Monthly Archives: October 2011

The Economy Has Caused Riots Before – In the Great Depression

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Washington’s Blog reminds us that things got ugly during the last prolonged depression in the United States.  This interesting historical footage from the Great Depression shows what happens when large numbers of people are unemployed for years at a time, get desperate, and perceive that the game is rigged to the benefit of Wall Street.

This depression isn’t as deep or severe as the Great Depression – the bank bailouts and the 2009 Obama stimulus spending/tax cut bill (ARRA) made sure of that.  But as this week’s GDP numbers show, we simply aren’t growing enough to fully recover.  For workers, the nightmare is real.  With the #OccupyWallStreet movement (#OWS) growing stronger, spreading, and continuing now for well over 6 weeks, perhaps the Wall Street banks are having nightmares of their own about such scenarios as what happened in the video.  Could that be why JP Morgan Chase bank is making such large payoffs donations to the New York City Police department?  Yves Smith at Naked Capitalism fills us in:

Is JP Morgan Getting a Good Return on $4.6 Million “Gift” to NYC Police? (Like Special Protection from OccupyWallStreet?)

No matter how you look at this development, it does not smell right. From JP Morgan’s website, hat tip Lisa Epstein:

JPMorgan Chase recently donated an unprecedented $4.6 million to the New York City Police Foundation. The gift was the largest in the history of the foundation and will enable the New York City Police Department to strengthen security in the Big Apple. The money will pay for 1,000 new patrol car laptops, as well as security monitoring software in the NYPD’s main data center.

New York City Police Commissioner Raymond Kelly sent CEO and Chairman Jamie Dimon a note expressing “profound gratitude” for the company’s donation.

“These officers put their lives on the line every day to keep us safe,” Dimon said. “We’re incredibly proud to help them build this program and let them know how much we value their hard work.”

…

But what, pray tell, is this about? The JPM money is going directly from the foundation to the NYPD proper, not to, say, cops injured in the course of duty or police widows and orphans…

And look at the magnitude of the JP Morgan “gift”. The Foundation has been in existence for 40 years. If you assume that the $100 million it has received over that time is likely to mean “not much over $100 million” this contribution could easily be 3-4% of the total the Foundation have ever received.

Now readers can point out that this gift is bupkis relative to the budget of the police department, which is close to $4 billion. But looking at it on a mathematical basis likely misses the incentives at work. Dimon is one of the most powerful and connected corporate leaders in Gotham City. If he thinks the police donation was worthwhile, he might encourage other bank and big company CEOs to make large donations.

And what sort of benefits might JPM get? It is unlikely that there would be anything as crass as an explicit quid pro quo. But it certainly is useful to be confident that the police are on your side, say if an executive or worse an entire desk is caught in a sex or drugs scandal. Recall that Charles Ferguson in Inside Job alleged that the use of hookers is pervasive on Wall Street (duh) and is invoiced to the banks.

Or the police might be extra protective of your interests. Today, [Oct 5] OccupyWallStreet decided to march across the Brooklyn Bridge (a proud New York tradition) to Chase Manhattan Plaza in Brooklyn. Reports in the media indicate that the police at first seemed to be encouraging the protestors not only to cross the bridge, but were walking in front of the crowd, seemingly escorting them across…

The wee problem is that the police are in the street, and part of the crowd is also on the street (others are on a pedestrian walkway that is above street level). That puts them in violation of NYC rules that against interfering with traffic. Note the protest were aware fo the rules; they were careful to stay on the sidewalk on the way to the bridge.

…some (many?) the protestors who used the walkway and got across the bridge were also corralled and not permitted to proceed to the Chase plaza. Greg Basta, deputy director of the New York Communities for Change, told me by phone, based on multiple reports from people who participated in the march, that as soon as protestors got to the Brooklyn side of the bridge, they were kettled. Greg was under the impression that there were construction barricades at the foot of the bridge which made it impossible for the marchers not to walk on the street. Because the focus has been on the what happened on the bridge, the coverage of what happened to the rest of crowd is sparse.

Some confirmation in passing comes from MsExPat at Corrente (apparently some of the very first off the bridge were permitted to proceed):

My friends and I made it to the Brooklyn side okay–we ended up with about 350 other marchers in Cadman Plaza, a lovely 19th century park. What I didn’t find out until later is that several hundred people behind me also got kettled and barred from going all the way to Brooklyn. So I was among the lucky marchers in the middle.

But notice even then that the procession to Chase Manhattan Plaza [correction, Cadman Plaza} was effectively barred. [Note JPM may have operations nearby, Bear Stearns had much of its back office there, and if the leases were cheap, JPM may have kept the space].

We simply don’t know whether the police would have behaved one iota differently in the absence of the JP Morgan donation. But it raises the troubling perspective that they might have. …

So far, the JP Morgan donation is an isolated example. But the high odds of continuing deep budget cuts at the state and local level open up the opportunity for corporate funding of preferred services, and with it, much greater private sector influence on the apparatus of government. This is a worrisome enough possibility to warrant a high degree of vigilance by all of us.

In Economics, the Zombies Walk Everyday, Not Just At Halloween

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In economics the zombies are with with us year-around, not just at Halloween.

Zombie Economics

Zombie Ecnomics

Thanks to ACEMAXX-ANALYTICS for the graphic.   And thanks also to John Quiggin (who also writes at CrookedTimber) for authoring the book Zombie Economics, a must read for understanding how current “mainstream” economics got so far off track from reality.

 

Banks Want to Do To Student Loans What They Did to Mortgages

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On the heels of yesterday’s post about student loans and their growth.  I want you to know that Wall Street is hot on the problem.  They’ve made a quiet proposal to the “supercommittee” that’s supposedly addressing government deficits to have the government subsidize the banks via fees without creating any more student loans or taking on any risk.  The essence of the whole proposal is to leave the government on the hook for student loans but to use accounting tricks to “take them off the books”.  It’s similar to the ways the big banks prior to the crisis would take debt and obligations they had and hide them in “special purpose entities” so they wouldn’t have to show them on their books.  There’s no benefit to investors, students, or the government from the proposal. Only the banks benefit.  But maybe that’s why they aren’t talking about the proposal in public but instead try to get it passed quietly through lobbyists.

Jason Delisle of New America Foundation’s Higher Ed Watch explains (bold emphases are mine):

The investment banking industry – and its friends in Congress – have cooked up a scheme they are pitching to the “supercommittee” that they say would reduce the federal debt and cut federal spending. Supposedly, the plan would take the government’s $555 billion direct student loan holdings off of its books. In reality, the plan, which would allow the bankers to earn fees on a $555 billion deal, plus $100 billion more every year, would not reduce the debt or cut spending. But that hasn’t stopped Wall Street from trying.

