Two New Yorks: Rich And Poor In Chelsea

Our recently anointed Democratic candidate for Mayor, Bill de Blasio, is making the "tale of two cities" and the "crisis of income inequality" the principal themes of his campaign.  Here he is quoted at The Daily Beast a couple of days ago:

The Bloomberg administration managed to ignore the inequality crisis. He claimed he wanted a third term to address the economy, yet very few policies were put in place to address the economic suffering that people are going through. So, yeah, I will be very focused on fighting inequality. That to me is the job of a mayor.

So I want to return to our look at two hypothetical families of four in the Chelsea neighborhood, just a few blocks from where I live.  Both live in comparably sized two bedroom apartments.  One has a cash income from employment of $100,000, which officially puts them at about the top 20% of the income distribution.   This family rents its apartment for $4000 per month, $48,000 per year, which is at the low end of what a two bedroom goes for in this neighborhood.  The other family has little or no cash income and is officially in poverty.  It lives for little or no rent in one of the low income public housing projects in the area, say the Robert Fulton Houses along 9th Avenue between 16th and 19th Streets. 

Now consider this question: If well being is measured by access to physical goods (housing, food, clothing, medical care, etc.) as opposed to the arbitrary government measure of "cash income," which of these two families is better off?  The answer is remarkably close and could go either way.

The "rich" family pays about $25,000 in income taxes and $48,000 in rent, leaving $27,000 for everything else.  The "poor" family gets the $48,000 apartment for free and pays no income taxes.  Its food stamp allowance is about $660 per month (almost $8000 per year) and its cell phones are free.  But they do have a problem of no cash to spend on anything.  Or do they?

Actually, there are many ways to get your hands on some cash if you are poor.  Method number one is welfare, now known as TANF.  That is time limited to 5 years, but it's a start.  Then there is social security disability.  You may qualify for disability, or maybe one of your kids does.  For example, a learning disabled kid is entitled to an SSDI check.  Over 6 million children ages three to 21 received checks for disabilities according to 2010 data here.  (According to NYCHA data here, 41% of NYCHA tenants receive some form of a monthly check for social security, SSI, veteran's benefits, a pension, or other.)  Next comes the Earned Income Tax Credit.  That requires a modest amount of work, such as a part-time job with the City sweeping the parks, or a job at McDonald's.   With a 20 hour a week minimum wage job, you'll earn about $7500 for the year, and then you'll get another about $5000 - 6000 from the EITC.  Then of course there is off the books income of various sorts, and unrecorded cash contributions from the father(s) of the kids.  Obviously not all of the poor people have all of these sources of cash, but the majority clearly have one or more.   

Do we have any way of knowing that all or almost all of the poor have access to substantial amounts of cash?  One way is by observation of the low income housing projects.  Thus I took a walk yesterday over to the Robert Fulton Houses.  Here I have arrived at the main entrance:

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I've never been able to find any government in-kind distribution program to provide the poor with air conditioners.  (There is a program to pay the electricity bill for cooling, but that's different.)  So do some or most of the poor people living in RFH have air conditioning?  Here is a picture taken on West 18th Street looking at the northernmost of the three big RFH buildings between 18th and 19th:  

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Other than one apartment there on the 11th floor, it looks like every apartment has one or more air conditioners.  But this was a cool very late summer day, so the 11th floor people may have removed the air conditioners from the windows for the season.  Anyway, now looking south at the two big buildings between 16th and 18th Streets, it's the same thing -- hundreds of air conditioners:

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Another question:  Do the poor people living in RFH have enough cash to buy cars?  In fact, the buildings are surrounded by parking lots with spaces reserved for tenant parking.  Here is a view of one of the lots:

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And here's another lot across the street:

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A reserved parking spot in this neighborhood goes for at least $500 per month, $6000 per year, for someone paying cash.  Very few people with cash income of only $100,000 per year can fit that in their budget.

A few other comparisons:

(1) Medical care.  The "rich" family likely gets medical insurance through work, but must make some contribution to the premium, plus there will be some deductible and some co-pays.  That's likely a couple of thousand per year.  The "poor" family gets Medicaid.  New York State pays in excess of $10,000 per beneficiary per year for its Medicaid program, so by the measure of the cost to the taxpayers, the poor family gets medical benefits worth in excess of $40,000. 

