The One Chart Which Best Explains The Reason For The Growth Of Income Inequality In The US

The chart comes from The Motley Fool, here, and has nothing to do per se with the subject of the current debate about income inequality occasioned by the US tour of French economist Thomas Piketty promoting his new book Capital in English translation.

But the chart offers a little appreciated explanation for why income inequality has grown in the United States: the tax code of the United States itself treats income unequally, giving preference to long term capital gains. Key here isn't just that rates increase progressively and are unequal, but that capital gains income is at all levels taxed unequally compared to ordinary income, at lower rates. Is it a surprise then that one form of income would tend to grow more than the other in order to take advantage of the lower rates?

Ordinary income has been taxed at extraordinarily high rates off and on since the First World War while long term capital gains have been taxed at comparatively much lower rates off and on just about as long, as a favor to the few who have historically been able to play in that sandbox. It shouldn't surprise us though that the half of the nation which over time has joined the investor class has benefited disproportionately from this arrangement.

It has been a principle of conservative economics from the time of Reagan that if you want less of something, tax it. Well that's what has happened to ordinary income, where wages have been stagnating for some time while gains from investments have soared. You push here, it comes out there. Ordinary income tax rates have come down and stayed down since Reagan's revolution, it is true, but the differential between ordinary income tax rates and long term capital gains taxes has remained, favoring the returns from capital.

Cullen Roche here takes the view that we should raise taxes on long term capital gains, especially for the top 0.1% where he believes most of the inequality shows up:

The solution, in my opinion, is simple and based on a relatively widespread misunderstanding. We currently tax “investment income” favorably. The rationale for this is that we want to incentivize “investment”. That makes sense except for the fact that very few of the people transacting on secondary markets or obtaining dividend payments are actually promoting investment. In fact, one could argue that dividends disincentivize firms from using profits in a more innovative manner. And transactions on secondary exchanges only finance investment in the case of secondary offerings. Otherwise, buying stocks and bonds is a simple allocation of savings and does not remotely resemble the financing of investment. Why these forms of income are tax advantaged makes very little sense in my view. So a higher tax rate on dividends and secondary market transactions seems to make a lot of sense in my view.

I beg to differ. The tax code as it stands is doubly offensive in that it not only favors one form of income over another but that it also discriminates against income as it grows. To make the tax code "fair", it should treat all income the same way. If we equalized all tax rates to 10% irrespective of level or source or time, there would be so much opportunity to make money in this country that yours truly, Cullen Roche and Thomas Piketty would all have something far better to do than write about this, and you something far better to do than read about it.

Princeton/Northwestern study concludes business has representation but Americans do not

Here, where however there isn't the slightest suggestion that increasing representation for the majority of citizens by restoring the size of US House to its constitutionally intended proportions might help mitigate the problem:

The US government does not represent the interests of the majority of the country's citizens, but is instead ruled by those of the rich and powerful, a new study from Princeton and Northwestern Universities has concluded. ... Researchers concluded that US government policies rarely align with the the preferences of the majority of Americans, but do favour special interests and lobbying organisations: "When a majority of citizens disagrees with economic elites and/or with organised interests, they generally lose. Moreover, because of the strong status quo bias built into the US political system, even when fairly large majorities of Americans favour policy change, they generally do not get it." ... The theory of "biased pluralism" that the Princeton and Northwestern researchers believe the US system fits holds that policy outcomes "tend to tilt towards the wishes of corporations and business and professional associations."

h/t Business Insider

The expansion of NATO into former Warsaw Pact countries under Bill Clinton was a huge mistake

Jack F. Matlock Jr., former US ambassador to the USSR, in the Washington Post, here:

President Bill Clinton supported NATO’s bombing of Serbia without U.N. Security Council approval and the expansion of NATO to include former Warsaw Pact countries. Those moves seemed to violate the understanding that the United States would not take advantage of the Soviet retreat from Eastern Europe. The effect on Russians’ trust in the United States was devastating. In 1991, polls indicated that about 80 percent of Russian citizens had a favorable view of the United States; in 1999, nearly the same percentage had an unfavorable view.

Dear Rag-Headed Heathen Bastards: Our Markets Are Closed For Good Friday

New Gallup Poll of 20,000 Estimates ObamaCare Has Fallen Far Short Of Insuring The Uninsured

The story is here:

Overall, 11.8% of U.S. adults say they got a new health insurance policy in 2014. One-third of this group, or 4% nationally, say they did not have insurance in 2013. Another 7.5% got a new policy this year that replaced a previous policy. The rest either did not respond or were uncertain about their previous insurance status.

