Tag Archives: economics

European Socialism

The term “European Socialism” keeps turning up in the Rhetoric of the Right, and they seem to expect it to make my hair curl and give itself highlights.

I’ll confess that I don’t know a whole lot about European Socialism, in the sense of what it is really like to live there. So when the Right says that it’s “horrible” and “debilitating” and that it undercuts “freedom,” I can’t really call them liars. At least not personally. I simply don’t know enough about it.

But what I do know is that they are telling untruths when they say it is funded by “massive taxation.” I know this because I sat down and did the math. The truth is that Americans pay more in taxes than the European Socialists do.

Let me repeat that. American taxation is higher than European taxation.

I picked the Netherlands (where the Dutch live), a nation with lots of individual freedoms, its own military, and which is also one of the most “socialized” of the European nations. Their tax-paid benefits include:

  • Military
  • Social Security (retirement/disability)
  • Socialized Health Care
  • Public Education (through college/trade school)
  • Unemployment Insurance
  • Housing Assistance
  • Child Care Reimbursement
  • Annual Vacation Reimbursement

I did this calculation back in 2009, based on 2008 tax rates. That was at the end of Saint GW Bush’s radical tax-cutting spree, so US taxes were as low as they’d been in a long time, and health-care insurance was still reasonably affordable because the insurance companies could still rake in profits by selling it only to people who didn’t need it.

The US effective tax rate is shown below with no medical insurance coverage, with 2008 (private) medical insurance coverage, and with the 2012 “affordable” medical insurance coverage factored in. I omitted college costs and benefits, which has the effect of making the US situation look better than it really is.

Annual Income (US $)
$25,000 $50,000 $100,000
United States (no med) 36.1% 40.2% 44.4%
United States (2008 med) 63.7% 54.0% 51.3%
United States (2012 med) 100.0% 72.2% 60.4%
Netherlands 40.1% 44.3% 48.8%

If we don’t include any healthcare costs in the US, we can see that taxation in this European cradle-to-grave Socialist State is a whopping 4% higher than in the US, across all tax brackets (blue versus green).

When we add in health insurance as it existed in 2008, the US effective taxation becomes regressive rather than progressive: it takes more away from the poor than the rich (orange — note how it decreases as income rises). Note that it is higher than the Dutch rate in all income brackets (green).

When I update those health insurance numbers to what they have soared to under the “Affordable” Care Act of 2008, health care actually becomes completely unaffordable for low-income people, and spikes even the higher income brackets (yellow).

Of course, regressive taxation by definition spares the wealthy. So at income-levels of $1M/year or more (not shown) where paying for health care comes out of the petty cash box you keep by the garage door (as does college tuition for your kids), we can get back to claiming that European Socialism has “massive taxes” of an additional 4% for the ultra-wealthy.

Next time you hear some conservative Limbaugh-mouth ranting about the “high cost of European Socialism,” point them over here. And if they don’t like my numbers, they can refigure them for themselves. Assuming they can add.

Here are the hard numbers.

US/Colorado Taxes
Taxable Annual Income
(single earner)
$25,000 $50,000 $100,000
Federal Income Tax i 3349 8844 21978
FICA Tax ii 1913 3825 7650
FICA (employer’s contrib.) 1913 3825 7650
State Income Tax iii 1250 2500 5000
Property Tax iv 500 1000 2000
Unemployment Insurance v 110 110 110
Health Insurance Premiums
(2008) 3900 3900 3900
(2012) 6000 6000 6000
Health Insurance Deductible
(2008) 3000 3000 3000
(2012) 10000 10000 10000
Total
(no med) 9035 20104 44388
(2008 med) 15935 27004 51288
(2012 med) 25035 36104 60388
Effective US Tax Rate (Total / Income)
(no med) 36.1 % 40.2 % 44.4 %
(2008 med) 63.7 % 54.0 % 51.3 %
(2012 med) 100.0 % 72.2 % 60.4 %

 

 

Dutch Taxes
Taxable Annual Income
18,121 €
($25,000)		 36,242 €
($50,000)		 72,484 €
($100,000)
National Income Tax vi 6091 13701 30693
Health Insurance Premium vi 1177 2355 4711
Total 7268 16056 35404
Effective Dutch Tax Rate 40.1 % 44.3 % 48.8 %

Notes:

US federal income taxes are mandatory; 2008 tax tables were used.

