Fed Announces it Will Keep Interest Rates Low Until Unemployment Isn’t Quite So High

Ben BernankeI know this is a temporary reprieve. But I really have to thank John Tamny from pulling me back from the abyss. There is nothing quite like blinding anger to help one out of a depression. I’m not expecting much; by tomorrow, I expect to be back down. But while I’m feeling relatively good, I wanted to take a moment to discuss something I saw today in the New York Times that I thought was hilarious.

The article is, Fed to Start Unwinding Its Stimulus Next Month by Binyamin Appelbaum. Now, the humor didn’t come from the author or the Times. It came straight from the Federal Reserve itself. As everyone outside Washington and Wall Street knows, the economy sucks and it is getting better at a glacial speed. So the fact that the Fed has decided that now is the time to start tightening—Taking the punch bowl away before the party gets out of hand!—is funny enough.

Are these guys and gals really that out of it? In a word: yes. But the high comedy is yet to come. The Times reports:

The Fed sought to offset concerns that it is once again pulling back too soon by reinforcing its intent to hold short-term interest rates near zero “well past the time that the unemployment rate declines below 6.5 percent, especially if projected inflation continues to run below the committee’s 2 percent longer-run goal.”

Remember: I was really depressed. Yet when I read that I howled with laughter! But you can be forgiven if you don’t see the hilarity. So let me explain. Before the 1990s, full employment was thought to be 5%. Since then, we have found that it is actually 4%. This is the unemployment rate that we can have without cause inflation. So the Fed saying that they will keep interest rates low “well past the time” unemployment reaches the still very high 6.5% mark is just ridiculous. And then they add that they will “especially” do this if the inflation rate continues to be below 2%. First, 2% should not be the inflation target; 4% should be. But the hilarity only builds, because it isn’t enough to hold interest rates down as long as inflation is at the long-run goal of 2%; it has to be below that rate.

In the end, what they are saying is that even though unemployment is ridiculously high, they are going to stop doing one of the things that can help that situation (bond-buying campaign). But we aren’t to worry, because they won’t stop doing the other thing (keeping interest rates down). Except that they will only continue to do that second thing as long as unemployment is super high and inflation is below target. John Edwards was right: there are two Americas. There are the clowns and everyone else. And the clowns are in charge.

John Tamny Is Evil and Stupid

John TamnyI just watched last night’s The Daily Show, and even though I don’t feel up to writing anything, I have to say something. Forbes columnist John Tamny was interviewed by Jessica Williams on the SNAP (food stamps) program. Okay, I understand: conservatives hate the poor because they are the poor. Whether they know it or not, conservatives believe a long ago destroyed myth that the morally superior are rich and that if people are poor, they deserve it. So the fact that Tamny clearly thinks this is no big deal.

What bothered me was his justification for getting rid of SNAP. He started, “I think food stamps are cruel… I don’t think anyone is happy if they are reliant on someone else…” Okay. That’s a standard conservative line that is stuck in the past, way before Maslow’s 1943 paper on the hierarchy of needs. But whatever. He’s a horrible person. He’s a conservative. There are lots of them around.

But then Williams asked him about hungry children. What should we do about them? This is where I lost it. He said, “I think if people were literally starving, you would see a massive outpouring of charity.” Got that? I really have no idea how obvious it is, so I’m going to lay it out for you:

  1. It is cruel to allow people to be reliant on others.
  2. Hungry people should be reliant on others for charity.

Let’s take this home, because John Tamny clearly hasn’t thought about this at all. Charity from the government is cruel but charity from anyone else is not. So when he says that food stamps are cruel, what he means is that they are cruel to him. He doesn’t want to pay for them. It has absolutely nothing to do with the self-respect of the poor.

John Tamny is one of the most evil men in the world. Sadly, he’s also a dime a dozen. Why Forbes (which is not a totally awful magazine) would pay him anything is beyond me. There should be laws against being vile in such a public and stupid way. I wish there were a way to exclude him from “polite” society. But I suspect that among his friends and coworkers, what he said on The Daily Show is not even embarrassing; it’s what everyone just knows.