(2) Leisure time.  The majority of families earning at the $100,000 level have at least two income earners, and at least one full (or more) time earner.  The poor family has at most one part-time earner.  That's a big difference in leisure time, advantage to the poor family.

(3) Taxes.  The "rich" family pays $25,000 in income taxes, and its landlord pays real estate taxes on the building.  The "poor" family pays no income taxes, instead getting an EITC credit, and RFH pays no property taxes. 

So which family is better off?  By the government's official measure of "cash income," it's $100,000 for the rich family and $7500 for the poor family, a disparity of a factor of over 13 in favor of the rich.   By the measure of access to physical goods and services the poor family very likely comes out ahead.  If you value the Medicaid at what the government pays for it, then the poor family gets at least $48,000 for the apartment, $40,000 for Medicaid, $6000 for the parking space, $8000 for the food stamps, $2000 for the cell phones, $6000 for the EITC, and of course there is the $7500 for the minimum wage job at McDonald's.  That's a total of $117,500 (before getting to any off-the-books cash or SSDI, which would be additional), compared to $75,000 after tax for the "rich" family. 

But the rich family does have one very valuable thing that the poor family does not:  its independence.  And with its independence goes hope for the future.  If they work hard and continue to strive, the $100,000 family could well find itself in five or ten years earning $200,000 and moving up to a much nicer apartment and maybe even getting that parking space, plus saving up a nest egg.  The poor family is trapped in place.   If they make the mistake of earning more observable cash, their rent will be increased by 30% of the increased earnings (that's how it works at NYCHA), and then they start taking away the other benefits as well.  The worst possible thing a single mom of this family could do would be to marry a man with a middle class income, which would disqualify the family for the food stamps and the cell phones and the Medicaid and increase the rent through the roof.  So the poor family is virtually forced to remain in a situation where its measured cash income will keep it well within the poverty level.    

Thus the way actually to allow the poor family to become better off is to decrease the benefits, and/or put time limits and caps on all of them.  Got that, de Blasio? 

Is It Possible To Live In Manhattan And Be In "Poverty"?

Here in famously expensive Manhattan, there is virtually no such thing as an available unsubsidized apartment that does not cost more than the entire Federal Poverty Level income for the smallest family that can fit in that apartment.  So just about everyone in Manhattan lives in a home whose rental value alone exceeds FPL.  The obvious conclusion from that is that there can be no such thing as poverty in Manhattan.  Right?  

Not so fast!   According to the Census Bureau the official poverty rate for New York County (basically the same thing as Manhattan) is 17.6% for the most recent 2007-11 data.  That's actually higher than the 14.5% rate for all of New York State.  With a population exceeding 1.6 million, Manhattan supposedly has about 285,000 people in "poverty."  Yet essentially all of them live in apartments whose annual rental value alone exceeds FPL.  What are we missing?  The answer is highly relevant to understanding the so-called "crisis of income inequality."

The answer is not that there are terrible neighborhoods, slums, where the housing is falling down and poor people are forced to live. We don't have slums in Manhattan any more, at least not slums in the sense of places where the housing is inexpensive.  Harlem and the Lower East Side have both become desirable neighborhoods while nobody was looking.  A search of the very comprehensive Streeteasy data base reveals just one apartment for rent in Manhattan for under $1000 per month.  It's a very small (400 sq. ft.) walk up studio in Harlem only suitable for one person, for $950 per month.  That's $11,400 per year, as against FPL for a single person of $11,490.    Every other Manhattan apartment on Streeteasy has a rent above FPL.  This Manhattan Rental Market Report for August 2013 shows that Harlem is still the least expensive neighborhood to rent an apartment, but the average price for a studio there is now $1481, or $17,772 per year, which is well above FPL for a family of 2.

