Moneybox
A blog about business and economics.

Feb. 11 2016 8:09 PM

Marco Rubio’s Tax Plan Is a Grotesque Gift to America’s Plutocrats

At this point, a Republican tax plan would not be a Republican tax plan if it weren’t a morally and mathematically risible giveaway to America’s wealthy. The latest reminder of this fact comes to us from the nonpartisan Tax Policy Center, which Thursday released an assessment of Florida Sen. Marco Rubio’s especially plutocrat-friendly proposal.

Rubio’s blueprint is interesting because it drowns one big, potentially very popular idea—an expanded child tax credit of up to $2,500 per young one—in a heap of giveaways to the GOP donor class. This seems to have been part of Rubio’s strategy to appear as all things to all Republicans. But the end result is just a bit silly-looking, the tax-policy equivalent of getting drunk at Golden Corral and going overboard on the buffet line. (Oooh, pot roast. Oooh, banana pudding. Oooh, immediate expensing of capital investment.) Rubio’s plan eliminates taxes on dividends and capital gains—so you pay nothing to the IRS from money earned on stocks. It significantly lowers the corporate tax rate without really trying to balance the revenue loss. It crunches the number of income-tax brackets while lowering rates. And it eliminates the estate tax, which currently only applies to millionaires, anyway.

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Total tab: $6.8 trillion during the first 10 years. (That’s more than Washington is projected to spend on the defense budget this decade, by the way.) Then, another $8 trillion over the next 10.

The biggest beneficiaries of this tax largesse are, of course, the affluent. By 2025, more than 70 percent of these tax cuts go to the highest-earning fifth percent of tax payers; more than 40 percent go to the top 1 percent. The average taxpayer of the top 0.1 percent of taxpayers would get a $1.12 million break. The average taxpayer in the poorest 20 percent of Americans would get $232 under the Rubio plan.

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It didn’t have to be this way. One can sort of imagine a world in which Rubio would have campaigned primarily on his expanded child tax credit, which alone costs more than $1.2 trillion over a decade. It would have been an ambitious, middle-class-friendly tax cut that, while perhaps not enough to satiate the Wall Street Journal’s editorial board, would have at least distinguished Rubio’s economic thinking as something other than cartoonish supply-siderism.

Of course, Republicans (including the candidate’s advisers) argue that Rubio’s tax plan would unleash a surge of economic growth that would help make up for the lost revenue. But mainstream economics suggests that insofar as tax cuts are good for long-term growth at all, they only help if they're balanced by spending cuts. And, as Jonathan Chait illustrated at length earlier Thursday, Rubio, who among other things wants to increase defense spending, makes only the most pitiful gestures toward balancing his budget math.

But who knows. Maybe Rubio is waiting for after the campaign to make the numbers work. If that's the case, his plan isn’t so much laughable as cruel, as the spending cuts necessary to balance his tax cuts would almost certainly require decimating federal programs that service the poor.

Remember, Rubio is fighting to represent the Republican mainstream. He’s the conservative establishment’s vision at work.

Feb. 11 2016 2:24 PM

This Legal Dispute Says Everything About the Shadiness of Personal Finance Gurus

Remember Robert Kiyosaki, the it financial guru of the housing-bubble years? He co-wrote a small, self-published book with accountant Sharon Lechter called Rich Dad, Poor Dad that became a sales phenomenon. It spent years—from 2000 to 2008!—on the New York Times bestseller list. And as Slatewrote in 2002, it peddled some very, very suspect advice.

Rich Dad, Poor Dad is considered one of the bestselling personal finance books of all time. It combined the wish-fulfillment appeal of The Secret with what could be called a practical action plan in the age of easy credit—mainly, buy homes and properties with as little money down as possible, then enjoy the income flow.

No one ever went broke underestimating the financial smarts of the American public. In some cases, like Kiyosaki’s, they earned millions.

Kiyosaki’s still out there, but he’s kept a lower profile in recent years. But this month brings news of the former favorite personal finance guru in the form of an ongoing legal dispute between Kiyosaki and his former sponsor, the seminar company the Learning Annex.

According to the Wall Street Journal, the Learning Annex is petitioning a U.S. Bankruptcy Court in Wyoming to unseal a lawsuit pertaining to the bankruptcy of one of Kiyosaki’s company’s Rich Global LLC, which has been closed to the public since it was filed in 2014. The Learning Annex’s interest? Well, the Kiyosaki-controlled company declared bankruptcy in 2012, after the Learning Annex won an almost $24 million judgment against it.

