Thursday, September 14, 2017

TAX REFORM | Hatching a Bipartisan Plan?

Senator Orrin Hatch, Finance Chair. 
The following is from Dana Chasin, reposted with permission from his "Update 204". The New York Times reports that Committee Chair Hatch has warned against expecting too much in the way of a detailed tax reform plan just yet.

Washington, D.C., September 14, 2017 – Today’s Senate Finance Committee hearing on individual income taxes marked the first indication that we may be witnessing an administration-directed, or influenced, shift from partisanship to triangulation, this time on tax reform. The tectonic shift under the ground of American partisan politics was discernible at the hearing. 

At a Christian Science Monitor breakfast on Tuesday, President Trump’s legislative director expressed Trump's disappointment in the GOP after the failure to repeal Obamacare.  He said:
“We don’t feel like we can assume that we can get tax reform done strictly on a partisan basis... so it is wise for us, not just from a policy perspective but from a vote-counting perspective, to try to reach out and earn the support of Democrats as well.”
The witnesses' testimony, the opening statement by the Chair and the Q&A that followed called into question the hitherto presumed GOP legislative strategy to force tax changes through the reconciliation process. Is it possible Republicans may seek to forge bipartisan consensus and abjure reconciliation?  More below.

______________________________________________

Hatch: Senate Finance Legislates, not Secret 6

Senate Finance Chair Orrin Hatch dismissed the notion there is a secret cabal of tax planners seeking to re-write the code behind closed doors. He insisted his Committee would write legislation in a bipartisan way, he said, and that the GOP Secret Six that has met over the last few months would not write the new tax rules.  

Themes under Discussion

•  One Percent Factor

Democratic members and all but one panelist recommended that the top one percent not benefit from any tax changes. The administration has weighed in from every direction on this issue over the course of the year. Treasury Secretary Mnuchin articulated the rule named after him in his confirmation hearing promising that there will be no absolute tax cut for the wealthy. Earlier this summer, he said that he had walked that conviction back. Just yesterday, Trump walked it forward again out of nowhere. 

In today’s hearing, Sen. Casey said he was sure Republicans differed with him and his Democratic colleagues on this front. Chairman Hatch interrupted, saying there was no difference on the top one percent. This would be a signal change. 

•  Revenue Neutrality

A key point of concern for nearly every Democrat at today’s hearing was revenue neutrality. Democrats are right to worry that massive tax cuts for the rich will likely be financed (either in the short term or down the road) through cuts to the entitlements that low and middle income earners depend on. The GOP, usually happy to pay lip service to revenue neutrality without proposing it. Today's flawed but plausible feints toward neutrality from the GOP came in two identifiable proposals. Both got pushback. 
  • Taxing 401(K) accounts – unlikely to go much further due to the obviously negative impact it would have on working Americans
  • Eliminating state and local deductions – garnered immediate pushback from Democrats who claimed such measures would amount to double taxation and result in the blue states carrying too much the national tax burden. Some Republicans are opposed to eliminating the state and local deduction as well.
Remaining revenue ideas discussed today  include eliminating or reducing the mortgage interest deduction and eliminating the deductibility of interest on business expenses.  

Main Issues in Play at Hearing

•  The Standard Deduction

Hatch and Wyden found themselves in agreement and expected the same from their parties in terms of doubling the standard deduction. This method would lead to a simpler and more fair tax code. This could be a bipartisan feat for the committee moving forward as the elimination of State and Local Deductions ignites disagreement.

•  Mortgage Interest Deduction

Witness Iona Harrison of the National Association of Realtors highlighted in her testimony the importance of maintaining the Mortgage Interest Deduction. Harrison called for the simplification, and not the elimination, of particular elements of the tax code. The housing market is a primary tool for wealth attainment for a large portion of the population and therefore, is an undeniable influencer in the cycle of the economy.  As such, interests advocating for the mortgage interest deduction have a seat at the table. 

•  Child Tax Credit (CTC)

Republicans have previously rejected the Democrats efforts to establish federal leave for parents, but with Ivanka’s agenda of improving support for working parents, they may end up compromising with the Democrats and with the President by increasing the Child Tax Credit from $1,000 per child up to $2,500 per child. 

The Child Tax Credit has historically been something that some more conservative Republicans—like Paul Ryan—have affirmed, as it appeals to the down-home traditional family values crowd (who might also reject using birth control or having both parents working). Marco Rubio’s recent discussion of expanding the EITC included the CTC, and the Committee today discussed it at great length with surprising bipartisan agreement on the benefits of expanding the CTC. 

•  Earned Income Tax Credit (EITC) 

Chairman Hatch, Senator Wyden, and countless other members on the committee pressed constantly on the issue of using this moment in tax reform for good and relieving the tax burden of the middle and working classes. Senator Cantwell asked witness Batchelder for the best methods of boosting middle-class incomes. Her response was to increase the Earned Income Tax Credit. 

The EITC is a bipartisan issue that was pursued by Obama and Paul Ryan just over a year ago and has the potential of protecting low-income workers who are being “taxed into poverty” in Batchelder’s opinion. The benefits of this plan may be expensive to achieve when coupled with high expectations of increased Child Tax Credits.

