Econ-Recon: February 2008: Archives

February 28, 2008

The Price Of Economic Inequality? genre: Econ-Recon & Little Red Ribbon-Hood & Polispeak & Six Degrees of Speculation

Behind Bars

A report on the rising number of incarcerated Americans provides a disturbing look at the unspoken impact of economic inequality and the high cost we pay for perpetuating it. At the same time, during each election cycle, politicians from both parties accuse each other of practicing suspect fiscal discipline.

For this discussion, I want to look at the costs of incarceration in relation to providing universal health care as well as the Bush tax cuts. Time and again, the GOP points out the exorbitant costs that might be associated with providing universal health care. From what I've read, the plans being pushed by Senators Clinton and Obama are reported to cost 10 to 15 billion dollars annually. That's a big expense...but before one concludes we can't afford it, one must consider the burgeoning costs of incarceration and the distribution and impact of the Bush tax cuts.

From The Seattle Post-Intelligencer:

NEW YORK -- For the first time in U.S. history, more than one of every 100 adults is in jail or prison, according to a new report documenting America's rank as the world's No. 1 incarcerator. It urges states to curtail corrections spending by placing fewer low-risk offenders behind bars.

Using state-by-state data, the report says 2,319,258 Americans were in jail or prison at the start of 2008 - one out of every 99.1 adults. Whether per capita or in raw numbers, it's more than any other nation.

The report, released Thursday by the Pew Center on the States, said the 50 states spent more than $49 billion on corrections last year, up from less than $11 billion 20 years earlier. The rate of increase for prison costs was six times greater than for higher education spending, the report said.

So in the course of 20 years, we have increased our annual corrections spending by a whopping $38 billion dollars. That is roughly three times the projected annual cost to provide universal health care...health care that would help elevate the very people who are disproportionately represented in the prison population. Factor in the following data on the Bush tax cuts and one will begin to see the larger picture.

From MSNBC.com:

WASHINGTON - Since 2001, President Bush's tax cuts have shifted federal tax payments from the richest Americans to a wide swath of middle-class families, the Congressional Budget Office has found, a conclusion likely to roil the presidential election campaign.

The conclusions are stark. The effective federal tax rate of the top 1 percent of taxpayers has fallen from 33.4 percent to 26.7 percent, a 20 percent drop. In contrast, the middle 20 percent of taxpayers -- whose incomes averaged $51,500 in 2001 -- saw their tax rates drop 9.3 percent. The poorest taxpayers saw their taxes fall 16 percent.

Unfortunately, these percentages are deceptive. Let's look at a practical explanation of what these tax cuts meant to the working poor.

From BusinessWeek.com:

Imagine you are a waitress, married, with two children and a family income of $26,000 per year. Should you be enthusiastic about the tax cuts proposed by President Bush? He certainly wants you to think so. He uses an example of a family like yours to illustrate the benefits of his plan for working Americans. He boasts that struggling low-income families will enjoy the largest percentage reduction in their taxes. The income taxes paid by a family like yours will fall by 100% or more in some cases. This is true--but highly misleading.

President Bush fails to mention that your family pays only about $20 a year in income taxes, so even a 100% reduction does not amount to much. Like three-quarters of working Americans, you pay much more in payroll taxes--about $3,000 a year--than in income taxes. Yet not a penny of the $1.6 trillion package of Bush tax cuts (in reality, closer to $2 trillion over 10 years) is used to reduce payroll taxes. Moreover, should your income from waitressing fall below $26,000 as the economy slows, your family could be among the 75% of families in the lowest 20% of the income distribution that stand to get absolutely zero from the Bush plan.

The President claims that the "typical American family of four" will be able to keep $1,600 more of their money each year under his plan. Since you won't be getting anything like that, you might be tempted to conclude that your family must be an exception. Not really. The reality is that the President's claim is disingenuous. Eighty-nine percent of all tax filers, including 95% of those in the bottom 80% of the income distribution, will receive far less than $1,600.