Here’s the backstory, a saga that might perfectly illustrate the shadiness of the personal-finance advice racket.

Feb. 11 2016 1:45 PM

Could Our Cruddy Stock Market Cause a Recession?

Conventional wisdom says that the health of the stock market doesn't matter much to the wider economy. Shares go up. Shares go down. But the swings of the S&P 500 don't really influence things like growth rates or unemployment. On days like today, when global markets are getting slaughtered—JPMorgan's trading desk said it was "hard to imagine an uglier morning”—that consensus is pretty comforting.

But not everybody agrees with it. UCLA economist Roger Farmer has been arguing for some time that the stock market does, in fact, sway the real economy. The man is generally something of a contrarian but is also respected for his “fearsome math skills and deep understanding of how modern [economic] models work,” as Bloomberg View's Noah Smith has put it. Last year, the professor published a paper titled “The Stock Market Crash Really Did Cause the Great Recession.” On days like today, it's pretty discomforting.

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Using a statistical tool known as a Granger causality test, Farmer finds that changes in the stock market can predict changes in unemployment a quarter later. Using that relationship, he's then able to build an economic model that very closely matches what transpired in the Great Recession. Of course, that doesn't necessarily mean the plummeting share prices are what caused mass joblessness in 2008 and 2009. It's possible the stock market was just reacting to other changes in the economy that happened to drive unemployment as well. But other data you might expect to help forecast the jobless rate—including “real GDP, real investment spending, the three month treasury bill rate, the CPI inflation rate and the spread of BAA bonds over ten year treasuries”—don't have the same predictive relationship as stocks, Farmer finds. He concludes that the drop in the stock market alone could have driven unemployment far higher than it actually rose had it not been for the drastic interventions by the Federal Reserve.

What this leaves unanswered is how the stock market could crash the economy. Previously, Farmer has blamed "animal spirits"—which is just the term of art economists have adopted to describe what the rest of us call human emotion. The stock market plunges, businessmen get pessimistic, and they stop hiring or start laying off workers. During a recent appearance on Bloomberg's What'd You Miss, however, he suggested "wealth effects" might be at play. That's another fairly common-sense—but up-until-recently controversial—notion that when people feel richer they spend more, even if their wealth might only exist on paper. Likewise, when they feel poorer, they spend less. Here's how Farmer put it:

If you’re, say, a 65-year-old couple, and your 401(k) drops by 10 percent and goes up again the next day, you’re not going to do very much. If your 401(k) drops by 10 perent and stays down for three or four months, you might decide not to take that cruise you were going to take, you might decide you’re not going to put as much money into your grandchild’s college fund. And you’re going to cut back on spending. And that I think is the channel. So confidence, in my view, drives the real economy.

Here's where this story sort of falls apart for me. The most recent research suggests Americans' spending habits just aren't that sensitive to stock prices. When Nobel Prize winner Robert Shiller and his collaborators Karl Case and John Quigley last looked into the subject, they found “at best weak evidence of a link between stock market wealth and consumption.” Insofar as the link was real at all, it wasn't very large. This makes sense when you consider that stock ownership is concentrated among relatively well-off households who can often keep spending like normal when the economy turns rocky. Middle-class Americans care a lot about home values, since that's where their money is tied up, not the S&P 500.

But even if Farmer's theory has some weak points, it's at least interesting. Given how far markets have already dropped, does he think we're headed for a downturn? “A lot depends on whether declines remain persistent or whether the U.S. economy comes back up again,” he told Bloomberg. In other words: who knows. 

Feb. 10 2016 6:07 PM

Twitter Lost Users Last Quarter. Welp.

Well, you're probably going to hear more about the death of Twitter on Thursday. 

The little blue bird released its latest financial results Wednesday evening, and while it beat investors’ expectations on earnings, the company reported that its user base shrank slightly during the winter. Not including “fast followers” who access the service only through text messages, Twitter’s monthly active users declined from 307 million during the third quarter to 305 million in the fourth. Including those fast followers, who are concentrated among feature-phone owners in the developing world, monthly active users stayed steady at 320 million.

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Twitter has struggled to grow its user base quickly enough to satiate Wall Street, and initial news of the decline seemed to fulfill investors’ collective nightmares about the company's future. Its stock immediately fell almost 12 percent in after-hours trading. However, shares bounced back shortly as the market seemed to process the actual news. In its letter to shareholders, the company said monthly users returned to their third quarter levels during January and add it was “confident that, with disciplined execution, this growth trend will continue over time.” During a conference call with investors, executives also noted that the company actually grew its number of new users over the fourth quarter. Its overall monthly numbers declined because it failed to court back enough former users who had stopped checking their feeds.