•  Pass-Through Provision 

After his claim that there will be no tax breaks for the rich yesterday, the President’s policies for working class came under fire multiple times throughout the hearing.  Ranking Member Wyden and Prof. Batchelder criticized the administration’s tax policy agenda for its false attempt to put the masses at ease. The Pass-Through Business Income tax introduces a large loophole for corporations to use in order to dodge taxes.  With 95 percent of businesses qualifying as “pass-throughs”, businesses could see cuts from a 35 to 15 percent tax rate easily with proper taxation intel on hand.

•  State and Local Deduction

Throughout the hearing, Democrats and witnesses severely criticized the elimination of the State and Local deduction as a partisan proposal placing a disproportionate burden on taxpayers from blue states. The biggest concern voiced was elimination at the risk of double taxation. Senators Wyden and Cardin cried out in the name of protecting constituents’ incomes from excessive taxation at the federal level as the committee may consider throwing out State and Local deduction in the tax reform.

•  Retirement Security and "Rothification"

The panel of witnesses were weary of the idea of switching to a Roth, or after-tax, model that may impact savings and bring tax revenues into a 10-year budget window. Democratic members of the committee like Senator Brown found the switch from a pre-tax to an after-tax model unattractive. This was especially true when coupled with the probable cuts to entitlement programs and increased age qualification for Social Security.

Democratic Desiderata

Senator Wyden used a substantial part of his opening statement to make an appeal to bipartisanship, even going as far as to make Reagan-style tax reform a central motif in his appeal for sensible tax reform. Unsurprisingly, Wyden gave no indication that he is any more privy to the Secret Six’s policy details than the rest of us.

Wyden and other Democrats did make a coherent set of policy preferences quite clear including: 

•  proceeding by regular order with negotiations, i.e. not via reconciliation
•  revenue neutrality  
•  a commitment not to benefit disproportionately the one percent, as has generally been the practice over the last several decades. 

Senate Finance Endgame

Today’s consensus on the Child Tax Credit, the Earned Income Tax Credit, and vocal agreement on the trio of principles (regular order, revenue neutrality, and no changes for the top one percent) gives one pause. Is Chairman Hatch preserving the possibility of legislating a tax plan through regular order?  That would be a tall order.  

If Republicans surprise the town and open the process to Democratic input, rate reductions will not be as extreme as many thought. To win any Democratic votes, the final package would – it is now apparent – have to include extensions of the Child Tax Credit, the Earned Income Tax Credit, and more policies benefitting the middle class. Whether the GOP seeks to and can attract a few isolated Ds to get to reconciliation or the several more needed to get past a filibuster is actually a matter of national fiscal consequence.

GLASS-STEAGALL | Anniversary of Northern Rock

Run on Northern Rock, Sept. 14, 2007, first in
UK in 150 years. This is what Glass-Steagall
was design to prevent.
OXFORD, Sept. 14, 2017 – I'm here in Oxford for the annual Oxford Alumni Weekend. 

The lead business story today on BBC News "Business Live" at 8:30 a.m. this morning was the 10th anniversary of "the first run on UK banks in 150 years," i.e., Northern Rock. The bank was nationalized five months laters.

What has happened in the ten years since then? (1) Bank reserves are higher than they were then. (2) Retail banks have been separated from investment arms of the banks. This sounds a lot like what Senator Carter Glass tried to put in place along with Treasury Secretary Will Woodin in 1933. Rep. Henry Steagall from Alabama was pushing through federal deposit insurance for the banks and the Glass part was to protect the taxpayer.

The BBC announcer asked an expert whether the reforms are enough. The expert, a professor, who says no, that there are still too many risks.

The fear here is that the Bank of England will soon respond to good news and possible signs of inflation by raising interest rates. In the UK, that means a rise in the cost of variable-rate mortgages. Some mortgage-holders will be taken by surprise. Defaults may increase and cause insolvency among weaker financial institutions.

At least the new £10 note has Jane Austen on the back. Has the USA ever had the picture of a woman on a greenback? We were supposed to get Harriet Tubman but reports are that Trump has killed that idea.

EMPLOYMENT | UK Rate Goes to 75.3% High

London, September 14, 2017 – The UK employment rate, a robust indicator of national job creation, has surged above 75 percent.

As of July it is 75.3 percent of the working-age population. The ratio in London is consistently lower, by 1-2 percentage points, than the national ratio.

The UK is right behind, and challenging, Germany on this indicator. The number is current as of July 2017. The UK created 379,000 jobs during the year ending in July. The numbers are reported by the Office for National Statistics. 

The employment ratio is more stable measure than unemployment because it does not depend on assessments by surveyors and interviewees to determine whether someone else in the same household is employed or seeking a job.




Friday, September 8, 2017

HURRICANES | Measuring Severity and Cost

September 8, 2017 – On this date in 1900, a Cat 4 hurricane hit Galveston, a port city 50 miles southeast of Houston.

