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Results 1 - 12 of 12
1. China’s economic foes

China has all but overtaken the United States based on GDP at newly-computed purchasing power parity (PPP) exchange rates, twenty years after Paul Krugman predicted: “Although China is still a very poor country, its population is so huge that it will become a major economic power if it achieves even a fraction of Western productivity levels.” But will it eclipse the United States, as Arvind Subramanian has claimed, with the yuan eventually vying with the dollar for international reserve currency status?

Not unless China battles three economic foes. One is well-known: diminishing marginal returns to capital. Two others have received less attention. The first is Carlos Diaz-Alejandro. Not the man, but the results uncovered by his research on the Southern Cone following the opening up of its capital account that culminated in a sovereign debt crisis and contributed to Latin America’s lost 1980s. If the capital account is liberalized before the domestic financial system is ready, the country sets itself up for a fall: goodbye financial repression, hello financial crash. The second is the “reality of transition”: rejuvenating growth requires hard budgets and competition to improve resource allocation and stimulate innovation, counterbalanced with a more competitive real exchange rate. This is the principal insight from the transition in Central and Eastern Europe (CEE), which was far simpler than anything China faces.

China was able to raise total factor productivity (TFP) growth as an offset to diminishing marginal returns to capital, especially after joining the World Trade Organization (WTO) in 2001, and faster growth was accompanied by a rising savings rate. But TFP growth is hard to sustain. Any developing country targeting growth above the steady state level given by the sum of human capital growth, TFP growth and population growth (the latter two falling rapidly in China) will find that its investment rates need to continually increase unless it can rejuvenate TFP growth. China’s investment rates have risen from around 42% of GDP over 2005-7 (prior to the global crisis) to 48% in recent years even as growth has dropped from the 12% to the 7.5% range. Savings rates have hovered around 50%, reducing current account surpluses (numbers drawn from IMF 2010 and 2014 Article IV reports).

Hall of Supreme Harmony, Beijing.
Hall of Supreme Harmony, Beijing, by Daniel Case. CC-BY-SA-3.0 via Wikimedia Commons.

This configuration has forced China to choose between either investing even more, or lowering growth targets. It has chosen the latter, with its leaders espousing anti-corruption, deleveraging, environmental improvement and structural reform to achieve higher quality growth. The central bank, People’s Bank of China (PBoC), has reaffirmed its goal of internationalizing the yuan and liberalizing the capital account.

China’s proposed antidote is to “rebalance” from investment and exports to domestic consumption. But growth arithmetic would require consumption to grow at unrealistic rates, given the relative shares of investment and private consumption in GDP, even to meet scaled-down growth targets. Besides, households need better social benefits and market interest rates on bank deposits to save less and consume more. Hukou reform alone, or placing social benefits received by rural migrants on a par with their urban counterparts, could easily cost 3% of GDP a year for the next seven years as some 150 million additional people gain access to such benefits—quite apart from the public investment needed to upgrade urban infrastructure, according to calculations shared by Xinxin Li of the Observatory Group. And the failure to liberalize bank deposit rates has led to the rise of “wealth management products” in the shadow banking system. These “WMPs” offer higher returns but are poorly regulated and more risky.

Indeed, total social financing, a broad measure of credit, has soared from 125% to 200% of GDP over the five years 2009-2013 (Figure 2 in the July 2014 IMF Article IV report, with Box 5 warning that such a rapid trajectory usually ends in tears). Local government debt was estimated at 32% of GDP in mid-2013, much of it short-term and used to fund infrastructure projects and social housing with long paybacks. Housing prices show the signs of a bubble, especially away from the four major cities. Corporate credit is 115% of GDP, about half of it collateralized by land or property. While the focus recently has been on risks from shadow banking, it is hard to separate the shadow from the core. Besides, WMPs have become intertwined with the booming real estate market, a major engine of growth yet the centre of a “web of vulnerabilities” (to quote the IMF) encompassing banks, shadow banks, and local government finances. A real estate shock would ripple through the system, lowering growth and forcing bailouts. The gross cost of the bank workout at the end of the 1990s was 15% of GDP in a much simpler world!

