California Speeds Up Its Drain-Circling

I suppose that congratulations are in order to California, which passed Governor Brown's income tax increase measure by 54-46.  Proposition 30 will increase top marginal state income tax rates from 9.3% to 10.3% on income above $250,000, 11.3% on income above $600,000, and 12.3% on income above $1 million.  The increases are retroactive to the beginning of 2012 and will be in effect through 2018.  The measure also includes a sales tax increase.

Dan Mitchell says "I feel safe in stating that this measure is going to accelerate California's economic decline."  Agreed.

Changes in behavior resulting from extra taxes often happen slowly and can be somewhat hard to spot, but let me mention a couple of examples:

(1) In 1975 when I moved to New York, New York State's marginal income tax rate was 14%; New York City had an additional tax with a top rate of about 4%.  No state has anything close to that 18% combined rate today.  Those top marginal rates kicked in at very low income -- if recollection serves, I was paying the top state rate within my first year as a law firm associate, earning just over $20,000 per year.  At the time, New Jersey and Connecticut had no state income taxes whatsoever.  What happened?  This is the era when Greenwich Village was seedy, a new major corporation announced it was leaving New York every month or so, and the Bronx was burning.  Despite the high tax rates, the City defaulted on its debt.  New York City's population dropped by over 800,000 from 1970 to 1980.  Meanwhile, the New Jersey waterfront right across from us took off with one new tower after another, while the seemingly equally desirable Brooklyn waterfront across from the other side of Manhattan had not a single new building go up for decades.  And downtown Stamford, CT (about 35 miles away) also boomed with one new office building after another.

In the intervening time, what?  Starting in the late 70s New York State (first under Gov. Hugh Carey, but also under his successors Cuomo and Pataki) lowered the top state marginal rate in many steps until it got below7%. New Jersey adopted its first state income tax in the late 70s(after which then-Gov. Jim Florio was immediately ousted from office), and has continued to increase its top rate

until it is now 8.97%. Connecticut introduced its first income tax in the early 90s, and has increased it since until the top rate is now 6.87%.

The combined New York State/City top rate (State recently went back up to about 9% on a "temporary" basis) is still somewhat higher than either New Jersey or Connecticut, but instead of the ridiculous 18% to zero, we are now within striking range of competitiveness.  Results:  today Brooklyn is hot and Jersey City is ice cold.  The Bronx is no longer burning, Greenwich Village is fancy, and even the Lower East Side is gentrifying.  The Manhattan business community resumed growing in the 80s, and today new businesses have replaced the corporate headquarters that fled in the 70s.  Within the last year a major corporation (UBS) that had left Manhattan for Stamford years ago announced that it was planning to return.  (As of now, Connecticut has apparently retained them by offering some big-time "incentives" aka bribes.)

OK, there are other factors that went into this.  Public safety was certainly one.  Another was that, as bad as is the management of the New York State and City governments,New Jersey and Connecticut are clearly worse.  But there is no doubt that the 18% income tax rate differential was killing New York City.

(2)One other brief example.  I once was given a tour of Philadelphia that took us to City Line Avenue on the city's west border.  The side outside the city limits was lined with new office buildings.  The other side of the street consisted of decrepit buildings and vacant lots. 

The interesting question will be, how much of the projected increase in revenues will California actually achieve?  Good luck California! 

The Ascendancy of the Basket Cases

Barack Obama has won the election.  That means that my first official effort at predicting an election result has come out wrong.  However, I did hedge my bets by asking questions to both Obama and Romney about what they would do after the election.

To me the most remarkable thing about the election is the extent to which a relative handful of "basket case" cities determined the election by giving huge local majorities to Obama.  What do I mean by "basket case" cities?  They are the poster children for the failure of government spending to improve people's lives and incomes, cities in decline where decades of government programs have brought only shrinking populations, vast vacant zones, fleeing businesses, high crime and low income.  Yet they provide very large electoral majorities for the candidate promising to further expand the failed programs.

Consider Ohio.  Cleveland is the classic basket case.  Its population has gone from a peak of 914,808 in 1950 to just 396,815 in 2010.  It lost 17% of its remaining population between 2000 and 2010!  Second worst basket case in Ohio is Toledo, which has gone from 383,818 people in 1970 to 287,208 in 2010.  According to the latest figures I can find here, Obama won Ohio by not much over 100,000 votes; his margin in Cuyahoga County (Cleveland) was about 236,000, and in Lucas County (Toledo) was about 61,000.  In other words, his margins in just the two worst basket case cities (with their surrounding counties) provided his entire margin of victory in Ohio and then some.

