Baldwin Wallace University Economics Blog ... thinking out loud ...: June 2012

Saturday, June 30, 2012

…oh Sister, save me a seat

By kay.e.strong

Sometimes it is difficult to see the seamless thread that binds Congress and the Vatican, and high ranking generals and bishops to Catholic nuns. But I assure you, it exists…secreted just below the surface of our social consciousness in a network of interdependent and mutually reinforcing worldviews and institutions. In short, this binding thread is our cultural DNA.

A culture’s worldviews are unspoken, (typically) unquestioned but deeply felt perceptions about how our world works. Worldviews establish with broad brush strokes the boundary conditions of what is possible and what is desirable—the goals we pursue. A culture’s institutions, in turn, fill in the empty space between brush strokes with acceptable norms of behavior and the rules for engagement between individuals and between individuals and key structures of society.

It’s this seamless thread of cultural DNA that a handful of Catholic nuns have tripped sending waves of shock and awe across the country with their “Nuns on the Bus” tour (http://nunsonthebus.com/).

Beginning January 2013, $500 billion over the next nine years must be trimmed from the hefty security budget ($851 billion FY2013) and an equivalent $500 billion dollar from domestic spending ($450 billion FY2013) as part of the $1.2 trillion sequester required by last year’s failed partisan debt-ceiling debate. House Speaker John Boehner has publically decried the “hollowing” of our military, while his crony, chairman of the Armed Services Committee, Howard McKeon, whines about it being a “national disgrace.”

Unlike the mighty military-industrial complex flush with tax lobby dollars and powerful Republican friends in Congress, the Sisters scraped together enough funding to carry a message of faith, family and fairness via a bus tour across the mid-west to the steps of Capitol Hill. Their mission is to raise awareness about the real-life impact of further safety-net cuts for the millions of Americans living “on the margins.” At each stop in their nine state tour, the Sisters have highlighted “goods works” being carried out on behalf of the poor, the sick and the disenfranchised. Yesterday, in Cleveland the nuns toured a church in Tremont, visited a hunger center and learned of special outreach ministries to the deaf and blind.

Along the way the sisters have, also, raised the ire of the Vatican. The Vatican chastised the sisters for devoting too much time to caring for members of the community and not enough time to attacking abortion and gay marriage. The April report denounced members of the Leadership Conference of Women Religious for promoting “radical feminist themes incompatible with the Catholic faith,” and “challenging the bishops, who are the church’s authentic teachers of faith and morals.” Seriously? What teaching exactly was senior U.S. Roman Catholic Church official, William Lynn of the Philadelphia Archdiocese, intending when he sanctioned the transfer of priests to unsuspecting parishes to cover up child sexual abuse?

“It’s painfully obvious that the leadership of the church is not used to having educated women form thoughtful opinions and engage in dialogue,” suggests Sr. Simone Campbell, a lawyer and executive director of the NETWORK, a forty year old Washington, DC lobbying group founded by sisters and focused on poverty, immigration and healthcare.

If nothing else, the Nuns on the Bus tour, like the 99% movement before it, raises authentic questions about the boundary conditions of what is possible and what is desirable in our society. And they ever so gently remind us of Mother Teresa’s truth:

If we have no peace, it is because we have forgotten that we belong to each other.

Kay Strong, Ph.D., Southern Illinois University, M.T., University of Houston, M.A., Ohio University; Associate Professor at Baldwin-Wallace College; Areas of expertise: international economics, contemporary social-economic issues, complexity and futures-based perspectives in economics. E-mail: kstrong@bw.edu

Friday, June 22, 2012

…amortization of student loans

By kayestrong

Businesses have a nifty, IRS-friendly way to insure their ability to replace worn/torn, deteriorated or obsolete property and, thus, sustain their long term livelihood. According to the IRS businesses are permitted to take an income tax deduction to recover the depreciation cost of tangible property such as buildings, machinery, vehicles, furniture and equipment and some intangibles such as patents, copyrights and computer software. Just for clarity, depreciation is to tangible assets, what amortization is to intangible assets. These write-offs are no small chunk of change! In 2009 depreciation accounted to $1, 866.2 billion dollars, $1,874.9 in 2010, $1,950.1 in 2011 and 2012 shaping up to be even better—$ $2,004 billion dollars!

