Morning Report – Big Week Ahead 9/29/14

Stocks are lower this morning on the demonstrations in Hong Kong. Bonds and MBS are up.

This is a big week data-wise. We will get the ISM report, construction spending, Case-Shiller, and then the jobs report on Friday. Given that bonds again seem to be driven by overseas events, I think the jobs report will probably be a non-event for the bond market unless it is exceptionally strong or exceptionally weak.

Pending Home Sales fell 1% in August after rising 3.2% in July. The West was up 2.6%, while the rest of the US was down.

Bill Gross is out at PIMCO and has joined Janus Capital. This follows record outflows at the flagship Total Return Fund, which Gross ran. PIMCO anticipates another $10 billion will leave on the news.

Personal Incomes rose .3% in August, while Personal spending rose .5%. The PCE Core rate (the inflation measure the Fed prefers to use) rose 1.5% year-over-year, below their 2% target rate.

Freddie Mac’s Chief Economist told the New England Mortgage Banking Conference that 2015 could be the best year for home sales since 2007. They are forecasting mortgage rates to be around 5% by the end of 2015.

38 Responses

  1. Slate posts an interesting argument that I’ve seen presented less coherently at PL.

    Namely if you can tie achievement levels to innate ability differences in individuals due to genetics, etc (i.e. nature, not nurture) does that imply a duty to those who don’t succeed in this system?

    I.e. it all comes down to luck and the “birth lottery” so redistribution is justified.

    “Ever since John Locke laid the groundwork for the Enlightenment by proposing that we are born as tabula rasa—blank slates—the idea that we are created equal has been the central tenet of the “modern” worldview. Enshrined as it is in the Declaration of Independence as a “self-evident truth,” this idea has special significance for Americans. Indeed, it is the cornerstone of the American dream—the belief that anyone can become anything they want with enough determination.

    If we acknowledge that people differ in what they have to contribute, then we have an argument for a society in which all human beings are entitled to a life that includes access to decent housing, health care, and education, simply because they are human. Our abilities might not be identical, and our needs surely differ, but our basic human rights are universal.”

    http://www.slate.com/articles/health_and_science/science/2014/09/malcolm_gladwell_s_10_000_hour_rule_for_deliberate_practice_is_wrong_genes.html

    The problem with that argument as presented in Slate, is that once you deconstruct the John Locke Enlightenment idea that “All men are created equal” and find it wanting, what basis do you have to assert that there’s such a thing as universal human rights at all?

    Once you ditch the Enlightenment and it’s value system, you are just as likely, if not more so, to end up with Nietzsche instead of egalitarianism.

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    • JNC, the equality argument is easy to make, if you accept “similarity” as equality. Humans are similar to each other and different from canines, simians, ursines, and felines. The similarity argument is easy to make from the standpoint that we all have different gifts and graces, but most of us can do something. The similarity argument also takes into account variance between generations and reversion to the norm. There is no permanent system of treating folks unequally that will not treat folks unfairly, if fair means according to their merits.

      Having said all this, I reject any legal system or ethical system that enshrines a nobility or an aristocracy or that treats one human as entitled and another as drekh.

      However, the populist left notion of income inequality as evil has no appeal for me. What does appeal to me is for Texas to adequately fund its educational system so that talent can rise from any quarter and Texas can prosper. What does appeal to me is vigorous public and private anti-trust and fair trade practices enforcement so that new businesses are not strangled on entry by monopolies and oligopolies. I have no trouble with an intergenerational estate tax on large estates – the next generation will still have a head start, but not be enshrined as permanent nobility. It is all windfall to the generation that did not earn it, anyway.

      I maintain that the nature of constitutionally required federal spending redistributes wealth from the middle class upward. Highway and defense contractors are not poor. The redistribution the left wants from the federal government tends to be “elective” rather than “required” and is downward. I am OK with some of the existing schemes: the GI Bill, the VA, SS and Medicare, for examples. I think they are worth the cost, and if a majority expects the benefits it must pay the price.

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      • Mark:

        I have no trouble with an intergenerational estate tax on large estates – the next generation will still have a head start, but not be enshrined as permanent nobility.

        I don’t think there is any evidence that the absence of an estate tax in America has or would lead to anyone being “enshrined as permanent nobility”. The term “nobility” connotes something very different than simply “having lots of money”. It suggests hereditary, government granted privileges. Such a thing does not and has never existed in the US, even prior to the implementation of an estate tax.