So in management's telling, Twitter stumbled a bit on user growth, but things are picking back up apace. Presumably, the investor freakout will be a tad more severe if the promise doesn't come true next quarter.

In other news, the exec team said that the algorithmic timeline it debuted Wednesday is already increasing user engagement. Perhaps #RIPTwitter was a little premature, after all.  

Feb. 9 2016 7:02 PM

So, People Are Getting Nervous About Germany’s Biggest Bank

It's never a good look when a major bank has to pipe up and reassure the world that it's still financially sound. But such is the lot this week of Deutsche Bank, which has been getting absolutely savaged by the markets as of late. Its shares, down more than 40 percent this year on the New York Stock Exchange, are trading at a record low, while the cost of insuring its debt has spiked, a sign investors are becoming more worried that it might default. The beating has been so bad that CEO John Cryan felt compelled to send his employees an upbeat memo on Tuesday promising them that the bank “remains absolutely rock solid.”

Its stock kept tumbling.

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The ups and downs of Teutonic high finance might not seem like a super pressing concern here in the United States, where Donald Trump might still be on the verge of turning the presidential election into a full-on Idiocracy prequel. But given the fragile state of global markets, it's possible that any trouble at Germany's largest bank could spread.         

What's wrong with Deutsche Bank? In part, it's dealing with the same problems facing banks all across Europe. The combination of sagging global growth and low interest rates has made it difficult to earn money from lending. Loans to energy companies are going bust. Stricter rules designed to make the financial system more stable have made investment banking less lucrative, leading some institutions to shrink that line of business. This has all culminated in a “chronic profitability crisis” among Europe's banks, as the Wall Street Journal puts it.

Things have been especially ugly for Deutsche Bank, though, because of its legal rap sheet. Last month, Frankfurt's finest announced a prodigious 6.7 billion euro annual loss, thanks in large part to the billions of dollars it has had to set aside to pay fines and settle litigation involving all manner of fraud and international sanctions violations. With more law-enforcement trouble potentially looming, investors are worried that Deutsche Bank is one big, unforeseen financial penalty away from serious trouble. Forget turning a profit—the bank might have to stiff some of its bondholders.

Understanding why requires a little bit of background. In order to prepare for new international requirements set under the Basel III agreement, banks have been trying to build up their capital bases—the financial safety cushions that are supposed to buffer them from losses on riskier assets. One can spend many deeply dull hours learning the ins and outs of what does and doesn't count as bank capital. But to simplify, “tier 1” capital, the type that's relevant to Deutsche Bank's predicament, is basically money that a financial institution doesn't have to pay back to a lender. That typically includes funds raised by issuing stock, or retained profits.

But in Europe banks have also been fattening up their capital ratios by selling large quantities of so-called contingent convertible bonds, or CoCo Bonds, which Bloomberg has described as "high-yield hand grenades." These securities are a sort of cross between a stock and a bond. Like a regular bond, they pay interest. But banks can choose to skip payments if need be. And should their capital levels fall too low, the bank can convert them into stock or, in many cases, simply write off the debt.  

Investors have gone cuckoo for CoCo bonds—sorry, I'm so sorry—in part because they offered fairly high interest rates, which have been hard to come by in recent years, but also because they were pretty sure banks would treat them as normal debt. Now that seems like less of a sure bet. This week, CreditSights analyst Simon Adamson warned that Deutsche Bank might have to miss coupon payments by next year. “While we are confident about 2016 coupons, we are less so about coupon payments in 2017,” he wrote. The bank has tried to reassure CoCo bondholders that in fact it has all the money it needs to keep paying them, but credit markets still went into a tizzy.The anxiety has been fueled, in part, by Deutsche Bank's precarious legal situation since, again, one big settlement could change its entire financial standing. In a worst-case scenario, the bank could theoretically have to force losses on bondholders by swapping their CoCos for stock or wiping away the debt entirely.

Is that really something to lose sleep over? Maybe. “When the first one goes sour and halts coupon payments, it’s possible investors could suddenly wake up to the inherent risk and flee all CoCos, destabilizing the corporate bond market and possibly even the financial system,” Bloomberg opines. At the very least, it's one more potential source of instability at a moment when markets are already full of them. So much for German reliability.

