Friday, October 12, 2012

The Progressive Fiscal Cliff

Dylan Matthews of the Washington Post has a post up today that offers some interesting data on whom the "fiscal cliff" would hurt most, but he presents the data in a way that I believe invites misinterpretation.

Matthews draws on estimates from the Urban-Brookings Tax Policy Center of the impact of the "fiscal cliff" on marginal tax rates for various income cohorts. He performs what I view as a public service in calling attention to this data; while I can't vouch for the accuracy of the estimates, the focus on marginal rates is desirable.

Where he goes astray in my view is in his presentation of the data, which focuses on the percentage increase in each income cohort's marginal tax rate in the event that we go over the "fiscal cliff."

For example, a chart shows that the marginal income tax rate for people earning under $10,000 annually would see a 64% increase in their marginal tax rate, as they went from paying a 4.9% marginal rate in 2012 to an 8% marginal rate in 2013. The claim is indisputably true, in the sense that his algebra is correct, but in my estimation it creates a very misleading impression of the impact on economic incentives.

The more useful way to interpret the data is by focusing not on the impact on tax rates, but on the impact on after-tax income. In the example above, someone earning under $10,000 in 2012 keeps 95.1 cents of the next dollar he earns, and the "fiscal cliff" would reduce that to 92 cents in 2013. So while the 64% increase in this person's marginal tax rate sounds dramatic, the reality is a decline of just 3.3% in after-tax income ((8.0-4.9)/95.1). A person who keeps 92 cents of the next dollar they earn is unlikely to be discouraged by his tax rate from going out and earning it.

The effect is most dramatic at the extremes; Matthews' methodology creates an exaggerated impression of the impact on the incentive of lower-income people to earn that next dollar, and an understated impression of the impact on the incentives of high-earners.

Here is the data, with Matthews' numbers (the percentage rise in tax rate) on the left, and the actual decline in after-tax income on the right:

Cash Income      % Rise in Tax Rate     % Decline in After-Tax Income
<$10,000               64.4%                            3.3%
$10-$20K             26.5%                             5.2%
$20-$30K             5.6%                             2.3%
$30-$40K             2.8%                             1.4%
$40-$50K             2.2%                             1.0%
$50-$75K             7.8%                             3.9%
$75-$100K           16.7%                             8.2%
$100-$200K         8.5%                             4.8%
$200-$500K         6.2%                             3.8%
$500-$1M            26.2%                             13.8%
>$1M                    16.4%                             10.0%

In other words, the "fiscal cliff" turns out to be rather progressive.

People earning between $500,000 and $1 million would see a 13.8% decline in their marginal after-tax income, and those earning over $1 million would see a 10% decline, while those earning under $75,000 would see declines ranging from 1% to 5.2%.

I sent Mr. Matthews a tweet about this, and even though he doesn't know me he was nice enough to reply:

Sure, but (a) the poor face the highest work disincentive increase and  (b) ability to pay is logarithmic. 5% of $20k is more important than 10% of $1 million.

Twitter doesn't lend itself to detailed discussion, but I think his first point alludes to the fact, which he notes in his post, that while low-income people appear to face a smaller impact from the "fiscal cliff" when viewed in isolation, the reality is that as benefits such as the EITC phase out, they face marginal rates that can only be described as confiscatory.

As with his algebra, this much is indisputable. The disincentives to work created as eligibility for benefits phases out are a huge problem, and one to which it is difficult to imagine any good solution without a substantial commitment of additional resources, which entails its own problems.

Yet I don't think this justifies the misleading portrayal of the effect on tax rates rather than on after-tax income. It easy enough to marshal the data to show effective marginal tax rates for people transitioning out of benefit eligibility; Matthews has done so himself in other posts. So I fail to see any good reason to risk one's credibility by presenting this data in such a misleading manner.

The second point, regarding the ability to pay, strikes me as a non sequitur. Any presumption about ability to pay is irrelevant to the calculation of what the tax burden actually is.

Moreover, while someone earning $1 million can presumably bear an increased tax rate more easily than someone earning $20,000, such a person can also more easily avail themselves of tax avoidance strategies, including exiting the labor market altogether. If you are earning a very modest income, you are unlikely to have any good alternatives to continuing to work no matter how high your tax rate goes. If you are earning seven figures or more, particularly if you have done so for a multi-year period, you are apt to have far more flexibility to decide you'd rather spend your time doing something other than making money. In short, willingness to bear a higher tax burden starts to become as important as ability to pay.