2014 began with fears of a hard landing and an impending default by a bankrupt coal mine on a $500 million WMP-funded loan intermediated by a mega-bank. The government eventually intervened rather than let investors take a hit and risk a confidence crisis. And starting in April, stimulus packages were launched to meet the 7.5% growth target, a tacit admission that rebalancing is not working. But concerns persist around real estate. Besides, stimulus will help only temporarily and China is likely to be facing the same questions about growth and financial vulnerability by the end of the year.

With rebalancing infeasible, and investing even more prohibitively costly, virtually the only remaining option is to spur total factor productivity growth: China is still far from the global technological frontier. This calls for a package that cleans up the financial sector and implements hard budgets and genuine competition, especially for the state-owned enterprises (SOEs), while keeping real exchange rates competitive. The real appreciation of the past few years may have been offset by rising productivity, but continued appreciation will make it harder for the domestic economy to restructure and create 12 million jobs a year to absorb new graduates and displaced SOE workers.

In sum, China must heed Diaz-Alejandro. No one knows what the non-performing loans ratio is in China and few believe the official rate of 1%. If the cornerstone of a financial system is confidence and transparency, China is severely deficient. This must first be fixed and market-determined interest rates adopted before entertaining hopes of internationalizing the currency. China must also accept the reality of transition; the formidable remaining agenda in the fiscal, financial, social, and SOE sectors reminds us that China is still in transition to a full-fledged market economy.

The combination of a financial clean up and the policy trio of hard budgets, competition, and a competitive real exchange rate will improve resource allocation and force innovation, boosting total factor productivity growth. But doing this is hard—that’s the essence of the “middle-income trap”. Huge vested interests will be encountered, evoking Raghuram Rajan’s description of the middle-income trap as one “where crony capitalism creates oligarchies that slow down growth”. Dealing with this agenda is the Chinese leadership’s biggest challenge.

The era of cheap China is ending, while the ability of the government to virtually decree the growth rate has fallen victim to diminishing returns to capital. Diaz-Alejandro and the reality of transition are no less important as China seeks a way forward.

Headline image credit: The Great Wall in fall, by Canary Wu. CC-BY-SA-2.0 via Wikimedia Commons.

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2. Increasing income inequality

Quite abruptly income inequality has returned to the political agenda as a prominent societal issue. At least part of this can be attributed to Piketty’s provoking premise of rising concentration at the top end of the income and wealth distribution in Capital in the Twenty-First Century (2014), providing some academic ground for the ‘We are the 99 percent’ Occupy movement slogan. Yet, this revitalisation of inequality is based on broader concerns than the concentration at the very top alone. There is growing evidence that earnings in the bottom and the middle of the distribution have hardly risen, if at all, during the last 20 years or so. Incomes are becoming more dispersed not only at the top, but also more generally within developed countries.

We should distinguish between increasing concentration at the top and the rise of inequality across the entire population. Even though both developments might take place simultaneously, the causes, consequences, and possible policy responses differ.

The most widely accepted explanation for rising inequality across the entire population is so-called skill-biased technological change. Current technological developments are particularly suited for replacing routine jobs, which disproportionally lie in the middle of the income distribution. In addition, low- and middle-skilled manufacturing jobs are gradually being outsourced to low-wage countries (see for instance Autor et al., 2013). Decreasing influence of trade unions and more decentralised levels of wage coordination are also likely to play a role in creating more dispersed earnings patterns.

Increased globalisation or technological change are not likely to be main drivers of rising top income shares, though the larger size of markets allows for higher rewards at the top. Since the rise of top income shares was especially an Anglo-Saxon phenomenon, and as the majority of the top 1 per cent in these countries comes from the financial sector, executive compensation practices play a role. Marginal top tax cuts implemented in these countries and inherited wealth are potentially important as well.