Update, Feb. 10, 2016, at 8:40 a.m.: Deutsche Bank’s stock jumped in Frankfurt on Wednesday after the Financial Times reported that it was considering buying back billions of euros worth of bonds as a show of financial strength. Repurchasing debts that have fallen below their face value could also help the bank book a profit. Notably, the program would not include the CoCo bonds that have had investors worried

Feb. 7 2016 8:15 PM

Quicken Loans Ad Promises Fast Mortgages on Your Phone. What Could Possibly Go Wrong?

Advertisements during the Super Bowl often make plays for attention by aiming for offense. This year, however, our early contender for winner of the controversy sweepstakes wasn’t particularly vulgar. Instead, it was a commercial for Rocket Mortgage, an app from Quicken Loans that promises to deliver mortgage judgments in as little as eight minutes. It proposes to “do for mortgages what the Internet did for buying music, and plane tickets, and shoes.” If we embrace this model, the ad suggests, we would be patriotically creating jobs and swelling the economy, as new homeowners rush to buy goods to fill their new homes.

Wondering how “people [are] going to afford all of this,” CNET’s Chris Matyszczyk worries that by making mortgages easier to acquire Quicken’s service might undermine “rational decision-making.” On Twitter, meanwhile, the judgments came fast and hard.

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Ultimately, Rocket Mortgage may not even be equipped to make good on its advertised promises. On the website Marketwatch, Andrea Riquier observes that while it’s “technically possible for a mortgage applicant to have all the data and documentation lined up” to make it through the process in less than 10 minutes, most are likely to “move more slowly.” 

Feb. 5 2016 4:44 PM

Why Legal Marijuana Could Be a $6 Billion Industry in 2016

This post originally appeared on Inc.com

…America's homegrown marijuana industry is expected to bring in $6.7 billion in 2016

Feb. 4 2016 11:33 PM

Hillary Is Finally Being Honest About Bernie’s Health Care Plan

Hillary Clinton's early attacks on Sen. Bernie Sanders' plan for single-payer health care were at best convoluted and at worst simply dishonest. In earlier stages of the campaign, she seemed to suggest that the Vermont senator's desire to "dismantle" America's current suite of public health care programs and replace them with a system of universal government insurance would somehow give Republicans permission to roll back Medicare, Medicaid, and Obamacare. She also attacked Sanders for wanting to raise taxes on the middle class without mentioning that those taxes would, theoretically, just be replacing their health premiums. For whatever reason, she seemed to think Democratic voters couldn't handle the obvious argument that moving to a single-payer system is politically and logistically unrealistic and instead settled for debating in bad faith. Ezra Klein summed it up at Vox with the line, "Hillary Clinton Doesn't Trust You.”

Tonight, at the Democratic debate, she did a better job explaining herself.

Senator Sanders and I share some very big progressive goals. I've been fighting for universal health care for many years and we're now on the path to achieving it. I don't want us to start over again. I think that would be a great mistake to once again plunge our country into a contentious debate about whether we should have and what kind of system we should have for health care. I want to build on the progress we've made. Go from 90-percent coverage to 100-percent coverage. And I don't want to rip away the security that people finally have. Eighteen million people now have health care. Pre-existing conditions are no longer a bar. So we have a difference.
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You may not especially like this argument, but it's honest. The wars over Obamacare aren't even over, and Clinton doesn't want to relitigate the fundamental question of how our health care system should be structured. She also doesn't think the government should take away coverage that people already have (likely because, as she learned in the early 1990s, people who have insurance tend to be incredibly protective of it). Instead, she wants to build on the framework that Obamacare put in place and try to expand insurance to those who still don't have it.

Again, you might not agree with all these points. You could argue her own goals aren't even especially achievable, so long as Republicans control the House. But, at least it's a straightforward, sincere argument.

Feb. 4 2016 10:31 PM

Hillary Just Successfully Attacked Bernie Sanders for Supporting a Bill Her Husband Signed

Going into Thursday night's Democratic presidential debate, pretty much everyone expected Vermont Sen. Bernie Sanders to criticize Hillary Clinton for accepting donations from Wall Street. And, indeed, he eventually brought up the millions of dollars her super PAC has collected, in part from donors in finance.

So, how’d she respond? In part, by criticizing Sanders for supporting a bill her own husband, former President Bill Clinton, signed into law. And weirdly, it was kind of effective.