In other words, when a 100% tax cut is the equivalent of $20.00, a family of four might be able to translate that twenty dollars into a meal at McDonalds...one time in 365 days. On the other hand, if one is lucky enough to be in the top one percent (those with $915,000 in pretax income...and first class health care) of earners and receive a 20% tax reduction, I suspect the savings would buy more than one fast food dinner over the course of a year. The skewed advantages...and disadvantages...suddenly become obvious.

If that isn't bad enough, let's return to the costs of incarceration and look at future cost projections.

From The New York Times:

By 2011, the report said, states are on track to spend an additional $25 billion.

The cost of medical care is growing by 10 percent annually, the report said, and will accelerate as the prison population ages.

In less than four years, we will spend another $25 billion annually (more than enough to pay for universal health care) to incarcerate more and more Americans...the bulk of which come from the economically underprivileged.

More From The New York Times:

Incarceration rates are even higher for some groups. One in 36 Hispanic adults is behind bars, based on Justice Department figures for 2006. One in 15 black adults is, too, as is one in nine black men between the ages of 20 and 34.

The report, from the Pew Center on the States, also found that only one in 355 white women between the ages of 35 and 39 are behind bars but that one in 100 black women are.

Let me be clear...crime is wrong...and it should be punished. However, we cannot ignore the factors that facilitate crime. Failing to provide opportunities to those most lacking in resources is also wrong...and it often leads to a lack of education and therefore a susceptibility to participating in crimes that are driven by poverty.

We have likely exceeded the point at which it will cost us more to punish and incarcerate those who commit these crimes of poverty than it would have cost us to insure their education, to raise the minimum wage above the poverty level, and to grant them the dignity and peace of mind that comes with knowing one's family members can receive health care when it is warranted; not just when it is necessary to prevent death.

Instead, under the guidance of the GOP, we have elected to ignore the fact that 47 million Americans lack health care and to focus upon further enriching the wealthiest...all the while being forced to endure asinine arguments that doing so will create jobs and thus facilitate a rising tide to float the boats of all Americans. It simply isn't true.

At a savings of $20 a year, millions of Americans can't even buy a seat in the boat...let alone stay afloat by treading water in the midst of the steady deluge of ever more ominous waves. If the number and availability of life preservers continues to dwindle, we are fast approaching the point at which our society will collapse under the weight of the inequity we chose to ignore.

If that happens, it will be as my grandfather argued many years ago, "They can eat you, but they can't shit you". The cannibalism has begun. What follows will not be pleasant.

Tagged as: 2008 Election, Barack Obama, Economics, George Bush, GOP, Health Care, Hillary Clinton, Incarceration, Jobs, Minimum Wage, Poverty, Prison, Racism, Tax Cuts, Tax Rates, Wealth

Daniel DiRito | February 28, 2008 | 3:27 PM | link | Comments (0)
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February 20, 2008

How Many Revised Economic Forecasts Before The Fed Says The "R" Word? genre: Econ-Recon & Six Degrees of Speculation

Stimulus Package?

Just how many revised economic forecasts does it take to finally conclude that the U.S. is in a recession? Former Fed Chairman Alan Greenspan likes to up his odds we're heading into a recession by approximately 20 percentage points every quarter. Current Fed Chairman Ben Bernanke seems to prefer a different approach. His modus operandi is to lower GDP a few tenths of a percent with each revised outlook.

As an outside observer, this measured slide towards using the "R" word feels like being in my car at a red stoplight with my favorite backseat driver seated beside me. As we wait for the lights to change (because we know they will), my trusted traffic manager sits there predicting the seconds until the opposing green light will turn yellow...never getting it quite right...but jubilant each time he announces...after the fact...that "The light just turned yellow". This process continues until our red light turns green and we can proceed to the next intersection...to start all over again.

While I realize my analogy isn't an actual equivalent, the frustrations are much the same. Yes, predicting the twists and turns of the economy isn't an exact science...but I do find our willingness to grant these prognosticators a free pass each time they err to be a rather absurd practice. The fact that the nation holds its breath each time a new report is scheduled for release merely supports my contention.

WASHINGTON (AP) -- The Federal Reserve on Wednesday lowered its projection for economic growth this year, citing damage from the double blows of a housing slump and credit crunch. It said it also expects higher unemployment and inflation.