Now, to be considered depreciable an asset must possess at least two characteristics: a limited useful life and depreciation estimable with reasonable accuracy. I would argue that the human capital investment, i.e. a college degree, as an intangible asset on par with intellectual property or computer software and easily meets both criteria. Education has a limited shelf life. Knowledge churns daily. I would further argue that it—like the aforementioned intangible assets—suffers from “consumption, expiry, obsolescence or other decline in value as a result of use or passage of time.”

So what my point? Simply put, that human capital investment is as important, if not more important, to our economy’s long run growth than physical capital investment. That without the ability to write down the “consumption, expiry, obsolescence or other decline in value as a result of use or passage of time,” we stand to stymie the conduit for stimulating economic growth in the 21^st century. And this is all the more true in the current macroeconomic environment.

According to the Survey of Consumer Finances released by the Federal Reserve last week:

“Families’ income also continued to decline, a trend that predated the crisis but accelerated over the same period. Median family income fell to $45,800 in 2010 from $49,600 in 2007.”

“The survey also found a shift in the reasons that families set aside money, underscoring the lack of confidence that is weighing on the economy. …Fewer said they were saving for retirement, or for education, or for a down payment on a home.”

“…the share of families with education-related debt rose to 19.2 percent in 2010 from 15.2 percent in 2007. The Fed noted that education loans made up a larger share of the average family’s obligations than loans to buy automobiles for the first time in the history of the survey.”

In fact, student loan debt now at more than a trillion dollars exceeds the nation’s credit card debt!

All this on top of labor market unable to absorb new workers—estimates of joblessness and underemployment range above fifty percent for college graduates.

The Great Recession effectively drove home the implication of “skills obsolescence” for hundreds of thousands of laid off workers. We need stretch the imagination very little to see the pending implications of “education obsolescence” for hundreds of thousands of new graduates!

Allowing the cost of education to be amortized like patents and computer software would seem to be a legitimate, equitable method for addressing the current student debt crisis, as well as, for insuring the human capital investment pipeline for long run economic growth remains open despite short run fluctuations in the economy.

Am I wrong?

Thursday, June 14, 2012

…the echo chamber

By kay.e.strong

By definition, the echo chamber effect refers to any situation in which information, ideas or beliefs are amplified or reinforced by transmission inside an “enclosed” space. One outcome of the echo chamber effect is to give credence to false claims through sheer volume of repetition. The Bush-Era tax cuts exemplify such an effect transmitted inside the enclosed “politicking” space.

To understand the echo chamber effect of the Bush-Era tax cuts, we must revisit the period from which they sprang, the triggering events, their specific provisions and gross incongruence with reality.

First, the rationale for the 2001 tax cuts was to provide “tax relief” by returning excess federal budget surpluses to American taxpayers. The tail end of the 120-month expansion which began in March 1991 had been very generous to the government coffers, generating more federal tax revenue than expenditure. However, what the administration had not anticipated was a pending turning point in the economy. Leading up to 2000, Y2K loomed larger than life. The business sector responded to the hype by ramping up spending on new equipment and software: +14.5% (1998) and +14.1% (1999). Then, having navigated the event successfully, businesses quite logically reduced spending (10.5% in 2000) which triggered the mini dot.com bust (2000-2001). In 2001, businesses throttle back spending further with a -2.8 percent drop—split between a -1.5% on plant facilities and a -3.2% in purchases of equipment and software. Unfortunately, a positive feedback loop gained momentum in 2002 with the business sector responding to the dot.com bust by further slashes in spending (-17.7% on plant expansion and another -4.2% on equipment and software).

Intermeshed with the Y2K (2000) and dot.com bust (2000-2001) was September 11^th(2001). However, despite all the press, September 11^th does not figure prominently into the eight-month 2001 downturn. According to the National Bureau of Economic Research that brief downturn running from March 2001 (peak) to November 2001 (trough) was followed by a healthy 73 month expansion.

Interestingly, all other economic sectors sans business registered positive spending growth from the end of the 1991 (November) downturn through December 2007, the onset of the next eighteen-month contraction. An economic expansion, albeit slow, has been underway since June 2009.

