Newsflash: Nobody's Actually Getting Poorer

One of the more repeated bits of conventional wisdom out there is that, while the last few decades have been quite good for America's "rich," our poor and middle class have really struggled.  For example, here's President Obama trotting out the conventional wisdom in his recent middle finger to Paul Ryan speech on deficit reduction:

In the last decade, the average income of the bottom 90 percent of all working Americans actually declined. Meanwhile, the top 1 percent saw their income rise by an average of more than a quarter of a million dollars each. That's who needs to pay less taxes?

Leaving aside the speechwriter's apparently bad grammar (I think it's "fewer" taxes), an interesting new study (h/t Mark Perry) from the Employment Policies Institute calls President Obama's basic assertion that the "rich got richer, and the poor got poorer" into question.  Here's The Daily Caller with a good summary of the new study:

Research, published at The Journal of Policy Analysis and Management, from Cornell economist Richard Burkhauser, Joint Committee on Taxation economist Jeff Larrimore, and Indiana University economist Kosali Simon, however, suggests that the president’s piece of conventional wisdom isn’t entirely accurate. According to the findings, while the rich have indeed been getting richer, for the last 30 years so too have the poor and middle class.

Burkhauser told The Daily Caller that Obama’s suggestion that the poor are getting poorer understates the amount of income to which Americans actually have access. The president does not take into account, Burkhauser explained, tax unit shifts, government transfers, and other sources of income such as health care benefits.

“The bottom line is [conventional wisdom] asks what’s been happening to private personal income over time and they are right if you look at that for tax units, things do not look very good for the middle class,” he said. “But if you take other things into account, the reason the country has not gotten in a civil war is because things are not that bad. In fact everybody has done better.”

Burkhauser’s research shows what has actually been happening to the lives of Americans over the last thirty years — not just counting the amount of money individuals made in the market, but the actual income that people get in their hands to spend.

“This isn’t a zero sum game, where one group wins at the expense of others,” Burkhauser said. “The growth in productivity of Americans in the top twenty percent of tax units increased the size of the economic pie sufficiently to register major gains across the entire distribution of after-tax income.”

Burkhauser's findings add to a growing body of work which demonstrates that policymakers' (and rent-seekers') breathless concerns over American "income inequality" could be totally overblown, and thus that the redistributionist/statist policies that they justify based on said inequality should be met with serious skepticism.  One of the things not covered by Burkhauser but explained here frequently is the role that trade with China and other low-cost nations plays in further shrinking the great divide between rich and poor because the benefits of "cheap" imports are disproportionately enjoyed by lower income Americans. (In short, "rich" people don't shop at Wal-Mart or Target, so they don't get as much benefit from free trade with China than do frequent Wal-Mart/Target shoppers.)

So if America's poor and middle class have actually been earning more than originally thought (and more than they did only a few years ago), and if through free trade (and other things like technology) they can afford a lot more with those earnings, then should we really follow the President and his buddies into the tax-happy abyss based on an increasingly incorrect conventional wisdom about wage stagnation?

I think not.

(p.s. If the middle class has experienced a 30-40% increase in "total income" since 1979, and 1979 is when US manufacturing jobs peaked, then what does that say about another bit of conventional wisdom re: the alleged "superiority" of such jobs?  Hmmmm.)

UPDATE: Cato's Alan Reynolds has more on the issue here.

Tuesday Quick Hits

Work's been pretty rough these last few days, but here are some quick hits to get you through the slower blogtimes:

• "Zeroing" took yet another hit last week: this time by the Court of Appeals for the Federal Circuit, which ruled last Thursday that the Department of Commerce needs to revisit its use of the WTO-illegal methodology in antidumping annual reviews because (i) DOC had abandoned the practice in investigations; and (ii) the US government had failed to offer a good (well, any) reason for the different approach in reviews.  WorldTradeLaw.net's Simon Lester offers some good commentary on the CAFC decision, and the WSJ rightfully applauds it: "thanks to statistical sleight-of-hand, American consumers have paid billions of dollars more over the years in higher prices either because antidumping duties raised prices on imports or because those duties sheltered domestic companies from downward price competition. This was bad economics, and now it turns out it was bad law, too. The World Trade Organization has dinged Washington repeatedly for zeroing. Commerce and Congress have done their best to avoid complying, at considerable expense to American credibility abroad. Most recently, Commerce attempted to stop zeroing for new antidumping investigations while keeping the practice for existing duties, to placate both the WTO and domestic protectionists. Last week's appellate court ruling puts an end to that charade by finding that under existing U.S. law Commerce has to either zero in all cases or zero in none. Since the department has abandoned zeroing for new investigations, there's reason to hope the Obama Administration will disavow zeroing entirely instead of searching for some way around a carefully reasoned and forceful appellate ruling."  Indeed.  I'd only add that the US courts have been the last refuge of America's zeroing proponents (i.e., protectionists) and their buddies in Congress, so the CAFC's latest decision must have them squirming something fierce this week.  And that thought makes me smile.