        The primary function that the estate tax serves is as an employment racket for tax planners. And it’s primary victims are the moderately wealthy, not the super wealthy. People like Warren Buffet and Bill Gates will manage to distribute most of their wealth as they see fit when they die, and won’t pay anything near the percentage of their total wealth in estate taxes that a small business owner who manages to cobble together $10 million in assets over a lifetime will end up paying.

        I can think of no sensible reason for having an estate tax. It is nothing more than an expression of envy.

        It is all windfall to the generation that did not earn it, anyway.

        Regardless of where it goes, whether the government or heirs, it is a windfall to a recipient that did not earn it. The relevant question to me is therefore who should get to decide who the recipient of the windfall will be. And the obvious answer to that quesition is the person who actually did earn it. It is difficult to think of any reason it should be voters (ie the government) who didn’t earn it.

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  2. that’s quite the gym, jnc

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  3. “JNC, the equality argument is easy to make, if you accept “similarity” as equality. ”

    I don’t see how you get there from the piece. If you concede the premise that some people are genetically superior to others and that’s what determines their abilities and success, there’s no reason that they have any sort of obligation to those who are below them in the gene pool. Similarity in that case isn’t equality.

    “What does appeal to me is for Texas to adequately fund its educational system so that talent can rise from any quarter.”

    I’d argue that this is still an Enlightenment basis for that policy, the tabula rasa described.

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    • JNC, let me attempt to clarify. Genetics determined that Michael Jordan had extraordinary athletic ability and that Newton had a brilliant mind. Genetics plus nutrition and opportunity, of course. But genetics of a large and totally mixed population of homo sapiens is not predictable for the results for any individual. We cannot gauge who has it and who does not have it except as a static exercise within one short defined period. Hell, we have been breeding horses for hundreds of years and each individual is still a crapshoot. Thus I am pretty dismissive of the argument from genetic superiority, however it is used, to justify the individual over the group or to justify the group over the individual. Give a group of kids an education and the individuals will rise in each generation.

      Scott – using the argument that taxation is theft trumps all taxation equally. Using the argument that taxation is a necessity we can look for the tax that inflicts the least pain, every time. I suggest that taxing transfers always pains someone, but “hurting” the person who did not produce the taxed wealth or income is less painful, because that person never had it to lose.

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      • Mark:

        using the argument that taxation is theft trumps all taxation equally.

        Perhaps, but I wasn’t using that argument.

        Using the argument that taxation is a necessity we can look for the tax that inflicts the least pain, every time.

        I think you would be pretty hard pressed to make a case that the estate tax is a “necessity”, even if we assume (rather outrageously) that all current government spending is necessary. In 2013 estate tax liabilities came to $40.5 billion, while total federal revenues were $2.8 trillion. That is to say, estate taxes comprised less than 1.5% of total government revenues. Practically a rounding error.

        Besides, I thought you were justifying the estate tax as a means of preventing the enshrinement of a permanent nobility class, not as a necessity to funding government operations. But I don’t think your above justification, the “least pain”, is any better. The estate tax, at least as currently designed, is not designed to inflict the least pain on those subjected to it, but rather is designed to inflict pain on the least number of people. One of the arguments made by estate tax advocates in favor of it is that it applies to so few people. But I think a tax system in which the burden of paying for government spending is explictly designed to be borne by the least number of people is exactly the opposite of just. And pretty crazy to boot. When a majority of citizens are allowed to make decisions on spending that will be financed by a small minority of other citizens, the destruction of that system is inevitable. Taxation that is deemed by the electorate to be a “necessity” should not aim to be the least painful, but rather should aim to share whatever pain is “needed” across the entire electorate, so as to induce the electorate to make sure it realy is “necessary”. An estate tax that applied equally to all estates no matter the size might conceivably be justifiable, but certainly not one that explicitly and intentionally targets a tiny minority of citizens.

        I suggest that taxing transfers always pains someone, but “hurting” the person who did not produce the taxed wealth or income is less painful, because that person never had it to lose.

        As I pointed out with your “windfall” point, the same exact thing could be said of the government. It never had it to lose either, so “hurting” it by withholding it from the government is least painful of all.