It still ranks as the deadliest hurricane in American history. But other hurricanes were more severe from a damage/cost standpoint, and hurricanes Harvey and Irma are being described as record-breaking.

Deadliest Hurricanes

Galveston had many vacationers, in addition to the town’s 40,000 year-round residents. People were aware of a strong tropical storm coming but the U.S. Weather Bureau was convinced that the storm's path would be up the Eastern Seaboard. The residents and tourists on Galveston Island weren’t warned until September 7. The hurricane brought a storm surge 15 feet high and covered the entire island. Telegraph lines and bridges to the mainland were destroyed. The New York Times quoted a survivor as saying:
“I managed to find a raft of driftwood or wreckage, and got on it, going with the tide, I knew not where. I had not drifted far before I was struck with some wreckage and my niece was knocked out of my arms. I could not save her, and had to see her drown.”
The Great Galveston Hurricane killed 6,000-12,000 people, often cited as the midpoint, 8,000. It was not just the deadliest hurricane in the United States ever, but the deadliest U.S. natural disaster.


              Ten Deadliest U.S. Hurricanes
              Rank. Hurricane, Year. Deaths
1. Galveston Hurricane, 1900.  8,000 dead.
2. Okeechobee Hurricane, 1928. 2,500-3,000 dead.
3. Hurricane Katrina, 2005. 1800 dead. 
4. The Cheniere Caminada Hurricane, 1893. 2,000 dead.
5. Sea Islands Hurricane, 1893. 1,100-2,000 dead.
6. Georgia-South Carolina Hurricane, 1881. 700 dead.
7. Atlantic-Gulf Hurricane, 1919. 600 dead. 
8. The Great New England Hurricane, 1938. 600 dead.
9. Hurricane Audrey, 1957. 400 dead.
10. Florida Keys Labor Day Hurricane, 1935. More than 400 dead
Prospective Measures of Hurricane Severity

The significance of an oncoming storm is estimated by meteorologists based on wind-speed categories and barometric pressure. The two measures are interrelated and point to likely wind speeds. The public needs also an indicator of the likely economic impact of flooding.

1. Five Wind-Speed Categories. A Category 1 hurricane means wind speeds of 74-95 mph on the Saffir/Simpson Hurricane Scale. The categories go up to 5 for wind speeds above 155 mph. Hurricane Irene petered out on its way north. The warm air carried by Hurricane Sandy on its way north met another storm with cold air from the northwest.

2. Millibars — Barometric Pressure. The Christian Science Monitor has posted a lucid summary of the significance of this measure of hurricane severity. (It also repeats the error cited above about the cost of Hurricane Irene — I will return to this.) Ordinarily, the barometric pressure is related to wind speed. The normal sea-level barometric pressure is 1013.5. During a hurricane the eye of the storm shows the lowest barometric pressure. The lower the pressure, the higher the winds. During the afternoon before Sandy hit landfall,the barometric pressure at its eye fell from 943 to 940, which is a level associated with Category 3 or Category 4 winds. The lowest barometric pressure that has been measured in a U.S. hurricane is 882 for Hurricane Wilma. Hurricane Carla was the tenth-lowest, 931. The National Hurricane Center list of the most intense Atlantic hurricanes does not follow the Millibars ranking exactly, since Katrina and Wilma are not in the order one would expect. Irene is not among these most intense hurricanes. So the prospective readings are not a definitive measure of impact.

3. Storm Surge Impact. Most of the damage from Hurricane Sandy is caused by the delayed impact of the storm surge (the hurricane equivalent of a post-earthquake tsunami). We need a new indicator of likely flood damage, which would have to take into account the economic value of property in the track of the hurricane, the sea level of the land, and the size of the expected surge.  The Storm Surge Impact index could take into account the timing of the tides — Hurricane Sandy hit landfall near high tide and the full moon added to the height of the tide and therefore to the surge. The geography of the surge was important in the case ofNew York City because the surge came from two directions — down the Connecticut coastline through the Long Island Sound and northward through the funnel of New York Harbor.

Retrospective Measures of Impact or Cost

There are at least six basic ways to measure or adjust the cost of a hurricane after the fact.

1. Deaths.  Every life is precious. That is why good records are kept on fatalities. On the measure of number of lives lost to a hurricane, Hurricane Irene’s 24 lives lost did not even rank among the 100 most costly hurricanes.  As a measure of the severity of a storm, the indicator is limited because government officials are much better than they used to be at identifying places from which people should be evacuated, and at following up. Over the years there has been steady improvement in (a) U.S. Government warning systems via NOAA and its National Weather Service and National Hurricane Center, and (b) the FEMA network of state notification and assistance.  Loss of life can be converted to a dollar figure via life insurance losses or a value that economists impute to a person’s remaining working life. Injuries also represent a cost either to the individual or to health insurance plans (private or governmental), and injuries that result in a disability can be attached to a working-life cost.