Paul Klee and the Evolution of Talent

Paul KleeSome people really hate these birthday posts and some really like them. Over time, I think I’ve won over some of the haters, probably because they are better than they used to be. As a result, I keep doing them. But I hate doing it. They take forever. And for the last three days I have been slipping into a depression. You never realize just how horrible they are until you are in them. When in a manic phase, that depressed person who wants to crawl away and die just seems like another person. And on the other side, that manic person not only seems foreign, he seems like a fool. But one thing is for sure, it is easy to write a birthday post when I’m feeling “up.” I still complain, because I feel rushed. But now I look at the birthdays and I think, “So what?” My years of science training have made me able to push through and do things I’m not all that happy about doing. So here goes.

On this day in 1870, the writer Hector Hugh Munro, better known by his pen name Saki, was born. He was one of the great short story writers of his time, particularly noted for his humor. In fact, he was a primary influence on P G Wodehouse. He’s easy to compare to Dorothy Parker, in that he is wonderfully quotable. He was gay and conservative, so there is more than a hint of misogyny in his writing. Take, for example, the clever line, “Romance at short notice was her specialty.” But this one totally sums up my life, “I’m living so far beyond my means that we may almost be said to be living apart.”

The great American inventor Edwin Armstrong was born in 1890. He is best known for the invention of FM radio. Of course, it didn’t go well. In Corporations are Rarely Creators, I wrote, “Lessig then goes on to talk about the fight between Edwin Howard Armstrong, inventor of FM radio, and RCA. RCA wanted to stop FM radio because they made so much money off AM radio. This all led to FM radio being delayed for decades and Armstrong killing himself.” Welcome to America, bitch!

Other birthdays: one of the worst human beings and best baseball players ever, Ty Cobb (1886); jazz composer Fletcher Henderson (1897); film director George Stevens (1904); actor Ossie Davis (1917); musician Keith Richards (70); political activist Steve Biko (1946); film director Steven Spielberg (57); actor Ray Liotta (59); and actor Brad Pitt (50).

Well, it had to happen. After comparing so many artists to him, and often not favorably. The day belongs to the great painter, Paul Klee, who was born on this day in 1879. When I was a teen, I was crazy for Klee. Now, not so much. But there is no doubting his brilliance. And it really does matter what period you are looking at. More than any other painter that I know of, Klee developed in a positive direction his whole life. His later work is by far his best. What’s especially interesting about this is that the work got more and more simple. But his vision became more and more clear. A good example is Insula dulcamara which means (maybe) something like, “Island of bittersweet nightshade.” His original title for it was, “Isle of Calypso,” but he thought that too concrete. It was painted just a couple of years before his death when he seems to have known the end was near. It hearkens back to his trip two and a half decades earlier to Tunisia. A lot has been written about it and its meaning, but I think the emotional core of the painting is clear. And the use of colors is just masterful.

Insula dulcamara

Happy birthday Paul Klee!

Income Inequality Solutions 1: Estate Tax

This is the first in a series of articles about what we can do to reduce our unacceptable levels of income and wealth inequality.

Over the cliff and onto catastropheI don’t have a fundamental problem with a capitalist economic system. It does seem right that if I provide the bicycle that allows another person to operate a package delivery service, then I ought to receive some part of the profits of that business. It isn’t much different than if I were to simply sell the bicycle. The problem we run into is that capital begets capital. There is an absolute limit on the amount of labor one possesses. There is little limit to the amount of capital one can possess. The state of technology and the law will determine just how divergent worker and capitalist will be.

Technology is not such a big deal, but it is worth thinking about. A society defined by the manufacture of chairs and tables is far different than one defined by the manufacture of computers. Automation really does exacerbate inequality as the demand for labor goes down. But thus far in our economic evolution, we don’t really see this effect. That’s because the law swamps this effect, but it may not always be so. Still, conservatives love to talk about this because they claim that nothing can be done about it. But if it really were a problem and if it eventually becomes a problem, there is much that can be done about it. For now, I want to talk about the law—specifically, the Estate Tax.

The Estate Tax and Dynasties

Perhaps the biggest problem with the accumulation of capital is that it can be transferred from generation to generation. This is no different from an aristocracy. A worker cannot bequeath his labor to his children. So they start at zero. A capitalist can and does bequeath his capital to his children. And indeed, if you look at the prominent billionaires in American culture, they all inherited huge fortunes: Rupert Murdoch, the Koch brothers, Donald Trump. This is not a story of meritocracy, and note that even if rich men were not allowed to leave any money to their children, their children would still have huge advantages over the poor in terms of education, social connections, and much more.