        Your assumption seems to be that upon death, the assets suddenly become ownerless (hence you say that “the person never had it to lose”.) I disagree with that assumption, but even if we accept it, what justification is there for claiming that voters who did not earn the assets, and not the person who did earned it, should decide what happens to them? Your above argument seems to claim necessity as a justification, but as I explain above, I don’t think that argument holds at all.

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        • Ultimately necessity is the only justification for taxation, Scott. That a tax may serve another purpose as well is understood. But I would never argue for taxes in general if they were not necessary. I do not distinguish among taxation ideas as to whether one is more necessary than another, as a general rule. I would favor different tax structures than the one we have for simplicity and efficiency, as would we all. In the hierarchy of present taxes, the estate tax is far less painful to any individual than the property tax or the income tax. And in the face of current spending, all taxes are necessary.

          That current spending is too much and that we all agree on that is a different subject entirely.

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        • Mark:

          Ultimately necessity is the only justification for taxation, Scott.

          Necessity cannot be separated from the ends which one is seeking to achieve. That is why I totally disagree with your final claim. Current spending, and whether it is necessary (ie too much) is very much essential to the issue of whether and how much taxation is necessary.

          But I would never argue for taxes in general if they were not necessary.

          We weren’t talking about taxation in general. We were talking specifically about the estate tax on a small number of large estates and whether it was a justifiable tax. Originally you seemed to say such a tax was necessary in order to prevent enshrining a permanent nobility class. I think both our history and our constitution proves there is no such necessity.

          Next you said it was justifiable because it limited the “pain” of taxation. First of all the argument presumes a “necessity” which has not yet been established and, I think, is actually disproven by the miniscule amount of revenue collected by it.

          Second, even assuming necessity, I think the moral notion guiding your claim is exactly backwards. Taxation should not seek to limit “pain”. The pain of taxation should be neither more nor less than necessary, necessity already being established as the only justification for any taxation at all. Therefore, having already assumed that the amount of taxation required is necessary, the only question is whom to tax. You apparently think it should be limited to as few people as possible, in order to limit the pain. I couldn’t disagree more. The pain should be spread out and shared by as many voting citizens as conceivably possible. Those with the privilege of deciding what is and is not “necessary” should as a consequence bear the burden of funding those necessities.

          I don’t understand why you would think otherwise.

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        • You are talking by me – pain for individuals is what I addressed, and it just cannot be argued that taxing a transfer to one who did nothing to earn the transfer is individually painful to the transferee as taking the earnings or the receipts of someone who earned them.

          As for bundling revenue and expenditure, I believe the best a political system can do is find a compromise and there were several offered last cycle that were all rejected by both parties. All reduced spending $2 for every dollar of tax increase, an were thus closer to what I wanted then not. I think that sort of compromise is available if the parties looked past themselves just for a fucking minute. And once we had that compromise in place we would have something closer to a budget to project and we could talk about how much tax we need smartly. While we are not now talking about taxes in the framework of a serious budget with limits, we can talk about which sources of revenue inflict the least pain on the tax payers. Not in gross numbers, but individually.

          Your original argument that “Regardless of where it goes, whether the government or heirs, it is a windfall to a recipient that did not earn it” is far more applicable to comparing the government with the person who earned it rather than to the generational heirs. You cannot tell me that you prefer an income tax to an estate tax because the income earner is getting a windfall.

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        • Mark:

          pain for individuals is what I addressed, and it just cannot be argued that taxing a transfer to one who did nothing to earn the transfer is individually painful to the transferee as taking the earnings or the receipts of someone who earned them.

          I agree. But unless you are arguing in favor of an estate tax instead of an income tax – and I am fairly positive you are not given that you advocated an estate tax only on “large” estates and never said anything about eliminating the income tax as a result – that is neither here nor there for the purposes of our discussion. The existence of the income tax is not in question, so the person who earned the receipts will already be taxed regardless of whether or not the estate tax exists. The only question at issue is whether the person who actually did earn the receipts will get to decide where his assets go when he dies, or whether people who did not earn the assets, namely voters via the government, will get to decide where his assets go when he dies. And beyond the permanent nobility argument, which I think we have eliminated, and the necessity argument, which I addressed in the previous post and you have not countered, you still have not provided any justification for thinking that voters should get to decide instead of the person who earned them in the first place.

          If you are worried about limiting “pain”, then you should advocate for the elimination of the estate tax, as eliminating will reduce the pain from the tax to zero.