Matthews' post is still well worth reading in full, but it should be read while bearing in mind that the presentation of the data seems designed to create the impression that the "fiscal cliff" would most heavily impair the incentive to work of low-income people, when in fact the data do not support that conclusion.

Saturday, October 6, 2012

You Really Don't Want To Hitch Your Credibility To Jack Welch

Yesterday's drop in the U-3 unemployment rate to 7.8% was shocking, given the absence of a commensurate improvement in the underlying economy, or indeed in the broader labor market as measured by the U-6 rate, which was flat at 14.7%.

Coming on the heels of Obama's weak debate performance Wednesday night, this seems to have led a lot of people to speculate about whether the Obama administration has somehow compromised the integrity of the BLS for the benefit of their re-election effort.

While I wouldn't rule such a possibility entirely out of the realm of possibility - I am on record as stating that Barack Obama is not merely a bad President but a bad person - I think it is really, really unlikely.

And the grandstanding of Jack Welch makes me even more skeptical than I would otherwise be, about which more in a bit.

One good rule in the blogosphere is: when in doubt, trust Megan McArdle. And she delivers a good overview of why the most likely explanation for the U-3 outlier is entirely innocent: the inherent volatility of the household survey.

Conservatives dismayed by the misleadingly bullish headline unemployment number should focus less on the probability that the numbers were cooked, which is quite low, and more on the probability of mean reversion in the November number, which is high. If the September U-3 number is truly the outlier it appears to be, then there is every reason to anticipate that the October number, which will be released four days before election day, will rebound to 8% or higher.

I do think one argument that Megan (and others) have advanced is faulty, and that is the idea that there is no rational motive to manipulate the data because it is too late in the campaign to do Obama any good. People making this argument invariably cite the experience of George H.W. Bush, who lost despite improving unemployment numbers as the 1992 election approached. I think this overlooks the Feiler Faster thesis popularized by Mickey Kaus. Voters will receive and process information much faster in the 2012 campaign than they did twenty years ago, and so Obama could very well benefit from late trends that did not help George H.W. Bush.

The worst thing about this episode, though, and the one with the potential to do the most long term harm to the conservative cause, is that it has enticed people into ascribing credibility to former General Electric CEO Jack Welch, who has been publicly questioning the integrity of the unemployment data.

When the issue is credibility, history suggests that you should be very wary of lining up on the side of Jack Welch.

A little over 10 years ago I started looking into General Electric. The consistency of the company's earnings over many years under Welch had been an anomaly. The idea that so large a company could grow earnings so consistently amid the vicissitudes of the global economy seemed like a red flag.

In reality, this was evidence of what is described in boardrooms as "earnings management," and outside of boardrooms as "fraud." Earnings management doesn't always rise to the level of fraud in the legal sense (though it can), but in the colloquial sense that's all it is; the practice is intended to hide the true performance and condition of a company, including from the investors who own it.

When asked about the seeming improbability of GE's earnings trajectory, I found that executives often fell back on a mantra: "We manage companies, not earnings."

Unfortunately for them, it was about that time that Jack Welch published his quasi-memoir, "Jack: Straight from the Gut." On page 225, Welch described the aftermath of the Joseph Jett trading debacle at GE-owned Kidder Peabody, in which it was suddenly discovered that Jett had lost the firm $350 million:

"That Sunday evening, I called 14 of GE’s business leaders to deliver the bad news and apologize to each of them for what had happened. I felt terrible, because this surprise would hit the stock and hurt every GE employee. I blame myself for the disaster.
The previous year, 1993, when Jett’s phantom trades accounted for nearly a quarter of the profits made by Kidder’s fixed income group, Jett had been named Kidder’s “Man of the Year.” We had approved Mike’s request to give Jett a $9 million cash bonus, a huge award even for Kidder. Normally, I would have been all over this. I would have dug into how one person could have been so successful, and I would have insisted on meeting him.

The response of our business leaders to the crisis was typical of the GE culture. Even though the books had closed on the quarter, many immediately offered to pitch in to cover the Kidder gap. Some said the could find an extra $10 million, $20 million, and even $30 million from their businesses to offset the surprise."