So should we care about these larger income differences? At the end of the day this remains a normative question. Yet, whether higher levels of inequality have negative effects on the size of our total wealth is a more technical issue, albeit not a less contested one in political economy. Again, we should differentiate between effects of increasing concentration at the top and the broader higher levels of inequality. To start with the latter, higher dispersion could incite people to put forth additional effort, as the rewards will be higher as well. Yet, when inequality of income disequalises opportunities, there will be an economic cost as Krugman also argues. Investment in human capital for instance will be lower as Standard & Poor’s notes for the US.

Coins on a scale, © asafta, via iStock Photo.

High top income shares do not lead to suboptimal human capital investment, but will disrupt growth if the rich use their wealth for rent-seeking activities. Stiglitz and Hacker and Pierson in Winner-Take All Politics (2010) argue that this indeed takes place in the US. On the other hand, a concentration of wealth could facilitate large and risky investments with positive externalities.

If large income differences indeed come at the price of lower total economic output, then the solution seems simple: redistribute income from the rich to the poor. Yet, both means-tested transfers and progressive taxes based on economic outcomes such as income will negatively affect economic growth as they lower the incentives to gain additional wealth. It might thus be that ‘the cure is worse than the disease’, as the IMF phrases this dilemma. Nevertheless, there can be benefits of redistribution in addition to lessening any negative effects of inequality on growth. The provision of public insurance could have stimulating effects by allowing individuals to take risks to generate income.

How to leave from here? First of all, examining whether inequality or redistribution affects growth requires data that makes a clean distinction between inequality before and after redistribution across countries over time. There are interesting academic endeavours trying to decompose inequality into a part resulting from differences in effort and a part due to fixed circumstances, such as gender, race, or educational level of parents. This can help our understanding which ‘types’ of inequality negatively affect growth and which might boost it. Moreover, redistribution itself can be achieved through multiple means, some of which, such as higher heritage taxes, are likely to be more pro-growth than others, such as higher income tax rates.

All things considered, whether inequality or redistribution hampers growth is too broad of a question. Inequality at which part of the distribution, due to what economic factors, and how the state intervenes all matter a great deal for total growth.

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3. Interesting 1500’s Trivia


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Have you ever thought about how things were in the 1500’s compared to now?  Here are a few facts you may not know about.

  1. Where did the saying “dirt poor” come from?
  2. How did the saying “bring home the bacon” get started?
  3. I am sure you have heard “raining cats and dogs”, but where did it originate?
  4. Where did the tradition of brides carrying a bouquet of flowers at a wedding come from?
  5. “Don’t throw the baby out with the bath water,” sounds peculiar right?  Well how did this saying get started?
  6. What do you think their food customs were like?

Now, let’s see if you got the answers correct!

  1. “Dirt poor” was when poor people had dirt floors.  Those that had money were able to obtain something to cover the dirt, but those that were poor were stuck with the dirt.
  2. The more wealthy people were able to buy pork, and when visitors would come they would hang up the bacon to show off.  The owners of the meat would cut a little piece off to share with their guests who weren’t as financially endowned.
  3. In houses that had thatched roofs, they had straw piled up high with no wood underneath, is where they kept their animals.  When it would rain it would become slippery and the animals would sometimes fall.
  4.  Back in the 1500’s, people would take a yearly bath.  A wedding would usually take place in July because the bride would take her yearly bath in May, and so by July she would not smell too horrible.  To help cover up the smell, the bride would carry a bouquet of flowers when they got married.
  5. When they took their yearly bath in the 1500’s,  they took them in a big tub filled with hot water.  They would not empty the water out until everyone was finished.  The man of the house was first, followed by other males and older sons, then the women and children.  They kept the babies until the end, when the water was at its dirtiest.  It was said to be so dirty that they could lose someone in it, and there was born the saying.
  6. The wealthy people were able to buy plates made of pewter.  Food with lots of acid would cause some lead to get into the food, which caused lead poisoning.  Needless to say, for about 400 years, tomatoes were considered poisonous. 