A proposal that could only have been be cooked up by investment bankers is circulating on Capitol Hill. It would refinance the $555 billion direct student loan portfolio with new debt backed 100 percent by the federal government. But this new debt would not be called U.S. Treasury debt, despite the 100 percent guarantee, and therefore not counted as part of the national debt. In other words, the new debt would be used to pay off the old debt (Treasury bonds) that the government issues to finance direct student loans. To be sure, the mechanics of the proposal are more complicated than that, but the effect of the proposal would be to move all outstanding and future student loans from bonds backed 100 percent by taxpayers to another set of bonds backed 100 percent by taxpayers but not counted as part of the national debt. …

The proposal would increase federal spending because the new securities the government would issue to finance direct loans would have higher interest costs than the Treasury bonds they would replace, effectively increasing the cost of every direct loan. Investors would view the new securities as slightly less desirable than Treasuries (even though they still carry a 100 percent guarantee from the federal government) because they will not be as liquid (easily bought and sold among investors). The new securities would also be subject to prepayment risk…Then there are the fees that the government would have to pay to investment banks (the “syndicate of underwriters”) to put the new securities on the market each year. Those fees could cost taxpayers tens or even hundreds of millions of dollars every year.

Apparently the supporters of the proposal claim that it would “diversify funding sources”.  In other words, if someday, somehow, some investors wouldn’t want to buy U.S. Treasury bonds (something is emphatically NOT happening now since interest rates are at record lows), then maybe they might be interested in something that’s backed by the U.S. but isn’t called a Treasury bond.  In other words, there’s a slight chance that pigs might someday fly away from the farm so let’s have a bunch of hogs that well call “pink cows”.  Jason speaking again:

Some members of Congress – particularly Republicans – would simply feel better if the direct loan program were funded with “private capital” rather than U.S. Treasury bonds….[but] the securities would be sold in the same markets as Treasury bonds and the capital raised to finance direct student loans would be no more or less “private” than it was before.

If the Wall Street proposal to refinance direct student loans doesn’t actually reduce the debt, increases the federal budget deficit, and doesn’t make the program’s financing any more dependent on the private market than it already is, what does it do? It effectively addresses what some see as the direct loan program’s biggest shortcoming; it doesn’t allow Wall Street to make a ton of money off of it.

So Wall Street wants to do to student loans what it’s done to home mortgage finance.  Have somebody else, such as the federal government, guarantee that they cannot lose any money.  Then, they want to bundle them and re-sell them solely for the purposes of making more fees – just like they did with mortgage-backed securities and credit default swaps and other derivatives.  If I recall correctly, that didn’t really work out too well now did it?  Well it worked out for the banks, but not for the rest of us.

Student Loans and the Building Crisis

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Student loans are gradually becoming a crisis.  At the macro level, student loans are the only sector of consumer finance that is growing since the recession began 3 years ago.  Federal student loans outstanding now total more than $1 trillion.  That’s more than total credit card debt.  From Mybudget360.com:

Student loan debt only segment of household debt expanding

The Federal Reserve tracks federally backed student loan debt and the figures are astounding.  The only sector of household debt that has expanded in manic fashion during this recession is with student loans:

debt growth by sectors

Every sector has taken a hit including:

-Home equity revolving debt

-Automobile loans

-Credit card debt

-Other debt

Yet there goes student loan debt saddling countless students with back breaking debt.  Make no mistake, much of the for-profits are growing simply because of the government:

“(USA Today) For profit-schools. The highest default rates are at for-profit schools that tend to serve lower-income students and offer courses online. The University of Phoenix, the nation’s largest, got 88% of its revenue from federal programs last year, most of it from student loans.”

This is absolutely nonsense and shows how the coupling of Wall Street and the government have simply turned education into another commodity to water down and gamble on.  Like the multiple card game tables in Las Vegas higher education is the hottest game in town.

But unlike credit card debt, student loan cannot be reset or forgiven in bankruptcy court.  It’s a permanent burden on the former student.

In theory, the loan shouldn’t be a burden because it was an investment in greater earning power of the former student and now potential worker.  But since this current era of lesser depression or workers depressionbegan, incomes for the college educated have actually declined.  CalculatedRiskBlog quotes from the New York Times recent analyses of U.S. household incomes: (bold emphases are mine)

From the NY Times: Recession Officially Over, U.S. Incomes Kept Falling. A few excerpts:…

And on education:

Median annual income declined most for households headed by someone with an associate’s degree, dropping 14 percent, to $53,195, in the four-year period that ended in June 2011, the report said.

For households headed by people who had not completed high school, median income declined by 7.9 percent, to $25,157. For those with a bachelor’s degree or more, income declined by 6.8 percent, to $82,846.

What’s more, the unemployment rate is also up for graduates (and all other categories). Mybudget360.com puts a graph to the income dynamics:

 Yet if we look at the earnings potential during the bubble years we see a very troubling picture:

earnings-of-college-grads-and-cost-of-college

Source:  BusinessWeek

Since 2000, in real terms college costs are now up by 23%

Since 2000, in real terms real pay for college graduates is down by 11%

This means potential disaster for graduates and other former students. From Leo Komfield at New America Foundation’s Higher Ed Watch:

The Department of Education recently announced that the national student loan default rate has risen to over 8 percent and we know that this measure provides only a limited view of the troubles that borrowers are having repaying their student loan debt. In the current economy, we can only expect things to get worse unless the Education Department tackles this problem head-on.

Among the defaulters are a large percentage of unemployed college students. It’s bad enough to be unemployed; however, when you add to this difficulty with being classified as a defaulter, you are really in trouble. Defaulting on federal student loans results in a lifetime of financial purgatory — it destroys your credit, making it impossible to obtain a credit card, car loan, and home loan, and it puts you at risk of having your wages garnished, and your tax refunds intercepted by the IRS.

The student loan market is back in the news as it makes its unrelenting march to the $1 trillion mark.  This crippling figure comes in the face of a decade of lost wages for middle class Americans.  Just like the housing bubble people were supplementing a disappearing middle class with more debt.  The allure of housing was that never in our history have we seen national home prices fall, until they did in dramatic fashion.  The same cultural nostalgia for education in every respect has created a zombie higher education system that is now expanding like the mortgage markets at the height of the housing bubble.  Why?  For-profit schools have largely lured in countless Americans into a system that has provided very little economic gains for students while enriching these Wall Street listed companies.  It should come as no surprise that the highest default rates stem from the for-profit system and most of these loans are federal loans.  In 2010 there were $100 billion in student loan originations, the highest ever in the midst of the deepest recession since the Great Depression.