• Politicians of both parties are lining up in support of the US-Colombia FTA - a strong signal that the Obama administration could finally send the Agreement to Congress sometime soon (everybody likes a winner!).  Dem Senators Baucus and Kerry gave the FTA a nice (albeit mercantilist) plug in a recent WSJ op-ed, and the (admittedly dwindling) New Democrat Coalition in the House fired off a letter to the President calling on him to submit all three pending FTAs asap.  Meanwhile the US business community is also upping the pressure, as this US Chamber blogpost and Caterpillar ad make clear.  Eternal optimist Monica Showalter of IBD has gleefully noticed all of this news and notes something important on Facebook: "With Obama and Santos scheduled to meet Thursday, and Santos refusing up until this point to meet Obama unless there's free trade - I think it is going to happen."  A very insightful point, and I hope she's right, but I'll believe it when I see it.  (Although this announcement re: the Canada-Colombia FTA certainly adds more pressure on the USA.) [Update: Monica has more in this new IBD editorial.]

• Speaking of that Kerry-Baucus op-ed, Cafe Hayek's Don Boudreaux gives it "two cheers," and withholds the third because of something that I've been arguing here for a long time: "A third cheer would be in order had not the senators relied upon a wholly mistaken reason to justify this particular move toward freer trade. In their essay, U.S. imports and American consumers are mentioned a total of zero times, while U.S. exports and American producers (such as farmers, firms, and workers) are mentioned 23 times.... The senators’ argument for freer trade in this particular case undermines the larger effort to persuade the public that free trade is to everyone’s long-term advantage – an advantage that is measured by increases in what we’re able to consume and not by increases in what we must sacrifice."  Exactly!!

• Cato's Ted Galen Carptenter explains why China's inevitable rise to superpower status isn't so inevitable, and why the United States has a lot to say about it.

• The Mercatus Center's Veronique de Rugy explains something I already know and have known for a few years now: the Alternative Minimum Tax sucks and should be eliminated asap.  Mind-blowing fact: "Congress created the AMT in 1969 to prevent 155 wealthy taxpayers from using deductions and credits to avoid paying any federal income taxes....  According to the Congressional Budget Office, last tax season 4.5 million taxpayers were affected by the alternative minimum tax, an increase of more than 4 million taxpayers since 1970."  Sonova...

• The WSJ Asia pens an excellent editorial on how the Japan tragedies have clearly revealed just how dependent American businesses and workers are on imports in this modern era of global supply chains.  The whole thing is worth reading, but here's my favorite passage: "Despite the fears of Japanese products a generation ago, in reality those imports have allowed America to keep its place as the world's largest economy by a country mile. We hope someone on President Obama's economic team is taking note. Trade opponents can always point to the jobs they claim trade has "cost" Americans, but it's rarer to see such an obvious example of how Americans are hurt when trade is suddenly interrupted. The point extends to imports from everywhere. American auto-industry fears over car imports from South Korea have so far helped block ratification of a Korea-U.S. free-trade agreement. That bit of politics hurts Americans who would export to Korea under the deal, but it also hurts the Americans who would benefit from Korean imports. Such as, say, small businesses that use pick-up trucks and currently face higher domestic prices and less competition thanks to a 25% tariff on imported trucks."  Amen.

• Last week USTR released its annual national trade estimate (NTE) report on foreign trade barriers.  It's never anything earth-shattering (and involves a lot of cut-and-pasting from previous years), but it's still a good place to find the next US WTO dispute or two.  (If you don't mind wading through the chaff.)

• Paul Ryan: Stud.

Now that should keep you busy until I come up for air...