Another interesting fact about food:

Bread was divided by status.  Workers got the burnt bottom of the bread.  Family members got the middle of the bread.  Guests got the top, or the upper crust of the bread.   

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4. Millennials ARE Green & Politically Conscious, Despite What The Media Says

In the past week, the media has been captivated by a study on Millennials by San Diego State University’s Jean Twenge, published in the Journal of Personality and Social Psychology. Twenge has conducted research among students for the past few... Read the rest of this post

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5. Scotland’s return to the state of nature?

By David A. Rezvani


Some observers may immediately recoil at the thought that an entity that is partially independent would have advantages over an entity with a full measure of sovereignty. This indeed seems to be the view of the minority of Scottish voters who intend on voting in favor of Scotland’s secession from the United Kingdom during the September 2014 independence referendum. To them, Scotland’s current condition of partial independence may seem like a cup that is half full. By contrast, full independence may seem like an outcome that is always good. This view is however at odds with the condition of nearly 50 partially independent territories throughout the world (like Hong Kong, Bermuda, and Puerto Rico), which tend to be far wealthier and more secure than their demographically similar fully independent counterparts. The per capita GDP of the average partially independent territory (of US$32,526) is about three times higher than the average sovereign state (of US$9,779). The relative wealth of partially independent territories is even more striking when the comparison controls for factors such as population size, geographic region, and regime type. The aspiration for full independence for its own sake also flies in face of our own common sense experience as individuals.

When consumers purchase fruits and vegetables at the grocery store rather than growing it themselves, when we buy clothes rather than learning the art of weaving, when customers put money in banks rather than guarding it themselves, when citizens consent to reliable police protection rather than arming for a state of war―in all of these actions people have ceded what would otherwise be their full independence and instead embraced partial independence. We put our confidence in others in some respects while in other ways retain our own autonomy. This frees us to specialize. It facilitates collaboration, allowing us to build on the work of others. It gives us confidence to take risks. At the citizen level, however, we do not typically refer to this as partial independence―we refer to it as being civilized. Clothing oneself with an animal skin and running out into the wilderness to survive alone in the state of nature may provide someone with a full cup of independence, but it is not the kind of condition that most people want to be in.

scottish parliament building

But this is precisely what Scotland’s First Minister, Alex Salmond, and his secessionist Scottish Nationalist Party (SNP) colleagues seem to want for their homeland. Scotland’s current partial independence with the United Kingdom provides wide ranging economic, political, and security advantages for both the United Kingdom and Scotland. With the world’s fifth largest economy, the UK provides a larger share of public services per capita to Scotland than other areas of the country. London is also one of the largest financial centers in the world and amidst the 2008 financial downturn―while nearby sovereign states like Iceland and Ireland were reeling under financial strain―Britain’s central bank opened its coffers to Scotland, spending £126.6 billion to prevent local bank failure. Britain, which is the world’s fourth largest military power, also furnishes Scotland’s defense. The UK also has one of the highest levels of rule of law and provides Scotland with credible guarantees for its own self-determination.

And with full control over the elections in its own local parliament as well as control over one-tenth of the seats in the British Parliament―with an occasional Scotsman as UK Prime Minister―Scotland is far more influential with its neighbors and throughout the world than atrophying into a mini sovereign state. If Scotland’s current arrangement is modified with new powers (such as greater control over taxation, natural resources, and foreign relations), its partially independent status stands to deliver even greater advantages.

Choosing full independence would, however, tragically throw away many ― or all of ― the aforementioned advantages. It would take Scotland into the wilderness of international anarchy in which it would have to fend for itself as a sovereign state. Entry into the European Union may mitigate some of the costs of secession and international anarchy, but there are no guarantees of the terms―or availability―of such membership. Indeed, even if Scotland managed to eventually join the EU, it is widely believed that it would need to drop the British pound and adopt the (locally unpopular) Euro.