The key figure is the 4% who are newly insured in 2014, which most likely represents Americans' response to the individual mandate requirement the Affordable Care Act (ACA). This estimate of the newly insured broadly aligns with the reduction Gallup has seen in the national uninsured rate from 2013 to the first days of April 2014. However, the calculation of the newly insured does not take into account those who may have been insured in 2013 but not in 2014.

The ACA envisioned that the new healthcare exchanges would be the main place where uninsured Americans would get their insurance this year, but it appears that a sizable segment of the newly insured Americans used another mechanism. These sources presumably include employee policies, Medicaid, and other private policies not arranged through exchanges.

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If the adult population is presently about 247 million, 11.8% with new insurance in 2014 is 29 million adults.

If 33% of them had no insurance in 2013 (or 4% of the adult population), that's about only 9.6 million to 9.9 million newly insured who weren't previously, leaving 20 million uninsured yet to sign up. Estimates of the total uninsured previously had been widely estimated at 30-40 million Americans.

If the whole point of ObamaCare was to provide insurance to those who didn't have it or couldn't get it, so far ObamaCare is therefore not much of a success, especially since it has caused an upheaval for everyone else who has had insurance, which Obama told us we could keep if we liked it.

Replacement policies going to an additional 7.5% of the adult population who were previously insured means 18.5 million people have had to replace their insurance or wanted to replace their insurance because of ObamaCare, three times as many as the 6 million widely reported to have had their policies canceled because of ObamaCare late in 2013.

That leaves less than a million in the category who were uncertain about their previous insurance status.

It remains to be seen how many saying they have new insurance simply signed up for Medicaid because they didn't qualify for a health insurance subsidy because their income was too low. In Michigan a family of three that doesn't make at least $20,000 a year typically gets forced into Medicaid under ObamaCare if that family wants coverage and hopes to avoid a "tax" for failing to obtain coverage.

Evidently even such a family could avoid the tax, and Medicaid, by making a "hardship" claim.

h/t Chris

Lloyd's of London wouldn't insure half of the power grid

From the LA Times here:

Some members of Congress want to empower regulators to force specific security upgrades at utilities. Others are attacking whistle-blowers and the media, demanding an investigation into disclosures of how easily the country's power grid could be shut down.

The magnitude of the problem is underscored by concerns raised by insurance giant Lloyds of London, which is known for a willingness to insure pretty much everything.

Lloyds' appraisers have been making a lot of visits lately to power companies seeking protection against the risk of cyberattack. Their takeaway: Security at about half the companies they visit is too weak for Lloyds to offer a policy.

"When Lloyds won't insure you, you know you've got a problem," said Patrick Miller, founder of the Energy Sector Security Consortium, a Washington-based nonprofit that advocates tougher cybersecurity measures for the electricity industry.

Janet Yellen's Fool's Errand: Finding A Way To Fix What's Supposedly Fixed

Everybody believes the financial crisis is over, but apparently Janet Yellen does not. She's more right than she knows, but that's a sign of something into which angels fear to look. This could be rough.

Quoted here:

Yellen said regulators must focus on ways to prevent another financial crisis. She spoke via video to a financial markets conference sponsored by the Fed's Atlanta regional bank.

"In 2007 and 2008, short-term creditors ran from firms such as Northern Rock, Bear Stearns and Lehman Brothers and from money market mutual funds and asset-backed commercial paper programs," she said. "Together, these runs were the primary engine of a financial crisis from which the United States and the global economy have yet to fully recover."

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Regulators specialize in keeping capitalism from cleansing itself through failure. According to this line of thinking, recessions are personae non gratae, and depression doesn't even exist as a conceptual category of the contemporary period. If one occurs, they call it something, anything, else, as in "The Great Recession". Bankruptcy? Fuhgeddaboutit. Until these are welcomed once again, that is, until reality penetrates into the penumbra of the reigning ideology, the zombie economics of the last 14 years are here to stay, or perhaps worse, and we shall continue to walk in the darkness.

Why Obama Should Not Be President: Even Recreational Pot Use Alters The Brain, Emotions and Motivation

It took Obama three days to respond to the Christmas Day bombing attempt by Abdulmutallab over Detroit. The New York Times noted his odd unresponsiveness several times in the article cited below. If you wonder why Obama's done nothing about the jobs and GDP crises, perhaps now you do.