America's Cotton Problem

A little heralded congressional vote last week shows just how hard it will be to reform America's bloated, trade-distorting farm subsidy programs and, more generally, get the US government's insanely profligate spending problem in check.  On Friday, the US House of Representatives overwhelmingly rejected a bi-partisan amendment to the 2010 continuing budget resolution that would have ended $140 million in annual bribespayments to Brazilian - yes, Brazilian - cotton farmers.  The payoffs, which I've repeatedly blogged on, resulted from a ludicrous deal between the Obama administration and the Brazilian government to stave off Brazil's imposition of retaliatory tariffs on US exports due to the United States' refusal to amend its cotton subsidy programs so that they complied with WTO rules (the cotton subsidies had been repeatedly ruled WTO-inconsistent in dispute settlement proceedings).

Cato's Sallie James provides some good analysis (and much-needed hostility) on the amendment's failure:

Republicans -- those stalwart fiscal conservatives! -- voted 75 in favor and 164 against. The Democrats showed more courage and voted in favor of the amendment 108 to 82. (These numbers are according to C-SPAN; I will post an update if they prove to be incorrect)....

The Hill article (linked to in the first paragraph of this post) points out that some members (presumably the Republicans who voted against the amendment) were concerned that "the move [to cease the payments to Brazil] could create a trade war if Brazil decided to retaliate."  It doesn't seem to occur to those concerned members that one way to avoid a trade war would be to abide by international obligations and cease subsidizing U.S. cotton farmers. It would also shave a few million from that huge deficit about which they profess to be concerned.

Sallie's point is exactly right.  If House members are truly concerned about a trade war with Brazil, then the sane, fiscally-conservative approach is not to continue paying $140 million in Brazilian hush money but instead to eliminate the offending cotton programs (and other US farm programs that are either unnecessary or WTO-inconsistent).  That this very sensible thought didn't even register in the US Congress is a testament to just how entrenched agriculture interests are on Capitol Hill.

And unfortunately, it gets worse.

Congress' latest vote on, and apparent support for, cotton subsidies is particularly egregious given the fact that the current environment for reform is pretty much perfect.  First and most obviously, the US government is flat broke, and the new Congress has a massive new contingent of Tea Party-driven budget cutters who - one would think! - would be open to ending the Brazilian bribes and embracing significant and immediate cuts to WTO-illegal US farm subsidy programs.  Second, those bribes and the US cotton program are taking place during a period of record cotton prices and unprecedented investment in American cotton production:

[Cotton] prices hit a 150-year-high last week, more than double what it was a year ago. (What happened 150 years ago? The Civil War began, and cotton jumped to $1.89 a pound. What do you think Rhett Butler was trying to smuggle past those Union gunships?)

Also having an effect: droughts and flooding in China, Pakistan and Australia, plus restrictions on exports from India. Plus, the world’s economy looks a little better than it has in the recent past. People can afford clothes.

At the same time, the Virginia Department of Agriculture and Consumer Services announced today that cotton acreage in the state is expected to increase by nearly 27 percent, from 82,250 acres in 2010 to an estimated 105,000 acres this year. In 2007, Virginia farmers planted only 58,000 acres. The last time the state topped 100,000 acres was 2006. Part of this is smarter agriculture and innovative research. Part of it is supply and demand.

Third, the WTO's Doha Round negotiations will probably die if not completed by the end of 2011, and as Phil Levy and I wrote in December, a bold US commitment on farm subsidy cuts and cotton reforms will be essential to completing a final deal.

Given these facts, there might never be a better time than right now for cotton subsidy cuts, and yet the House - and all those new fiscal conservatives - have once again refused to address the broader cotton issue and instead prefer to continue embarrassingly paying off Brazilian cotton farmers.  Awful.

Moreover, the House's latest cotton episode reveals a far more serious problem with the future of America's inefficient, outdated farm policies and US budget-cutting efforts more generally.  If the US House of Representatives can't make some basic cuts to American cotton subsidies amidst serious budget shortfalls, a wave of new budget-conscious GOP freshmen, record high cotton prices, unprecedented private investment in American cotton, and a Doha Round on life support, then what hope is there for a serious US farm subsidy reform proposal as part of Doha or otherwise?  And if (allegedly) fiscally conservative House Republicans can't defund the WTO-illegal US cotton programs or, at the very least, stop the insanity of sending 140 million in taxpayer dollars to Brazil's farmers every year, then why should we think that they'll have the courage to tackle the much more politically-sensitive and important budget reforms that will be absolutely essential to getting our crippling budget deficit in check?