But it also spells a crisis on a much larger scale.  Reports are showing that the OccupyWallStreet movement (#OWS) is partially made up of significant numbers of young people and recent graduates in particular.  These are not the “dirty hippies” and “degenerates” that many conservatives have labeled them.  Rather, they are the people who followed the “rules”. They studied. They went to college.  In large numbers they took responsbility for their future by taking on student loans and investing in their human capital – all things society has told them to do.  Now, almost 4 years since the recession began, there aren’t any jobs for them.  They’ve graduated and now face payments on those loans.  But the jobs simply don’t exist.  When young people are educated and then are denied opportunity, there’s danger for society.  That’s the recipe for revolutions as we’ve seen in Tunisia and Egypt already this year.

 

Some Other Interesting Perspectives on OccupyWallStreet

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I’ve already mentioned my initial thoughts on the Occupy Wall Street movement (#OWS).  Here’s some snippets from a couple of others with some interesting insights.  First, historian William Hogeland writes at his blog Hysteriography.  He notes how the #OWS movement is a deeply American movement.  It has roots in the American revolutionary period as much as any Tea Party. He also reminds us that the Revolution wasn’t simply Americans vs. the tyrannical English. It was just as much about pure economic equality and fairness.   It was also about elitist rich Americans vs. populist American farmers and workers oppressed by taxes, foreclosures, and debts.

… I write about the deep, founding roots of rowdy, American populist protest and insurrection, often visionary and even utopian, yet informed and practical too, specifically over money, credit, and the purpose and nature of public and private finance. …most people still don’t connect the American founding period with a rugged drive on the part of ordinary people for equal access to the tools of economic development and against the hegemony of the high-finance, inside-government elites who signed the Declaration and framed the Constitution and made us a nation.

Sometimes people even ascribe democratic ideas to the famous upscale American Revolutionaries, who to a man actually hated democracy and popular finance. Paine, the exception, was ultimately rebuked and scorned by all of the others. [UPDATE: Anyway, Paine wasn't one of them; I threw him in defensively because consensus-history types like to "include him in" on the basis of "Common Sense," while including his social/economic radicalism out.]

The difficulty in dealing with our founding battle for democratic economics arises in part because the movement was not against England but against the very American banking and trading elites who dominated the resistance to England. That complicates our founding myth, possibly unpleasantly. Also, it was a generally losing battle. With ratification of the Constitution, Hamiltonian finance triumphed, and people looking to Jefferson and Madison for finance and economic alternatives to Hamilton are barking up the wrong tree, since what those men knew, or even really cared, about finance could be written on a dime. (Anyway, in pushing for creating a  nation, Madison supported Hamiltonian finance down the line. Their differences came later.) When Occupy Wall Street protesters say “It’s We the People!”  they’re actually referring to a preamble, intending no hint of economic democracy, to a document that was framed specifically to push down democratic finance and concentrate American wealth for national purposes. Not very edifying, but there it is.

…Amid horrible depressions and foreclosure crises, from the 1750′s through the 1790′s, ordinary people closed debt courts, rescued debt prisoners, waylaid process servers, boycotted foreclosure actions, etc. (More on that here and here.) They were legally barred from voting and holding office, since they didn’t have enough property, so they used their power of intimidation to pressure their legislatures for debt relief and popular monetary policies. Their few leaders in legit politics included the visionary preacher Herman Husband, the weaver William Findley, and the farmer Robert Whitehill.

They had high hopes for American independence. In the 1770′s, their “out-of-doors” collaboration with the famous elites was critical to enabling the Declaration of Independence — even though none of their names appears there (well, Benjamin Rush’s does, but by then he’d become unradicalized). Their democratic, egalitarian hopes dashed, in the 1780′s, in western Massachusetts, they marched on the state’s armory in Springfield to reverse regressive finance policies that had again plunged ordinary people into debt peonage and foreclosure while bailing out rich creditors (elites called that populist action, reductively, Shays’s Rebellion). In the 1790′s, with the Constitution in force, and Hamilton’s economics the law of a powerful new nation (partly in direct reaction to the Shays action), populists took over the militia and debt-court system throughout western Pennsylvania and western counties of neighboring states, flew their own flag, and tried to secede from the United States and form an economically egalitarian country. Hamilton dubbed that action, again in a successful effort to reduce it, the Whiskey Rebellion, and he and President Washington responded, naturally enough, by occupying western Pennsylvania with federal troops.

It is my possibly vain hope that reading up on such historical matters might inspire efforts like Occupy Wall Street to greater cogency and a deeper, more solid foundation in longstanding (if embattled and problematic) American values than they now seem to possess. You don’t have to look as late as the 19th-century Populists and the 1930′s labor movement, for example, to find an American left deeply immersed in both economic issues and an ambitious vision of a better country. Those things were present at the creation.

Hogeland also recommends an “Occupy Wall Street” Reading List.

Next up is John Quiggin at Crooked Timber.  He first observes that much of the eventual outcome of the #OWS movement depends on the “19%” – the folks that are in the top quintile, the top 20%, but aren’t part of the top 1%.  As we know powerfully from a graph I posted a few days ago:

First, economix at the New York Times reported on the basic income distribution data recently:

The graph below shows how much income is earned by a household at any given percentile in the income distribution, based on these new numbers for 2011:

DESCRIPTIONTax Policy Center

Incomes grow much, much faster at the top end of the income distribution than in the middle or at the bottom end. That is, the disparity in income between one percentile and a consecutive percentile is bigger among the very rich.

The top quintile, the top 20% may be rich compared to the rest, but not very much.  It’s really the top 1% and the top 0.1% where the income scale is truly distorted and outrageous.  Quiggin makes the point that the 19% is politically influential and powerful.  Perhaps not as powerful as the 1%, but clearly politically influential.  To keep the redistribution of income to the top game going, the top 1% has to keep the 19% on their side.  Without them, there’s clearly no legitimacy.  [bold emphases mine]

The top quintile as a whole commands the great majority of US income, and virtually all financial wealth – few households outside this group own much beyond their homes and perhaps some money in a pension fund….