Whether as a society or an individual, there certainly is a time in which it makes sense to quit the interdependence advantages of civilized life. If (as with war torn regions) one’s security and rights are under threat, or if (as in the world’s numerous weak fully independent states) conditions are so poor that society has lost its preexisting capability to deliver services, or if (as with historic colonies) one is subject to continuous exploitation by a higher power―under such conditions one may be justified in grabbing a rifle, bundling up the family, and heading for the woods. To some extent, some of the later conditions may indeed apply to Catalonia’s association with Spain―but none of them apply to Scotland’s relationship with the United Kingdom. Scotland’s partially independent union with the UK brings substantial advantages that would not be available under full independence.

True nationalists do not seek a political alternative (like full or partial independence) for its own sake or because it is an article of faith. Rather, they seek out alternatives that best fulfill the economic, security, political and other interests of their nationality. They refrain from needlessly throwing advantages away. It may however still be the case that SNP leaders have a winning strategy. If pushing for a self-damaging divorce with the UK is merely a ploy to win even greater powers as a partially independent territory, they may in fact have a strategy that could validate their nominally nationalist credentials.

David A. Rezvani, D.Phil. Oxford University, has taught courses in international and comparative politics at Dartmouth College, Harvard University, MIT, Trinity College, Boston University, and Oxford University. He is a visiting research assistant professor and lecturer at Dartmouth College. He is the author of Surpassing the Sovereign State: The Wealth, Self-Rule, and Security Advantages of Partially Independent Territories.

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Image credit: The modern architecture of the scottish parliament building in Edinburgh. © andy2673 via iStockphoto.

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6. Transparency at the Fed

economic policy with richard grossman

By Richard S. Grossman


As an early-stage graduate student in the 1980s, I took a summer off from academia to work at an investment bank. One of my most eye-opening experiences was discovering just how much effort Wall Street devoted to “Fed watching”, that is, trying to figure out the Federal Reserve’s monetary policy plans.

If you spend any time following the financial news today, you will not find that surprising. Economic growth, inflation, stock market returns, and exchange rates, among many other things, depend crucially on the course of monetary policy. Consequently, speculation about monetary policy frequently dominates the financial headlines.

Back in the 1980s, the life of a Fed watcher was more challenging: not only were the Fed’s future actions unknown, its current actions were also something of a mystery.

You read that right. Thirty years ago, not only did the Fed not tell you where monetary policy was going but, aside from vague statements, it did not say much about where it was either.

800px-Federal_Reserve

Given that many of the world’s central banks were established as private, profit-making institutions with little public responsibility, and even less public accountability, it is unremarkable that central bankers became accustomed to conducting their business behind closed doors. Montagu Norman, the governor of the Bank of England between 1920 and 1944 was famous for the measures he would take to avoid of the press. He adopted cloak and dagger methods, going so far as to travel under an assumed name, to avoid drawing unwanted attention to himself.

The Federal Reserve may well have learned a thing or two from Norman during its early years. The Fed’s monetary policymaking body, the Federal Open Market Committee (FOMC), was created under the Banking Act of 1935. For the first three decades of its existence, it published brief summaries of its policy actions only in the Fed’s annual report. Thus, policy decisions might not become public for as long as a year after they were made.

Limited movements toward greater transparency began in the 1960s. By the mid-1960s, policy actions were published 90 days after the meetings in which they were taken; by the mid-1970s, the lag was reduced to approximately 45 days.

Since the mid-1990s, the increase in transparency at the Fed has accelerated. The lag time for the release of policy actions has been reduced to about three weeks. In addition, minutes of the discussions leading to policy actions are also released, giving Fed watchers additional insight into the reasoning behind the policy.

More recently, FOMC publicly announces its target for the Federal Funds rate, a key monetary policy tool, and explains its reasoning for the particular policy course chosen. Since 2007, the FOMC minutes include the numerical forecasts generated by the Federal Reserve’s staff economists. And, in a move that no doubt would have appalled Montagu Norman, since 2011 the Federal Reserve chair has held regular press conferences to explain its most recent policy actions.