How about Michigan?  Detroit certainly qualifies as a basket case; indeed, if there were a contest for worst basket case in the U.S., the two finalists would have to be Cleveland and Detroit.  Detroit's population

hit a peak of 1,849,568 in the 1950 census, and by 2010 had fallen to 713,777.  The population decline for just 2000 - 2010 was an astonishing 25%!  Detroit has famously stopped providing most city services to large vacant zones within the city limits.  While I'm having some trouble finding exact figures at this hour, and Obama won Michigan handily, it looks like almost his entire margin of victory, if not all of it, came from Wayne County.  If it did not, then including the results from a couple of smaller Michigan basket cases (e.g., Flint,Pontiac) would be enough to provide the entire margin of victory in Michigan.

Next, Chicago and Illinois. You may ask, is Chicago really basket case? If you go there, it will not appear to be one, at least on first impression. The downtown is in good shape, with new condos and office towers; the near north side is upscale and attractive.  But the population has gone from a peak of 3,620,962 in the 1950 census to just 2,695,598 in 2010.  How is that manifested?  Try taking the Green Line el south from the loop to the end of the line.  After being told by your hosts that you should never attempt such a thing, you will observe huge deteriorated public housing projects surrounded by vast vacant areas and abandoned private buildings.  For anyone willing to open his eyes and look around, Chicago demonstrates "the misery and ruin that well-intentioned liberals combined with aggressive public sector labor unions inflict on the poor they ostensibly want to serve." 

And Illinois is in a completely impossible position with public pensions, where systematic over-promising and under-funding has made default within the next few years a virtual certainty. How does that turn out in the election? Obama won Illinois by about 825,000 votes. His margin just in the city of Chicago was about 679,000;and in the remainder of Cook County (Chicago's county) it was about 280,000.  In the city of Chicago, Obama won by an astounding 84 - 15 percent.  So Chicago and Cook County alone provided more than Obama's entire margin of victory in Illinois. 

Just those three examples alone account for some 54 electoral votes, or a 108 electoral vote swing if the voters in the basket case cities had voted in the same proportions as the voters in the remainder of their states.  If that would not have swung the election, add Philadelphia to the mix and it would have.  Or Milwaukee.

Even as the subjects of the dependency society have their cities descend into a death spiral, those subjects continue to vote with huge margins to continue their dependency.  On the scale of entire nations, we have Argentina, Venezuela, Greece, maybe all of Europe.  Can anyone actually exit the death spiral through the democratic process, through being convinced that their better future lies with an opportunity society rather than a hand-out society?  Our next few elections may give us our last chance to find out.

UPDATE:  Final election results from Google.

Ohio:  Obama margin -101,000; Cuyahoga County (Cleveland)  -236,000; Lucas County (Toledo) -61,000

Michigan:  Obama margin - 358,000; Wayne County (Detroit)  -335,000;Genessee County(Flint) - 47,000

Illinois:  Obama margin - 825,000; Cook County (Chicago) - 850,000

Pennsylvania:  Obama margin - 284,000; Philadelphia County - 466,000

Speculators: Good or Evil?

Everybody -- politicians especially -- loves to rail about the evils of "speculators."   They must be the ones driving up the price of oil!  Back in the spring, as gas prices were accelerating toward their current highs, President Obama joined the usual chorus, blaming the price run-up on speculators and proposing new restrictions on oil trading as the fix.

From Business Week, April 19, 2012:

On Tuesday, President Obama announced he wants Congress to increase the amount of collateral that traders have to post to buy a futures contract. (It’s typically around 10 percent of the value of the total contract.) Obama also wants to give the CFTC an extra $52 million to pay closer attention to the oil market and dole out stiffer penalties to those who manipulate it: $10 million instead of the current $1 million. That assumes of course that the CFTC can find those manipulators.

The President isn't alone.  Eliot Spitzer was famous for cracking down on speculators.  And it's not just a liberal disease.  Bill O'Reilly of Fox News, for example, widely considered a conservative (although he would say an independent) regularly rails against speculators, particularly in the oil market.

It's all economic nonsense of course.  Here's a very smart letter that appeared in the Washington Post a few days ago.  The author is Don Boudreaux of Cafe Hayek.

Have you noticed the enormous increase in greedy speculation in the northeast over the past two days? It's quite something! In advance of hurricane Sandy, consumers are now artificially increasing the scarcity today of the likes of bottled water, canned goods, batteries, and medicines by stocking up on these goods.

And all of this self-interested speculation - done merely in anticipation of staple goods being much more scarce after Sandy strikes than they are today - is applauded and even encouraged by the news media and government leaders!