The 19 per cent also have a disproportionate political weight, since they are much more likely than Americans in general to register, vote and engage in political activity. So, it makes a big difference whether, as as implied by ‘We are the 99 per cent’ their interests are aligned with the mass of the population or with the top 1 per cent…

The top quintile as a whole has done very well over the past few decades, and (despite some silly claims to the contrary), high-income earners have mostly voted Republican, in line with their economic interests. Certainly there are plenty who don’t vote their interests, but that is also true of many people in the top 1 per cent, not to mention bona fide billionaires like Buffett and Soros. [but]… a closer look at income growth figures suggests that, while the 19 per cent have enjoyed rising incomes, they’ve only barely maintained their share of national income. The redistribution of the past three decades has gone from the bottom 80 per cent to the top 1 per cent.

That suggests the possibility of a policy response in which the main redistributive thrust would be to reverse this process.  This would almost certainly involve higher tax payments, but this would be offset by the restoration of public services, which are in economic terms a ‘superior good’, valued more as income rises. The top 1 per cent can buy their own services, and are largely unaffected by public sector cutbacks, but that’s not true of the 19 per cent.

Another important factor is the growth of economic insecurity. The myth of the US as a land of opportunity for upward mobility has been replaced by Barbara Ehrenreich’s Fear of Falling (another good source on this is High Wire by Peter Gosselin). Even if people in the top 19 per cent are doing well, they are less secure than at any time since the 1930s, and their children face even more uncertain prospects.

Finally, there is the alliance of the 1 per cent with the forces of rightwing cultural tribalism. The 1 per cent can only rule by persuading lots of people to vote against their interests, and that requires a reactionary and anti-intellectual agenda on social, cultural and scientific issues. As a result, educated voters have increasingly turned against the Republican Party.

I don’t want to make too much of this last point. As Allan Grayson said during his memorable takedown of PJ O’Rourke recently, the 1 per cent own the Republican Party outright, but they also own much of the Democratic Party, and can rule satisfactorily through either. Also, having a college degree isn’t the same as being educated – Tea Party supporters are more likely than the average American to have a degree, and college-graduate Republicans are even more prone to various delusional beliefs on issues such as climate change.

Nevertheless, taking account of all the factors listed above, even the most comfortably affluent members of the professional class, looking at the alliance of plutocrats and theocrats arrayed to defend Wall Street could reasonably conclude that it was in their own interests to support the 99 per cent and not the 1 per cent.

We are therefore (surprisingly to me) suddenly back in a situation where a progressive movement can reasonably claim to act in the interests of a group that is:..
(a) the overwhelming majority of the population
(b) responsible for nearly all the productive activity (as against the 1 per cent’s incomes drawn from a parasitic financial sector)
(c) economically desperate or at risk of becoming so.

Can all of this be sustained? I don’t know, any more than anyone else. But #OWS has already achieved things that most people would have regarded as impossible a month ago, and for the moment at least, the momentum is still growing.

The #OWS movement appears to be spreading and  growing in a way the Tea Party never did.  It’s clearly, as Hogeland points out, deep in the tradition of American politics.  And as Quiggin points out, the 19%, the top quintile folks  have had income gains in recent years but they’ve also had a dramatic increase in economic insecurity, diminished prospects for their children, and a reduction in the public services they value such as top-notch public universities and infrastructure.  It’s interesting times, especially since no presidential candidate from either party appears to align with the interests of the #OWS movement.

Oligopoly and the Costs of Higher Education – Journals Edition

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There are many reasons why costs in higher education have been rising faster than inflation for many decades.  A fundamental reason is because education is so labor-intensive and (so far) has been resistant to improved productivity via capital investment or technology.  This is called Baumol’s Cost Disease.

But there are other reasons too.  One is that historically higher education has been a non-profit industry but it is like healthcare in that much, if not all, of the costs are paid for by a third-party such as government instead of the consuming customer themselves.  There’s another similarity to healthcare in that in both it’s the seller, the doctor or the professor/university, that tells the consumer, the patient or student, what specifically they need to consume.  The consuming customer, the student or patient, doesn’t have all the information to know what they need.  This 3-way or 4-way transaction arrangement isn’t the standard buyer-seller arrangement of micro-economic texts about markets.  When a 3-way arrangement exists where there’s a seller, a consumer and a separate payor, conditions are ripe for abuse.  Basically, the seller tells the consumer to buy more at higher prices.  The consumer doesn’t object because somebody else is paying.

Historically, the arrangements never got out of hand because doctors in healthcare and universities in higher education were non-profit “professionals”.  But when for-profit entities entered, the dynamics shifted.  Higher education still consists of a a strong majority of non-profit institutions.  But they are surrounded by a several supplier industries that are very definitely profit-maximizers such as book publishers.  Publishers have long pursued a process of competing on features and making textbooks more expensive because the person who selected the book, the professor, didn’t have to pay.  Students paid through their student loans and they didn’t have much choice.

Eliminating choice is the key to higher profits.  That’s why monopolies and oligopolies make economic profits while firms in pure price competition don’t.

Now courtesy of a lecture by Hal Abelson at the Educause 2011 conference, passed our way by George Siemens at elearnspace.org, we see why prices of academic journals have risen so much that many libraries can’t afford them.  It’s the trend towards concentration and oligopoly.  The government could do something about it via antitrust enforcement, but for several decades antitrust enforcement has been weak except for blatant conspiratorial price-fixing.  This image below (from this article – .pdf) demonstrates:

Warning: More Bank Bailouts Possible

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One area I haven’t commented on much is the ongoing European “debt crisis”.  The Greek debt crisis is a part of it, but it’s only the tip of the iceberg.  The roots are much deeper.  One reason I haven’t commented is because it’s fairly complex and requires a lot of background explanation which I haven’t had time to write.  Nonetheless, it’s something worth mentioning.  In particular because it’s likely to mean more big bank bailouts.

In short, the crisis involves the way the Euro currency zone is constructed.  Countries that use the Euro have surrendered their sovereignty on monetary policy – that’s now the purview of the European Central Bank (ECB).  This means that government debt levels do matter for countries in the Euro.  They can default because they don’t have control over their own currency.  The U.S., Japan, UK, Canada, Australia, and others can’t default because they control their own central bank and currency.  But Euro countries can.  In the case of Greece and Ireland this means a high likelihood of default.  When the global economy crashed three years ago, it sent the economies of most countries down.  This raised the debt-to-GDP level by reducing the denominator, the GDP number.  But a country in a recession needs to increase government spending and deficits to stimulate growth.  Instead, the construction of the Euro agreement and pressures from the ECB forced these countries to pursue an austerity-based policy of cutting government programs.  But the cutting of government spending has only worsened the recession and shrunk their GDP even more, reducing tax collections.  It’s made default more likely.