No, the answer is that the people deemed to be in poverty do not pay full price, or anything close to it, for their Manhattan apartments.   There is a dizzying array of subsidies and handouts available to people to get them into housing in Manhattan if they can define themselves into poverty.  There is low income public housing, Section 8 vouchers, and "affordable housing" and "income restricted" housing of many sorts.  Critical to the entire enterprise is the fundamental proposition that nothing about the apartment you live in counts as income for purposes of determining your income or poverty status.  Obviously, if a the value of a Manhattan apartment, measured by the market rent that everyone else pays for a comparable apartment, counted as part of "income," then it would be impossible for anyone in Manhattan to be counted in poverty.   

Thus, a few blocks from where I live we have the neighborhood of Chelsea, where the cheapest 2 bedroom apartment you can find on the market goes for about $4000 per month.  The neighborhood also has several large public housing projects, where residents are almost all deemed to be in poverty, and pay nothing or next to nothing for their 2 bedroom apartments.  In a very real sense they are receiving income of at least $48,000 per year in the form of the housing -- far above the FPL.  None of it counts in the official measures of income or poverty.

Compare the lives of two families of four living in Chelsea in 2 bedroom apartments.  One earns about $100,000 per year.  It pays about $25,000 off the top in income taxes.  Then $48,000 for the apartment.  Transportation to work is several thousand per year.  Cell phone service is another couple of thousand.  No food stamps or clothing allowances.  This is a very tight budget.  The family across the street in poverty gets the $48,000 apartment for free. Food stamps pay for the food.  The cell phones are free.  Medical care is free.  In measured income statistics, the difference between these two families is $100,000 and zero, enormous income inequality.  In actual consumption, the difference between them is not very large at all.

The so-called "crisis of income inequality" is all over the news right now, from the de Blasio mayoral campaign, to many, many articles from the left-wing punditry.  Try this one today from E.J. Dionne of the Washington Post if you can stand it.  Not one of these people uses remotely honest data to measure poverty or income inequality.

Will Obamacare Destroy The Middle Class American Family?

As readers here know, my main prediction for Obamacare is that it will go quickly into a death spiral as the young and healthy decline to sign up.  But if enough healthy people sign up to enable it to last for several years, there is another major problem that few are mentioning, namely the hugely destructive effect that it is likely to have on the American middle class family. 

The destructive effect arises from the fact that the subsidies under the law are to be allocated based on household income.  Here is a summary of how it works from Kaiser Health News, via PBS, interviewing a partner of Jones Day named Cathy Livingston: 

The law requires consumers to contribute a specific percentage of income to the premium. It's a sliding scale based on the federal poverty level. For example, if your household income is at 150 percent of the FPL, you are required to contribute 4 percent of income toward the premium. If your income is at 300 percent of poverty, then you're required to contribute 9.5 percent. The subsidy then makes up the difference between that amount and the cost of the benchmark plan.

The subsidies continue all the way up to "400% of FPL," which is currently almost $100,000 for a family of four.

I think it has never occurred to these geniuses that people can manipulate their eligibility for subsidies by reconfiguring who is in their household or their family.  Do you think people wouldn't do that?  Well, let's consider the poverty scam once again. 

Have you ever seen the line "the best way out of poverty in America is to get married"? Both liberals and conservatives tout marriage as some kind of cure for poverty.  See, for example, a study from Brookings here, and one from Heritage here.  But they are just engaged in the usual confusion between "poverty" as commonly understood (physical deprivation) and "poverty" as defined in federal statistics (cash income for the arbitrarily-defined "household").  A more honest way to put the same proposition is:  "If you want to have a middle class income while also qualifying for government handouts by reason of being in 'poverty,' then don't get married.  Simply define yourselves as two families instead of one.  The people with the income go in one family and the people without income go in the other."

And thus, with government means-tested anti-poverty handouts now approaching $1 trillion per year, we get a rate of non-marital births for African Americans of 73%, and for whites of 29%.  What this shows is that people are not stupid and know how to organize their lives in order to collect available handouts.  Still, most of the people collecting food stamps and housing vouchers would be at least somewhat toward the lower end of the income distribution even if they combined themselves into traditional families.