US FICA taxes pay for Social Security and Medicare, and are mandatory. Individual and employer contributions of 7.65% were used, for a total FICA tax of 15.3%.

US state income taxes vary from zero (Wyoming) to nearly ten percent (California), and are mandatory. I chose the approximate Colorado rate of 5% (actual 2008 rate was 4.65%).

US property taxes pay for public primary and secondary education. They are loosely related to income, in that people with higher income tend to live in more expensive properties, and vary from below half a percent (Louisiana) to nearly seven percent (New Jersey). I chose the approximate Colorado rate of 2%.

US unemployment insurance is optional for small companies; unemployment benefits are only available to employees of companies that pay premiums. Premiums vary by state, from negligible (Georgia) to $500/year/employee (Oregon). I chose the approximate Colorado rate of $110/year/employee.

US health insurance rates for 2008 were based on my own business-group-of-one rates in Colorado at age 52, as advised by my health insurance broker as the best moderate coverage for the lowest cost. This is comparable to the reported national average of $6000/year.

US health insurance rates for 2012 were based on half my own business-group-of-one rates in Colorado for my wife and I (family coverage), which is actually somewhat lower than what I would pay for individual coverage.

Salaries in US dollars were converted to Euros using the 2008 conversion rate of 1.00 USD == 0.724840 Euro.

Dutch national income tax pays for social security, public education, and unemployment insurance, as well as other benefits, and is mandatory; 2007 tax tables were used.

Dutch national health insurance tax is a supplementary tax to offset the costs of health care, and is mandatory. I used the higher value of 6.5% for normal income.

I omitted post-secondary educational costs and benefits. Education is free (government paid) in The Netherlands, but not everyone gets into college or trade school — you have to demonstrate some aptitude to get into advanced education. So I’ve omitted it, which makes the Dutch figures look higher (or the US tax figures look lower).

The practical difference is that Dutch students who are accepted for post-secondary education graduate without debt and are free to take a job and begin earning their own living wage immediately; US students who choose to go to college graduate with a debt roughly the size of a home mortgage and are indentured to the banks, often for decades.

i http://taxes.about.com/od/2008taxes/qt/2008_tax_rates.htm

Sacred Economics

I’ve been waiting forever for Charles Eisenstein’s book, Sacred Economics. We’ve been reading snippets of it on Reality Sandwich, and I wanted to be able to see the whole thing laid out.

The result was well worth the wait.

I’ve been concerned for some time about two contrary motions in the economic world: on the one hand, the fact that money increases exponentially due to the existence of interest (above and beyond what economists call the “risk premium,” which is the rate at which money is lost to bad investments); on the other, the fact that the real economy of goods and services is not only slowing down, globally, but it is reaching the point of either stopping entirely, or contracting.

Economists are worried sick about that, too — they just don’t talk about it, because it’s scary as Hell.

It means there will not be a “recovery” from this recession. Ever. Unlike the Great Depression, this recession will deepen until (in conventional thinking) the entire economy goes down the toilet and we return to herding goats. Which won’t work very well in Manhattan.

Eisenstein brings a solution to the table. Because I live on the intellectual fringe — as I said, we’ve been reading his book in snippets — I was not completely unfamiliar with the ideas he’s proposing, but it was astonishing to see them all put together like this.

It also turns out that these ideas are not all that new, and many of them have actually been field tested — and they worked extremely well. They didn’t take hold, because they naturally and systematically combat the single greatest problem with our current interest-based economy, which is limitless concentration of wealth and power. In every case, the field-tests were shut down by the central banks and the government.

Shutting down field tests won’t be an option this time around, because this, or something like it, will be the only way the powerful can retain any power or wealth at all.

It’s like the sinking Titanic. At first, people light candles, the orchestra plays, and it’s all very romantic. When the steward comes and says it’s time to get into the lifeboats, the people drinking champagne say, “Why? Nasty, crowded things. We’re perfectly comfortable right here.” But when ice-cold seawater begins washing the deck, the lifeboat suddenly looks extremely attractive.