That is the textbook definition of earnings management, if not outright fraud, in Welch's own words. Barry Ritholtz offers a good roundup of other information that reflects upon Welch's leadership and credibility here.

In the battle of ideas, your credibility is really all that you've got. It's the reason why I made such a big stink about Reuters' faulty claim that "GM is still losing as much as $49,000 on each Volt it builds." Many smart people, who believe as I do that the auto bailout and ongoing Volt subsidies make the nation worse off, impaired their own credibility and that of our shared cause by embracing Reuters' faulty argument.

Writing about another issue entirely earlier this year, Megan McArdle offered a singularly valuable bit of wisdom to her readers:

"After you have convinced people that you fervently believe your cause to be more important than telling the truth, you've lost the power to convince them of anything else."

That's true for Barack Obama, and its true for Jack Welch. 

Anyone wondering how much credibility to ascribe to Welch's comments on the unemployment data should bear that in mind.

Friday, October 5, 2012

Rule 5 Post: Cosplay with Olivia Munn


On Friday, September 14 I abandoned the pretense of political relevance and offered up a Friday Rule 5 post consisting of nothing but photos of Janina Gavankar, and noted that I would be interested to see whether there was any difference in traffic. There was: three weeks later, the Janina Gavankar post is the 10th-most-viewed post in the history of this (admittedly young) blog.

Senator Blutarsky is nothing if not responsive to the desires of the readership, so henceforth any topical elements in Rule 5 posts will be incidental to the objective of posting photos of beautiful women. After admiring said beautiful women, however, please feel free to stick around and check out other posts if you're interested in such disparate topics as the economics of the Chevy Volt, or the future of liberal news media, or why NHL players may be better off without a union.

This week we bring you Olivia Munn. Like Janina Gavankar, she is exceptionally beautiful, yet also conveys the illusion of attainability by virtue of being a bit of a geek in real life and not seeming to take herself to seriously. Unlike Janina Gavankar, we also have Olivia Munn is cosplay pics:

 More after the jump.

Pre-Post Mortems on the Remaining Presidential Debates


It seems fair to say that most of us on the right were pleasantly surprised by the result of the first Presidential debate, Wednesday evening, if nothing like so shocked as the mainstream media or the Obama fluffers at MSNBC.

In 2008, Obama got to debate John McCain. The acclaim for his campaign has always struck me as over the top in light of that fact. And on Wednesday night we saw what Obama looks like in a debate where the dessicated and ineffectual old man in the room in not his opponent but merely the moderator.

From where I'm sitting, the best thing about the outcome of the first debate is how it sets Mitt Romney up for the second debate. Like a power pitcher behind in the count, Obama is under pressure to bring the heat, but he's got to be exceedingly careful about how he does it. 

Obama's most fervent partisans want to see him become much more aggressive in attacking Romney, and after seeing the reviews of his performance in the first debate, Obama is probably happy to oblige. And therein lay the danger.

The upside, from Obama's perspective, of his performance on Wednesday night, was that it kept his natural churlishness in check. He smirked, and offered other tells, but mostly you had to be looking for them in order to notice. In going after Mitt Romney aggressively, Obama risks showing Americans a side of his personality that he'd be better off hiding.

Simply put, Barack Obama is a smug prick. He is not used to being challenged, and is prone to react badly when it happens. The more effectively he conceals this, the better off he'll be, but he is now under pressure to adopt a debate posture that risks highlighting it.

In this way, the town hall format of the second debate may work to his disadvantage. Obama may be disciplined enough to refrain from ad hominem attacks on Romney directly. But will he be able to resist inserting them into answers to the voters' town hall questions? And once he goes on the attack, will he remain sufficiently self-disciplined to avoid revealing his inner Marxist?

In the first debate, Romney took the battle to Obama with great success. In the second debate, Romney needs to adapt to Obama's heightened aggression and be prepared not only to parry more attacks, but to invite certain lines of attack that can be used to make Obama seem angry, extreme, or just generally less presidential.

I predict that this is just what will happen. After the second debate, the MSNBC hosts will have gotten their wish for an Obama who much more aggressively presses the case for wealth redistribution, and government intervention in the economy.

I further predict that as the impact of this registers in the polls, they will regret getting what they had wished for so fervently.

Forecasting the outcome of the other debates is far simpler:

The Vice-Presidential debate may never take place, as the prospect of debating Paul Ryan may well cause Joe Biden to rationally decide instead to commit seppuku. And of the debate does take place, the end result is likely to be about the same as if he had: Biden's entrails scattered across the floor.

