Foolishness On "Income Inequality" From The Mayors

Yesterday's New York Times predicted that the United States Conference of Mayors would shortly issue a report on income inequality, and sure enough it promptly turned up here.  The Report was actually prepared for the Conference by a consulting firm called IHS Global Insight.  Friends of mine tell me that that firm is generally well respected in the field of economic consulting.  Perhaps that is true, but you would never know it from this Report.

According to the Times, Mayor de Blasio of New York is the "chairman" of the "task force" that is "tackling" the issue of income inequality for the Conference of Mayors.  The task force was apparently formed at the prior meeting of the Conference in Dallas in June, but its next meeting took place yesterday in New York, seemingly coincidentally with the issuance of the Report.  I guess they just left it up to de Blasio to come up with what to tell IHS, because the Report more or less parrots de Blasio talking points on the issue.

The problem with this Report is that it completely accepts U.S. Census income data at face value, without considering what is included and not included in those data and whether those data are suitable for the purpose for which they are being used.   The result is a series of howlers, occurring both in the sections on diagnosis of the issue and in the prescriptions for solution.

The centerpiece of the income inequality discussion is a chart of income by quintile of the population for selected years since 1975.  The chart is derived from U.S. Census data.  It seems to lose some formatting in my copying, but I think it is still legible, so here it is:

FIGURE 4: SHARES OF INCOME BY QUINTILE

            Quintile                 1975          1985          1995          2005          2012   
 
% of income
Lowest 20%             4.3            3.9            3.7            3.4            3.2
Second                10.4           9.8            9.1            8.6            8.3
Third                  17.0          16.2          15.2          14.6          14.4
Fourth                 24.7          24.4          23.3          23.0          23.0
Highest 20%            43.6          45.6          48.7          50.4          51.0
           Top 5%                16.5          17.6          21.0          22.2          22.3   

The Times summarizes the takeaway as follows:

From 1975 to 2012, the highest-earning 20 percent of households markedly outpaced the lowest-earning 20 percent in America. In 1975, the wealthiest households captured 43.6 percent of the nation’s income, while the poorest had a share of 4.3 percent. In 2012, low-income households saw their share drop to 3.2 percent while the high earners saw their share jump to 51 percent.

Now for starters, is it too tacky to mention that this Census data is pre-tax, so that the top earners lose up to half to income taxes while at the bottom they get a refund from the EITC?  That would change these numbers very dramatically, but no, it is not mentioned either in the Report or in the Times coverage.

And how about that 3.2% share of income in 2012 for the bottom 20%?  Those who know anything about this subject know that government in-kind handouts are also not counted in the Census data.  Are those enough to skew the answer?  Yes, hugely.   The most recent compilation I can find from the Heritage Foundation puts the annual cost to the taxpayers of all government means-tested benefits at $940 billion in FY 2011.  That would mean that they have to be well over $1 trillion today.  Well, that's about 7% of all personal income in the country, most to almost all of it going to that bottom quintile.  So how can we possibly take at face value the 3.2% share of the bottom quintile in national income?  Yes, a few of the government handouts are counted in the Census definition of income (e.g., TANF, SS disability), but the large majority are not (housing, food stamps, Medicaid, EITC).  Of course you can't actually get the real data anywhere, but my estimate is that the handouts would approximately triple the share of the bottom quintile in national income, and also completely reverse the direction of change for the share going to that quintile, from a small decline since 1975 to a large increase.  And no, neither IHS nor the Times mentions this.

And of course when you have no idea what's in the data you are using, you are very likely to come to ridiculous conclusions.  For example (from the IHS/Conference Report):

An existing program which may be expanded to directly reduce the after-tax income
inequality is the Earned Income Tax Credit, which also encourages work and builds
experiences and skills.

Well, yes, but after six more rounds of increasing the EITC, won't people like you still be quoting the pre-tax income inequality numbers, without saying so, to convince the ignorant to support yet more EITC redistribution?  That's certainly what you're doing here.  And even that's not as bad as then including a paragraph praising increased pre-K education programs as a way of reducing income inequality. 

Are New York City's Pension Plans In Trouble?