The “rising tide” is the increase in the money supply. The slowing economy is the sinking ship. It’s a really bad combination.

Apart from bringing a breath of very fresh air to the stale economic debates, Charles’ book is a book about beauty, and it is itself a beautiful book. An inspiring book. One of those reads that makes you wonder how you are going to start living your life in the aftermath of reading it.

Investment Advisers are Insane

Last night I was trolling the Internet, and came across some contrarian economist doing an infomercial plugging his new book, offering a free copy in exchange for accepting a “free” subscription to his three $99/year (each) investment advice publications. He’s allegedly one of the only economists who predicted the bubble bursts in 2008, and he’s predicting an even bigger collapse in 2013. Sorry to be so vague about the guy and his book, but I really wasn’t impressed.

(His name is Bob Wiedemer, author of Aftershock: Protect Yourself and Profit in the Next Global Financial Meltdown, and the site I stumbled on is here. Apparently his book is currently in the top five business books on Amazon.)

Nothing he said really surprised me. Personally, I think the situation is a whole lot more dire than even he thinks. Yes, he’s talking about a 90% stock market devaluation, 50% unemployment, and 100% annual inflation for three years — seriously alarmist stuff. But he thinks we’ll weather it, and eventually bounce back to “normal.”

I don’t. I think we’re going to have to find a whole new paradigm for our economy: a shift entirely away from growth capitalism and usurious banking. I do think it will take longer than three years, though, so maybe he’s right about the short-term.

Two mad prophets shouting at each other over a crystal ball. I know.

But what stuck with me was his “investment” advice regarding buying a house, which made zero sense to me, even under his assumptions. That has chafed in the back of my mind all day like a rock in my shoe.

Here’s his advice: don’t buy, rent. His reason? The housing market hasn’t hit bottom. Invest the money instead.

I’m trying to figure this out.

This is of some practical concern, because Marta and I feel kind of crowded in this townhouse, and as we get older, the stairs are going to eventually become a problem. They are already a problem when we have elderly guests, and we’re getting more of those all the time. We’d like to move to a “flatter” house.

So let’s work the numbers.

We can get a nice 4-bedroom house right now for around $300,000 (to use very round numbers). Assuming we put $50,000 into a down payment, and get 5% interest on the mortgage (I’m just using the defaults that showed up on the web-based mortgage calculator) we have monthly payments of around $1600/month.

To rent an equivalent house, we would pay between $1300/month and $2000/month, from a quick scan of rental listings in the area. Let’s assume we find a bargain at $1300 that isn’t a rathole.

In three years, we’ll have spent $46,800 on rent, and to show for that? Absolutely nothing. We walk away with $50K gone forever (round numbers).

In the meantime, we’ve been aggressively “investing” that $50K down payment we never made on the house we never bought. Since we’re going to throw away $50K on rent, we have to make an additional $50K off our $50K investment in three years, just to stay even. That’s 100% return on a financial investment in three years, which is about 26% a year. In this economy?

Day-trading, maybe. More like day-dreaming.

But in an economy where the DOW drops from 12,000 to 1,200 over three years?

That’s ridiculous.

 

 

Why are we doing this, again? Oh, yes, we’re waiting for the housing market to hit bottom. Hopefully the $300,000 house will drop to $250,000. Then we break even even if our investments suck: we’ve thrown away $50K renting, but the house prices came down to meet us. Maybe they’ll even drop a little more, and we’ll get a bargain. Maybe we’ll be lucky, and our $50K in investments won’t tank, like they did in 2001 and in 2008. Maybe they’ll even make a little money. Maybe, maybe.

An awful risk to take, based on some guy you listened to on the Internet.

Now let’s add in the effect of the 100% per year inflation this guy is predicting. At 100% per year, after three years, the dollar is worth 1/8 its current value. Think rents will go up under those conditions?

You betcha. That’s what makes it inflation: market prices rise as the dollar becomes worth less. At the start of our fourth year renting, our new lease will require $10,400 per month in devalued dollars.

On the other hand, if we’ve locked in a 30-year mortgage, our house payments will be exactly the same every month for the next thirty years.

That’s $1600/month to the bank, compared to $10,400/month to the landlord, just three years from now.