The pot study story is here:

The 20 pot users in the study, ages 18 to 25, said they smoked marijuana an average of about four days a week, for an average total of about 11 joints. Half of them smoked fewer than six joints a week. Researchers scanned their brains and compared the results to those of 20 non-users who were matched for age, sex and other traits.

The results showed differences in two brain areas associated with emotion and motivation - the amygdala and the nucleus accumbens. Users showed higher density than non-users, as well as differences in shape of those areas. Both differences were more pronounced in those who reported smoking more marijuana.

See here for the New York Times report on December 28, 2009, three days after the bombing attempt on the Christmas Day flight bound for Detroit:

Mr. Obama, making his first public comments since the episode, said he had ordered his national security team “to keep up the pressure” on terrorists. ... Although he had been out of sight for three days, he assured Americans he was on top of the situation. ... The visual contrast of a president on vacation while there was anxiety about air travel also drew fire. Although aides issued statements describing conference calls with counterterrorism advisers, pictures of passengers enduring tougher airport screening were juxtaposed with reports of the president picnicking at the beach and playing sports. Representative Peter T. King of New York, the ranking Republican on the House Homeland Security Committee, criticized Mr. Obama’s silence Monday before the president’s statement. “We’re now, what, 72 hours into this and the president’s not spoken, the vice president’s not spoken, the attorney general’s not spoken and Janet Napolitano has now told two different stories in two days,” he said on Fox News. “First, she said everything worked; now she said it didn’t.”

Global banking crisis: How to be profitable when you can't do it the old fashioned way

Fire your workforce.

EU banks cut 80k positions in 2013 according to this story:

Spurred into action by falling revenue, mounting losses and the need to convince regulators they are no longer "too big to fail", banks across the globe have shrunk radically since the 2008 collapse of U.S. bank Lehman Brothers sparked the financial crisis. ... Europe's 30 largest banks by market value cut staff by 80,000 in 2013, calculations by Reuters based on their year-end statements showed. ... [I]n its heyday of 2008 . . . the 25 of the top 30 banks with comparable figures employed about 252,000 more than the 1.7 million they do today. 

Construction is almost complete on the new Obama presidential library

h/t Theo

Fair value of the S&P500 in early April: 1033

Doug Short, here:

The regression trendline drawn through the data clarifies the secular pattern of variance from the trend — those multi-year periods when the market trades above and below trend. That regression slope, incidentally, represents an annualized growth rate of 1.75%.

The peak in 2000 marked an unprecedented 150% overshooting of the trend — nearly double the overshoot in 1929. The index had been above trend for two decades, with one exception: it dipped about 12% below trend briefly in March of 2009. But at the beginning of April 2014, it is 80% above trend, up from 76% above trend the month before. In sharp contrast, the major troughs of the past saw declines in excess of 50% below the trend. If the current S&P 500 were sitting squarely on the regression, it would be around the 1033 level. If the index should decline over the next few years to a level comparable to previous major bottoms, it would fall to the vicinity of 500.

Click the link for his charts.

Beware of Greeks bearing gifts . . . of yield

Greece ranks 2nd worst for debt/gdp.

Cyrus Sanati for Fortune here recaps the recent history of the Greek debacle and the success this week of its auction of intermediate term bonds paying just 4.75%:

Thursday's debt offering only illustrates the severity at which the global junk debt bubble has grown and how desperate investors have become in their futile search for yield. Investors have no real confidence in Greece or Europe. Either they have lost their minds or they view Greece as some sort of momentum play in which they will try to cash out right before the bottom falls out of the market. Europe remains an economic basket case, and Greece continues to be the weakest link in a brittle chain.

Food prices are up 9.52% in the last four years, average hourly earnings just 8.28%

And it's gotten worse in March as reported here:

U.S. producer prices recorded their largest increase in nine months in March as the cost of food and services rose, pointing to some pockets of inflation at the factory gate. ... Food prices jumped 1.1 percent, the largest increase since May, after rising 0.6 percent in February. ... Food prices have now risen for a third straight month, in part reflecting a drought in the West.

On top of that, average hourly earnings dropped a penny.