It's hard to be a doomsayer on public pensions, because the process of collapse moves so slowly.  Even if a given pension system is definitely in a death spiral from which no exit is possible, it still may be 20, 30 or even 40 years before the final collapse when the pension checks actually start to bounce.  That's just too long to maintain any kind of a sense of crisis.  Meanwhile the pension systems provide the perfect slush fund for politicians to play with, making promises to the people who put them in office, completely secure in the knowledge that the bill will come due long after they themselves are gone.

And thus we have new New York City Comptroller Scott Stringer, one of the trustees of each of the City's pension plans, coming out with a big press release last week touting the great performance of the City pension plans on his short watch:

New York City Comptroller Scott M. Stringer announced today that the New York City Pension Funds achieved a 17.4 percent investment return for Fiscal Year 2014, which ended June 30th.

Stringer also noted the strong performance of the funds over the previous four years, going back to 2010.   The result: more money for the City to spend on other programs!:

The pension investment returns from FY 2014 will lower the City’s pension contributions beginning in FY 2016, resulting in cumulative City savings of $17.8 billion  phased in over a six-year period with each year’s incremental savings repeated for 15 years.

So I guess there's no problem here!  Stringer's press release contains no mention of funding levels of the various plans (New York City has five), nor any discussion of whether the current level of pension promises is sustainable in any sense.

The New York Times, to its credit, promptly came out with a long front-page article on Monday August 4 taking a much deeper look at the City's pension situation and coming to an overall very pessimistic view.  Other articles critical of the City pension situation came from Greg David of Crain's and Megan McArdle of Bloomberg on August 5. 

While the Times article is not directly addressed to or critical of Stringer, it contains plenty of data to make Stringer's statements appear, frankly, ridiculous.  For example, while Stringer cites data on investment returns only from the last 5 years (2010 - 2014) during which the stock market has performed strongly, the Times points out that returns from 1999 to 2009 averaged only 2% per year.  That is a big, big problem for systems that at the time were calculating contribution and funding levels based on an assumed 8% rate of return.  And then the Times has a big chart showing contributions and funding levels  for 2003 - 12 for the biggest of the five plans, the so-called Employee Retirement System, now based on a new investment return/discount rate assumption of 7%.  In summary, for that plan over that period:

• Assets have gone from about $32 billion to about $47 billion.
• Contributions have been about $20 billion.  Do the subtraction and you see that contributions have exceeded the overall growth of the fund, meaning that all investment returns and then some have been consumed by payouts of pensions to beneficiaries.
• The present value of benefits accrued to date (7% discount rate) has soared from about $49 billion to about $104 billion. 
• Therefore the funded ratio (7% discount rate) has gone from about 65% to about 45%.

And now here's a calculation the Times does not do, but is important.  If you think a more proper discount rate would be 6%, or even 5%, what would the funded ratio be?  Assuming average duration of liabilities of 15 years (which I think is short) that would mean that liabilities at 6% would be around $120 billion and the funded ratio 39%; and at 5% the liabilities would be around $138 billion and the funded ratio around 34%.  

About the best you can say about this is that New York City, largely for having made very large contributions to these plans over the last decade, is in substantially better shape than, say, Chicago or Los Angeles.  On the other hand, as I have said many times, when you are in a Ponzi scheme, the best thing you can hope for is that it will collapse quickly; the alternative is that you spend more and more money to keep it going, only to have a much bigger and more horrible crash in the end.

In the face of this, Stringer's strategy is to fail to mention the funding situation at all, and to declare that more money is now available to spend!  And de Blasio?  According to the Times:

Mr. de Blasio, notably, did not mention the word “pension” during his hourlong budget presentation in May.

While there is lots of good data in the Times article, the big picture is that its main criticism of New York City's current pension situation is that a switch of higher risk investment vehicles (largely hedge funds) to chase higher returns has not notably increased returns but has notably increased fees.  The most recent number they give has fees running about 0.5% of invested assets, up from only about 0.1% earlier when the funds invested in less exotic stuff.  That is indeed real money, with lots of opportunity for graft. 

However, it is not the big problem.  The big problem is unsustainable pension promises, including retirement ages in the 50s or even 40s following working careers as short as 20 and 25 years in most cases.  Do even the simplest math and you realize that, as these promises work their way through the system, pension costs are going to exceed, and indeed far exceed, the costs of active employees.  No amount of magical returns from the stock market, or from hedge funds, can fix that problem.  