My income will rise with inflation, assuming my skills remain useful. Probably not enough to stay even with it, but let’s say I can increase my income by a factor of four while general prices rise by eight, meaning I’ll lose half my real income. That means the $10,400 rent will feel like $2600 today, while the $1600 payment will feel like $400 today.

So renting, my housing payments will effectively double in three years. Buying, my housing payments will effectively drop to one fourth in three years.

Let me make this PERFECTLY clear:
Rent: my cost doubles in three years.
Buy: my cost is cut to one quarter in three years.

In the next-to-worst-case, I can’t budge my income, so $1600 still feels like $1600. Just imagine what that $10,400 is going to feel like.

By the way, since the landlord has been doubling my rent every year with each new lease, I’ll have ended up paying him nearly $110,000 at the end of three years. To break even, my $50K investments now have to make an addtional $110K, or the $300,000 house has to drop to $190,000, or some combination of the two.

But house prices are not going to drop with 100% inflation. They’ll rise. Fast.

That $300,000 house will sell for $2.4M in three years. That won’t make me rich, because it’s not real value, it’s the dollar becoming worthless. It will cost $2.4M to buy an equivalent house; a Big Mac will cost $28, a dinner out for two at a Denny’s will cost $300, and a tank of gas will be $400. Groceries will be $4000 to $8000 a month.

So let’s assume that the housing market hasn’t hit bottom: maybe that house will only fetch $2M instead of the $2.4M it’s “worth.” Hell, maybe it loses 60% of its value and only fetches $1M. We’re dealing with catastrophe, why not?

But I only owe $250,000 on the thing. If I decide to move, I can sell it for $1M, pay off the loan, buy another equivalent house for $1M, and put 75% down. I end up with the same $250,000 debt, minus bank fees and moving costs.

If I’m renting, I’ll be out $110,000, but I’ll gain back whatever I managed to make by “investing” that $50K I never spent on the house I never bought. To break even with the buying power I get from holding a mortgage on a house, I’d have to turn that $50K into $750K (for that down payment when I finally decide to move at the end of three years), and that’s assuming that the housing market is going to lose another 60% of its value. If it loses only 20% of its value, I’d need to clear — let’s see — $1.7M?

I’m sure those $99/year investment advice publications will tell me exactly how to turn $50K into $1.7M in three years, while the stock market is melting down and inflation is completely out of control, with half the population out of work. Of course they will.

This “economist” is bat-shit crazy, and his investment advice is bilge.

But he’s crazy like a fox. His book is apparently selling so well that he’s been able to give up his day job.

#OWS and Canaries

Some days past, I watched a video of a self-proclaimed Chief Executive Officer of an unnamed company who took a film crew to Zucotti Park in New York City to “chat” with the occupiers. It seems his only real objective was to recite a Capitalist Catechism to the occupiers, many of whom seemed much more knowledgable of history and economics. When he proclaimed that there was “nothing immoral about greed,” I stopped watching.

Had I been there, I would have had a few things to say to this CEO. It might have run something like this:

Sir, are you familiar with canaries? Yes, I mean the small bird. Yellow in color, from which the term “canary yellow” is derived. A ruthlessly cheerful songbird, hence the term “to sing like a canary,” as when a mobster rats out his fellows.

Canaries were great friends of early coal miners. Not for their virtues, but for the fact that they were weak. Specifically, they had weak, delicate lungs.

When a “canary in a coal mine” flopped over, dead, it meant that a silent killer ran free in the mine tunnels: usually carbon monoxide or carbon dioxide, but occasionally more toxic gasses. Invisible. Odorless. Without texture. Deadly.

When the canary died, it meant the miners with their stronger lungs had minutes, at most, to climb to clean air, else they would also flop over like the canary. Dead.

What the miners did NOT do was debate with the dead canary before a video crew, arguing that the air was perfectly clear and fine; that the canary had no valid reason to lie about while there was work to be done; that the canary was merely immoral and lazy, desirous of a free handout.

You stand, sir, in an entire park full of dead canaries. They have died to political process, which they believe does not listen to them. They have died to economic process, which they believe steals from their labor to feed those who already eat well, while the hungry receive only insults and swift kicks to get them out of the doorways of commerce. They have died to productive participation in a society which they understand to be unjust, unworkable, and deadly.

