The Poverty Deception, Part II

What is the biggest scam practiced by the U.S. government?  There are a lot to choose from.  But if the criterion is number of dollars stolen or wasted based on the scam, the winner has to be the so-called "poverty" rate, published by the Census Bureau. 

Today the reports on "poverty" put out by the Census Bureau are completely and thoroughly dishonest.  As Mary McCarthy famously said about Lillian Hellman, everything about them is a lie, including "and" and "the."

I do not think that the poverty measure began as a scam.  It was created in the 60s as a very crude way to get a handle on poverty in the sense of material deprivation.  The Census Bureau calculated the cost of a basic market-basket of food for a family of four, and multiplied by three to account for all other family expenses.  If a family did not have a level of income equal to three times the cost of the basic food budget, it was deemed to be "in poverty."  While the measure was crude, it was a bona fide attempt to get a handle on material deprivation.  Since then, the poverty threshold as originally set by this measure has been adjusted for inflation.   For 2011 the poverty threshold for a family of four with two children by this original measure was $22,881.

Over the succeeding years the government put in place numerous programs to alleviate material deprivation:  welfare, food stamps, public housing, Medicaid, school breakfast and lunch programs, etc., etc.  Means-tested anti-poverty programs today approach $1 trillion in annual spending.  Here is a report from the Heritage Foundation putting the total Federal, state and local spending on means-tested welfare programs for fiscal 2011 at $927 billion.  The report collects Federal data for some 79 programs.

For 2011 the Census Bureau reported 46.2 million, 15% of the population, in "poverty."  Both those figures are well up from the late 70s, when supposedly they were about 25 million and 12% of the population.

Wait a minute.  $927 billion of spending on 46.2 million people is over $20,000 per person, over $80,000 for a family of four.  That is higher than the median income for a family of four in the United States. and if simply distributed as cash would be nearly four times as much as necessary to get every single one of the 46.2 million out of material-deprivation poverty.  How could we possibly be spending all that money and the reported "poverty" goes up instead of down?

The answer is that the Census Bureau long ago decided that almost none of the government spending counts against the measure of poverty.   The measure of "poverty" turns only on "cash income."  All in kind benefits are excluded.  Just to give a few prominent examples of what is excluded:  food stamps, school lunch programs, Medicaid, all housing assistance.

There is nothing honest about the exclusion of in-kind benefits from the definition of poverty.  The main results of the exclusion are (1) the public thinks that the "poverty" rate is measuring something about material deprivation, but it is not, and (2) additional spending, even hundreds of billions of dollars of it, cannot ever make any dent in the poverty rate, even as the government spends more per family in poverty than the median income of a family of four in the entire country.

Even as the mainstream (and not so mainstream) media has fallen hook line and sinker for this scam, at least some scholars and think tanks have been onto it, and have been trying to demand from the bureaucracy some real numbers showing the impact of in kind benefits.  The GW Bush administration made at least some modest efforts to push for a new measure taking account of in kind benefits, but never actually implemented any reform.   Needless to say, the idea of honest numbers horrifies the poverty bureaucracy, not only in the Census Bureau but throughout the government, because of the potential to reveal the dishonesty and undermine the basis for the massive ineffectual spending.

But once the Obama administration came in, the bureaucrats knew that they had friends who would cover for them.  In January 2011 Obama's Census Bureau released information that they were considering various alternative measures, supposedly to take account of in kind benefits.  Then, last Wednesday (November 14) the Census Bureau released the results of their research on the "alternative measures".  Surprise!  Even with the inclusion of in kind benefits, the measure of poverty has increased!  Now the poverty rate is 16.1%

With the $927 billion of annual means tested anti-poverty spending, how can this possibly be?  Simple: the new measure of poverty is no longer even attempting to be an absolute measure of material deprivation, and now is explicitly a relative measure with respect to 33rd percentile of the population.  By the way, read their release and, for that matter, the full report, and try to figure that out.

They think they have dodged a bullet and have come up with something so impenetrable that no one will ever figure it out.  Now we can safely have a measure of "poverty" that has nothing to do with material deprivation, that can be used to sell the gullible public on ever more "anti-poverty" spending, and that can never go down no matter how much anti-poverty spending there is.

Mickey Kaus is onto the scam.  Is anyone else?

The SEC In Action

I went to a panel today discussing the JOBS Act. The Act itself is only tangentially related to jobs, and is rather intended to deregulate, somewhat, the cumbersome and expensive process of raising capital in the public markets. 

One of the panelists was a current SEC commissioner, Daniel Gallagher.  He reported on how they are doing at implementing the Act.  Part of the JOBS Act calls for deregulation of the process sometimes called "crowd funding." But in the way of Washington, it is not self-implementing, but rather provides that it will take effect only on the adopting of new rules by the SEC.  Unfortunately, the SEC is woefully backed up in drafting all the other rules that Congress has asked it to draft. 