And that's the problem that de Blasio and Stringer will not even talk about.  I'm not sure they've even figured it out.    Prior Mayor Bloomberg had figured it out and did talk about it.  Also in the category of those who have figured it out are members of the bureaucracy, but they badly want for the problem not to be discussed, at least until they are collecting their own pensions. 

I'll close with this from the Times:

In the existing environment, important questions about cost and sustainability can be broached only with great diplomacy. In 2010, Blackstone Advisory Partners, a private equity firm, found out what can happen otherwise. On a conference call with investors, a company official answered a fiscal question by saying retirement benefits for public workers across the country were excessive. When New York City’s trustees got wind of the comment, they called for Blackstone’s chairman to apologize in person. A few months later, he did, and when that proved insufficient, Blackstone issued a statement saying it opposed “scapegoating public employees.”

Of course, the financial guys who work with the pension funds are among the very few people in the City who understand how these things work.  Shut them up, and you have a really good shot of keeping the whole subject of unsustainable pension promises out of the public debate.  And there are several hundred million of annual dollars in investment advisory fees for these funds to be used in the shutting-up project.

A couple of bad stock market years in a row and we could easily see the City's required pension contributions doubling to 20% or more of the budget.  Meanwhile, our current leaders fiddle.

Please Take Note: Argentina Has Defaulted

Having covered many times the Perils-of-Pauline saga of the Argentina debt crisis (for example, here, here and here), it is appropriate to take note that Argentina has now officially defaulted on is so-called "exchange bonds."   Holders of the exchange debt were supposed to receive a payment on July 30, and Argentina deposited the money with Bank of New York Mellon, but orders of a federal judge in Manhattan prevented BNYM from distributing the money to the bondholders unless Argentina also paid holdout creditors from previous issuances, which Argentina was not willing to do.  On July 30 Standard & Poor's announced that Argentina had defaulted; and subsequently the International Swaps and Derivatives Association declared that Argentina's failure to pay had activated the credit default swaps on Argentine debt.  See New York Times Dealbook summary here.  That's about as official as it gets.

A roundup here from Fact Check Argentina notes that Argentina continues to maintain that it has not defaulted.  Their theory is that the deposit with BNYM ought to be good enough, even if the bondholders didn't get the money.  Obviously, S&P and ISDA are not buying it.  Meanwhile Fact Check Argentina notes that the latest tactic of Argentina's lawyers from Cleary is to blame the court-appointed mediator, Dan Pollack, for failing to achieve a settlement.  Without knowing who offered what, it's hard for me to lay blame, but I will note that Pollack is a very respected guy in this business.

The whole saga of the bonds is of course a great distraction from what is happening in the underlying Argentine economy, where every kind of bad policy (crony capitalism on steroids, wild monetary expansion, exploding inflation, high trade barriers, subsidies for many basic services) continues to wreak havoc.  Here's a roundup from the Economist on June 27.  It seems that Argentina's economy has entered recession, based on 4Q 2013 and 1Q 2014 economic shrinkage -- in other words, that had already occurred well before the bond default. 

Many of Argentina’s problems are familiar. Inflation has plagued Argentina for much of the past decade; it still grew by an average of 5.6% from 2005-2013. Exchange and trade controls have long made it hard to get hold of primary materials, stifling production. But whereas in the past Argentina could maintain growth by propping up the peso and consumers’ purchasing power, falling foreign-exchange reserves mean it can no longer afford to do so.

Is the bond default even a negative for Argentina's economy?  If it is, it's a very small part of the problem.  Indeed, if it has the effect of imposing even a little discipline on the populist vote-buying culture of Argentina's political class, it might even do some good.

Which Are We For, Hospitals Or Condos?

Readers who have thought that the official position of the New York Progressive is to support hospitals and oppose condos have been in for a couple of recent surprises.  Is there a unifying principle?

As to just where you may have gotten the idea that a right-thinking Progressive should support hospitals and oppose condos, perhaps it was from the de Blasio campaign.  If your memory is short, check out the photos at this post from last August, showing de Blasio campaigning with Susan Sarandon here in the West Village in opposition to the new condo development under construction on the former site of our local hospital, St. Vincent's.  The signs read "Save Our Hospitals" and "Hands Off Our Hospitals." 