If you were wise, sir, you would not lecture these dead canaries. You would listen to them carefully, and try to understand how and why they died.

Because what killed them is coming for you next.

You have a great deal to lose, sir, and your wealth stands poised between two bad ends.

On the one hand lies continuation without change. Even ten years ago, no one would have believed that anyone in the top ten percent of income in the United States would have trouble paying their bills. Yet it is so. Ten years from now, even the one percent will struggle to make ends meet. Do you intend to outrun that rising tide? Do you honestly think you can, even as the remainder of the one percent falls around you? Or do you simply seek to postpone the moment when you slip beneath the water and join the rest of the dead?

On the other hand lies radical change. Perhaps the entire global economy, its structure destroyed by overheated market bubbles, will collapse. Perhaps a popular movement will rise and gain political power, to strip you of your wealth by force and redistribute it to the masses. Perhaps you will be hunted, a photograph of your face posted on every street corner.

Your wealth as you know it will survive neither continuation, nor radical change.

If you were wise, sir, you would stop lecturing the masses on the virtues of Capitalism and instead try to understand why they died. You would seek desperately to discover how to keep the next batch of canaries from dying.

It just might save your own fortune.

Social Security: Much Ado About Nothing

I started out this afternoon with a simple question: how many Social Security beneficiaries are retirees?

The right wing has had its underwear tied up in knots over our “nanny state” for quite some time, and it occurred to me to try to figure out just who is being “nannied.” Not me, for sure — I still have to work for my beer. But presumably there is this huge class of undeserving lazy bums who are being treated to a lavish lifestyle at taxpayer expense: other than Congresscritters and the well-connected rich, I mean.

I wanted to know just how much of my taxes these bloodsucking leeches (not the Congresscritters, etc.) are draining away from the common good.

Some puzzling things cropped up.

First, I went to the Social Security site to find out how they’re spending my money, and I can’t find a category for “bon-bon eating, Lexus-driving, unwed welfare mothers.” Here’s what I did find:

  1. Old Age, Survivors, and Disability Insurance (OASDI)
  2. Supplemental Security Income (SSI)
  3. Medicare
  4. Medicaid
  5. Unemployment Insurance
  6. Workers’ Compensation
  7. Temporary Disability Insurance
  8. Black Lung Benefits
  9. Veterans’ Benefits

I dug into some of these briefly, and I still couldn’t find the bon-bons. I assumed they are hidden in the fine print. So my next step was to produce the following chart:

I simply dug out my OpenSource version of Excel and plugged in the numbers from the Social Security summaries for 2009. I won’t say they made it easy. For instance, here is the OASDI information:

At first glance, this looks like $1.3 trillion. But if you stare at it long enough — in context with other entries where they did the same thing — you realize that the first item is a total, and the second two (which add up to the the first) are subtotals. They only spent $675 billion on OASDI, not $1.3 trillion.

Accountants who produce these reports are doofuses, and should be spanked.

The veterans’ benefits were particularly opaque, since they refuse to tell you anywhere how much they actually spent on veterans. Instead, all you get are average monthly benefits in certain categories, and then total numbers of recipients in completely different categories. I expected serious cover-up and hanky-panky, so I took the worst possible case: the total number of veterans paid (about 3.3 million) times the average monthly amount ($2673) for 100% disability, which should be WAY more than was actually paid out. Even with this grotesque overestimate, it still amounts to diddly.

The Big Three expenditures are OASDI, Medicare, and Medicaid — they account for well over 85% of what Social Security pays out (remember, I inflated veterans’ benefits because the doofus accountants left out the totals.)

OASDI is the retirement benefit — Old Age, Survivors, and Disability. These are all people who have put money into the system for decades. It isn’t available to illegal aliens, nor to the indigent, nor to welfare mothers eating bon-bons.

Medicare is generally available only to people who qualify for OASDI. No illegal aliens, indigents, or bon-bon eaters there, either.

Medicaid is intended to cover medical expenses for the poor. I only skimmed through the summary, but it looks pretty spartan, and it’s not easy to qualify. I also see a lot of signs in private-practice physicians’ offices indicating that they don’t accept Medicaid, so it seems like treatment options are limited. This might cover the bon-bon removal if you were to choke on one. It wouldn’t help at all with the Lexus.