In the Greek case, default appears inevitable.  The question is how much of a loss do bondholders take and when.  Therein lies a problem.  The people who own the Greek debt are largely big French and German banks. These banks themselves aren’t exactly robust.   If Greece defaults at a level that will actually help Greece find it’s way out instead of simply delaying the crisis, then these banks will likely take very heavy losses.  The losses are large enough to jeopardize the solvency of the banks themselves.  So Greek default also means figuring out how to recapitalize these big banks.  These are so-called “too big to fail banks”.

Currently there are negotiations going on about how to structure a  Greek default, simultaneously prop up the Euro banks, and stop a possible contagion effect from spreading to Ireland, Portugal, Spain, Italy, and Belgium.  But there have been negotiations over this crisis for nearly two years now with much successs.  The German and French leaders have promised a comprehensive solution later this week. It was supposed to be today, but it’s been delayed to mid-week.

What does that have to do with the U.S.?  Nobody really knows.  The devil is in the details.  At first pass, big U.S. banks aren’t supposed to have much exposure to Greek debt, so they shouldn’t be endangered by a large Greek default.  But, the big U.S. banks like Citi, JP Morgan Chase, BofA, and Goldman Sachs have large stakes in the big Euro banks.  A failed Euro bank could have repercussions.  Of greater concern are derivatives, particularly Credit Default Swaps. The U.S. banks, particularly Goldman are known to have been active in selling these derivatives.  Since the derivative markets and positions are largely secret and non-transparent (a failure of the Dodd-Frank Financial Reform bill), we don’t know if a Greek default will trigger significant liabilities for these banks.

In separate news, Bank of America, is on a death-watch by some analysts.  Yves Smith at Naked Capitalism clues us in:

If you have any doubt that Bank of America is in trouble, this development should settle it. I’m late to this important story broken this morning by Bob Ivry of Bloomberg, but both Bill Black (who I interviewed just now) and I see this as a desperate (or at the very best, remarkably inept) move by Bank of America’s management.

The short form via Bloomberg:

Bank of America Corp. (BAC), hit by a credit downgrade last month, has moved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits, according to people with direct knowledge of the situation…

Bank of America’s holding company — the parent of both the retail bank and the Merrill Lynch securities unit — held almost $75 trillion of derivatives at the end of June, according to data compiled by the OCC. About $53 trillion, or 71 percent, were within Bank of America NA, according to the data, which represent the notional values of the trades.

That compares with JPMorgan’s deposit-taking entity, JPMorgan Chase Bank NA, which contained 99 percent of the New York-based firm’s $79 trillion of notional derivatives, the OCC data show.

Now you would expect this move to be driven by adverse selection, that it, that BofA would move its WORST derivatives, that is, the ones that were riskiest or otherwise had high collateral posting requirements, to the sub. Bill Black confirmed that even though the details were sketchy, this is precisely what took place.

Part of BofA’s problems, well, actually a very large part of it’s problems stem from the loose and possibly illegal banking practices at Countrywide Mortgage which it took over in 2008.  Yves updates us on this here.

Bottom-line on all this:  expect more big bank bailouts of some kind in coming months.  It might only be big Euro banks.  It might only involve Bank of America.  But there’s significant,if less than probable, chance that we’ll have to see another round of bank bailouts.

The Fraudulent Flat Tax Pitch – A Rich and Powerful Tactic

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Power and riches go together. But nowadays, they need political spin. Throughout history the very rich have usually also been the very powerful.  And usually the very rich use that power to both protect themselves from the less well-off and to figure out ways to further enrich themselves.  Often the enrichment comes at the expense of the less well-off.  When you’re powerful, redistribution of income away from the poor towards yourself is often a lot easier and more lucrative than trying to be productive and creative.  It’s been this way largely since the start of history.  But getting the poor and middle classes to go along it can be a challenge.  Of course blatant power, threats, and coercion were the means of choice for centuries.  The pure power dynamic gave way over the centuries to class, the idea that somehow the rich were different people, better people. The poor and middling classes were taught that it was the natural way of things.

Then the American and French revolutions brought out that dangerous idea: people really are fundamentally the same and they should have the same political rights.  It was a very dangerous idea for the rich and powerful classes. It leads to questioning why the rich are rich and the poor aren’t.  More importantly, this equality idea gave rise to a democratic governments.  Democracy is a challenge for the rich and powerful.  As historian William Hogeland has powerfully explained, the U.S. Constitution was actually created as a reaction by the rich and powerful against democratic finance well after the American Revolution.

So how do the rich and powerful today attempt to overcome democratic impulses and further enrich themselves at the expense of the others?  In other words, how do the rich and powerful get the poor and middle classes to go along with proposals that ultimately are only in the interest of the rich and powerful? 

One tactic is to simultaneously promote the idea that anybody can get rich and that success is purely a function of individual merit and effort.  One blatant example of this is Republican presidential candidate Herman Cain’s statements that “If you don’t have a job and you’re not rich, blame yourself.”   The unstated, but necessary assumptions behind such a statement are that sufficient opportunities exist instead of an economy where there is only 1 job opening for every 4+ job seekers.  It also assumes that all power is benign and that the rules are truly fair and balanced.  There’s a pernicious micro-economic theory called marginal resource productivity pricing (the MRP=MRC idea) that falsely provides a patina of cover for such ideas.  I won’t deal with that here but I hope to in a future post.

A second tactic is political spin.  Proposals that are really attempts to use the government to further entrench the rich and powerful at the expense of the 99% are dressed up in language that is carefully chosen to sound like it’s fair and populist.  But it’s a faux populism.  It’s an attempt to fool voters. Flat tax proposals are just such attempts to fool voters into supporting proposals that will hurt them. Let’s look at how and why flat tax proposals are neither “fair” nor beneficial to the majority of voters, workers, or taxpayers.

Inevitably, all flat tax proposals represent an attempt to raise taxes on the poor and middle classes while reducing taxes on the extreme rich, the top 1%. I’ve already analyzed and explained just how much Herman Cain’s “flat tax” proposal, the “9-9-9″ plan would raise taxes on at least the 80% while providing a huge tax cut for the top 1% and even more for the top 0.1%.  If there were truth in political advertising, Cain’s plan should be described as the “9+9+9=27% tax plan”.