The Bush-Era tax cuts typically refer to two different pieces of legislation which both the President and his fellow Republicans had envisioned to be permanent revision to the tax code. The first known as the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) signed into law in June 2001, phased in lower tax rates over a period of nine years, provided a 2001 rebate ($300/ $500/ $600) for qualified taxpayers based on their 2000 earnings, while simplifying retirement and qualified plan rules for IRAs, 401(k), 403(b) and pension plans. The unanticipated sunset—reversion to earlier status—provision was scheduled for end of 2010.

More specifically, the 2001 legislation provided for the following changes:

Individual Income Tax Rates to be eliminated in 2011:

Bottom Income Bracket: a new 10% bracket for single filers applied to first $7,550 for individuals and $15,100 for couples

The 15% bracket's lower threshold indexed to the new 10% bracket

The 28% bracket lowered to 25%

The 31% bracket lowered to 28%

The 36% bracket lowered to 33%

Ultra-high Income Bracket: the 39.6% bracket lowered to 35%

Marriage Penalty: Increased the standard deduction for joint filers from between 174% to 200% of the deduction for single filers to be eliminated in 2011.
Child Credit: Increased per-child tax credit ($500-$600 in 2001 and 2002 increased to $1000 in 2005) and amount eligible for dependent child care returning to $500 in 2011.
Estate Tax/ Gift Tax/ Generation-skipping Tax: top rate gradually reduced from 55% in 2001 to 45% in 2007; estate tax credit exclusion gradually increased from $675,000 in 2001 to $3.5 million in 2009. In 2011, tax to be reinstated with top rate of 60% and $1 million exemption.
Alternative Minimum Tax (AMT): Increased the exemption to $40,250 for individuals and $58,000 for couples.
Created a new depreciation deduction for qualified property owners

The second revision, known as the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) introduced into the House in February 2003, was signed by Bush into law in May 2003. This legislation, while accelerating the individual credits and rate reductions in the 2001 Act, attacked the perceived obstacles standing in the way of pump up business expansion. Taxpayers were permitted to deduct the full cost of specific items from their income without having to depreciate the amount. Capital gains tax decreased from rates of 8%-10%-20% to 5 and 15%.

Contrary to the echo chamber, the original legislation had NOTHING to do with jump starting the economy! In fact, the economy had been so healthy that despite government’s best spending efforts—it generated four successive years of federal budget surpluses! Republicans seizing the opportunity rammed through “tax relief” for the ultra-rich—who else could take advantage of the Estate Tax/ Gift Tax/ Generation-skipping Tax, the Alternative Minimum Tax, an Income Tax break on par with the pre-relief rate of the middle-class, as well as Capital Gains Tax reductions?

The rationalizing echo in the political rhetoric-de jour for extending the Bush-Era tax cuts is just as disingenuous as the then-President Bush in his 2006 State of the Union address: “I urge the Congress to act responsibly and make the tax cuts permanent…and stay on track to cut the deficit in half by 2009”—which, incidentally, hit its historic hit—a trillion point four dollars in 2009!

I have to wonder, what might our political reality look like if politicians of all colors stretched their necks outside the echo chamber?

Sunday, June 10, 2012

Why Not...a World Series of Economics?

By Doug Goepfert, guest writer

***This blog introduces a novel idea conceived by our most enthusiastic reader/ commenter—and B-W alum! If you love baseball, you're gonna' love Doug's cross-over for assessing the economic health of "Team USA".

I love Major League Baseball: the games, the players, the trades, the playoffs, the winners and the losers. But most of all, I love the statistics. In baseball there’s a statistic for everything. All the information any manager could want to manage his team more effectively. Just look at today’s American League Central Division.

Team	Won	Lost	Percent	Games Behind	Last 10	Streak	Home	Away
Chicago	29	22	.569	-	9-1	W-8	12-13	17-9
Cleveland	27	23	.540	1 ½	4-6	L-2	15-14	12-9
Detroit	24	27	.471	5	4-6	W-1	11-12	13-15
Kansas City	21	28	.429	7	5-5	W-2	5-17	16-11
Minnesota	18	32	.360	10 ½	4-6	W-3	9-17	9-15

Now add to these figures a myriad of other comparative statistics: earned run averages, batting percent’s, slugging percent’s, runs, hits, errors. Now you can get a real feel for the health of a baseball team. Now you can see what the team needs to do to compete well, maybe even make the playoffs and win the World Series.