          Your original argument that “Regardless of where it goes, whether the government or heirs, it is a windfall to a recipient that did not earn it” is far more applicable to comparing the government with the person who earned it rather than to the generational heirs. You cannot tell me that you prefer an income tax to an estate tax because the income earner is getting a windfall.

          Again, the preference for one over the other is not an issue. I am assuming that the income tax exists and will continue to exist. The only question before us is whether we should have an estate tax in addition to the income tax. And, as I said in my original, voters (ie the government) are the exact equal to any other heir in that they would each be recipients of a windfall if they were to get control of assets that they did not earn. I’m not sure I understand how it is that you dispute this.

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        • Back in a couple hours.

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  4. Interesting case study on effectively raising the minimum wage:

    “Because everyone, including the cashiers, made so much money, the Bison had to charge a lot. It was the same everywhere you went in western North Dakota.

    “What the fuck?” demanded one woman when I rang her gallon of milk for $6.59.

    In the lounge, a trucker from Michigan ranted to the other men that “you hear all these people complaining about the minimum wage. I’m like, ‘If you give a state a $15 minimum wage, it’s going to be the same problem you got out here. You got all of us that are making over $100,000, all your prices and everything went up. The more money you make, the more they take.””

    http://www.theatlantic.com/features/archive/2014/09/searching-for-the-good-life-in-the-bakken-oil-fields/380677/

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  5. “But genetics of a large and totally mixed population of homo sapiens is not predictable for the results for any individual.”

    Not yet it isn’t. But that’s what’s being argued as a premise in the piece.

    I take it one step further. I buy that Raw intelligence or athletic talent is secondary to self discipline and hard work, so I reject the premise of luck or the talent birth lottery being determinative entirely.

    I know a lot of smart, useless people (mostly in PhD programs) and a lot of self made entrepreneurs who only completed undergraduate college at the second tier of state schools.

    I still go with hard work matters more than raw physical or intellectual ability.

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  6. “Using the argument that taxation is a necessity we can look for the tax that inflicts the least pain, every time.”

    That’s not what’s being argued. The “aristocracy” argument for the estate tax isn’t about funding needed government services in an efficient and equitable manner, but rather about confiscating wealth above a certain level specifically to preclude it’s being passed on.

    See also it’s close cousin, the progressive income tax set at marginal levels designed to maximize government revenues, full stop.

    http://krugman.blogs.nytimes.com/2011/11/22/taxing-job-creators/

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  7. Hope it went well.

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    • Let’s put it this way…the new eye sees bright white, almost blue-white light where the old remaining eye sees yellowed white.

      So far, so good. Tomorrow it should have settled enough for me to drive. I will be on eye drops for three weeks and then setting up for the left eye surgery.

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  8. I’m not sure how a wife or children can be considered to have done nothing to help earn the income that resulted in the estate to begin with.

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    • McWing:

      I’m not sure how a wife or children can be considered to have done nothing to help earn the income that resulted in the estate to begin with.

      To be fair a spouse is exempted from estate taxes. But it is certainly difficult to argue that nameless, faceless voters (ie government) somehow have a more justified claim to the wealth than do the children, or really any other individual, to whom the owner of the assets has decided to leave an inheritance.

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      • BTW, Mark, I was re-reading your original on this thread (to make sure I hadn’t misunderstood something) and ran across this comment that I missed the first time:

        I maintain that the nature of constitutionally required federal spending redistributes wealth from the middle class upward. Highway and defense contractors are not poor.

        I think it is a conceptual error to view such spending as “redistribution of wealth” at all, much less from the middle class upward. A highway or defense contractor gets paid in exchange for providing a service. It is not a redistribution of wealth. It is an exchange of value for value. It is no different from, and no more a redistribution of wealth than, any other free market transaction.

        Wealth redistribution generally means taking wealth from one person and giving it to another, not paying for a service. Social Security is wealth redistribution. Food stamps are wealth redistribution. Tuition grants to students are wealth redistribution. Grants to universities for scientific research are wealth redistribution. Paying a contractor to build an interstate highway or F-16 is something entirely different.

        Besides which, the “rich”, not the middle class, pay the vast majority of taxes. Even if we call such payments to contractors “wealth redistribution”, it is primarily redistribution from some members of the upper class to other members (along with, of course, all of the middle class people that work for those other members).

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        • I readily concede the point on redistribution. I also am surprised by those tax impacts.

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        • Mark:

          I also am surprised by those tax impacts.

