Some random stuff on economy etc ...

I have been meaning to post some interesting analysis of the elections etc.  Meanwhile, let me post some links that make interesting reading:

• As Dylan Matthews has posted here and analyzed by Brad DeLong, the potential of the US GDP has been declining, at least in the CBOs view.  There are some fundamental issues affecting the US besides the budget.

• Zachary Goldfarb has an excellent analysis here of Obama's economic philosophy of reducing inequality and what he's doing about it.
• This is perhaps the best explanation of the austerity crisis (incorrectly called the fiscal crisis).  My favorite table is the one that outlines the economic impact as shown below.  As you can see the economic impact of the taxes being debated is expected to be small relative to what is being left unsaid:

• Finally, Stuart Stevens, Romney's chief strategist, has written a very interesting piece on Romney's loss.  He accepts no responsibility whatsoever for the loss.  His most interesting comment is that Romney won every economic group except those who earned less than $50,000 income.  This is factually correct as you can see here.  Except, that's roughly 41% of the voters and Romney lost the group by 22 points.  In fact, he's lucky.  The US median income is ~$50K.  So, what he just said is that Romney lost badly among a group that constitutes half the population.  Hmmm ... just a math question here, how was he planning to win the election while losing among such a large chunk of the population by 22 points?

The deficit is shrinking

In an earlier post I had shown that a significant portion of the Federal budget deficit is actually due to the economic downturn.  This would suggest that as the economy has started to grow and the stimulus has worn off, the budget deficit should start to shrink.  I just saw this interesting post by Suzy Khimm showing that's exactly what is happening.  In fact the recent deficit reduction is one of the fastest in recent history, as you can see from this chart:

An economic analysis of the top tax rates

The Congressional Research Service, at the behest of Congress, recently studied the top marginal rates and their impact on the economy.  Here's their conclusion:

"The top income tax rates have changed considerably since the end of World War II. Throughout the late-1940s and 1950s, the top marginal tax rate was typically above 90%; today it is 35%. Additionally, the top capital gains tax rate was 25% in the 1950s and 1960s, 35% in the 1970s; today it is 15%. The average tax rate faced by the top 0.01% of taxpayers was above 40% until the mid-1980s; today it is below 25%. Tax rates affecting taxpayers at the top of the income distribution are currently at their lowest levels since the end of the second World War. 

The results of the analysis suggest that changes over the past 65 years in the top marginal tax rate and the top capital gains tax rate do not appear correlated with economic growth. The reduction in the top tax rates appears to be uncorrelated with saving, investment, and productivity growth. The top tax rates appear to have little or no relation to the size of the economic pie. 

However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution. As measured by IRS data, the share of income accruing to the top 0.1% of U.S. families increased from 4.2% in 1945 to 12.3% by 2007 before falling to 9.2% due to the 2007-2009 recession. At the same time, the average tax rate paid by the top 0.1% fell from over 50% in 1945 to about 25% in 2009. Tax policy could have a relation to how the economic pie is sliced—lower top tax rates may be associated with greater income disparities."

Their conclusion was promptly rejected by the GOP as biased and flawed.   You can read the report and make up your own mind.

Is Romney's "gifts" comment accurate?

In a recent conference call of big-dollar donors, Romney explained why he had fallen short in his race for the Presidency by saying President Barack Obama had bribed liberal special interests with expensive gifts.  Here's a YouTube clip of the call.

Here’s what he said, according to The New York Times:

“With regards to the young people, for instance, a forgiveness of college loan interest, was a big gift…Free contraceptives were very big with young college-aged women. And then, finally, Obamacare also made a difference for them, because as you know, anybody now 26 years of age and younger was now going to be part of their parents’ plan, and that was a big gift to young people. They turned out in large numbers, a larger share in this election even than in 2008 … You can imagine for somebody making $25,000 or $30,000 or $35,000 a year, being told you’re now going to get free health care, particularly if you don’t have it, getting free health care worth, what, $10,000 per family, in perpetuity, I mean, this is huge … Likewise with Hispanic voters, free health care was a big plus. But in addition with regards to Hispanic voters, the amnesty for children of illegals, the so-called Dream Act kids, was a huge plus for that voting group.”