But now with Obamacare, we are going to be pushing the incentives to define yourselves as separate families well up into the middle and even upper middle class.   It's not just that every non-working spouse can be re-defined into poverty by failure to marry.  Recognize also that the so-called FPL is more per capita the smaller the family.  According to this HHS table, the 2013 FPL is $11,490 for an individual, $15,510 for a family of two ($7755 per capita), $19,530 for a family of three ($6510 per capita), $23,550 for a family of four ($5888 per capita), $27,570 for a family of five ($5512 per capita), and so forth.   Multiply all those numbers by 4 to get the Obamacare subsidy cutoffs.   At any level of income, groups of single individuals are at a higher "percent of FPL" than multi-person families.  For example, two people each making $23,000 are at about 300% of FPL as a married couple, but only 200% of FPL as individuals. 

Any couple that gets married will immediately greatly decrease its Obamacare premium subsidies.  Kids only make it worse.  The effect is even greater the more the couple's income is skewed to one earner.  

Of course, all this is assuming that this couple is signing up for health insurance at all under Obamacare, which many, many young couples will not do.  

Global Warming Cognitive Dissonance

The global warming thing is rapidly falling apart, but a lot of loud and/or powerful people owe their careers to it.  So with each passing month the contrast grows starker between the evidence of the real world and the program of the zealots.

On the one hand: 

The global temperature as measured by UAH for August came in at +0.16 deg C, remaining well below the peak of +.68 deg C reached way back in 1998, and showing no signs of increasing.

The global temperature as measured by RSS (the other source of satellite-based temperatures) also remains flat and, according to this post at Watts Up With That from Christopher Monckton on September 11, has had a completely flat trend line now for 17 years and 7 months.   Here's the graph:

 

Do you notice that you haven't heard much lately about the crisis of Arctic sea ice?  That's because Arctic sea ice has had a record increase this year.  September is the month of lowest sea ice in the Arctic, so when people raise a scare about an "ice-free" Arctic, they are talking about this time of year.  Last year the September minimum was under 2.5 million sq.km., but this year it's back over 3.5 million sq.km.  Source here.

 

Perhaps it is the Antarctic sea ice that is shrinking?  No, yesterday that actually set a record high for this date, and it has set some 42 daily records this year.

Down in Australia an election has thrown out the Labor party and brought in the Liberals (we would call them conservatives).  The new guys are promising promptly to repeal the carbon tax and disband most or all of the climate bureaucracies:

Tony Abbott’s coalition signalled that it would disband Australia’s Climate Commission – an independent scientific body that provides reliable information on climate change to the public. In response to a report the commission released, warning that extreme weather was made more likely by climate change, Abbott said: “When the carbon tax goes, all of those bureaucracies will go and I suspect we might find that the particular position you refer to goes with them.”

And on the other hand:

The front page of the Wall Street Journal and many other sources today report on new regulations from the EPA that will effectively ban all new construction of coal-fired power plants in the United States.  This report at Town Hall calls the new rules a "De Facto Ban" on coal power plants.  Do they even know that China continues to build new coal power plants at a rate of about one a week?  Let alone that the whole global warming thing isn't happening?

And check out 350.org, energetically organizing a movement at hundreds of college campuses seeking divestment of ownership of companies in the fossil fuel business.  I'll bet your college has a branch!  It's run, of course, by rich kids with nice cars who have never gone a day in their lives without electricity. 

Do Government Income Support Programs Increase Or Decrease Measured Income Inequality?

To listen to the voices on the Left, income inequality is a big problem, and the government needs to fix it promptly.  But do government programs to aid poor and low-income people actually increase or decrease income inequality as measured by government statistics?  The answer is, they increase it.  Does that seem counter-intuitive?  Maybe, but it's clearly true.  Of course, this is excellent news for the politicians and bureaucrats who make a living using government statistics to advocate for more money for the government and for their programs.

One can find multiple examples on any given day, but I'll give a couple of current examples of voices calling for government action to fix the crisis of income inequality.  Our new Democratic candidate for Mayor, Bill de Blasio, made exactly that the central theme of his just-concluded victorious campaign for the nomination.  His core campaign document is titled "One New York, Rising Together."  Its introductory paragraphs identify the "crisis of income inequality" as the problem that must be "at the center of our vision":

 Nearly 400,000 millionaires call New York home, while nearly half of our neighbors live at or near the poverty line. Our middle class isn’t just shrinking; it’s in danger of vanishing altogether.  Addressing the crisis of income inequality isn’t a small task. But if we are to thrive as a city, it must be at the
very center of our vision for the next four years.