          Given the nature of percentages, it shouldn’t be all that surprising. Even with a flat income tax rate, high income earners would end up paying a greater share of the tax burden than low income earners. And the whole point of a progressive income tax is concentrate that burden even further. So the fact that a relatively small number of tax payers bear such a large share of the tax burden shoudldn’t come as a shock. It is exactly what would be expected and desired by advocates of a progressive tax code.

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        • I am surprised that the incomes are so heavily weighted to the top 10%. Turns out R and I are well into the top 10%, which I also had not considered.

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        • Mark:

          I am surprised that the incomes are so heavily weighted to the top 10%. Turns out R and I are well into the top 10%, which I also had not considered.

          Ah. You know, you may even be one of Obama’s reviled millionaires and billionaires of the top 1% (which somehow starts at a shade less than $400k). Which means pretty much by definition that you are not paying your “fair share”. How does it feel to be a member of the aristocracy/oligarchy?

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  9. Personally, I don’t find it that worthy of sarcasm that the top 10% own 45% of the wealth, or that all of the income gains since the beginning of this recession have filtered up instead of down.

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    • lms:

      Personally, I don’t find it that worthy of sarcasm that the top 10% own 45% of the wealth, or that all of the income gains since the beginning of this recession have filtered up instead of down.

      I don’t think the percentages of total wealth owned by any particular income demographic is all that meaningful or relevant, for several reasons. First of all the individuals that make up the top 10% (or the bottom 10%) are changing all the time. It is wrong to think that if the top 10% today have a greater percentage of wealth than it did 10 years ago that the individuals themselves that made up that demographic 10 years ago have accrued the difference. Lots of people in the top 10% today were in the middle or at the bottom in the past. So bully for them, I say. And lots of people who used to be in the top 10% no longer are.

      But perhaps even more importantly, what really matters to the lives of individuals is not how much wealth they have relative to all the wealth in existence, but rather how much absolute wealth they own, and the quality of life the wealth allows them to live. And it is pretty much undeniable that even relatively poor people today live much wealthier lives in terms modern conveniences, quality of living, and access to luxury goods on an absolute basis than even rich people did say, 100 years ago. Poor people own TVs, live in air conditioned apartments (and sometimes even their own houses), drive their own car, and walk around with their own mobile phones, most of which wasn’t even possible for rich people in 1914.

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  10. Is it bad, in and of itself?

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  11. I think it’s bad because when you take into account inflation, the middle class is falling behind. Whatever! Personally, our customers are the middle class, and so we prefer they have a little more money in their pockets. They may not be the tax payers but they are the spenders!

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  12. Scott

    Poor people own TVs, live in air conditioned apartments (and sometimes even their own houses), drive their own car, and walk around with their own mobile phones, most of which wasn’t even possible for rich people in 1914.

    That sounds like a Kevin argument (he always said a similar thing) when wealth inequality comes up.

    Anyway, I disagree with both of your statements. I think it’s more important to look at the middle class as a group or average and highlight the fact that with inflation taken into account they’re no better off, and in fact are worse off, than they were a couple of decades ago. Obviously, some individuals in any given group fluctuate between them. And if poor people are doing so well now, comparatively, then perhaps the “War on Poverty” was more successful than we all realized.

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    • lms:

      I think it’s more important to look at the middle class as a group or average and highlight the fact that with inflation taken into account they’re no better off, and in fact are worse off, than they were a couple of decades ago.

      Worse off in what ways? Are they less well fed? Are they more likely to die from various diseases? Are they living in smaller houses with fewer modern conveniences? Were their TV’s bigger and better 20 years ago than now? Do they spend less time engaging in leisure than they did 20 years ago? I am genuinely curious.

      And if poor people are doing so well now, comparatively, then perhaps the “War on Poverty” was more successful than we all realized.

      Well, you may remember that I have long argued to you that it makes no sense at all to measure poverty without actually including government transfer payments designed to ameliorate it.

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      • I realize that most of the “health care is a right” advocates are no longer with us, but I’d still like to pose a question to them.

        Do ebola victims in west Africa have a right to health care, and if so, should the US be inviting them to come to the US and providing them with the care they need?

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  13. Scott, I won’t be able to get to this again until Saturday………….taking another couple of work days off………………..:)

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    • No worries…I just hope you can still find my comment amongst the plethora of others that you are sure to have to dig through when you get back.
      😉

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