Let's leave aside the politics and the normative question about whether this the right attitude for a second.  Let's also leave aside the question as to whether "gifts" as described by Romney are materially different from targeted tax cuts and other policy pronouncement by Romney himself.  Let's look at whether his underlying assessment of why he lost is true.

In this excellent post at the Washington Post, the examined precisely this question.  They examine how Obama did in 2012 with the constituencies that Romney mentions vs what he did in 2008.  I took the liberty of adding the 2004 data for Kerry from CNN's exit polls where available.  Here's the data:

Voters ages 18-29 [percent of overall vote: 19 percent in 2012, 18 percent in 2008; 17 percent in 2004]

2012: 60 percent       2008: 66 percent    2004: 54 percent

African Americans [percent of overall vote: 13 percent in 2012, 13 percent in 2008; 11 percent in 2004]

 2012:   93 percent    2008: 95 percent    2004: 88 percent

Hispanics [percent of overall vote: 10 percent in 2012, 9 percent in 2008; 8 percent in 2004]

 2012: 71 percent    2008: 67 percent    2004: 53 percent

Non-married women [percent of overall vote: 23 percent in 2012, 20 percent in 2008]

 2012: 67 percent   2008: 70 percent

In the Washington Post article, they conclude that this data conclusively proves that Romney's comment is wrong.  I am not as emphatic.

In one sense Romney has a point.  As seen above or as I posted earlier, Romney got less support among the young and among Hispanics relative to Bush in 2004.  

However, Romney appears to be suggesting that this is a new coalition persuaded by "gifts" to join Obama, i.e. that  these people were in Romney's camp and were won over by the "gifts".  In fact, this isn't correct.  In virtually every case, except Hispanics, Obama's support actually declined with the group in question relative to 2008, i.e. Obama had already built this coalition in 2008.  So, to believe Romney's comment, you'd have to believe that Romney was making significant inroads into Obama's 2008 coalition and that Obama offset Romney's advantage with gifts.  There is insufficient data to suggest this.  The simpler explanation is that Obama built a coalition in 2008 and did enough in his first term to satisfy the people who already supported him to continue to support him.  Since these people were already in Obama's camp, the key question for Romney is what did he do to win them over?

Government Spending

Suzy Khimm posted a new blog post at Ezra Klein's Wonkblog examining Federal spending projections.  The post uses data from five think-tanks commissioned by the Peterson Foundation to come up with their own plans for reducing the deficit over 10 and 25 years: the Center for American Progress and the Economic Policy Institute on the left; the American Action Forum and the Heritage Foundation on the right; and the Bipartisan Policy Center in the middle.  Here's the relevant chart:

There are two interesting points.  First, that expenses will skyrocket if `we don't do anything (current policy).  Secondly, that the sequester (current law) actually fixes the issue.

The debate now isn't really about whether there will ultimately be cuts like this - there likely has to be something similar at some point.  The point now is who pays and when.

Why Romney lost and other suchlike

There are a lot of memes about the 2012 Presidential election.  However, not all of them are accurate.  Here are some of the facts. 

• Was Obama's victory "huge" by historical standards?

One of the common memes is that this was a huge win for Obama.  One reason for this meme is clearly the extent to which Obama beat expectations.  However, by historical standards, Obama's win isn't all that big.  It's about middling in terms of popular vote (note Roman numbers against the name indicates which term).

In terms of electoral votes the election too, Obama's performance was middling at best.

Some factoids:

• As far as I can make out no President before Obama has ever won reelection with fewer absolute votes in the second term than in the first - he got ~6MM fewer votes
• Obama is only the second president (Andrew Jackson was the first) to win a second term with a reduced percentage of the popular vote
• Obama is only the third president (after Madison and Woodrow Wilson) to win a second term with a smaller percentage of the electoral vote.
• Obama is one of only four Presidents in the last 100 years to win 50%+ of the votes in all their terms (the others being FDR, Eisenhower and Reagan)
• This is only the second time in US history where there has been three consecutive two term Presidents. The last time this happened was between 1800-1824 (Jefferson, Madison, Monroe)

• Was there a huge shift in the composition of voters?

