In our first look at parallel universes, we examined the role of the Federal Reserve Board in fighting inflation and Chinašs defense of its economic growth. As promised, in part two we will turn our attention to John Snow and Congress, two more hapless inhabitants of a universe far removed from our own.
So far removed that we can ask: when was the last time you felt bad for a really rich guy? I'd be willing to bet it has been awhile. Envy maybe, jealousy perhaps, but never sympathy. Unless of course the super-rich guy is John Snow.
The job Mr. Snow currently does as Treasury Secretary may be coming to an end if the rumors are to be believed. Although his efforts will not be worthy of much in the way of historical documentation, he has done what he was hired to do.
Snow was given a less than enthusiastic assurance from his boss when the topic came up recently, which it too bad considering the fact the "good job Brownie" support that was thrown in the direction of the Defense Secretary instead. Snow has had far less impact on the global stage and for that, we should all be thankful.
The reasons are unclear why Snow holds less promise of finishing his last two years on the job. Even less clear is who would want to replace him. John Snow has dutifully if unconvincingly made the necessary public appearances to offer his support for misguided tax plans and the monthly jobs numbers. He seems to be talking the talk without imposing his own rhetoric, which is all this administration asks of its employees.
The Treasury Secretary was at one time a powerful position in the White House. Designed "to promote the conditions for prosperity and stability in the United States and encourage prosperity and stability in the rest of the world" according to the mission statement on the Treasury website. Although much of that power has been shifted to other agencies during the last six years, Mr. Snow is the go-to guy for all things economic.
Unfortunately, he lives in a parallel universe compared to you and I. In his, economic expansion is creating jobs, increasing pay, and "raising the rate of sustainable growth". In ours, the jobs numbers do not reflect the way pay differentials affect the averages he uses in his most common examples of economic success. Mr. Snow, peering from beneath his bushy brow, offers a wry smile and suggests it be called differentiate compensation.
Even using the actual word parallel recently, he suggested that all ships were rising, as the wealthy got wealthier. As the haves became the have-mores, he seems less convinced that the tax cuts instituted by his boss have helped the economy as much as they could have. But he is unable to disagree. The jobs that have been created during this so-called expansion have been less satisfactory, paid less because of it and have done little to give us the impression of growth.
On the other hand, Snow has often pointed to a real problem in his universe as the reason our economy has not taken off, as it should have. The strength of the dollar, Snow is convinced is the result of currency manipulation by the Chinese. And while there may be some truth to that accusation, there is little evidence that free floating Yuan will actually help anyone, including us.
Currency manipulation is not easy to prove and the reasons for it are less likely to be understood if you are on the wrong end of the equation. The Chinese are faced with a interesting problem. They have, as everyone knows, an economy that is on a double-digit increase. They run a current account surplus while we run a current account deficit. They save and we do not.
Despite a domestic investment that runs around 40% of GDP (compared to the US domestic investment of 16% of GDP), the Chinese still save. Snow wants them to become more like us and allowing their currency to rise "naturally" would be the best way to get them to shift from savers to borrowers. They on the other hand, understand the consequences of such a shift and have resisted that revaluation of their currency.
We had a similar despite with the Japanese during the eighties, forcing them to revalue the yen. The result of this effort caused an economic downward spiral in Japan that only recently has begun to reverse itself. The Chinese do not have the per capita income that the Japanese had then nor do they have the infrastructure to support any sort of economic freefall. Those two reasons alone are enough to keep the Chinese from changing the value of their currency.
In Snow's universe, the change would come in an increase in consumption among the Chinese. In our universe, the shift should come from a serious attempt at deficit reduction. We need to keep borrowing in a world where savers support our saving deficiency and if Mr. Snow had the gumption, he would point this out instead of harassing the Chinese on this issue.
Congress is returned to their parallel universe on Monday with many issues left undecided on the table. Believing that a two-week recess would do wonders for their lawmaking skills, they will take action on several items that will have long-range repercussions on those of us who are not regularly protected by Mr. Snow.
Those darned taxes, the ones that will garner billions from hapless wage earners if Congress fails to act have yet to be fixed. The protection previously provided by the tax code has expired for an additional 22 million households leaving two income families to face the unrelenting grip of the alternative minimum tax.