So Gallagher started talking about where they are. There are some 100 or more rules called for by the Dodd-Frank law, all of which were suppposed to have been adopted by sometime in 2011, and all still in limbo without a projected date. The "crowd funding" rule is caught in this endless queue. Meanwhile, what rule is actually moving forward and has reached the desk of the Commissioner for review? Why, the Conflict Mineral Rule! What is that you ask? Not that I'm one to stand up for warlords attempting to profit from "blood" minerals, but let's just say that conflict minerals have absolutely nothing to do with raising money in the US capital markets, or with any conduct in the US at all. However, all of the business of the SEC is backed up behind this cause. And by the way, the Commissioner candidly admitted that the Blood Mineral Rule will be extremely expensive to comply with, maybe even more expensive than the entire benefit to be gained from the deregulation of the JOBS Act. 

That's how our government works. 

Hotel Lightbulbs

Here in Washington at the Federlist Society convention at the Mayflower hotel. It seems like a very nice hotel, but, like every other hotel I have stayed in for the past couple of years, the lighting is terrible. You turn on the lamp, and at first nothing happens; a second or two later, the light comes on with a pale, palid glow. You look under the shade. Sure enough, it's one of those squiggly compact fluorescents. 

So yet another person has been convinced that we can change the weather by changing our lightbulbs from ones that work to ones that don't work.  We may be annoying the customers, but at least we are saving the planet!  Not that anyone can actually articulate the causal mechanism by which non-functional lightbulbs can change the weather.  How did we get into the grip of this mass hysteria? 

Thankfully we don't allow these terrible lightbulbs into the Menton house. While they were still available, I went out and bought hundreds of incandescents. They should last until the Congress comes to its senses and makes them legal again.  

Meanwhile, not satisfied with merely ruining lighting, the administration is hard at work attempting to replace all energy that works with energy that doesn't work. Who needs 24/7 electricity when you can have electricity that goes on and off with the whims of the wind and the sun?  And as an added benefit it will be three or five times as expensive.

And we laugh at medieval people for thinking the earth was flat.

Governor Cuomo and LIPA

More than two weeks after the big storm, the lights are still out in big parts of Long Island.  Their utility out there is called LIPA -- the Long Island Power Authority, a New York State agency.  Not only has LIPA done a poor job of getting the power back on, but they are famous for having about the highest rates in the country, except for some remote places in Alaska and Hawaii.

Our Governor Andrew Cuomo has called for an investigation of the performance of the various utilities, and particularly LIPA.  He has appointed a commission to "investigate."  How could their rates be so high and their performance at the same time so bad?

Well, it's not too hard to figure out. There's a rather good summary on Wikipedia.

In the 1990s and before, Long Island had a utility called Long Island Lighting Company, LILCO. LILCO was private, not a state agency.  In the 70s and 80s LILCO got the idea to build a nuclear power plant at Shoreham on the North  Shore of Long Island.  They got a Federal permit and went out and built it, at a cost of about $6 billion.

By the time the plant was completed in about 1984, the post-Three Mile Island nuclear scare was in full swing. To open the plant, LILCO needed the participation of Suffolk County and New York State in just one thing -- an emergency evacuation plan.  Both flatly refused to cooperate. The then Governor, also Cuomo (first name Mario - father of the current Governor) ordered state officials not to  approve any plan.  (Full disclosure:  the elder Cuomo is Of Counsel at my law firm.)  LILCO gave up, and was left with a fully-completed, functional nuclear power plant that it could not open. 

The elder Cuomo came up with a plan to have a state agency, LIPA,take over LILCO and close down Shoreham.  Basically, LIPA would issue tax-exempt bonds to take out the LILCO debt on the power plant.  Those bonds would bear a lower interest rate because of their tax-exempt status.  Essentially, close to half the cost of the plant would be put to the Federal government through the tax exemption on the bonds, but the rest would be left to the Long Island ratepayers, even though they had no usable facility to show for the money.  The Republican congress of the 90s set out to stop this by making bonds issued to finance takeovers of utilities ineligible for tax exemption, but in congressional horse trading, New York got the LILCO takeover excluded.

The LIPA takeover of LILCO was not completed until the late 90s, by which time the elder Cuomo was out of office.  But I think he would be pleased to take credit for the result.

And the result is, LIPA ratepayers have to pay not only for the facilities that provide their electricity, but also for an entire nuclear power plant, fully built and discarded.  I'm sure there are other factors, but is it then any surprise that the Long Island ratepayers have about the highest rates in the country, and at the same time LIPA is always squeezed for funds and skimps on maintenance?

And by the way, since LIPA is a state agency, who is responsible for it?  The Governor is not the CEO, but he does appoint most of the Board.  So, Governor Cuomo, exactly who is the commission going to investigate?  I guess not you, because you appointed the commission and they know better.