As a side note, I suppose we could shoot sick people who can’t pay for medical care, and save a whopping 17% of the Social Security budget. That’s a different discussion for a different day. I’m still hunting for the bon-bon eaters.

I don’t think the bon-bon eaters are covered under Veterans’ Benefits, Workers’ Compensation, Federal Unemployment, or Black Lung Benefits. SSI applies only if you are over 65, or are blind or disabled, whether you eat bon-bons or not.

So that leaves the Temporary Disability Insurance, and finally, FINALLY, I find the welfare mothers! Yes, the TDI does cover pregnancy as a temporary disability: in California, Hawaii, New Jersey, and New York. Period.

Total fraction of the Social Security outlays? Three tenths of one percent. Assuming that every single TDI recipient is a bon-bon eating welfare queen.

Wow. I feel so ripped-off. Not by the welfare mothers. By the damned right wing whistle-brains who sent me on this fool’s chase.

They did the same thing with NPR a while back. If the federal budget is a fully-stocked 45-pound backpack, the entire federal contribution to NPR weighs less than a single “Inspected by #20” slip of paper in the bottom of one of the backpack pockets.

Fiscal responsibility my ass.

While on this subject, I was told by one conservative that Social Security is a Ponzi scam. I didn’t entirely understand this comment, but found a short, clarifying discussion on the Wikipedia page for Social security. The argument on that page is pretty clear.

A Ponzi scam is an investment scheme where I claim to have a wealth-creation tool — let’s say, a Magic Formula for predicting horse races — and I gather money from some credulous and well-heeled investors (some of whom may be in on the scam). I spend their initial investment on advertising: I go to a broader audience and say, “I have a Magic Formula, and it really works! Look at these famous, well-heeled investors who have already signed up!” I rope in a whole lot of new investors who think if John Moneybags can invest in this, it must be good. Now I have a huge pile of cash from the new investors, so I use it to pay out to my first (small) circle of investors, all of whom are very satisfied with their 100% return, never mind where it came from. With the money left over, I go on television and claim 100% return from my Magic Formula, and my initial investors will testify that, by golly, they did get 100% return on their investment. The money that brings in is paid out to the second circle of investors, who are also very happy with their 100% return on their investment.

Note that I have never gone anywhere near a horse racetrack; I have never once used my Magic Formula. Nor does my “investment fund” have any money in it, on the average — every time I get a new flush of investment capital, I use it to pay out the previous circle of investors and draw in a bigger circle of new investors. It’s a variant on a pyramid scam, except that no one knows it’s a pyramid scam until it crashes.

Social Security isn’t even close to a Ponzi scam. No one believes it generates wealth for its investors. It simply taxes one class of people (workers) to pay benefits to a different class of people (retirees). It’s a wealth-redistribution program. Period.

The money you contribute isn’t held in trust for you when you retire. It’s spent immediately on people who have already retired. Your retirement will come from the people still working when you retire. If they all stop working, or stop paying taxes, or the economy or the government collapses, you won’t get a dime. If managed carefully in a functioning economy, however, there is no reason for it to ever fail.

It’s simply children providing for their parents in their old age, averaged out over an entire nation. You helped pay for my Dad’s retirement. I helped pay for your Mom’s last days in the hospital. Where is the big moral crisis in this?

Yes, it sucks to be on the tail end of the Baby Boom, where I sit, because I will pay more, and receive less, than all those bastard older brothers and sisters of my friends. They suck.

I have about a billion other things to whine about, too. Want to hear about my plantar fasciitis?

It isn’t quite as bad as it seems, though — that’s what the Social Security Trust Fund is all about. Those clever fellows in charge of the fund have actually been saving away a little bit of those Boomers’ contributions rather than just paying it all out to current retirees, so that when the Boomers retire, it doesn’t ALL fall on the backs of the next generation. When the last of the Boomers drop out of the system, that trust fund should be just about empty, because that was precisely what it was for. It was just a buffer to get the Boomers through.

Yes, the Social Security Trust Fund is going to go bust. It’s supposed to.