So why don’t we have a World Series of Economics? That way we can see the true health of “Team USA” and whip together a strategy to compete successfully in the world. Let’s see, what would be the key stats in a World Series of Economics? Well, you would need some indicator of the financial well being of the average citizen of the country. Gross Domestic Product per person should do that. This statistic would approximate average income and cover employment levels. That’s not enough though; you’d need an indicator of how fast income was growing or declining. And the economy might be growing at the expense of natural resources, so I think you’d need an indicator to show if the nation is consuming more than it’s fair share of its bio-capacity. Our “Economic Footprint” work be a good measure.

Also, you’d need an indicator of the physical well being of each citizen (life expectancy, educational expectations); the “Human Development Index” is the statistic there. You might also add data on the spread of income between the richest and the poorest. Does the economy distribute wealth in an equitable manner? Finally, there’s government borrowing. How much debt is too much debt for the country? How much is not enough?

You would need to organize leagues and divisions. Let’s create a “West League” with four divisions and an “East League” with five. Let's say the US competes in the West League, “North/Central American Division”. Now, let’s set this up in a Major League Baseball type of grid. You can check the footnotes at the end of this blog to get the full definitions for the stats I’ve used.

NORTH/CENTRAL AMERICA DIVISION

Country	GDP per Capita ($mm’s) (1)	Ave. Annual % Growth GDP /C (2)	Ecological Footprint (3)	Human Develop-ment Index (4)	Top 10% Ave. Income/Bottom 10% Ave. Income (5)	% Debt/ GDP (6)
US	47.3	0.7	10.0	.910	15.9x	94
Mexico	9.6	0.5	3.8	.770	21.6x	43
Canada	46.2	1.1	-25.0	.908	9.4x	84
Guat.	2.9	1.1	1.5	.574	33.9x	24
Cuba	n/a	2.4	3.0	.776	n/a	n/a
Haiti	0.7	-1.8	1.0	.454	54.4x	17
Dom Rep	5.2	3.6	2.5	.689	25.3x	28
Honduras	2.0	1.0	0.0	.625	59.4x	26
El Sal	3.7	1.6	3.5	.674	38.6x	50
Nicaragua	1.1	0.9	-5.0	.589	31.0x	80
Costa Rica	7.8	2.7	2.0	.774	23.4x	30

Do you think we can win our own division? Not so much. Rank the countries by how many times each nation scored in the top three in each of the six categories. If so, Canada is in the lead. But that’s just our own division. Take a look at how we compare to other potential division winners. Each division leader was picked by the same method, i.e., the country with the highest number of top three results in each category. All countries with populations of at least 5 million were entered.

WESTERN LEAGUE

Division	Country	GDP/c	GRW%	EFP	HDI	10%	DBT%
North/Central America	US	47.3	0.7	10	.910	16x	94
South America	Chile	11.8	2.8	-1	.805	26x	9
Western Europe	Sweden	48.9	1.6	-8	.904	6x	40
Eastern Europe	Belarus	5.8	7.1	1	.756	7x	27

EASTERN LEAGUE

N Africa/African Horn	Algeria	4.4	2.5	3	.698	10x	10
Sub-Saharan Africa	Angola	4.5	8.3	-6	.486	29x	35
Middle East	Turkey	10.4	2.3	3	.699	7x	42
Central/South Asia	Kazakhstan	8.9	7.7	1	.745	9x	11
Far East/Oceana	Australia	56.0	1.7	-23	.929	13x	21

Australia is in great shape for a run at the World Series of Economics. But that spread of income could be much better. And what’s with the lack of growth? Sweden’s game is quite good in most categories but again, where is the growth coming from? How about Kazakhstan? Good growth in GDP per capita and a very respectable Ecological Footprint, Human Development Index and spread of income. Got to get that average income up there. Chile is financially the most conservative; they have the lowest debt ratio. But without debt, can they stimulate enough investment to facilitate the measures that will boost the level of income?