Right now, with income inequality being at its highest rate ever, we have an Estate Tax that is anemic at best. It is hard to be specific, because the law does change a lot. But currently, one can inherit up to $5,250,000 without paying any taxes on the money. (It doesn’t apply to spouses at all.) Above that amount, the tax is progressive, running from 18% up to 40%. What’s more, the percentage of dying people who owe any estate taxes was at an all time low (as of 2008, since Reagan) of just above 0.5% , even though the rich are richer than ever. The tax structured in this way is not meant to provide parents with security that their children will be taken care of. It is structured to allow the building of dynasties.

Foolish Arguments Against High Estate Taxes

The primary conservative argument against the Estate Tax is that it lowers the incentive of people to be entrepreneurial. That may be true, but the effect is clearly not large. Regardless, this goes along with the very silly conservative argument that people start businesses based upon how much in taxes they will have to pay if they are really successful. I understand that the super rich corporate raiders think about this stuff. But these are not the kinds of market activity that we should be encouraging. I simply cannot imagine someone considering opening up a doughnut shop or creating an Android app thinking, “I’d do it, but if I’m really successful, they are going to tax some of the money I give to my kids!”

What’s more, the government does what it does. Would a high Estate Tax be worse for the economy than a high tax on earned income? Most clearly not. But in the conservative mind, if a trillion dollars of taxes on the rich results in the reduction of one dollar in “innovation,” then it is unacceptable. The opportunity costs are never considered. The fact that the poor could have a trillion dollars more money to spend and that this would lead entrepreneurs to create new products for them to buy doesn’t matter. Ever. That’s because the insistence of a low Estate Tax is at best about protecting entrepreneurship of the past, not of the future. (And in reality it is primarily about protecting past inherited and stolen wealth.)

Clearly, what drives the Estate Tax down is people who already have huge amounts of money who want to give it to their kids tax free. For the umpteenth time, these are not the entrepreneurs. Look at the difference. Joe Coulombe bought a small supermarket chain that was going out of business and created a whole new kind of market, Trader Joe’s. That’s entrepreneurship. Mitt Romney bought companies, saddled them with debt that often destroyed them, took his “cut” and ran. That’s not entrepreneurship. Now if someone can show me how the Joe Coulombes of the nation will just give up because the Estate Tax is too high, I’m willing to listen. But I think it is the Mitt Romneys of the nation who will be hurt and who thus lobby for an end to what they now call the “death tax.”

The only actual concern with regard to the Estate Tax is that if it were too high, the rich would find ways to avoid it. That is an issue that can be dealt with. Regardless, it could not be any worse a problem than it was in 2010 when there was no Estate Tax at all. Note: the Estate Tax has been much lower the entire time Obama has been in office than the entire time that Bush was in office. The Estate Tax was supposed to go up to 55% on gifts above one million dollars. But because of the Fiscal Cliff deal, it was lowered dramatically to 40% on gifts above five million. That is a difference in tax revenue of roughly $40 billion per year.

High Estate Taxes Promote Democracy

My main point is that a low or (as most conservatives wish) nonexistent Estate Tax increases inequality. It also puts further pressure on the government to spend less on safety net programs. All of the Debt Scolds are big on cutting Social Security and Medicare, but raising the Estate Tax is almost never mentioned. Simpson-Bowles don’t even consider it. Yet they are big on Chained-CPI which would save half that amount. And 55% isn’t that large. Throughout our booming post-WWII period, it was 77% with a deduction amount of only roughly $300,000 in today’s dollars.

Our current Estate Tax is unfairly generous to the rich. It exacerbates inequality and makes our country more class based. It is also undemocratic. We should at least raise it back up to 55% with a one million dollar deduction. We should look seriously at raising the amount to the previous 77% with a lower deduction. My intention here is not to “get the rich!” It is to put more sanity and fairness into our economic system. As such, I think that the Estate Tax itself should be much more progressive. When the top rate was 77%, the bottom rate was 3%. Now that the top rate is 40%, the bottom rate is almost half that, 18%. This situation exacerbates inequality among the wealthy—which is also an important issue. The Estate Tax we have now is more fitting to a feudal system than to democracy or meritocracy. It needs to be changed.