2. Damage to Physical Property.  Property can be destroyed by wind or flooding or a combination. This means a loss of wealth of the property owner. If the loss is charged against revenue, it means a loss of revenue. (A building may be a depreciated asset; loss of inventory is likely to be expensed.) The first impact may be flying debris, the lifting off of roofs, the flattening of flimsily constructed buildings. The delayed effects include (a) loss of electricity from downed power lines, which means that many perishables have to be thrown out, and (b) flooding, which destroys or rends temporarily useless all kinds of property, such as books and electronics, especially if the flooding is from salt water. In 2012, as Chief Economist for the New Jersey Institute for Social Justice, I wrote something for the Huffington Post looking at damage from Sandy in New Jersey and damage from Hurricane IreneIrene was originally billed as the fifth most costly U.S. hurricane, but was in fact not even among the ten most costly. The claim was based on decades-old figures, not adjusted for inflation.

3. Business Interruption. The delayed effects of a hurricane also include business interruption. Increasingly, businesses insure not only against loss of property but the loss in profits that comes from an interrupted business. When a restaurant or a theater remains closed because of floods that prevent people from showing up, it is hard to make up the loss because the business space has a limited capacity. That is something not fully taken into account by those who look for a large rebound after a disaster, as might be true of a retail store that offers a post-hurricane sale. Some kinds of losses are much harder to make up. Figures on the cost of hurricanes increasingly include business-interruption losses, which bias upward the later numbers — another reason it is so important to adjust for inflation as discussed below. It is incorrect to offset the wealth loss from hurricane damage with the economic activity from replacing the loss — Frederick Bastiat long ago explained why with his “broken window fallacy” analysis.

4. Insured vs. Uninsured Private Losses. Insurance companies are most interested in the total of insured losses. But from an economic perspective, losses to individuals (e.g., workers paid by the hour) are real. The money that would have been spent in the community by the individuals is missing. The National Hurricane Center uses a simple rule to estimate uninsured losses — it doubles the number for insured losses.

5. Government Losses. At the national level, flood insurance is provided by the National Flood Insurance Program. Individuals pay a premium for this insurance, which would otherwise not be available. After a hurricane, there will be payouts and a loss that may exceed cumulative premiums. The  National Hurricane Center in its estimate of damage adds in the number for flood damage provided by the National Flood Insurance Program. FEMA programs provide relief to local governments and individuals. Other Federal bodies (the dewatering unit of the Army Corps of Engineers, for example), states (emergency response teams) and localities (police, fire, sanitation, ambulance) must also be factored in as costs of a disaster.

6. Adjustments for Inflation or Growth in Business Activity. Two kinds of adjustments are typically made to comparisons among hurricanes. One is to adjust cost figures for inflation. The Christian Science Monitor story cited above incorrectly describes Hurricane Irene as the fifth mostly costly hurricane in U.S. history. As I explained last year, that label only works if we are under the delusion that a dollar 100 years ago should be valued the same as a dollar today. (Apart from the fact that business-interruption costs are increasingly included in hurricane losses, adding to the size of the numbers.)  There are widely available cost-of-living indicators to refer to, such as this one from the BLS. Business activity measures are used to relate hurricane damage to the value of the real estate through which the hurricane travels. This is a good predictor of cost and is also a factor to consider in comparing the impact of a hurricane traveling the same path in different years.

Total Economic Damage

The deadliest hurricanes are not always the costliest in terms of property loss or business interruption.

The 10 costliest Atlantic hurricanes are listed below with their estimated damage. Total estimated damage includes insured and uninsured losses. A rule of thumb is that uninsured losses equal insured losses. So if an insurance association or forecaster estimates that insured losses are $10 billion, then total private losses (insured plus uninsured) are commonly doubled (to $20 billion). In addition, losses are borne by Federal, state and local governments - the cost of special national insurance programs like flood insurance, or the cost of FEMA assistance, or the cost to states and localities of the overtime of emergency-assistance personnel or the damage to public infrastructure.

Note that earlier estimates are generally based on physical damage only, whereas later economic impact numbers, after WWII, include impacts such as business-interruption costs because these became widely insured events. In addition, as mentioned already, dollar-value rankings must be adjusted for inflation. There is no sense in old unadjusted dollar numbers. The most costly U.S. hurricane ever was the 1926 Miami Hurricane, which cost $165 billion in 2010 dollars, according to the National Hurricane Center.

Ten Costliest Hurricanes

Rank. Hurricane, Year. Cost $billion (2010 dollars)
1. Great Miami, 1926.  $165. 
2. Katrina, 2005.  $110. 
3. Galveston, 1900.  $104. 
4. Galveston, 1915.  $71.4. 
5. Andrew, 1992.   $60.5. 
6. L.I. Express, 1938. $41.1. 
7. SW Florida,1944.  $40.6. 
8. Lake Okeechobee, 1928 $35.3. 
9. Ike. 2008 $29.5. 
10. Donna. 1960 $28.2.
Source: NOAA, National Weather Service and National Hurricane Center, Blake and Gibney, 2011.  Calculations utilize Pielke et al. (R. A. Pielke, Jr., J. Gratz, C.W. Landsea, D. Collins, M. Saunders, and R. Musulin, 2008: “Normalized Hurricane Damages in the U.S.: 1900-2005.” Natural Hazards Review, 9, 29-42.)  Pielke et al. adjust historical data for inflation to 2010, wealth per capita and population.