Meanwhile, out in Brooklyn, at least four hospitals remain in some stage of death throes.  Long Island College Hospital either has or has not finally done a deal to turn into a glorified emergency room and have the rest of the site developed into housing.  Interfaith just survived death with a last minute infusion from the State to enable it to exit bankruptcy (for the moment).  And at least two other hospitals are reported to be in serious financial trouble.  So perhaps we should all be relieved that Methodist Hospital in upscale Park Slope is proposing a substantial expansion to bring its facility up to top modern standards.

Not so fast!  On Wednesday July 30 an organization called Preserve Park Slope filed a lawsuit seeking to invalidate the zoning change that would enable the hospital to expand.  Here's a link to their website.  The basis for the suit:

“The process to secure approval of these variances has been conducted with complete disregard to key elements of the law, including proper environmental review and recognition of the 2003 re-zoning of the area,” said Andrea Stewart, a member of Preserve Park Slope and a petitioner in the lawsuit.

And as to opposing condos, I wouldn't be so sure of that one either.  New York has seen two great periods of the creation of top-end multi-family owner-occupied housing.  One is right now, and the previous one was a few generations ago in the 1920s.  Of course all right-thinking people are horrified by the current wave of wildly priced high end construction.  But how about those from the previous period, now known as the grandes dames of Park Avenue, West End Avenue, and Riverside Drive, among others?

The answer is, notwithstanding occupation by the super-rich, these now-iconic condos (and co-ops) must be preserved!  Indeed, after a long campaign by landmarking activists, the blocks of upper Park Avenue from 79th Street to 91st Street were just designated as a landmark district in April.  Other sections between 62nd Street and 79th Street were already landmarked, so the new designation means that almost the entire stretch of Park Avenue between the midtown office district and the emergence of the railroad viaduct from its tunnel at 95th Street is now landmarked.

So what is the unifying principle?  Forget the whole hospital/condo thing; that is just incidental to the NIMBYism of the moment.  I suggest this, from my "About" page:

[T]he current built environment is optimal and all attempts to change it in any way must be opposed at all costs.

Why Is Haiti So Poor?

I would suggest that any discussion of how to alleviate world poverty, or for that matter "income inequality," needs to begin by looking at actual countries out there to see what works and doesn't.  Granted, it's not possible to do a controlled laboratory-type experiment in the field of economic policy.  On the other hand, 190 or so countries all trying somewhat different things can generate a lot of data.

So there we have Haiti, sitting just a few hundred miles southeast of Miami, and it's about as dirt poor as you can get.  Here is a Wikipedia site that aggregates per capita GDP data for all countries of the world for 2013 from the IMF, the World Bank, and the CIA.  Note that, particularly for smaller and poorer countries, the numbers can differ substantially from one source to another.  But Haiti is right near the bottom no matter which source you choose:  $1315 according to the IMF; $1703 per the World Bank; and $1300 per the CIA.  (By comparison, the U.S. is at approximately $53,000 in per capita GDP in all three rankings.)  And, what's more, there have been no recent improvements in the Haitian economy, and there are few prospects for improvement in the immediate future.  Surely there is something those Haitians could sell to the United States to make some money!  How is it even possible for them to maintain this level of poverty?

Perhaps, influenced by the terrible post-colonial history of sub-Saharan Africa, you are thinking of a hypothesis that Haiti is poor because all black-dominated countries are poor.  Well, as Einstein famously said (actually, this may be apocryphal, but the quote is widely attributed to him), "a single experiment can prove me wrong."  In the case of the hypothesis that all black-dominated countries are poor, there are multiple counterexamples that prove it wrong.  Number one is Bermuda (55% black), which is at the very top of the income distribution of countries, ranking way ahead of the United States in the CIA ranking (at $86,000) and just behind the U.S. per the World Bank (at $53,030).  At about 85% black population, we have the Bahamas (IMF - $32,036; WB - $23,102; CIA - $32,000) -- this country is right on the tail of places like France, Japan and the UK.  Even among countries that, like Haiti, are well above 90% black in ethnic mix, we have Botswana (IMF - $16,377; World Bank - $15,675; CIA - $16,400) and Barbados ($25,181 - IMF; $15,566 - WB; $25,100 - CIA).  These countries are solidly middle-income, and are considerably wealthier than, for example, Mexico and China.  So no, black-dominated countries are not inherently poor.