What gives? Many of the same people who today publicly encourage us to speculate ("Make sure your family has ample supplies of batteries!") are among the loudest critics of speculation at other times and in other markets.

But in fact the oil speculator who, say, buys oil today in anticipation of oil becoming more scarce tomorrow does just what a consumer does today in a supermarket in anticipation of a disruptive storm: both persons usefully transfer resources across time. They both stock up on resources that are today relatively abundant in order to preserve these resources for consumption at a time when they are relatively more scarce (and, hence, more precious). Both persons transfer resources from today - when the consumption of any one bottle of water or gallon of gasoline provides relatively less benefit - to tomorrow when the consumption of that same bottle of water or gallon of gasoline will provide relatively more benefit.

Anticipating the future and taking actions to allocate goods and services from times of relative abundance to times of relatively greater scarcity is an immensely useful activity. And we all perform such speculation whether or not we are popularly identified as "speculators."

Just to continue the application of the abstract concept to the more mundane, how do you feel about traders who "go short," that is, sell something they do not own?  Traders who "short" stocks and commodities regularly come in for attacks from politicians and prosecutors.  But every business "goes short" in something or other every day.  For example, consider the contractor you hire to build a new bathroom.  He promises to do the job for a fixed price, and only then goes out and buys the fixtures, hires the plumber, hires the tiler, etc.  Should it be illegal?

A Few Questions For Obama and Romney

I don't know who is going to win today's election (although I'm officially predicting Romney), so to hedge my bets I'm going to pose a few questions for each of the candidates.

For Obama:

Do you think that the Federal government has an infinite ability to borrow without causing damage to the country and the economy?

Does the President have any responsibility to contribute to operating the government in a financially responsible manner?

Are Federal entitlements as currently structured sustainable? If not, what is your plan to make them sustainable?  Are you going to do anything about this in your second term, or just have a huge blowout and leave the problem for the next guy?

Is the explosion of recipients of programs like food stamps and social security disability during your term OK?

Are you going to continue the war against energy?

And a few for Romney:

Are you going to stand up for free trade or are you going to keep bashing China?

When are you going to get specific about necessary spending cuts?

Are you going to work toward getting government spending in line with revenues, or do you think that deficits are a "stimulus" so the bigger the better no matter how wasteful the spending?

Manhattan Orthodoxy in Local Races

A visit to the polls this morning confirms what I already knew: no competition in the West Village for any political office at the state and local level.

For State Senate from the Village, Chelsea, and midtown - an open seat! - the Democrat Brad Hoylman was the only candidate on the ballot.  No Republican and no minor party candidate was running.  (And by the way, the minor parties like Conservative, Libertarian, Green and Working Families of course all had candidates for President.)

For State Assembly, Democrat Deborah Glick was the only candidate.

There were numerous candidates for state court judge, all Democrats running unopposed.  The Republicans had cross-endorsed one of the candidates, but otherwise no one appeared on the Republican line or on any of the minor party lines.

The Republicans did put up a candidate for U.S. Congress, Michael Chan, to run against the incumbent Jerrold Nadler.  I suppose I should be grateful for that.  Also, the Republicans had a candidate for U.S. Senate (Wendy Long), although I have never seen an ad for her, and I bet that I was the only person in the polling place (out of hundreds) who could have come up with her name before I got the ballot.

Intentional Devastation Sure Beats Nature's Devastation

The following post was written on November 1, 2012:

Breaking news:  Mayor Bloomberg has endorsed Barack Obama, and has written an article on Bloomberg View explaining his reasons.  Here’s the article.

So what’s the main reason?  Climate change!

Our climate is changing. And while the increase in extreme weather we have experienced in New York City and around the world may or may not be the result of it, the risk that it might be -- given this week’s devastation -- should compel all elected leaders to take immediate action.

That’s right.  There’s been “devastation”!  Therefore our leaders must take “immediate action.”  What kind of immediate action?  Action to “decrease our carbon consumption.”

Hmmm.  I think  I’m experiencing a good piece of the “devastation” right now, namely that the electricity is out.  That is causing a huge decrease in my carbon consumption.  Wait a minute, is that “devastation” or is that something that the government should impose on us intentionally?  Intentionally imposed devastation in order to avoid devastation?

Here’s a new Romney ad on the subject.

So because we might suffer natural devastation once every few (or maybe one hundred) years, let's inflict the exact same devastation intentionally and all the time.  If we can make electricity so expensive that you can't afford more than a little of it 365 days a year, then we can (maybe) avoid having the electricity knocked out for a few days every decade.  Yup, makes a lot of sense.