Team US needs help in income growth, income spread, and debt levels. Growth means 1) facilitating business, (2) investment in a strong infrastructure (roads and rails) and 3) improving the education of our workforce. We can’t let our economic footprint suffer while we do this. It’s already pretty high. At the same time we must bring down that debt level so we don’t choke future investment or the welfare of generations to come. Restructuring and enforcing tax rules is a must, as is, development of innovative funding forms.

You see, now we can begin to form a coherent strategy for managing our country, for staying competitive with the world. We can start generating specific goals and action plans. Maybe, we can win the World Series of Economics!

Now let’s turn to the teams that make up the “also-rans” of the divisions; the ones in the cellar of each division. What can we learn from the management of such countries? What can we say about our own foreign aid strategy?

WESTERN LEAGUE

Division	Country	GDP/c	GRW%	EFP	HDI	10%	DBT%
North/Central America	Haiti	.7	-1.8	1	.454	54x	17
South America	Bolivia	1.9	1.7	-45	.663	94x	37
Western Europe	Portugal	21.6	0.1	8	.809	15x	93
Eastern Europe	Greece	27.3	2.4	9	.861	10x	143

EASTERN LEAGUE

N Africa/African Horn	Niger	.4	0.4	.3	.295	46x	16
Sub-Saharan Africa	Congo	.2	2.0	-7	.286	18x	34
Middle East	Israel	28.6	1.0	11	.888	13x	77
Central/South Asia	Nepal	.6	1.7	6	.408	16x	36
Far East/Oceana	Papua-NG	1.5	0.9	-4	.466	24x	26

The 68 million people of the Democratic Republic of the Congo make an average of $200 per year. Income is growing only about 2% per year. The Human Development Index reflects a life expectancy of 48 years and a schooling level of 3.5 years. There’s a large spread between income of rich and poor and debt levels are not low. The country must focus on building a strong infrastructure (roads to facilitate commerce) and education of the workforce. Yet, where are they going to get the funds to do this?

The favorable Economic Footprint of the Congo would suggest development of its natural resources (cobalt, tantalum, diamonds) in a manner that benefits its citizens. The country’s rivers can provide hydroelectric power to other African countries and wise harvesting of forest products is also a possibility. Foremost, the country has suffered from two major wars since declaring independence in 1960. This strife has settled and perhaps a strong government can get back to doing what’s best for the country.

Again, by studying the stats and comparing results to other competitor states, we can develop a strategy for success!

So I say let's have an annual competition for the World Series of Economics! As citizens of the US, we have a great advantage over Major League Baseball. That is, we get to pick the manager for Team US! This is an election year. Who will it be? Democrat, Republican? Who has the best plan to for the US to compete with the rest of the world for the benefit of its citizens? How does it stack up against plans of other nations? Maybe we can use the World Series of Economics to actually keep score. Wouldn’t that be a home run!

We'd love to hear what you think of Doug's World Series of Economics!

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Notes:

(1) Gross Domestic Product (GDP) per capita; a measure of the average income for each individual in the nation. (In thousands of US dollars) ⁽Source: Wikipedia - International Monetary Fund List of Countries by Nominal GDP per Capita (2010)

(2) Average annual percentage growth in GDP per capita over the last decade; a measure of the growth and vitality of the nation. Source: ERS International Macroeconomic Data Set.

(3) The Ecological Footprint of the nation; a measure of how many natural resources are consumed per person in excess of the natural resources per person available. Source: Global Footprint Network, 2011.

(4) The Human Development Index (HDI); a measure of individual longevity, years of education, and level of income. Source: Human Development Report 2011.

(5) The ratio of the income of the richest 10% of a country to the income of the poorest 10% of the country; a measure of the distribution of wealth. Source: Wikipedia - UN statistics.

(6) The percentage of total national debt to the total GDP of the country; a measure of the fiscal responsibility of the country, it’s ability to pay bills and its ability to attract investment. Source: Wikipedia IMF Statistics.

Dr. Lewis C. Sage (AB Kenyon, PhD U. Maryland) likes intersections. Since 1991, he has taught Law and Economics, Mathematical Economics, and the Economics of Healthcare. A former Fulbright Fellow (Bulgaria 1995-6), he teaches an interdisciplinary Honors seminar, Enduring Questions, and is studying strategy in the NFL draft with faculty and students in Sport Management and Psychology. E-mail: lsage@bw.edu