Why are all flat tax proposals some kind of tax increase on the poor & middle class while providing tax cuts for the rich?  It’s because we already have a mildly progressive tax system.  Progressive means that the higher your income is, the higher your tax rate is.  In other words, under a progressive system, the rich pay higher rates and the poor lower rates.  Under a regressive system, the poor pay higher rates than the rich.  In the U.S., the federal income tax system is moderately progressive, although it’s been flattened a lot in the last the 33 years.  The progressiveness of the federal income tax system is offset partially by the regressive nature of a lot of other taxes like Social Security and Medicare payroll taxes, state and local sales taxes, and some property taxes.  The net effect is a mildly progressive tax system.  I quote from a post I made about this topic last spring:

 the folks at  Citizens for Tax Justice  used 2008 data for all federal, state and local taxes combined to do the analysis.  Here’s their analysis (via New York Times - warning paywall):

It found that the average effective tax rate is 29.8 percent, and that including state and local taxes makes the tax curve look much  less steep:

INSERT DESCRIPTION
Source: Citizens for Tax Justice Horizontal axis shows the income group. Vertical axis shows the percentage of income that the average member of that group pays in taxes. Taxes include all federal, state and local taxes (personal and corporate income, payroll, property, sales, excise, estate, etc.). Incomes include cash income, employer-paid FICA taxes and corporate profits net of taxable dividends.

So what do we learn from this?  It shows us that if we look at the overall tax system in the U.S., the complex patchwork system of federal-state-local income taxes, payroll taxes, property taxes, sales taxes, etc., we are pretty close to having a flat tax system.  The poorest, lowest income folks pay 18.7% of income as some type of tax while the the richest 5% do pay more, but they only pay 32.2%.

What is really stunning is how the top 1%, the really-really rich multi-millionaires actually pay less average tax rate than the those who are only rich enough to make the top 5%.  It must really be nice to be so rich that Congress tweaks the tax code just for you.

So the system is very, very mildly progressive.

Flat tax advocates don’t make this “tax increase on the poor/middle class with tax cut for rich” aspect clear.  They try to hide it and obfuscate it.  They use terms like “flat” and “fair”.  They are really trying to tap into our collective memories of childhood when the idea of everybody getting the same percentage of the birthday cake seemed like an obvious “fair” solution.  They don’t want us to pay attention to the actual numbers.

But even a “flat” tax rate isn’t really fair. There’s a phenomenon that’s described in economics as the “diminishing marginal utility of money”.  In plainer English, it simply means that the richer you are, the more income you have, the less valuable any particular increase in income is to you.  The reverse is also true, when you’re poor and don’t have much money, the value or utility of money is very, very high.  An obvious example is to consider two extremes and look at the value or utility of having an additional dollar bill.  To an unemployed person with no assets and no money, a dollar bill is very, very valuable.  It may well represent eating vs. not-eating today. Life is dependent upon it.  Now contrast that to a hedge-fund manager who has a tens of millions of dollars in income each year and even more cash in the bank.  A single additional dollar doesn’t mean much.  If a strong wind blows the dollar out of the hand of the unemployed, they will no doubt chase it.  If it blows it out of the hand the hedge-fund manager, they’re much less likely to chase it.

But some critics may point out that my example is using dollar amounts not percentages.  Surely percentages would be the same.  Not really.  This time let’s consider someone working full-time at minimum wage.  They earn $296 per week – gross. But after payroll taxes they’re closer to $275.  That’s close to $1100 per month. One percent of that is $11.  That one percent could easily represent the difference between bus fare or gasoline and not having it.  In other words, that 1% represents the very ability to get to work and earn their income.  It’s extremely valuable.  It can be the difference between making it and not making it.  For many seniors on social security, 1% is the difference between life-maintaining prescriptions and not. But let’s look at that hedge-fund manager again.  The one with the $16 million dollar a year income.  The monthly income is $1.33 million.Now yes, 1% for our hedge fund manager is $13,333 each month. It seems like a huge amount of money to us (I’m assuming not many of the 1% read my blog), is how big of a sacrifice will it mean to the hedge fund manager?  Would paying an additional $13,333 per month really change the hedge fund manager’s life much?  Not likely.  It’s not likely to change the choice of first or second house.  I’ll grant it might affect the choice of whether to have a third home or how big it would be. The point is that the sacrifice represented by 1% of income is greatly different depending upon your income.  A flat tax does not represent equal sacrifice.  

The flat tax advocates also make much of the idea that a flat tax would simplify the tax code. Again the reason for claiming simplification is to get middle class voters to support  something that isn’t  It won’t.  First, while some flat tax proposals start out as recommending the elimination of all deductions, exemptions, and tax credits, they rarely do in practice.  Even Herman Cain has backtracked from his original proposal of eliminating all exemptions.  It’s the personal exemption that gives the current federal income tax system much of it’s progressiveness.  When push comes to shove, the political pressures and special interests that pushed for the deductions and credits originally rise up and force some kind of inclusion in the new proposal.  Herman Cain, I understand has now already backtracked and decided to add back personal exemptions.  That ends the “flatness” of his flat tax.  Now it’s just a tax cut for the rich proposal. In the real world of politics and special interests, no flat tax proposal will stay that way.  There are too many legitimate reasons why we don’t have a flat system now and they will inevitably reassert themselves.  Charitable deductions (think churches and universities, not homeless shelters) and home mortgage deductions have powerful interests behind them. Besides, much of the complexity in tax forms comes from simply trying to determine what’s income and what isn’t.  That won’t change.  Simplicity is just false promise to make flat tax proposals attractive to the middle class.

Flat tax advocates also claim it would treat all taxpayers the same.  But the current system already does that. As Robert Reich points out:

The truth is the current tax code treats everyone the same. It’s organized around tax brackets. Everyone whose income reaches the same bracket is treated the same as everyone else whose income reaches that bracket (apart from various deductions, exemptions, and credits, of course).

For example, no one pays any income taxes on the first $20,000 or so of their income (the exact amount depends on whether the person is married and eligible for tax credits like the Earned Income Tax Credit of the Family Tax Credit.)

People in higher brackets pay a higher rate only on the portion of their income that hits that bracket — not on their entire incomes.

So when Barack Obama calls for ending the Bush tax cut on incomes over $250,000, he’s only talking about the portion peoples’ incomes that exceed $250,000. He’s not proposing to tax their entire incomes at the higher rate that prevailed under Bill Clinton.