It was Congress's fault in the first place that so many unsuspecting individuals found themselves paying the tax this year. The AMT is normally reserved for the wealthy that had found too many loopholes in the tax laws, and cleverly, paid nothing. No more.
The perverse logic on Capitol Hill suggests that the AMT will provide a much-needed boost to revenues. If this were to happen, it would allow them to continue the dividend tax rate of 15%, which has been a hugely beneficial cut for the super wealthy while having little or no impact on the average investor/wage earner.
Because so much of the dividend income for most people is tied up in retirement accounts, designed to forego the payment of taxes to the future, folks who earn between $75,000 and $500,000 see little in the way of saved taxes. Even at the high end, taxpayers might get an income tax savings totaling a thousand dollars. At the low end of those income ranges, taxpayers would receive almost nothing.
According to the Tax Policy Center, this same income group could see their taxes increase as much as $2200. This is largely the result of increased alternative minimum taxes. It is difficult to understand the growing disparity between who pays and who doesn't until you look further up the income ladder. Wage earners grossing a million dollars in annual pay would only see an increase of $98 in their AMT bill while their dividend savings would be just shy of $38,000. In their parallel universe, this is considered an equitable tax policy.
Snuggled deep within their hallowed halls, Congress will also take up discussions on the $2.7 trillion budget. The Republicans remain deeply divided on how they should do what needs to be done. As well they should be. Their popularity is decreasing not only as a whole but also individually in many districts that seemed to be stalwart supporters of the incumbents.
One bone they can throw us would be an effort at serious pension reform. The pension reform bill, also left languishing, seems destined to become another clever way free to give the "have-mores" additional tax cuts.
The House bill would accomplish this by raising the minimum amount you can contribute to your 401(k). On the surface, this seems like a good idea. The opportunity to save even more should be a good thing. But in a parallel universe, things do not always seem as the appear.
The only ones who would benefit from this beneficence are those who are already maxing out these plans, the ones who can afford to put away the $15,000 maximum. Currently, less than 5% of those who participate in 401(k) plans save that much.
Tax breaks and saving incentives for those at the top will have the net effect of deepening an already unwieldy deficit. This will force us to borrow more as a nation to stay at the same level of debt.
And to add insult to injury, the saver's credit, the one thing that would help low income wage earners save more for their retirement is actually all but eliminated in the House version of the pension reform bill.
The flaws in the pension bill donšt stop there. The House bill is not likely to take away credit balances a way for companies to factor pre-funding payments that make assumptions for subsequent years, smoothing this allows a company to take an average when calculating the interest rate assumptions over a four year period, and lastly P&L averaging which allows companies to account for a profit and loss statements spanning five years. These would not be business-friendly reforms but would serve the employees and retirees of this country far more than raising the 401(k) limit.
The best Congress is likely to do is increase the premium paid to the Pension Benefit Guaranty Corporation for each employee from $19 to $30 and that will be phased in over the next five years. Which in a parallel universe leaves plenty of room to tuck a tax cut or two neatly inside the package.
I should probably leave it right there but who can resist the parallel universe that exists deep inside the cabinet. The former head of the Office of Management and Budget is now the chief of staff. The former head of our trade office, Rob Portman now has the office of the OMB vacated by his new boss Joshua Bolten.
The Portman promotion is of particular interest. To his credit, he served as a good liaison between Capitol Hill and the White House. He accomplished little but should be commended for his ability to raise the relative wealth of our trade partners. Now the great ŗdecider˛ has decided his budget battle should be in the hands of this former House representative.
Mr. Portman faces the challenge of making the tax cuts permanent, revisiting the issue of Social Security and Medicare reform and hold domestic spending down while reining in the annual budget deficit. Mr. Bolten had little success in doing that job, ergo the promotion.
Susan Schwab, the inexperienced, internationally anonymous deputy trade representative will assume Mr. Portman's old position. While Mr. Portman failed to create a bipartisan consensus for free trade, was unable to keep global trade talks moving in the right direction (the talks, organized by the WTO and referred to as the Doha Round were meant to narrow the trade barriers for agricultural and manufactured goods and have since hopelessly stalled), and was unable to garner Congressional encouragement for bilateral trade talks, his replacement is not expected to do much better. Any efforts she makes will, ironically have to go through Mr. Portman's office.
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