Or, to take just one of many, many examples from the New York Times, here is what Frank Bruni had to say in his op-ed column in yesterday's election day edition: 

It is indeed the case that income inequality in New York city has worsened during the Bloomberg years, to an extent that's morally unacceptable and perhaps socially untenable.

Well, if income inequality is indeed a "crisis" and "morally unacceptable," why do these people propose so-called solutions that will clearly make the problem worse, at least as measured by the same statistics they themselves are using to define the problem in the first place?

When you go through de Blasio's document, you find out that he covers three main areas of income redistribution programs:  "food security" programs, "affordable housing" programs, and medical care programs.  He thinks all of these programs should be grown and strengthened.  But something is immediately obvious: all of the programs are in-kind distributions.  Therefore, none of the spending on these programs counts as income to the recipients, and none of the spending serves to reduce "income inequality" as measured by the government statistics to even the slightest degree. 

But it's worse than that.  The existence of the programs creates strong incentives that have the effect of greatly increasing measured income inequality.  Measured income inequality is to a large degree a function of family definition, and these programs cause families to redefine themselves to qualify for the programs.   

Consider a family of four, father, mother, and two children.  Father makes $50,000 a year.  This is a middle class family.   It does not qualify for food stamps or low income public housing, and probably not for Medicaid. (I'm not so sure after the upcoming Obamacare expansion of Medicaid.)  Suppose these people realize that they can enhance their well-being by continuing with the income but also collecting on the in-kind programs.  Husband moves out.  Now we have one person with a middle-class income, and three in abject poverty, with no measured income.  If the father gives substantial funds to the family, it will almost certainly be done in a way not captured by the statistics, so no change.  Now the mother and two kids qualify for food stamps, housing and Medicaid, and they go out and collect it.  None of it counts in the measures of income inequality, so we still have one middle class guy and three people in abject poverty.  And that will continue to be true no matter how much spending may be increased on public housing, food security, and Medicaid.

So the result of the programs in the real world of physical well being is that we previously had a middle class family with a $50,000 income, and now we have four people with the same combined $50,000 middle class income and also food stamps, public housing and Medicaid.  But in the world of government income statistics, we previously had a family of four with $50,000 income, therefore all solidly middle class, and now we have one guy with a $50,000 income and three people with zero income, therefore in deep "poverty." 

That's for that one family.  To the extent that spending on the in-kind programs is substantially increased, it is highly likely that more families that have so far resisted getting into the separate-and-collect mentality will cross the line and take the handouts.  And thus will measured income inequality increase., even as the income redistribution programs expand.

You can be sure that de Blasio and the city bureaucracy will use the coming increase in measured income inequality to advocate for yet more increased funding for the in-kind redistribution programs.   Are we really so stupid to keep getting taken in by this?

Regulation In Action At The SEC

Looking for examples of how smart, all-seeing, all-knowing regulators can succeed in removing all risk from human existence, we turn today to the SEC.   We'll start with a little history, and then move on to a current issue.

You may know the SEC as the guys who missed Madoff, but I'll bet you're not aware of the details of just how bad that one really was.  According to a Wikipedia summary here, Madoff started in business in 1960, and closed his business only when arrested by the FBI in December 2008.  The arrest occurred only after Madoff admitted to his sons that the business was a scam, and that he was out of money to pay redemptions; one of the sons then turned him in.  His fraud was never uncovered by the SEC.  Yet beginning no later than 1999 a guy named Harry Markopolos informed the SEC "that he believed it was legally and mathematically impossible to achieve the gains Madoff claimed to deliver."  According to Markopolos, quoted at CBS, "It took me five minutes to know that it was a fraud.  It took me another almost four hours of mathematical modeling to prove that it was a fraud."  