As hypothesis number 2, there is the theory that Haiti is poor because it is being exploited by the evil rich capitalist countries.  According to data here from Wikipedia, Haiti's exports in 2012 were $801 million -- around [$80] per person in a country of about 10 million people, which is rather pitiful.  It seems that the rest of the world is just staying away, perhaps because Haiti doesn't have much to sell -- but it's hard to call that "exploitation."  By comparison, close neighbor Barbados, with a population of only about 250,000, had 2012 exports of almost $500 million -- about 25 times Haiti's level on a per capita basis.  Yet it is a middle income country.  Somehow the evil exploiters are failing to keep Barbados down.  My own view would be that trade makes you rich, not the reverse, but I'm just trying to consider all the hypotheses here.

Now, might I suggest hypothesis number 3, which is that endemic corruption and the absence of the rule of law make it nearly impossible to invest in or trade with Haiti.  Let's just look at a few pieces of data:

•   In an International Finance Corporation project in 2012 called Doing Business, Haiti was ranked 187 out of 189 countries surveyed in terms of ease of starting a business.
• How about tourist hotels?  Lots and lots of international capital is available to build them, and most every Caribbean country has used that capital as a source of good jobs for the people.  Trip Advisor here lists some 47 tourist hotels in Haiti.  Does that sound like a lot?  They list 102 in Barbados -- and Barbados has only one-fortieth the population!  So Barbados has more than 80 times the number of tourist hotels per capita.
• According to Atlas Media here, Haiti's main exports, such as they are, are t-shirts, knit sweaters, other garments, and scrap iron.  Notable for all of those is that these are things that do not require an expensive factory to make.  Or to put it another way, nobody but nobody builds an expensive factory in Haiti.  Why not?  The labor is really cheap -- couldn't you make a lot of money?  The simple answer is, you could make a lot of money if the government wouldn't steal it.   QED -- If you make a big investment, nobody trusts the government not to steal it.  The nice term for that is "absence of the rule of law." 
• According to the Center for Global Development here (2012), the so-called "formal sector" of the Haitian economy accounts for only 10% of employment.  That's another amazing statistic, which says that the large majority of all business activity is essentially hiding from the government.
• Transparency International in 2008 ranked Haiti the 4th most corrupt country in the world.

And finally, let us consider foreign aid.  Haiti is perhaps the all-time champ of foreign aid.  If foreign aid worked to raise a country up out of poverty, then Haiti would be a rich country.  The Center for Global Development (no enemies of foreign aid) here has a history of foreign aid in Haiti, including the statistic that by 1970 "foreign assistance was 70% of the Haitian national treasury revenues" and proceeded to increase from there: "aid levels rose to $35.5 million in 1975."  And "by 1991, Haiti received $380 million from abroad."  And so on.  But the aid thing really exploded after the big earthquake in January 2010.  A compilation here has the total of gifts and pledges to Haiti in the aftermath of the earthquake at $9,337.8 million.  That's about the equivalent of a full year's GDP for Haiti!  But the title of this report from Foreign Policy In Focus in January says it all:  Haiti: billions in Aid, Pennies in Progress since Earthquake.  You really need to read the whole thing to see how one government-imposed obstacle after another has kept Haiti from moving forward.  

Barbados?  They basically don't get any foreign aid.

UPDATE August 8:  A reader points out that $800 million of exports for 10 million people is $80 per person, not $800 as in an earlier version.  It has been corrected.

The Campaign To Preserve Obamacare Turns To Fraud

In the previous post I relied on my own memory of the extensive public debate in 2009/10 for the proposition that the limitation of the Obamacare subsidies to policies purchased on exchanges  created by a state was a very intentional feature designed to coerce the states into creating exchanges.  Today, various web denizens have been going out and doing some homework as to exactly who said what when. 