Under its new economic forecast, the Fed said that it now believes the gross domestic product will grow between 1.3 percent and 2 percent this year. That's lower than a previous Fed forecast for growth, which at that time was estimated to be between 1.8 percent and 2.5 percent.

With economic growth slowing, the Fed projected that the national jobless rate will rise to between 5.2 percent to 5.3 percent this year. That is higher than the central bank's old forecast for the rate to climb to as high as 4.9 percent. Last year, the unemployment rate averaged 4.6 percent.

And, with energy prices marching upward, the Fed also raised its projection for inflation. The Fed now expects inflation to be between 2.1 percent and 2.4 percent this year. That's higher than its old forecast for inflation, which was estimated to come in at around 1.8 percent to 2.1 percent.

The Fed said its revised forecasts reflected a number of factors including "a further intensification of the housing market correction, tighter credit conditions .... ongoing turmoil in financial markets and higher oil prices."

In truth, I suspect that the average American has just as good a sense of where the economy is headed as those who get paid to inform us. If the last number in our checkbook is negative, we conclude we have a problem. Why wouldn't the same math hold true for our national economy?

No, we allow our political leaders to sell us on the notion that a tax rebate of $300.00 to $1,200.00 is all that matters and all that is needed to jump start the economy...even as they continue to predict further economic contraction. Excuse me, but isn't that on par with each of us taking a cash advance on an already debt heavy credit card and thinking we're suddenly in the black?

Look, I understand the notion of spending an economy out of a downturn. However, the rest of that equation posits that the increased spending will result in new jobs, greater investment and productivity, and increasing revenues for the individual, the corporation, and the government.

Unfortunately, this equation may no longer be valid...especially since the jobs are often created in other nations, the investments are frequently targeted for countries with cheap labor such that productivity is less relevant, and the only increased revenues find their way into the pockets of formerly impoverished third world individuals and the corporations and their CEO's that benefit from the enhanced bottom line that ensues.

So what does the average American get? A stimulus package that provides a single check that won't overcome the unfavorable wage-inflation ratios, the higher costs of fuel, the expanding credit card debt, the skyrocketing health care costs, and the ever shrinking job opportunities.

At the same time, some of our political leaders clamor for making the tax cuts for the wealthiest Americans permanent and lowering the corporate tax rate from 35 to 25 percent. I don't know about anyone else, but these refund checks remind me of the dynamics underlying "the world's oldest profession"...the one where one party gets poked for a few bucks by the fat cat who realizes that money can buy him anything he wants.

In the end, getting the powers that be to speak the "R" word is an exercise in relabeling. After all, once the deed has been done and the hush money has been paid, does it really matter what we call an old fashioned screwing? I think not.

Tagged as: Corporate Profits, Corporate Tax Rates, Economics, Federal Reserve, GDP, Globalization, Inflation, Outsourcing, Recession, Stimulus Package, Tax Cuts, Tax Rebates, Taxes, Unemployment

Daniel DiRito | February 20, 2008 | 2:27 PM | link | Comments (2)
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February 12, 2008

Housing Crisis: "Project Lifeline" Dead On Arrival genre: Econ-Recon & Polispeak

HomeForeclosures.jpg

For homeowners facing rising interest rates, higher payments, and dwindling or nonexistent equity, the roll out of "Project Lifeline" seems little more than a "dying by inches" strategy. The plan's 30-day freeze on foreclosures seems to be the equivalent of offering a band-aid to a patient in need of an organ transplant.

Project Lifeline is premised on the notion that granting homeowners a 30 day reprieve will lead them to contact their lender and provide some new financial information that will magically alter their grave situation such that the lender will forego the completion of foreclosure proceedings.

Feb. 12 (Bloomberg) -- Bank of America Corp., Citigroup Inc. and four other U.S. lenders agreed with Treasury Secretary Henry Paulson to take new steps to help borrowers in danger of foreclosure stay in their homes.

Paulson and the banks offered a 30-day freeze on some foreclosures while loan modifications are considered. The Treasury chief, with Housing and Urban Development Secretary Alphonso Jackson, said today at a news conference in Washington that "Project Lifeline" would help stabilize communities disrupted by mortgage defaults.