Markopolos didn't just inform the SEC in 1999 and forget about it.  He kept going back and back and back, providing all kinds of detail as to why it had to be a fraud.  After being ignored by the Boston SEC office in 2000 and 2001, he turned repeatedly to the New York office, to no avail.  The SEC even sent people to Madoff's office to look at documents, and they came away without finding anything.  At this link there is a lengthy 2005 written submission that Markopolos made to the SEC laying out in great detail why Madoff had to be a fraud.  For example, Madoff had explained to investors that his returns were always positive because he hedged using options.  But Markopolos tells the SEC:

Mathematically I have proved that BM cannot be hedging using listed index put and call options. . . .  [I]f BM was really buying OTC index put options, then there is no way his average annual returns could be positive!!  At a minimum, using the cheapest way to buy puts would cost a fund <8%> per year.  To get the put cost down to <8%> BM would have to buy a one-year at-the-money put option and hold it for one year.  No way his call sales could ever hope to come even fractionally close to covering the cost of the puts.

Markopolos ultimately wrote a book about his efforts entitled No One Would Listen.  Of course, the SEC should well have been able to figure this one out on their own.  But even with a guy totally on to it and laying it all out for them and literally hammering them with it for nine years, they couldn't do it. 

And then there are the hundreds of other Ponzi schemes over the years.  Always, they come to light only when the operator runs out of money to pay redemptions.  Has there ever been one single example of the SEC finding a Ponzi scheme before it collapsed on its own?  I have looked hard and asked many people.  I do not believe there is a single example. 

If there isn't a single example (or even if there are one or two), why exactly is the SEC using up taxpayer resources claiming a role in this area?  It's just a matter for criminal prosecution after the fact.   But somehow we believe that having "experts" at the SEC looking into this can eliminate the risk of crooks.  It seems that no amount of experience to the contrary can ever teach us that this can't work.

To turn to current events, today the SEC is applying its skills to the regulation of Money Market Mutual Funds.  The concept again is that the smart experts can eliminate all the risk, presumably without side effects (because if risks come with benefits, we should be entitled to have the risks). 

Again, a bit of history.  In 2008 a large money market fund, Reserve Primary, sustained a substantial loss when Lehman filed for bankruptcy, and its net asset value fell below $1 per share.  The loss came to about 2 cents per share at Reserve, meaning that they had 98 cents left to redeem each dollar share.  But there was an immediate run at Reserve, as large investors sought to get their money out immediately.  Runs also began at other money market funds, leaving them at least temporarily with not enough cash to pay redemption requests, and some say that the market "froze."  The Federal government promptly (and very unwisely, in my view) stepped in and guaranteed the assets of all money market funds.  (Those guarantees have since been rescinded, but the market has undoubtedly learned a lesson that the guarantees will return when the government wants to do it.) 

Again, one might ask, if the SEC is all-knowing and all-seeing experts, why hadn't they foreseen the 2008 money fund crisis coming and already provided for it?  The answer is, that their job is not to maintain a healthy horse, nor even to close the barn door after the horse has run away, but rather to be sure that the horse can never escape again by burning down the barn and shooting the horse.  So, carrying out that mission, the SEC put in place in 2010 a large list of money market "reforms" for the purpose, they said, of "better protect[ing] investors."  There is a list at this link.  The main ones were requiring a "minimum percentage of . . . highly liquid securities," requiring "higher credit quality" in assets held by money funds (a very complicated rule to implement), and requiring "shorter maturity limits" for securities for securities held by money funds.

The result was entirely predictable:  Since these rules took effect, you basically haven't been able to earn more than 0.01% interest on a money market fund.  Every so-called "reform" looked at the risk/reward trade-off in some area and required taking the option of the least risk.  No risk, no reward.   

I don't know about you, but I'd be perfectly willing to risk losing 2% on my money fund every once in a while, or even 5%, if I could get some regular positive returns the rest of the time.  Why am I not allowed to do that any more?  And believe me, they haven't driven the risk of loss to zero.  So now it's all downside.  Thanks, guys! 

And now this year the SEC is out with another round of proposed money fund "reforms"  Here's a link.  It's 698 pages long!   Well, what could go wrong with adding a few more (hundreds of pages of) regulations when you've already driven yields down to 0.01%?  The accounting firm PWC in a summary of the effects of the new rules states:

Existing and future sponsors will have to decide whether it will be economically viable to manage MMFs given the proposed regulation.

No kidding.  I guess the American people aren't smart enough to make their own decisions about risk and reward in money market funds.  So we just have to turn those decisions over to the people who missed Madoff.