The "Balanced Approach" To Deficit Reduction

Here is Francesca Chambers of Red Alert Politics reporting on President Obama's recent statements to the effect that the American public, by re-electing him, has given him his mandate to raise marginal tax rates on the "rich" (I prefer the term "high earners").  This is all a part of the "balanced approach" to deficit reduction -- to reduce the deficit, you need "balance" between  spending reform and revenue increase.

Ms. Chambers challenges the president's math as to whether he really got a mandate.  I challenge his math as to whether any conceivable program of tax increases on high earners can make even a dent in the deficit problem.

Here's my math.  In year one, the restoration of Clinton-era marginal tax rates on taxable incomes above $250,000 is thought to be likely to raise around $42 billion, per CBO figures reported at Political Carnival here.  The projection/guess is that that figure will then go up  modestly with economic growth in succeeding years, maybe by $10 billion per year.  That's how they get a figure of $1 trillion over 10 years.

OK, here's what happens with Medicare/Medicaid over the same time period.  In year one, they are up $50 billion, just the one-year increase eating up more than the entire yield of the tax increase on the high earners.  In year two, M/M are now up $100 billion over today's base; the tax increase on the high earners yields $39 billion for that year above today's base, per CBO.  In year three, M/M are up $150 billion over today; the high-earner tax increases yield $64  billion extra.  In year 4, M/M are up $200 billion; the tax increases yield $75 billion.  Year 5:  M/M up $250 billion; tax increases yield $87 billion.  Continue for as long as you can stand it.  It gets worse and worse every year.

Did you notice that I wasn't even compounding the M/M increases? I was just adding a flat $50 billion per year, which is the projection for next year.  In any self-respecting Ponzi scheme like M/M, the increase compounds.  At 7% CAGR, a $50B increase this year becomes $53.5B in year 2,  $57.25B in year 3, $61.25B in year 4, $65.54B billion, and so forth.

So to keep up with the M/M increases using only income tax rate increases on the high earners, you would need to increase the rates not by 3%, but more like 5%, and not just one time, but every year.

  36% this year, then 41%, then 46%, then  51%, then 56%, and so on.  Since we're starting at about 36%, in 13 years we'll be past 100% tax rates on income above $250,000.  And don't mention that to New York State and City -- they think they get 12% of your income.  If you concede them the 12%, New Yorkers will be past 100% income tax rates in 10 years.  What's your plan for year 11?

Nothing about this is really much different from Madoff.  The math is the math.  The only thing that counts is ending the inexorable auto-pilot geometric increases in the big entitlements.  Whether or not you think that tax rate increases on high earners are a good thing, or whether you think that they ultimately hurt the low earners by degrading economic performance and decreasing opportunity, it is still indisputable that as long as the big entitlements are on auto-pilot geometric growth, such tax rate increases are a complete drop in the bucket.

Has President Obama actually thought this through?  To the extent he has any plan at all, I think it's something like, I can keep this thing going for another four years, and after that it's not my problem.  Or, perhaps, this math is too hard for me, but I really want to punish the successful for their success, so I'm going to do it.

Low Income Public Housing On The Barrier Islands?

Have you been struck, as I have, by the sad tales in the press over the past couple of weeks of the suffering of the residents of the high rise low income public housing projects in Coney Island and the Rockaways?

These areas have lost electricity for weeks, and much is still not back on.  Many stores have been closed and have still not reopened.  With elevators out of commission, residents have had to walk up to their apartments,often ten or even twenty flights up.  And in high rises the water also doesn't work without electricity.  These are very serious problems, even more so for the elderly or disabled.

Excuse me, but how could it possibly be that we have high-rise, electricity-dependent low income public housing projects sitting on the barrier islands?  (Yes, Coney Island and the Rockaways are barrier islands.  Look at that map in the previous post.  Coney Island is right at the top of the red pin; the Rockaway Peninsula is immediately to its right.)

It is a given that a barrier island can be overwashed by the ocean in a big storm at any time, and over the course of 50 to 100 years it becomes almost certain that it will happen at least once. What possible excuse is there for housing the dependent poor, elderly and disabled in electricity-dependent high rise buildings in these places?  This is a very clear example of the total inability of government entities to make rational decisions.

Of course, these buildings were built about 20 to 50 years ago.  Nobody's still around to be held accountable.

As to the other people with homes on the barrier islands, I'm sorry but you should not have a house there unless you are prepared to lose it, including accepting the financial consequence of the loss.  And I say this as someone who used to own a house on Fire Island.  (On that map, our house was right about where you see the "ay" in "Great South Bay."  We sold it in the late 90s.)  I was never comfortable owning on the barrier beach, and was relieved when we sold the house.  My neighbors thought I was crazy. Many had summered there their whole lives without ever having a problem, although much of Fire Island had been destroyed in the great hurricane of 1938.  This time, I understand that most every house in our former community suffered at least  some damage, although the town was not wiped out.

Anyway, the idea that the government can just use the infinite credit card to make it so no one with a house at the barrier island needs to take any loss from a hurricane -- that just can't work.  Sorry.  We'll see how long the current illusion lasts.