Follow John Tepper Marlin on Twitter: www.twitter.com/cityeconomist

Thursday, September 7, 2017

FEDERAL BUDGET | Trump Deal with Dems

L to R: President Trump, Mitch McConnell,
Chuck Schumer, Nancy Pelosi
An agreement between President Trump and the Democratic leadership extends government funding, increases the federal borrowing limit through Dec. 8, and provides more than $15 billion in hurricane and disaster recovery aid.

Here is commentary on the deal from Washington, D.C.-based insider Dana Chasin:


Fiscal Deal with Democrats

How did the deal come to pass -- and will it pass?  Who are the winners and losers if it does?  Will the curious coalition supporting the deal become a functional majority, since the partisan majority appears dysfunctional?  Read on.

Deal Details 

Earlier this afternoon, the Senate passed the motion to concur in the House amendment to the Senate amendment to H.R. 601 with a further amendment. That’s fancy talk for, the deal was agreed to by a vote of 80-17.  The GOP split 33-17 against and Democrat en bloc in favor, 47-0). The amended bill now goes back to the House for final approval before heading to the President’s desk.  The House may consider the vote at any time.  The President is expected to sign it.
The Senate measure, now on its way to the House, provides:

•  An extension of the statutory debt limit through December 8
•  A continuing resolution extending government operations for all 12 appropriations bills through December 8
•  FY2017 funding levels
•  $15.25 billion of disaster relief for victims of Hurricane Harvey, Irma, and other fiscal year 2017 major disasters

Omitted: new funding for the Wall. 

Winners and Losers

•  Democrats -- Democrats have won a wedge to drive their way into negotiations, but only a slim one.  Trump’s impatience and time are on their side though, and in the press conference announcing the deal, Trump hinted that he wanted to work with Pelosi to try to work on solving the question about the future of DACA beneficiaries. This is odd, seeing as only two days ago he announced the end of DACA, but Trump has been known to make a quick pivot if it will help him look like he’s accomplishing something big. 

•  Republicans -- 

The GOP has the advantage of suddenly having the weight of a government shutdown lifted off their shoulders for at least three more months, without appearing to use the Hurricane Harvey victims as pawns in an ugly floor debate over the budget. However, this means Republicans lose some of their leverage over tax reform issues because the pressure of the debt ceiling closing momentarily lifted.
 On top of this, the end-of-year legislative calendar just became utterly packed, and as Freedom Caucus Rep. David Bratt put it “Massive deals and cliffs and omnibuses that take place right before the holidays end up being very bad for conservatives…” He’s right.  While the some in the Freedom Caucus still have lingering memories of the concessions they won from Obama with the 2011 Budget Control Act (concessions that were won at the height of the Freedom Caucus’ influence), more recent end-of-year slug fests have hurt the GOP for more than they have helped. 

•  The Administration -- Trump and Ryan have never seen eye-to-eye, not since the primaries, and McConnell has fallen into ill-regard by the President as well after the Republican failure to secure the vote to repeal the ACA. Avoiding the usual processes is a sign of Trump’s impatience and also his determination to have his way to get something done, playing by the rules or not.  In doing so, Trump turned his back on Ryan and McConnell, who were pushing for an 18 month extension, and then a 6 month extension on the debt ceiling. His going rogue means that we’re finally seeing some of the infamous dealmaking here in this first bipartisan legislative act of eight-month old Trump’s term. 

At the end of the day, it’s a win for Trump. He badly needed a win-- practically any sizable win-- and he got one.  

Policy Implications

•  Debt Ceiling -- The debt ceiling has been extended. For now. A three month extension certainly means the issue isn’t going away anytime soon, and Republicans will face yet more difficulty whipping up support for an extension at the end of the year.

•  FY 18 Budget -- An extension of the FY 17 Budget means that (at best) FY 18 will be 9 months long.  This is not only a major concession, but it conjures a major question:  Are Republicans capable of producing the resolution necessary to pass their tax reform efforts? 

•  DACA -- DACA has been thrust to center stage. Not only did Sarah Huckabee Sanders speak in bluntly about the need for Congress to address the 800,000 DACA recipients left in limbo by Trump’s decision to end the Obama-era executive order, but progressive advocacy groups have pressed Democratic leaders to use their newfound leverage to aggressively press the issue. Hopefully this is good news the Dreamers as Democrats will likely push the issue now that they have some firm ground to stand on.

•  Health Care Finance -- With the reconciliation instructions for ACA repeal expired and Republican attention turned to tax reform, a last-grasp Obamacare repeal effort seems unlikely. But financing for individual health insurance markets is still needed and bipartisan efforts to address this need are underway in committee. Let's see if Democrats can use their new-found leverage to push new funding through.

•  Entitlement Reform -- A long-time goal of the Republican Party’s right wing which wanted to use the debt ceiling negotiation as a way of extracting spending cuts and entitlement reforms. This now seems dead on arrival.