421px-European_Central_Bank_041107

The Fed is not alone in its move to become more transparent. The European Central Bank, in particular, has made transparency a stated goal of its monetary policy operations. The Bank of Japan and Bank of England have made similar noises, although exactly how far individual central banks can, or should, go in the direction of transparency is still very much debated.

Despite disagreements over how much transparency is desirable, it is clear that the steps taken by the Fed have been positive ones. Rather than making the public and financial professionals waste time trying to figure out what the central bank plans to do—which, back in the 1980s took a lot of time and effort and often led to incorrect guesses—the Fed just tells us. This make monetary policy more certain and, therefore, more effective.

Greater transparency also reduces uncertainty and the risk of violent market fluctuations based on incorrect expectations of what the Fed will do. Transparency makes Fed policy more credible and, at the same time, pressures the Fed to adhere to its stated policy. And when circumstances force the Fed to deviate from the stated policy or undertake extraordinary measures, as it has done in the wake of the financial crisis, it allows it to do so with a minimum of disruption to financial markets.

Montagu Norman is no doubt spinning in his grave. But increased transparency has made us all better off.

Richard S. Grossman is a Professor of Economics at Wesleyan University in Connecticut, USA and a visiting scholar at Harvard University’s Institute for Quantitative Social Science. His most recent book is WRONG: Nine Economic Policy Disasters and What We Can Learn from Them. His homepage is RichardSGrossman.com, he blogs at UnsettledAccount.com, and you can follow him on Twitter at @RSGrossman. You can also read his previous OUPblog posts.

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Image credits: (1) Federal Reserve, Washington, by Rdsmith4. CC-BY-SA-2.5 via Wikimedia Commons. (2) European Central Bank, by Eric Chan. CC-BY-2.0 via Wikimedia Commons.

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7. Childrens Writers and Illustrators of British Colombia

Check out the CWILLBC...Childrens Writers and Illustrators of British Colombia.

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8. Feel My Pain: The Federal Taxpayers’ Subsidy of Bill Clinton

Edward A. Zelinsky is the Morris and Annie Trachman Professor of Law at the Benjamin N. Cardozo School of Law of Yeshiva University. He is the author of The Origins of the Ownership Society: How The Defined Contribution Paradigm Changed America. In the article below he looks at the Clinton’s federal tax returns.

President and Senator Clinton’s federal tax returns provide much fodder for commentators who are debating a diverse set of questions in light of those returns: Has Mr. Clinton understandably maximized his post-presidential income in our celebrity-crazed culture – or has he exploited the presidency for unseemly financial gain? Does the Clintons’ private foundation reflect a worthy model of charitable giving – or the federal fisc’s subsidization of Senator Clinton’s presidential candidacy? Was Mr. Clinton financial relationship with Yucaipa appropriate for a former president – or for the spouse of a prospective president?

The Clintons’ tax returns raise one further issue which also requires public discussion: The federal subsidy the Clintons have received over the last seven years while earning in excess of $100 million. Mr. Clinton’s aggressive pursuit of post-presidential income is incompatible with the extensive public support he has received from federal taxpayers since leaving office. That public support was designed to preclude the nation’s chief executives from facing financial hardship after their terms of office. It was not intended to subsidize the aggressive pursuit of a post-presidential fortune.

The federal taxpayer’s subsidy of Mr. Clinton has several components. First, as a former president, Mr. Clinton is entitled to receive, for the remainder of his life, the salary of a cabinet secretary. That salary is today $191,000 per annum. In addition, as a former president, Mr. Clinton also receives, at taxpayer expense, “suitable office space appropriately furnished and equipped.” Mr. Clinton’s office in New York City costs federal taxpayers over $700,000 per year to lease and operate. Federal taxpayers also defray the salary and benefits for office staff and some of Mr. Clinton’s travel outlays. The General Services Administration currently budgets for all of these costs a yearly total of $1,162,000 for Mr. Clinton. The equivalent annual figures for former President Bush and former President Carter are $786,000 and $518,000 respectively.