The age distribution did shift in strange ways.  Most significantly, there was a reduction in the share of 60+ voters - did the Medicare attacks work?  

In race distribution, share of white voters went down, however, not quite as dramatically as the news media suggests.

Also looking closely, the rise in African American voters equals the rise in Hispanic voters followed by Asian voters.  In terms increase as a percentage of their population, the most massive shift was among Asians.

• What were the key changes between Bush's win in 2004 and Romney's loss in 2012?

The first thing to note is that Obama's weakness with White voters isn't so much an Obama thing as a Democrat thing.  This poll looked white support for Democrats and shows that while Obama significantly under performed Clinton and Kerry with White voters, Democrats have had a problem with White voters for over 40 years, at least.

The chart below parses the change in votes for Bush in 2004 and Romney in 2012 by race and gender.

Here's the strange thing.  Romney actually did just as well among white men as Bush in 2004, and actually did better among white women than Bush in 2004.  

In fact, more than 50% of the difference is due to demographics of voter turnout - i.e. the higher share of Hispanics, African Americans and Asians.  Romney seems to have experienced a dramatic erosion in support among non white women.

As seen below, looking at race more closely we find that apart from the shift in voter mix to more non whites, the loss in support among Hispanics seems to be one of his biggest issues.

As an aside, I didn't have the age distribution cross tabulated against race and gender.  However as a standalone, it appears that Romney really lost support among the under 45 voters relative to Bush.  Older voters went for Romney.  Also, the slightly younger skew in the electorate worked against Romney - but this effect was actually smaller than the loss of support among younger voters.

What's the bottom line?


Overall, erosion in support among younger voters and non whites particularly Hispanics appear  to be major causes of Romney's loss.  

David Brooks said on NPR that the introspection on the GOP loss takes three flavors: (a) those who feel that the GOP was not conservative enough, as stated here; (b) those who believe that the GOP needs to hold fast to their policies and give a little on immigration, e.g. Krauthammer; and (c) those who believe the GOP must restate their case, e.g. David Brooks himself.  Kathleen Parker makes an exceptionally impassioned case for the third way which is best summed up by her line: "The truth is, Romney was better than the GOP deserved."

We'll see which explanation the GOP settles on.  

Here's my hypothesis.  

The Democrats' view is that Government's role is to help those who need help.  The problem with this approach is that helping people invariably creates the free rider problem - i.e. when government starts handing out money to people, a lot of people are tempted to just take the money and mooch off the system.  This is exactly the resentment that the GOP has been successful at tapping into - the resentment that hardworking people pay more taxes to fund free riders and moochers.  However, the GOP's answer is that all largesse is bad.  Their focus on tax cuts essentially argues that anyone who isn't a free rider clearly earns money and a tax cut is the best way of giving them back their money.  Romney went one step further, essentially equating free riders with all recipients of government's largesse, which a largely incorrect juxtaposition but still taps into the same underlying sentiment.

I am not sure how well this story line jives with immigrants.  Most immigrants make immense personal sacrifices to come to the US to seek a better life.  Their work ethic and attitude does not involve free riders.  Their social circle does not include many free riders.  The GOP bogeyman of free riders therefore seems unreal.  On the other hand, they are familiar with a lot of hard working people seeking the American Dream who are not successful.  They cannot understand why the US should not be lending a helping hand to people who are so obviously trying to get ahead and need only the opportunity.  

So, it isn't so much that immigrants trust government more, it is that their fear of free riders is much less as the attitude that drives the fear is somewhat alien to them.

If I am correct then, to win over the non white vote, the GOP needs to distinguish between genuine free riders and the hard working who are just down on their luck, i.e. my guess is that David Brooks and Kathleen Parker are more than likely right.

2012 Elections a Win for Math and Suchlike

The 2012 election was a huge win for mathematics as well as for Obama.  Nate Silver and all the other poll aggregators had been panned before the election by commentators such as Michael Gerson. On Tuesday, the math based aggregators were vindicated.  TPM PollTracker, HuffPost Pollster, the RealClearPolitics Average, and the Princeton Election Consortium all called the election correctly.  However, my favorite one, Nate Silver was king!  Nate Silver picked the winner in all 50 states (better than his 49 out of 50 in 2008).  He had predicted Obama's total vote total would be 50.4% and Romney's would be 48.3%.  The actual numbers were 50.8% for Obama, just four-tenths of a percentage point higher, and 48% for Romney's 48, just three-tenths of a point lower for an average miss of just 0.35 percentage points.   