Since Trump is still looking to get something big done, it seems he wants to try to get tax reform passed through reconciliation--in a Republican-majority Congress where it should be a cakewalk--this buys him some time to do that. The Congressional Parliamentarian delivered instructions to the Republicans this week that require them to use reconciliation by Sept 30th before it expires. The talk so far has implied that the Republicans want to still try to push through the ACA repeal through reconciliation this month, but Trump’s focus has completely turned to tax reform. 

With a series of speeches this month about fiscal policy (occurring in places like Missouri and North Dakota), he seems to be attempting to pick off Democrats like Heidi Heitkamp and Claire McCaskill and pressure them to supporting his agenda. But if his agenda is oppositional to that of Paul Ryan and Mitch McConnell out of spite, who is to say what might be on the table when he finally gets down to brass tacks and gives some concrete numbers in a tax reform proposal.

Analysis: Causes and Implications

This was not how this deal was supposed to shake out.  While the GOP had hatched a plan over the weekend to attach Harvey relief funding to the debt ceiling, the original plan had been to extend the ceiling by 18 months, pushing the next difficult vote past the 2018 midterms.  But Trump is certainly one to hold a grudge and he’s been trading barbs with McConnell and Ryan for months. 

On top of this, Republican leaders in Congress are perpetually stuck between the necessities of governing and intransigence on their right flank. Because the Freedom Caucus decided to play hardball with the debt ceiling, Speaker Ryan was unable to deliver a GOP majority and had to turn to Democrats for votes. Pelosi and Schumer took this leverage to the White House where Trump was all too happy to make Ryan look like an absolute fool in the process of striking a deal with the Democratic leaders.

Congressional Democrats definitely got a win here, but it’s probably a less of an emphatic one than much of the media coverage would suggest.  Yes, Democrats got three more months of an Obama-era budget, and yes, they put pressure on Republicans by showing that they can get Trump to work with them on must-pass issues.  This means they have increased leverage when it comes hot-button issues like tax reform (i.e. stopping the Republicans from passing major tax cuts), DACA legislation (i.e. making Republicans actually pass something), and address the ACA (i.e. getting more money to shore up private health insurance markets). 

But this newfound and putative leverage should not be overstated.  Republicans can’t count on Freedom Caucus votes come December, so Democrats certainly get more room to maneuver, but that doesn’t mean they’re about to play hardball with something as important as the debt limit.  What Democrats are hoping is that this new found bargaining chip will give them enough purchase to protect Obama era legislation while protecting some parity for defense and non-defense spending in the upcoming negotiations over discretionary spending.

Forecasting the Republican Struggle

At the end of the day much of the media energy about this deal simply derives from how bad this all makes the Republicans look. Tactically, the Republicans are now in the politically awkward position of having to wrangle over the debt ceiling once again all the while time keeps slipping away from a legislative agenda that is stuck in the mud. While Republicans gained some time now to focus on their tax reform efforts, they will lose time later (in December or early 2018 depending on the Treasury's extraordinary measures) when they once again have to turn their attention to the debt ceiling. Republicans will now have to have to pass a completely new budget resolution and new reconciliation instructions in order to get to simple majority vote in the Senate to move on their tax reform plans. 

Democrats are rightly cautiously optimistic that the deal will give them increased bargaining power going forward. But the real story here lies with the Republican Party. What Trump’s turn to the Democrats suggests is that Republicans have lost the ability to govern.  While the Senate killed health care reform the House has an uphill battle to pass the budget resolution that is necessary to tax reform without ceding power the Democrats.  The GOP is a party at war with itself, with little to suggest interest in or capacity for governing as majority parties generally do in a democracy. 

Wednesday, September 6, 2017

SUFFOLK, NY | Disappointing 1Q17

Suffolk County, N.Y.
The first-quarter county data came out from the Bureau of Labor Statistics this morning (http://bit.ly/2wFDNPd), showing how Suffolk County is doing on jobs and wages.

Average employment in the county rose 0.6 percent, up slightly from the first quarter of the previous year, but not as much as most other counties. Suffolk ranked #259 out of 347 large U.S. counties, on the edge of the bottom quartile.

Manhattan jobs, by comparison, rose 1.3 percent, closer to the median county average. Brooklyn jobs rose 3.2 percent, which ranks #34, in the top tenth of the large counties.

Suffolk average wages rose 5.1 percent, ranking #260 out of the 347 counties, which puts it in the bottom quartile. In Manhattan, by contrast, wages rose 6.3 percent, again putting the county in the middle of the ranking.

Thursday, August 31, 2017

HOUSTON | Building on the Flood Plain

Houston in the wake of Harvey, August 30, 2017.
Houston with ring roads like the 610 can get people in and out (in good weather) quickly from areas that have little apparent land value. 

That’s where a lot of low-income and subsidized housing is built — I’d say most of it. 

They have little land value because they are intentionally placed in floodplains. The Feds still provide funding to rebuild after floods because that’s where the city wants low income housing. Climate change may well be playing a role, of course, but the city fathers are clear that they do not care to pay for massive infrastructure to handle flooding. If you look at the views of the flooded city, you’ll note that the bayous and streams are where they built most of the road infrastructure. – Josh Vincent, Director of the Center for the Study of Economics.

