  Assuming annual withdrawals of 5%, or $50,000 to start, and taking these in monthly increments, here is where you would stand:

• S&P 500 index funds. Even after taking $50,000 a year from your account, you’d have $1,279,000 a decade later. It would have been a scary ride, because this is a pure stock portfolio. By the bottom of the bear market, in March 2009, your account would have fallen to a bit less than $581,000. But the S&P 500 has gained 178% since March 2009, including reinvested dividends.

• Balanced funds. Traditionally a mix of 40% bonds and 60% stocks, these funds are noted for relative stability and yield. After a decade of withdrawals, you’d have about $1,134,000.

• Government bond funds. Unlike stocks, bonds really haven’t had a bear market in the past decade. But they don’t pay a great deal of interest, either. The bellwether 10-year Treasury bond yield has averaged 3.35% since October 2004. Your account after a decade of withdrawals: $899,000.

• Money market funds. You’d have problems here, because money funds have yielded less than the North Koreans on trade talks for most of this decade. Your retirement kitty after a decade of withdrawals: $640,000.

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Where does your tax money go?

To follow-up with my Economic Retrospect post on income taxes, the Tax Foundation posted a tool from the White House – “Your Federal Taxpayer Receipt”.  I found it interesting…  From the Tax Foundation:

Each time you purchase your favorite coffee and pastry at the corner shop, you get a receipt that tells you exactly how that money was spent and the taxes paid. Since April, taxpayers can do the same with their federal income taxes, social security taxes, and Medicare taxes for 2013. The White House has a tool that allows users to input their exact tax burden and see just how the government spent that money. If you don’t know your exact tax bill, the tool offers estimates based on status, children, and wages.

The biggest consumer of tax revenue is health care, which equals 25.2 percent of total taxes, followed closely by national defense at 24.8 percent.

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Economic Retrospect: The Income Tax

The majority of our nation’s years have been spent without an income tax.  Why is that and why is the tax so widely accepted today?  Death and taxes, right?  Can you imagine an America without an income tax?  Our Founders envisioned an America without an income tax.  Our Supreme Court shot down the tax on multiple occasions.  But that in and of itself doesn’t make the tax right or wrong.  My objective is not to determine whether the income tax is right or wrong.  The only objective of this post is to present a small piece of history and slice of perspective on perhaps the most influential policy instrument – the income tax.

So why do we pay taxes?  Taxes provide a source of revenue for the government.  This revenue is used to support our nations’ infrastructure, social programs, and national defense.  Essentially, various entities and people are taxed to generate the cash flow to pay for the programs above.  The makeup of the 2014 federal tax revenue is derived as follows:

  • Individual Income Taxes (39.8%)
  • Social Insurance Taxes/Payroll Taxes (29.2%)
  • Corporate Income Taxes (9.2%)
  • Other Taxes (8.1%)
  • Deficit (13.8%)

It is hard to imagine there was actually a time when we as a nation did not pay income taxes.  Even harder to grasp that the majority of our nations’ existence has been without an income tax.  In 1861, Abraham Lincoln enacted the first income tax, a 3% tax on annual incomes over $800 in a state of emergency during the Civil War.  Roger Sherman argued in favor of the measure:

“We tax the tea, the coffee, the sugar, the spices the poor man uses.  Everything that he consumes we call a luxury and tax it; yet we are afraid to touch the money of Mr. Astor.  Is there any justice in that?  Is there any propriety in it?  Why, sir, the income tax is the only one that tends to equalize these burdens between the rich and the poor.”

Opponents focused the tax’s inequality aspects. Thaddeus Stevens commented:

“It seems to me that it is a strange way to punish men because they are rich.”

Nevertheless, Congress abolished the tax in 1871.  Our Founders had foresight on the subject.  Our young nation has faced trials of both economic and combative natures.  The founders were arguably in the most vulnerable position in our nation’s nascent beginnings to enact an income tax.  Funds were initially needed to fight for our freedom; then they were needed to establish our nation.  Yet, they established Article 1, Section 8, Clause 1:

“The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;”

They felt the uniformity clause important to maintain fairness between the states which conceptually flows into the rights of individuals.  The Founders’ sentiment was perhaps echoed in the 1894 Supreme Court’s Pollock v. Farmers’ Loan & Trust Co. ruling striking down an income tax.  The Court argued that “nothing can be clearer than what the Constitution intended to guard against was the exercise by the general government of the power of directly taxing persons and property within any state through a majority made up from the other states.”

Justice Stephen Field prophetically wrote in a concurring opinion against the tax, “The present assault on capital is but the beginning.  It will be but the stepping-stone to others, larger and more sweeping, till our political contests will become a war of the poor against the rich; a war constantly growing in intensity and bitterness.”

The tax is crude and damned to unfairness.  I appreciate how Jonathan Hughes and Louis Cain paraphrased in their textbook “American Economic History”.  They stated, “[Taxation is] crude in that the monarch is seizing the of property from its own citizens.  What the monarch does with the property is it’s own business, not that of its former owners…”  They continue, “Unless the monarch’s subject have equal incomes and identical desires, unless they lose equal amounts of property, there is no way for taxation to be ‘equal’ or ‘fair’.”

Nevertheless, this was the late 19th century – the Gilded Age.  A new century and the rise of progressivism was upon the nation.  Opposition to big business and concentrations of wealth were at the political fore.  Both parties acknowledged this movement and it appeared likely an income tax in some form would pass in the near future.  The Revenue Act of 1913 was the bipartisan product reinstituting the American income tax.  The tax imposed was a graduated tax on those individuals whose income was greater than $3000; $4000 for married couples.  The average adult male income was $578.  Only 1.5% of households paid federal income taxes.

One the time’s foremost tax experts, Dr. Thomas Sewall Adams, was not disillusioned by the politics surrounding the tax law.  In “Ideals and Idealism in Taxation”, Adams concluded that “class politics is of the essence of taxation.”

Looking back, can we argue with the underpinning effects of an income tax suggested by the Founders’, the Supreme Court, or Dr. Adams?

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