What helped Obama win?  One of the best graphics on this was posted at the NY Times:

War Casualties

One of the interesting factoids I heard on a conservative talk show was that US troop deaths had tripled under Obama and that this was being suppressed by the "liberal media".  It was such an interesting statistic, that I decided to check it.  Here's a chart of US fatalities:

It turns out that 2008 onwards overall fatalities have dropped dramatically.  During 2005-2008, fatalities averaged 839 per year, whereas in 2009-2012 its averaged 445, i.e. roughly half.  

However, what is also true is that Obama's surge in Afghanistan has tripled the deaths in Afghanistan.  During 2005-2008, fatalities in Afghanistan averaged ~117 per year, whereas in 2009-2012 its averaged 379, i.e. more than triple.

I suppose the reason why this isn't an issue is that both candidates essentially agree to a 2014 exit from Afghanistan and so neither party has a substantively different strategy.

Obama's Incredibly Bad Idea

One of the proposals Obama has put forth that has received scant attention is the idea that US companies would have to pay taxes on their global income and not just on their US income.  Given how bad an idea this is, it is surprising that it hasn't received more attention.

Obama's corporate tax proposal has five key elements:

• It lowers the corporate tax rate to 28%
• It caps the corporate tax rate for manufacturers at 25%
• It imposes a 20% AMT on foreign profits irrespective of whether companies bring those profits back (although it does allow the deduction of foreign taxes paid)
• It introduces a 20% tax credit for moving operations to the US and disallows deduction of expenses related to moving operations abroad
• It eliminates a host of deductions to simplify the tax code, making these changes somewhat revenue neutral 

The aforesaid changes introduces a significant change in how multinationals are taxed.

Currently, not only does the US have one of the highest corporate tax rates in the world, but the US is one of the few countries that does not use a territorial tax treatment, i.e. unlike other countries which tax income earned within their borders, the US taxes global income and not just US income.  However, there is a pretty big loophole.  Multinationals are only taxed on the  foreign profits they bring back to the US.  So, they can effectively indefinitely defer paying taxes in the US by not bringing the profits back to the US.

To fix the loophole, Obama has proposed a 20% alternate minimum tax on foreign income.  

To understand why it is bad, consider a thought experiment.  Imagine that India decides to encourage the car industry and reduces corporate income tax rates for car companies to zero. Car companies from around the world would suddenly find the Indian market more attractive.  However, under Obama's tax rule, US car companies would still need to pay the 20% rate in the US.  That means US companies operating internationally would suddenly be at a huge disadvantage, earning upto 20% lower returns than companies incorporated elsewhere.

The counter argument is that US companies would not be tempted to park money abroad as there would be no advantage to parking the money abroad.  However, the same could be said if the US moved to a territorial tax system.  If companies no longer had to worry about getting taxed on foreign profits they bring back to the US, they would have more incentives to bring the money back.  Not having a territorial tax system actually deters companies from repatriating foreign profits.  Moreover, taxing income in foreign countries seriously affects the competitiveness of US companies.

The only saving grace is that even if Obama wins, its highly unlikely that this proposal will make it past the GOP dominated House.

Recent History of US Economy in a Few Charts

This is a series of simple charts that look at the performance of the US since about 1977.  Blue indicates a Democratic President and Red a GOP President.

• Growth rate of the US has been mixed.  

• Federal debt has been ramped up more when GOP Presidents were in charge:

• While under Carter grew spending dramatically, federal spending grew more under Bush I, II and Reagan than under Clinton. Under Obama its actually grown less than under Bush II (even including the stimulus).

•  Effective Federal tax rates have generally been lower under GOP Presidents

• The tax rate has actually grown more progressive under Bush II as measured by the spread between the average effective tax rates for the top and bottom quintiles.