New Yorkers Rejected For Jury Trial Of Occupy Wall Street Protester

Most of the prospective jurors for a trial of an Occupy Wall Street protester accused of felony assault of a policeman are being rejected because they admit they hate what OWS stands for. Another number hates the cops. I think they just hate jury duty for this malcontent, a female, who appears to be being made an example of rather than a truly violent criminal.

The UK Guardian has the story here.

Meanwhile the crazies at Naked Capitalism still fly their OWS sash proudly if not loudly on the upper right of their page even today by the way. But the top story there when you search for "Occupy Wall Street" is dated December 2012. Yves Smith apparently doesn't feel compelled to use a post label so-named to help you find out why you should support this cause.

A 20% correction from the current S&P500 high of 1890.90 would be . . .

. . . 378.18 points! Or 1512.72 on the index.

Bank mergers have doubled annually since 2009 as Dodd-Frank and now new capital rules begin to bite

The Wall Street Journal reports here:

More small banks are selling themselves, and executives say Washington regulations are a big reason why. ... In all, there were 204 bank mergers in 2013 in which the target bank had less than $1 billion in assets, according to financial-research firm SNL Financial. That is about the same as the 206 in 2012 and up significantly from 102 in 2009, before Dodd-Frank was passed in 2010. As recently as 2011, the number was 130. ... Many bankers think smaller banks now must have at least $1 billion in assets to cope with the increased regulatory burden. ... One issue some small banks say they are having a big problem with is the Consumer Financial Protection Bureau's new "qualified mortgage" rules, or QM, which require lenders to make sure borrowers can afford the mortgages they take out. Some banks say following the rules, which took effect in January, has been complicated and time-consuming.

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New capital rules being phased in between now and 2018 will require the largest banks to boost capital to 5% of assets from 3% and include risk assets in the calculations according to the New York Times, here:

Under the rule, banks with over $700 billion in assets will have to raise their capital, measured by the leverage ratio, to 5 percent of their overall assets. The ratio will have to be 6 percent at the banks’ federally insured banking subsidiaries, where many of their riskiest activities are. ... Senator Sherrod Brown, Democrat of Ohio, who has introduced a bill with Senator David Vitter, Republican of Louisiana, that envisions higher leverage ratios than those approved on Tuesday, said, “Today’s rule is a major step forward, but we can and must do more.”

Light on Mars

Pretty dang weird: Rover captures light emanating from the surface of Mars.

Story here.

Osama bin Laden is dead and so are 13 GM car owners

Michiganders in particular remain in denial about the GM bailouts.

Jim Geraghty here for National Review throws some cold water in our faces:

GM continued to make cars with a life-threatening defect during the era of government ownership. Joe Biden liked to boast, “Osama bin Laden is dead and GM is alive!” Indeed he is dead, and so are 13 people who were involved in car accidents linked to a defective ignition switch. ...

The New York Times reported that engineers at GM reviewed data in the black boxes of Chevrolet Cobalts at a meeting on May 15, 2009, and confirmed that the potentially fatal defect existed in hundreds of thousands of cars. The Obama administration and GM’s management finalized the terms of the bailout at the end of that month. It’s not yet clear who at GM knew this shocking and scandalous information, but at least some GM employees knew they were selling dangerous cars at the precise moment they were asking for taxpayer money to stay in business. ...

[T]he Obama administration’s Departments of Transportation and Justice came down like a ton of bricks on a Japanese automaker about unproven allegations of defects, while the government-owned American company continued to make and sell cars with proven potentially fatal defects, even after the chief of the NHTSA’s Defects Assessment Division twice proposed investigations.

The U.S. government sold its last shares of GM stock in December 2013; some have asked whether the government did so knowing the recall would be announced in February 2014. 

Grand Rapids, Michigan, Ann Arbor and Detroit make top 10 snowiest list

View the full list here.

Will The Phenomenal Gains In The S&P500 Since March 2009 To Date Be Cut In Half By 2019?

John Hussman, here:

Though we don’t have a 10-year figure for actual returns since 2009, investors should also notice that the improved valuations evident in 2009 will indeed have been followed by a decade of 10% S&P 500 total returns even if the total returns for the market over the coming 5 years are somewhat negative (which we view as likely).

The annual real gain for each of the almost five years to date is just under 20%, so a 10% annual return for each of the ten years in the period implies forfeiting half of what has already been made in the next five years.

Hussman has previously indicated that the vast majority of investors is likely to ride the coming decline all the way to the bottom.