Republicans have tried to sow confusion about this. They want Americans to believe, for example, that if the Bush tax cut ended, small business owners with incomes of $251,000 a year would suddenly have to pay 39 percent of their entire incomes in taxes rather than 35 percent. Wrong. They’d only have to pay the 39 percent rate on $1,000 – the portion of their incomes over $250,000.

Get it? We already have a flat tax – flat within each bracket.

Flat tax advocates also deceive by only focusing on federal income taxes.  Payroll taxes, the Social Security and Medicare taxes, are regressive.  People with incomes over $104,000 don’t pay any tax on the income above that threshold.  People whose income comes from capital gains and not wages don’t pay any Social Security or Medicare taxes.  Yet they are eligible for Medicare.  State sales taxes are highly regressive.  Flat tax advocates don’t want to change those systems because the real objective is to shift taxes to the poor and middle class and give tax cuts to the top 1%.

Finally, the biggest deception in most flat tax proposals is that capital gains, dividend income, and hedge fund management fees (called “carried interest”) are usually still provided special treatment.  Herman Cain does this.  He claims to want all income taxed at 9%, but in reality he proposes that capital gains and dividend income be totally exempt from taxes.  In other words, the way that the top 1% generally earns most of their money would be tax free.  How fair is that?  It’s the current loopholes about taxing capital gains, hedge fund managers, and dividends at lower rates that results in the top 1% paying less than anyone else in the top 10% (see graph at top).

Flat tax proposals aren’t about flattening tax rates. They’re about flattening the majority of taxpayers.  But that doesn’t sell politically so they have to be wrapped in political spin to be something they aren’t.

 

 

 

 

 

Herman Cain’s 9-9-9 Plan and the 99%

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In the constantly churning pool of Republican Presidential candidates, a seemingly political newcomer has risen to the top (for now): Herman Cain.  Mr. Cain, the former CEO of Godfather’s Pizza where he engineered a leveraged buy-out from Pillsbury, isn’t really a political newcomer or outsider, though.  He only appears to be because he personally has never won an election despite several attempts.  (see Wikipedia biography). In fact, he’s been a campaign insider and advisor for many Republican candidates going back to at least Bob Dole in 1996. He also played a key role in defeating President Clinton’s attempts to reform healthcare in the 1990′s.

Herman Cain has risen to the top (some recent polls show him essentially tied with Mitt Romney) largely because of his “9-9-9″ tax plan.  So what’s it all about and what are the likely consequences? Let’s explore what the plan is first.

I will summarize here.  A more in-depth analysis (pdf) is available from the Tax Policy Center.  The Cain campaign’s page on the plan is here. Cain is proposing to eliminate the existing corporate income tax and payroll taxes. I assume that this includes eliminating the Social Security tax and Medicare taxes, although the Cain campaign avoids saying that clearly by referring only to “payroll taxes”.  He then proposes to radically reform the existing individual income tax system and adding two new taxes.  The result is that the existing triad of corporate income tax, payroll tax, and individual taxes is replaced by a triad of three taxes which each have a 9% tax rate, hence the name for the plan.

  • Change existing Individual income tax system – charge a flat 9% on gross income with the only deduction allowed being for charitable contributions.  Home mortgage interest deduction is gone.  Personal exemptions are gone.  This means a single person with no dependents and $50,000 income pays $4,500 (9%), the same exact amount as a family of four with two small children and a $50,000 income.  It is unclear whether deductions for the expense of earning income are allowed or not such as sales representative deducting business expenses.  I presume they are not.  Only earned income from employment is taxed, not dividend income. It is unclear whether Cain would tax pension income or Social Security benefits.  He doesn’t clarify those.  My guess is they would be taxed.
  • A new national sales tax of 9% on everything.  Although most states currently exempt food and other essentials from sales tax, Cain does not.  Plan to add 9% to whatever you buy. The consumer pays the sales tax directly at the time of purchase.
  • A new national business tax of 9%. This is a modified form of value-added tax (VAT) commonly called a business transfer tax.  It essentially means that all businesses pay a 9% tax on everything they sell minus a deduction for whatever purchases they have made, not counting purchases of labor. I find the enthusiasm among Republicans for this part for the tax kind of strange.  The state of Michigan had a similar business transfer tax called the Michigan Business Tax (MBT) in recent years and it was the #1 target of Republicans to repeal when they came into office.  The MBT was absolutely hated.  That makes me skeptical that Cain either could actually get a a national business tax or that it would survive for longer than a year or so.  I expect that in implementation, the national business tax would soon be eliminated in favor of a higher individual income tax and/or higher sales tax and/or larger deficit. A business transfer tax like Cain’s proposed national business tax requires significant accounting and record-keeping.  Businesses would no doubt attack such a tax as a “heavy regulatory and reporting burden”.

Overall, estimates of the immediate effect of the 9-9-9 plan on tax revenues to the government show it would be largely neutral.  That is, the plan, when applied to today’s economy this year, should produce approximately the same revenue as today’s tax system produces.  In that sense, the plan represents neither a tax cut nor a tax increase in the overall macro sense.  At the individual  level, though, it’s a different story.  The 9-9-9 plan is either a really heavy tax increase or a really huge tax cut depending upon how high your income is.

For people who are in the lower 80% of the income distribution, meaning the poor, the working class, and the middle class, Cain’s plan represents a very, very serious tax increase.  Even households in the lowest 20% of the income distribution would pay an average of $1,854 more in taxes than they do currently each year.  The typical or normal household, the folks that are in the middle, the 60% of us that are neither in the top 20% or the bottom 20% (which most likely means you!), would pay more than $4,000 more each year in taxes.  That’s a serious tax increase.  How? Why? Currently people in these brackets, the majority of us, pay around 23-30% of our income in the form of all taxes to the all levels of government. Of those 23-30% points, approximately 10% points are taxes for state and local government.  Those taxes remain under Cain.  So currently the middle income ranks pay between 13-20% of their incomes to the federal government.  That initially sounds like it’s higher than Cain’s 9%.  But remember, Cain’s plan is a 9-9-9 plan.  You will pay a 9% income tax.  You’ll also pay 9% sales tax on everything you buy.  Let’s say you’re fortunate and prudent and only spend 90% of your income, that sales tax still equates to being 8% on your income.  But the sales tax is being applied to goods that have already been marked up in price by 9% by the retailer to pay for the business tax.  In effect, you’ll pay an 18% sales tax. That means that your real tax burden for the federal government will be closer to 9+9+9.  I expect the effective federal taxes paid by individuals in the middle income ranges under the Cain plan to be 24-27% depending on how much you save vs. spend.  Add in the 10% for state and local and you’ve got an individual tax burden in the 34-37% range – much, much higher than today.  The Tax Policy Center graphs out the actual expected change in your taxes in dollars by income quintile here:

Now what about the top 20%?  They come out ahead.  The average household in the top 20% gets a $14,442 tax cut.  If you’re not one of these fortunate rich people to get this large tax cut from the 9-9-9 plan, remember Herman Cain says it’s your fault you’re not rich.