The third Presidential debate will focus on foreign policy. The Obama campaign probably preferred that when the schedule was agreed to, figuring that would be their strong suit. Life can be funny.

If the second debate goes as I expect it to, then by the third debate Obama will be back on a leash, and Romney will have a fairly easy go of it. Challengers always have the advantage of being able to assume away the problems of the real world, and even just to make things up out of whole cloth (such as JFK's assertion of a non-existent "missile gap").

But Romney won't even need to rely on that. He can just promise to stop apologizing to savages for the First Amendment, and maybe for good measure add that "If elected, I will send our ambassadors U.S. Marines instead of Chevrolet Volts."   

Sometimes life is very regressive, as advantages beget additional advantages. Romney's trouncing of Obama in the first debate is one such time.

Tuesday, October 2, 2012

Voltonomics: A Detailed Analysis of the Chevy Volt's Profitability


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This post will be the first in a series in which I attempt to bring some clarity to the profitability - or, more accurately, lack thereof - of the Volt.

There is a lot of misinformation floating around regarding the Chevrolet Volt.

Recently reporters have unearthed some very useful data about the economics of the Volt. Unfortunately, these reporters clearly lack the basic financial and accounting knowledge to turn that data into useful information, and instead have muddied the waters with foolish claims, such as Reuters' assertion that Chevy loses $49,000 on every Volt it makes. I explain why this claim is faulty in this post.

For this post, I have modeled out the current and prospective profitability of the Volt, using publicly available data and estimates, as well as some estimates of my own. My estimates are certainly open to debate, but on balance I believe that I have erred on the side of generosity to GM.

THE BOTTOM LINE: even with generous assumptions, the first generation of the Chevrolet Volt will consume about $1 billion in federal tax credits, and STILL result in an economic loss to GM shareholders in excess of $600 million over its lifetime.Without the subsidies, the cumulative loss would triple to $1.8 billion.

Let's start with a look at the Volt's cost of production.

Reuters published estimates of the Volt's marginal cost of production ranging from $20,000 to $32,000. That's an awfully wide range. For the purposes of this exercise, I will use the midpoint: $26,000.

At that cost of production, the marginal Volt is quite profitable. The MSRP is $39.995. Of course, even if someone pays the full sticker price, GM doesn't see the entire $39,995. Dealers have to eat, too. According to Bob Lutz, who ought to know, GM sees a dealer net price of about $37,000, implying an $11,000 profit margin on each marginal Volt sold.

That's nice work if you can get it, but there are some mitigating factors.

Monday, October 1, 2012

I Am Done Pretending That Barack Obama Is A Decent Human Being

For too long, many of us with profound political disagreements with Barack Obama have nonetheless allowed that he is a decent person. An incompetent narcissist with a wildly overrated intellect, to be sure, but not fundamentally unfit for decent society.

It is now clear to me that we - I - have been wrong to extend him that benefit of the doubt.

Barack Obama is not merely a bad President.

Barack Obama is a bad person.

Barack Obama's campaign, through his official website,, has chosen to exploit people with Down syndrome for partisan gain (H/T Instapundit).

In short, the website has published a letter from, and photo of, a lady named Brittany who suffers from Down syndrome, calling her "A face of one of the 47%."

Brittany feels insulted by Mitt Romney's "47%" comments from last Spring, and this is understandable.

There is no denying that Romney's "47%" comments were, at best, poorly articulated. Most fundamentally, many of the 47% who pay no income taxes will indeed be voting for Mitt Romney next month, and many people who pay seven- and eight-figure annual tax bills will be voting for Obama. And at least in the segment that has been most widely circulated, Brittany could very reasonably have perceived an insult, even though common sense suggests that none was intended toward anyone who, like Brittany, actively supports themselves to the best of their abilities. Poorly worded comments allow for such misinterpretation.

It is also possible that Brittany's exploitation may have gotten started before she came to the attention of Barack Obama's minions. Her letter contains the post-script "My mom and her friend helped me write this."

And exploiting sympathetic people for political gain is, of course, nothing new. Just last month, Democrats attempted to exploit military veterans in order to channel additional subsidies to public employee unions.

Exploiting people with Down syndrome, however, is particularly odious.