Monday, August 28, 2017

TRUMP | The (First) Big Deal

New York City taxpayers are still paying for  the tax abatement that Donald Trump obtained from the City Council in 1977!

The tax benefit does not expire until 2019.

I watched that abatement get baked in 1977 when I was serving as President of the Council on Municipal Performance in New York City.

Two members of the New York City Council who were on my Board of Advisers called me up and asked me:
Could you please speak up against a proposal by Donald Trump to get a huge property-tax concession to renovate the Commodore Hotel while bringing nothing to the table. He will take the concession and sell it. No one else is prepared to say anything about this.
I checked it out and quickly agreed. Yes, it was a giveaway. It should not go ahead. I prepared a critical comment and delivered it on a radio station (ABC affiliate, I recollect).

Imagine my surprise when I discovered a few days later that these two City Council members voted for the concession that they asked me to oppose. I was annoyed...

"What's going on here?" I demanded to know.

"Oh, sorry, we should have called you. One of the deputy mayors said we really need this to turn around the neighborhood. The Commodore Hotel is an embarrassment to the City."

I have been trying to make sense of all this in the 40 years since then. Here's my best understanding of what happened, i.e., the forces that swept away rational discussion.

Fred Trump Cashed in Some Political Chits 

Fred Trump was a serious real estate empire-builder, like Fisher, Lefrak, Rudin, Tishman, and Zeckendorf. He started his personal real-life Monopoly game in 1923, when he was too young to sign his own checks. After the war he immersed himself in federally financed housing projects.

Fred and his wife, Mary, raised three sons and two daughters in a mansion in the most upscale part of Queens, Jamaica Estates. The eldest son succumbed to alcoholism at an early age. The other two sons continued their father's preoccupation with real estate. Fred was especially impressed with his son Donald, of whom he said: ''He was a pretty rough fellow when he was small. He amazes me. He's gone way beyond me, absolutely.’' The two daughters went into law and banking.

Fred and Mary Trump believed in hard work.  They sat at the feet of Reverend Norman Vincent Peale, who spoke highly of the Trumps back in 1983 when he was interviewed by Marylin Bender of the The New York Times.

The family believed in positive thinking. They gave money to politicians and they were positive that their generosity would be appreciated when political support was needed.

Donald Trump

Donald Trump prided himself on being street smart and has called Queens and Brooklyn, where he was raised and started working, among ''the toughest, smartest places in the world.'' After attending the Wharton School for his bachelor's degree, Donald Trump joined his father's business, then a collection of middle-class apartment houses in Brooklyn, Queens and Staten Island worth roughly $40 million in 1983 dollars. 

Fred sent Donald as a difficult teen-ager to the New York Military Academy in Cornwall-on-Hudson. During summers, the boys worked at Trump construction sites or in rent collection offices. ''Not your normal kid's vacations,'' noted Donald's brother Robert Trump. 

Trump told Bender in 1983: ''I don't like to lose.'' She noted that he reneged on a promise to donate to a museum the Art Deco bas-reliefs on the facade of Bonwit Teller's that were  bulldozed to make way for Trump Tower. It was a sin deemed unforgivable by landmark preservationists.
Harry Levinson, a Boston-based business psychologist who has studied family businesses, observed: 
The core problem of the entrepreneur in the family business is the unresolved Oedipal problem, trying to beat the old man. This is particularly so where the father has been very successful. The son feels so inadequate and unable to compete with the father that he works out compensatory behavior. He goes to the opposite and blows himself up to deny his feeling of helplessness.
Commodore Hotel Deal

Since the Grand Hyatt opened in 1980, it has been credited by some with reversing the deterioration of East 42d Street. The renovated Commodore Hotel emerged from this sequence:
  • Donald Trump purchased for $500,000 an option to buy the run-down Commodore Hotel, where sex was openly for sale, from the bankrupt Penn Central trustees. At that time several nearby office buildings were on the edge of foreclosure, as New York City faced bankruptcy starting in 1974.
  • Donald Trump took his option on the Commodore, for which he would ultimately pay $10 million, less $2 million from the sale of its furniture and equipment, to line up a partner in the Hyatt Corporation, which was looking for a New York link for its hotel chain. He would build it and Hyatt would manage it. They would be equal partners.
  • Trump enlisted George Peacock, senior vice president of the Equitable Life Assurance Society to put together financing. Concerned about the area, the Equitable brought in the Bowery Savings Bank and several smaller banks and promised Trump $70 million in mortgages once the doors of the renovated hotel opened.
  • ''So I took this commitment, which was a statement with 100 stipulations, to the city,'' Trump said. One of those conditions was that the financing be predicated on obtaining a tax abatement. ''I said, 'I will build you this incredible, gorgeous, gleaming hotel. I will put people to work in the construction trades and save hotel jobs and the Grand Central area will come around.' So the city made the deal.’’
  • Trump obtained a tax abatement worth $160 million over 42 years (the abatement is still in effect in 2017).
  • Besides the tax abatement, Stanley Friedman arranged for a special permit to allow Trump to build the hotel's restaurant. Friedman then left his government post to join the law firm of the Roy Cohn, of which Trump was a major client.  
  • The 42-year tax abatement from the city was the first ever granted to a commercial property. The city had no legal authority to grant it, so the Urban Development Corporation was enlisted to take title for $1 and lease the hotel property back to Trump for 99 years for an annual "rental" of $200,000 a year, which was called a PILOT, a payment in lieu of taxes. If the PILOT was a rental, then the property was totally exempt from property taxes. A sweet deal, either way. Meanwhile, Trump had at his disposal the agency's powers of condemnation to rid himself of undesirable retail tenants. 
  • Rival hotel operator Robert Tisch objected to the abatement on the grounds of unfair advantage. Tisch said the $200,000-a-year PILOT from the Grand Hyatt was the equivalent of the tax bill for a motel on Eighth Avenue. 
After construction was underway, in 1979, New York City's economy picked up. Hotel rates doubled and Trump changed his plans from a modest $38 a night to a luxury $90+ a night. Donald Trump said:
The whole economics of the deal changed. It was timing. In another year, I wouldn't have gotten the abatement and no one ever will again. 
Politics