After last Friday's vote on the cotton bribes, the answers to these bigger questions don't look too promising.

Discrimination Against Foreign Insurers in the 2011 Budget?

As if the Obama administration's run-of-the-mill protectionism weren't enough to worry (and complain) about, the Heartland Institute's Eli Lehrer finds a hidden nugget in the White House's 2011 Budget:

Most U.S. reinsurance comes from offshore companies. Because these companies often insure against events (like Tokyo earthquakes and U.K. floods) that probably won’t happen simultaneously with disasters in the United States, the process reduces prices by letting companies profit off of one type of coverage when they lose it on another. Right now, these offshore companies pay federal excise taxes roughly equivalent to U.S. corporate income taxes. The administration’s budget would give U.S.-based companies an advantage by imposing a burdensome tax on many offshore companies’ affiliated reinsurance transactions while allowing deductions for the same sort of transactions by U.S.-based companies. This has trading partners worried: When the Senate considered a similar proposal last year, the European commission strongly hinted that a trade war could result.

Read the whole thing here.  I don't know about a "trade war," but a quick glance at the United States' reinsurance services commitments through the WTO appears to show that the type of discrimination against foreign reinsurance that's contemplated in the 2011 budget could violate the United States' services obligations.  Thus, at the very least, a WTO dispute against the US could be on the horizon if the budget provision ever became law.  (Obvious Disclaimer: that's 3 minutes of quick review, not a legal opinion.)

Now, there's no immediate chance that this proposal will become law, but it certainly provides a great example of the White House's inattention to international trade rules and the United States' obligations under those rules.  (Shocking, I know.)

Definitely makes you wonder what other bits of trouble are buried in that budget, huh?

UPDATE: Cato's Sallie James adds some good perspective: "[T]his wouldn't be the first time that the US flaunted its obligations under GATS. US - Gambling was a shocking breach of rules that still is not fully resolved.... Antigua, I believe, is big in reinsurance, so this would be the second time US arrogance hit them hard."  Me: Those poor Antiguans - they give us gambling, reinsurance and sandy beaches, and this is how we show our gratitude?   How embarrassing.

Budget Gimmicks in a Trade Bill?

I fully admit that I'm not a tax/budget geek, but a tax provision slipped into a benign trade bill has set off my libertarian spidey-senses. BNA (subscription) explains:

Legislation (H.R. 4284) to extend the Generalized System of Preferences and the Andean Trade Preference Act, signed by the president Dec. 28, contains an offset that would increase 2014 estimated tax payments for corporations with at least $1 billion in assets in 2013.

The act (Pub. L. No. 111-124) increased by 1.5 percent the portion of corporate estimated tax payments due in July 2014 through September 2014.

It amended the Tax Increase Prevention and Reconciliation Act of 2005 to increase estimated tax payments for such corporations due in July, August, and September 2014 to 101.75 percent of what was otherwise due, according to the Congressional Research Service.

JCT estimated that the provision would increase revenues by $806 million in fiscal year 2014 and decrease revenues by $806 million in fiscal year 2015.

The measure passed the House Dec. 14 and the Senate Dec. 22, in both cases under a suspension of the rules by voice vote and unanimous consent, respectively.

The final law is here, and the legislative language is as follows:

SEC. 4. TIME FOR PAYMENT OF CORPORATE ESTIMATED TAXES.

The percentage under paragraph (1) of section 202(b) of the Corporate Estimated Tax Shift Act of 2009 in effect on the date of the enactment of this Act is increased by 1.5 percentage points.

The CBO scoring of the law is here. The CBO scoring matches the JCT estimate above, saying that this tax measure will goose federal revenues by $806 million in FY14, but immediately reduce them by the same amount in FY15.  So what gives?

I googled around and found only one analysis of the underlying "Corporate Estimated Tax Shift Act of 2009," from a random blog which calls the Act "good for the government, which extracts money from the business community sooner than planned."  So by increasing the percentages in the underlying Act, a random, non-germane provision of the GSP bill seems to extract even more money from big business "sooner than planned."

But why?  Normally, I'd just blow this minutia off, but considering the ridiculous budget gimmicks that the 111th Congress has attempted to pull off in order to secure its overreaching agenda, I'm calling "shenanigans."  So, any tax/budget specialists out there care to opine as to why the government is trying to squeeze out an extra 800 million at the end of FY14 instead of letting it go as planned into FY15?