In summary, the Cain 9-9-9 is a massive redistribution of the tax burden away from rich households onto the backs of poor and middle-income households.  As Jared Bernstein notes:

Conclusions:

–to implement the 9-9-9 plan would truly be the most dramatic and regressive shifting of the tax burden in the history of our nation;

–based on this policy, Herman Cain’s campaign is deeply out of touch with the challenges facing the American middle class;

But we haven’t really looked at the impact on the top 1% or the top 0.1%, the really, really rich folks, the Wall Street CEO’s and big hedge fund managers, the ones who have gotten large bonuses in recent years paid for by government bank bailouts.  The top 1% (which includes Herman Cain himself) will save on average $238,422 in taxes.  The top 0.1%, the 150 thousand or so households that are really, really rich and powerful, will get even more.  They will see an average cut of $1,356,078 in their taxes.  I also have a properly scaled graph to show this too, but it’s only after the jump for formatting reasons.  So click and take a look to see what Herman Cain calls making the tax system more fair.  It should add fuel to the Occupy Wall Street fires.

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What’s the 99%, the 1%, and the 53% All About?

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The OccupyWallStreet movement has helped push the meme of the “99%”.  But to what are they referring? And what’s the remaining 1%?  The 99% reference refers to income distribution in the U.S.  Income distribution is when we line up all the households in order according to their income from lowest to highest.  Obviously with somewhere around 150-200 million households in the U.S. we can’t deal with each individually.  Instead we group them into percentiles.

The 99% refers to the 99% of all households that have the lowest incomes.  Obviously this means nearly everybody – 99% of us to be exact.  What is not in the 99% is the 1% with the highest household incomes – the really rich.  What has the OccupyWallStreet movement so energized and angry though isn’t just the idea that the 99% make less money than the 1%.  It’s the idea that the rich, the 1% are getting richer faster than the 99%.  In fact, the 99% aren’t really getting richer at all.  Instead they (we) have been losing both relative to the rich (the gap is growing) and in absolute terms.  Let’s check out a few graphs to illustrate.

First, economix at the New York Times reported on the basic income distribution data recently:

The graph below shows how much income is earned by a household at any given percentile in the income distribution, based on these new numbers for 2011:

DESCRIPTIONTax Policy Center

Incomes grow much, much faster at the top end of the income distribution than in the middle or at the bottom end. That is, the disparity in income between one percentile and a consecutive percentile is bigger among the very rich.

For example, the difference in income between a household at the 50th percentile and a household at the 51st percentile is $1,237 ($42,327 versus $43,564). But the difference in incomes between a household at the 98th percentile and the 99th percentile is $146,118 ($360,435 jumps up to $506,553).

The gaps become even wider at the extreme top of the income ladder: A family at the 99.5th percentile makes $815,868; its neighbor at the 99.9th percentile makes more than double that, at $2,075,574 a year.

In fact much of the rise in inequality over the last few decades has been because of the increasing inequality isolated among the very top members of the income distribution, as America’s wealthiest have pulled further and further away from their slightly less wealthy peers.

This leads us to another similar graphic (graphic from occupydesign.org, but the data is from standard U.S. economic reports). This one reports not income, but wealth (income is what you $ you receive this year, wealth is how much you own).

 

The disturbing part of the income distribution is that it is getting much worse.  Since the recession/depression started in 2007, the median income for Americans, a number that fairly represents what’s happening to the typical member of the 99% show that incomes have decreased.  CalculatedRisk blog reports:

Recession Officially Over, U.S. Incomes Kept Falling. A few excerpts:

Between June 2009, when the recession officially ended, and June 2011, inflation-adjusted median household income fell 6.7 percent, to $49,909, according to a study by two former Census Bureau officials. During the recession — from December 2007 to June 2009 — household income fell 3.2 percent.

So the inflation-adjusted median household income has continued to decline even after the recession ended.

And for people who lost their jobs - and were lucky enough to find a new job:

In a separate study, Henry S. Farber, an economics professor at Princeton, found that people who lost jobs in the recession and later found work again made an average of 17.5 percent less than they had in their old jobs.

And on education:

Median annual income declined most for households headed by someone with an associate’s degree, dropping 14 percent, to $53,195, in the four-year period that ended in June 2011, the report said.

For households headed by people who had not completed high school, median income declined by 7.9 percent, to $25,157. For those with a bachelor’s degree or more, income declined by 6.8 percent, to $82,846.

Grim numbers. This is no surprise given the high level of unemployment and underemployment.

If we look at hourly wage rates by income groups over the last couple decades we the same story: the rich are getting richer and the vast majority of Americans aren’t improving at all.  From the Congressional Budget Office via EconomistsView’s Mark Thoma:

Essentially, since around 1980 whatever increases in national income (GDP) have occurred have all gone to the top 1% or so of Americans.  The rest, the 99% have not enjoyed the growth but they are the ones who worked and produced it. See my post on that here.  The inequality in the income distribution in the U.S. is at a highest (most unequal) that it has ever been since the 1920′s and the era of Robber Barons and the Gilded Age.  That period didn’t end well resulting in the Great Depression.

 

Finally, when the OccupyWallStreet movement began, some right-wing opponents tried to counter the whole 99% meme.  They attempted to create an identification with the moniker “the 53%”.  What they were referring to is the fact that of all U.S. households, only 53% pay any U.S. federal income tax after accounting for deductions and tax credits.  The implication or suggestion was that the “53%” are the ones who are paying to carry some freeloading 47% of households who supposedly aren’t working and definitely aren’t paying income tax.  The problem with this idea is two-fold.  First, it’s absolutely not true that 47% of households don’t pay any taxes.  They most certainly do pay taxes – a lot of taxes and at nearly the same rates as other households.  The 47% just don’t pay federal income tax.  They do pay Social Security and Medicare payroll taxes, sales taxes, property taxes, state taxes, and other taxes. Second, a lot of those households don’t pay federal income tax because they are retirees who are living on either tax-exempt pension income or Social Security benefits. Others are simply too low-income despite working to incur federal income tax.  A few are very-high income earners in the top 1% who avoid income taxes through deductions and special tax breaks.