"If someone is willing to make a call, to reach out, there's a chance they can save their home," Paulson said. "As our economy works through this difficult period, we will look for additional opportunities to try to avoid preventable foreclosures."

In a statement, the banks said the program would start with a letter to homeowners more than 90 days delinquent on payments that lays out procedures for them to "pause" the foreclosure process. The homeowner has 10 days to respond to the notice and give additional financial information so the lender is able to weigh new payment options.

Having worked in commercial real estate through the Savings & Loan scandal of the late 80's, my cynicism was piqued by the announcement of this plan. In truth, I suspect most delinquent homeowners with some mathematical potential to save their homes have already contacted their lender in the hopes of renegotiating. Those homeowners who haven't spoken to their lender are apt to already know they lack the financial means to forestall foreclosure or to withstand the terms of a restructure that may provide some minimal relief. Further, most lenders already know what I've just stated.

So the unasked question remains, "What is this plan really intended to achieve?" I'll posit two answers. First, the lenders participating in this plan are themselves in dire straits and the Bush administration, the Federal Reserve, the U.S. Treasury, and the Department of Housing and Urban Development know as much. Given the desire to avoid expanding recessionary pressures, it behooves the government and these lenders to slow the flow of home foreclosures. More bad news on the precipice of a recession simply accelerates the speed with which the economy falls further into recession. Thus, the plan hopes to blunt the bad news.

Secondarily, banking disclosure provisions require lenders to account for bad loans and to maintain acceptable loss ratios to remain viable. Should these huge institutions fall short on these formulas, an injection of additional capital is frequently required. Absent the ability to meet these capital calls, these lenders face insolvency and regulatory intervention...the very events that preceded the S&L fiasco and the subsequent creation of the Resolution Trust Corporation (RTC)...the entity charged with the management and administration of failed S&L's, the bad loans they held, and the liquidation of the properties associated with those loans.

Given the huge amount of capital that has already been injected to stabilize the industry, I suspect the powers that be fear the impact of announcing even more stopgap capital infusions. If my hypothesis is correct, then my characterization of the situation as "death by inches" is certainly appropriate.

There's no doubt the governments' hands-off approach to regulatory oversight clearly enabled the industry's careless and shortsighted practices. Truth be told, the government and the lending industry subsequently underestimated (or chose to bury their heads in the sand) the magnitude of the crisis. Too little has been done too late to solve the problems or to quell the growing consumer fears that hasten the trajectory of the recessionary spiral. Further half-measures to right the ship will only prolong the inevitable and heighten consumer mistrust.

A look into the pipeline simply indicates more bad news is on the way.

Federal Reserve officials project about 2 million homeowners face higher mortgage rates over the next two years as their loans reset higher. Economists at the Federal Deposit Insurance Corp. estimate foreclosures this year will be about 1 million more than average, a level that FDIC Chairman Sheila Bair has said "is just too high." They average about 600,000 in a typical year.

"This [Project Lifeline] is good, but we've seen this over and over again," said Kathleen Day, a spokeswoman for the Center for Responsible Lending in Washington. "The fact that they keep having to roll out subsequent rescue plans every few weeks underscores that each plan is inadequate."

I'll close with an observation relative to the 2008 election. George Bush's pattern of ignoring the economic warnings and the opinions of his underlings...coupled with his new focus upon bolstering his "fiscal conservative" legacy...may serve to enhance the Democrats' argument that voters can ill-afford the continuance of a Republican in the White House.

Each time the President asserts that the economy is sound and will soon weather the storm...and then has to backpedal...he risks placing his fellow Republicans in the unenviable position of asking voters to send them back to Washington smack-dab in the middle of an economic shitstorm.

Not only is Project Lifeline apt to be dead on arrival, the intransigent leader of the GOP may be unknowingly orchestrating his party's death march...one stubborn George W. Bush inch at a time.

Tagged as: 2008 Election, Economy, Foreclosures, George W. Bush, GOP, Housing Bubble, Housing Crisis, Interest Rates, Mortgage Industry, Project Lifeline, Recession, RTC, S&L Scandal, Sub-Prime Lending, U.S. Treasury

Daniel DiRito | February 12, 2008 | 2:42 PM | link | Comments (1)
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