Roy Cohn
Fred Trump was closely involved with the Brooklyn Democratic organization that produced Mayor Abraham D. Beame and a New York State Governor Hugh L. Carey. They were in power when Donald Trump decided to enter the Manhattan real estate scene in 1974 and 1975.

The Trump Organization hired lawyers with political access – Roy Cohn of Saxe, Bacon, Bolan & Manley, and the firm of Shea & Gould. 

Donald Trump supported Ronald Reagan in 1980 and was invited to the White House several times.

Although Donald Trump grew up in Queens and learned about real estate in Brooklyn, and cut his teeth on 42nd Street in Manhattan, his political power base was in the Bronx. Corrupt Bronx politicians helped Trump. The only photograph of Donald Trump in the book by Jack Newfield and Wayne Barrett  shows Trump scowling as Bronx native Roy Cohn wags his finger at him. Cohn served as Senator Joseph McCarthy’s chief counsel on the House Un-American Activities Committee. He became Trump's mentor.

Cohn’s law partner was Stanley Friedman, boss of the Bronx Democratic Partyunder Beame and Koch, and a deputy mayor under Beame. In 1977, Friedman was the engineer of the tax abatement for the Commodore Hotel for Donald Trump. Cohn made Friedman a partner based on the Trump deal. 

After that deal, Friedman and Cohn went into decline. Cohn died of AIDS in 1986. A year later, Friedman was sentenced to 12 years in prison on federal charges. He was convicted of promising kickbacks in connection with obtaining contracts from the New York City Parking Violations Bureau for a company that wanted to manufacture hand-held computers. He served four of the twelve years. The scandal, exposed during a City Club of New York luncheon that I attended, cost Koch his hope of winning a fourth term.

Trump’s legacy in the Bronx was a golf course named after him. The city built the course and let Trump operate it. Revenue was down in 1983, the course lacked a permanent clubhouse and residents complained that they couldn't afford the fees.


Media Relations

Wayne Barrett wrote a long article on the genesis of the Hyatt Hotel. When Trump announced his candidacy for the presidency, he said: “After four or five years in Brooklyn, I ventured into Manhattan and did a lot of great deals [starting with] the Grand Hyatt Hotel.” 

Over the course of Barrett’s reporting, Trump both threatened to sue Barrett and tried to bribe him.  Trump hinted he could get Barrett a nice apartment in midtown. Barrett said:
[My wife and I lived in] the poorest neighborhood in the city. But both of us were young radicals. We were doing all kinds of organizing there. We published a paper called The People’s Voice. We were doing it as a political thing. … He had checked this out. I certainly hadn’t said anything. And he says to me, in the interview, "You know, Wayne, you don’t have to live in Brownsville. I can get you an apartment."
Sources

Barkan, Ross, "How a Young Donald Trump Forced His Way from Avenue Z to Manhattan," Village Voice, July 20, 2015. https://www.villagevoice.com/2015/07/20/how-a-young-donald-trump-forced-his-way-from-avenue-z-to-manhattan/ 

Bender, Marylin, "The Empire and Ego of Donald Trump, New York Times,  August 7, 1983 http://www.nytimes.com/1983/08/07/business/the-empire-and-ego-of-donald-trump.html?pagewanted=all

Fabricant, Neil, "Politics and Real Estate," Bloomberg Watchhttp://bloombergwatch.com/index.php/07/politics-and-real-estate/
Lachman, Seymour P. and Robert Polner, The Man Who Saved New York: 
Hugh Carey and the Great Fiscal Crisis of 1975 (Albany: State University of New York Press, 2010). https://www.empirecenter.org/wp-content/uploads/2014/11/Carey.pdf

Newfield, Jack and Wayne Barrett, City for Sale: Ed Koch and the Betrayal of New York (New York: Harper & Row, 1989).