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Clinton started off by taking umbrage at Sanders’ “insinuation” that “anybody who ever took donations or speaking fees from any interest group has to be bought.” Which, all right, fine. “You will not find that I ever changed a view or a vote because of any donation that I ever received,” she added. Which, again, all right, fine. But then she moved onto a more interesting point:

While we’re talking about votes, you’re the one who voted to deregulate swaps and derivatives in 2000, which contributed to the overleveraging of Lehman Brothers which was one of the culprits that brought down the economy. I’m not impugning your motive because you voted to deregulate swaps and derivatives. I’m not saying you did it for any financial advantage. What we’ve got to do as Democrats is to be united to actually solve these problems and what I believe is I have a better track record and a better opportunity to actually get that job done.

What Clinton is referring to here is Sanders’ 2000 vote in favor of the Commodity Futures Modernization Act, a bill that essentially banned the government from regulating derivatives, such as the credit default swaps that helped bring down the global economy during the financial crisis. The legislation gets talked about less often than the repeal of the banking regulation law Glass-Steagall, which Sanders opposed. (It’s also a law Sanders has said he would like to revive and Clinton would not). But it almost certainly played a far greater role in setting the stage for Wall Street’s meltdown.

In some ways, Clinton’s critique here is a bit unfair. The version of the bill that Sanders supported as a House member, while certainly deregulatory, wasn’t quite as extreme as the final version that was passed into law. It’s also a little discordant since, once again, her own husband signed the bill. (He’s since said it was a mistake.)  

But fundamentally, it’s a fair retort. In Sanders’ view, Wall Street wins in Washington thanks to the corrupting power of money on politics. To some extent, that’s probably true. But it ignores the fact that sometimes, bad, industry-friendly ideas just become popular because they sound good at the time. In the late 1990s, there were lots of intelligent people on the center-left who thought deregulation was a legitimately brilliant idea. Deregulation was in the air and even Bernie Sanders, democratic socialist, wasn’t immune. Today, Democrats have changed their tune. And in Clinton’s view, ideas matter more than money.

Sanders, for his part, responded by talking once again about Glass-Steagall, which wasn’t particularly relevant.

*Correction, Feb. 5, 2016: This post originally included a photo from the NBC debate on Jan. 17, 2016, in Charleston, South Carolina, but misidentified it as a photo from the MSNBC debate held at the University of New Hampshire in Durham, New Hampshire, on Feb. 4, 2016. The photo has been replaced.

Feb. 4 2016 5:50 PM

Obama’s Big New Idea This Year: A $10 Tax on Every Barrel of Oil

As if the election cycle hadn't already supplied us with enough ambitious and politically doomed policy ideas, President Obama on Thursday called for a new $10 fee on every barrel of oil sold in the United States, which would be used to fund billions of dollars in new green transportation projects. The plan, to be phased in over five years, will be included the White House's annual budget, which it is preparing to release next week.

Think of this as an increase in the gas tax, but with slightly broader reach, and perhaps slightly better political optics. Any fee imposed on oil companies would likely be passed on to consumers in the form of higher prices, so motorists, airline passengers, trucking companies, and the like would eventually end up paying much of the bill (transportation is responsible for about 70 percent of U.S. oil use). The cost of other petroleum products, like plastics, would also rise a bit. As the White House clarified on a call with reporters, the fee would apply to imported oil, but not to exports from the U.S., so American-drilled crude wouldn't be at a disadvantage on the global markets.

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A hike along these lines is probably long overdue. The federal gas tax has been stuck at 18.4 cents a gallon since 1993. Congress, fearful of angry suburban drivers, has refused to lift it, which has made adequately funding crucial infrastructure spending trickier over the years. One of the main benefits of taxing oil companies rather than commuters is that the fee is better hidden from the public—the cost might get passed downstream, but people have to think about it a little before getting mad. Plus, rhetorically, it's just easier for a politician to talk about making Exxon Mobil pay up than it is to ask car owners to pay more.

Ultimately, Politico notes that Obama's proposal could add about 25 cents onto the price of gasoline, which should be somewhere around $145 per driver, per year.

In theory, there are other policy advantages to an oil tax. Some advocates have suggested using it to replace all of the various fuel excise taxes the government currently collects. That would both simplify the IRS's job and perhaps help the public forget about the tax altogether. It would also act as a de facto carbon tax that would, again, reach beyond gasoline, and would encourage some amount of conservation. And though Obama doesn't seem to be going this route, the government could also tax a percentage of each barrel's cost rather than collecting a set fee, so that if the price of oil went up, Washington would get more revenue (of course, if the price went down, it would  collect less).

But given that most policy proposals are DOA at the moment, the White House's idea mostly seems like an experiment in messaging. We'll see if taxing oil is more politically palatable than taxing gasoline.

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