My favorite comes from Jonathan Gruber.  For those who don't know him, he is a professor at MIT who is often described as the "architect" of Obamacare (and, for that matter, also of Romneycare in Massachusetts before that).   Gruber is known for having worked closely with the White House in coming up with the structure of Obamacare, and then moving over to work with the Congressional staff to come up with the language.  Gruber gave a speech on January 18, 2012 describing how the Obamacare structure works to coerce states to set up exchanges.  Here's some video from the speech:

Here's the key quote:

I think what’s important to remember politically about this, is if you’re a state and you don’t set up an Exchange, that means your citizens don’t get their tax credits. But your citizens still pay the taxes that support this bill. So you’re essentially saying to your citizens, you’re going to pay all the taxes to help all the other states in the country. I hope that’s a blatant enough political reality that states will get their act together and realize there are billions of dollars at stake here in setting up these Exchanges, and that they’ll do it. But you know, once again, the politics can get ugly around this.

Others have additional video of Gruber at other times making similar statements to the same effect.  Well, that was then and this is now.  Earlier this week on MSNBC, now striving for a favorable decision in the D.C. Circuit Halbig case, Gruber said of the limitation of subsidies to state-created exchanges:

It is unambiguous this is a typo. Literally every single person involved in the crafting of this law has said that it's a typo, that they had no intention of excluding the federal states.

With multiple videos of himself saying exactly the opposite of what he is saying now, you would think that this guy would be too embarrassed to show his face in public.  Instead he's taking the offensive.   Of course, he is uttering these bare-faced lies to give some cover to the courts in the hope that they will endorse hundreds of billions of dollars of taxes and spending not approved by the Congress.  And also to fool those of the people who were not paying attention back in 2009.  Some might call this "fraud."   Elsewhere in the MSNBC transcript, Gruber now calls the reading of the statute that the subsidies are only available on the state-created exchanges "criminal" and "insane."  Silly me -- I had somehow thought that even when a statute contains an obvious typo (like referring to the year 3015 instead of 2015) that they still need to send a correction bill back through Congress and get it passed to fix the thing.   Don't they enact a "technical corrections" bill a few months after every complicated new tax law goes into effect?

So are the courts really going to rule in the end that the statute says exactly the opposite of what we all know it says and thereby give the IRS the ability without Congressional authorization to impose hundreds of billions of dollars of taxing and spending on the economy?  So far, every Democrat-appointed judge to rule on the matter says that's how it works.

In case you aren't reading the stuff, I've collected a couple of examples of the statist thinking on why it's OK to do away with our republican form of government in favor of rule by the whim of unelected and unaccountable bureaucrats.    For example, here is Andy Koppelman in the New Republic:

If the argument is ultimately accepted by the Supreme Court, then about 4.5 million low- and middle-income workers in those states who are already receiving assistance from Obamacare will abruptly lose their benefits—not because they did anything wrong, but because this destruction furthers the political war. Their personal disasters are not unintended side effects of the litigation, but the very goal that the challengers are seeking.

Or here is Tim Jost blogging at the American Constitution Society (a little irony in the name there?) site:

Should the plaintiffs ultimately win, millions of Americans will lose their premium assistance and probably their health insurance. The individual health insurance markets may collapse in several states. This is mean-spirited litigation, intended to deny health insurance to those who Congress intended to help. It is to be hoped that in the end the courts will interpret the law as it was meant to be interpreted, and uphold the IRS rule. 

So in this world view, the most important value is that favored members of the elite get to pass out  taxpayer-funded "benefits" to those officially designated as poor and downtrodden.  The bureaucrats get to decide how much money they get to pass around and how much taxes to impose, with Congress cut out of the loop.  Having "low and middle income workers" "lose their benefits" leads to "personal disasters," and seeking such a result is "mean-spirited."  There's no particular room here for any value to be placed on our Constitution or on maintaining our republican form of government.  And do these people see any problem in having the IRS -- formerly thought to be a "non-political" agency -- lead the charge on this hyper-partisan attempt to rescue a failing statute not supported by one single Republican?  Not that I have seen.

The incredible thing is that 36 states continue to resist a statutory structure that had been thought to be so coercive that they would be forced to crumble immediately.  More than a few able-bodied Americans find the whole idea of the government paying for their health care to be insulting and demeaning.  I sure do.