In addition, Mr. Clinton is also entitled, at taxpayer expense, to Secret Service protection for the remainder of his lifetime – even though, as president, Mr. Clinton signed legislation limiting Secret Service protection for his successors to the first ten years after they leave office.

For most Americans, Mr. Clinton’s package would constitute a heady lifestyle. For President and Senator Clinton, however, this post-presidential package merely provided a tax-financed base for the aggressive pursuit of unprecedented financial gain for a former chief executive.

Mr. Clinton has apparently treated as tax-free much of the federal largesse he has received. While the Clintons’ federal tax returns report as taxable income his cabinet-level salary payments, he has apparently elected to exclude from his taxable income the other benefits he receives, namely, his federally-financed office, staff, travel costs and protection.

If the Clintons had treated these items as taxable, they most likely would have been reported on their Forms 1040 on line 21 for “other income”. On the Clintons’ 1040 for 2006, line 21 is blank, suggesting that they did not include in income the office, staff, travel costs or protection provided to them by federal taxpayers.

The tax-free treatment of this federal subsidy of Mr. Clinton makes it particularly valuable for him.

This post-presidential package and the federal subsidy it represents were not intended as a conventional deferred compensation arrangement. They instead reflect the judgment that former presidents should not be required to hustle in the marketplace after they leave office.

The story of an impoverished Ulysses Grant, financially-impelled to write his memoirs as he was dying of cancer, is an iconic image of American history. From this tragedy, the world received one of the great military autobiographies of all time. However, most Americans would prefer that the nation’s former leaders not confront the kind penury which plagued Grant at the end of his life.

The immediate stimulus for the modern post-presidential compensation package was the report that former president Truman lacked the resources to return his mail from the American public.

This post-presidential package was designed to preclude Grant’s and Truman’s successors from experiencing the financial problems they confronted. It was not intended to serve as a federal subsidy for the aggressive pursuit of a post-presidential fortune.

President Clinton is not required to accept all or any of the proffered subsidy from the federal Treasury. He can also make a payment to the federal fisc reimbursing it, in whole or in part, for the costs of this subsidy. Such reimbursement could, for example, be geared to the taxes Mr. Clinton would pay if his post-presidential benefits were treated as taxable income.

The federal taxpayers provide post-presidential benefits so that former chief executives will not replicate the unfortunate financial history of Grant or even the more moderate financial discomfort in which President Truman found himself. We do not subsidize former presidents so that they may pursue lucrative private sector careers. As a federal taxpayer subsidizing Mr. Clinton’s lifestyle, I hope he feels my pain.

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9. Tax “Old” Wealth By Abolishing the GST Grandfather Exemption

By Edward Zelinsky

In light of the Democratic party’s control of both houses of Congress and the White House, it is probable that the federal government will continue to levy an estate tax when affluent decedents transmit their wealth to their descendants. The most likely possibility is that Congress will continue to exempt decedents’ estates valued less than $3.5 million while it taxes estates exceeding that threshold amount. In light of President Obama’s statements on the subject, it is also probable that such excess will taxed at a 45% rate when a decedent dies and leaves his wealth to his descendants.

Important details remain to be determined, e.g., whether the $3.5 million federal estate tax exemption will be adjusted annually for increases in the cost of living; whether various estate tax planning techniques such as family partnerships will be curbed or eliminated.

How ever these matters are ultimately resolved, the legislation perpetuating the federal estate tax should contain a provision subjecting to federal taxation all large intergenerational transfers of family wealth. Specifically, Congress should repeal the grandfather exemption from the federal generation skipping tax (GST) for irrevocable trusts established on or before September 25, 1985. This exemption unfairly immunizes from federal taxation transfers at death of “old” wealth while economically equivalent transfers of new wealth are taxed.

As an historic matter, the federal estate tax was often avoided through the use of so-called generation skipping trusts. When a decedent established such a trust, the trust continued for his children, grandchildren and great-grandchildren with no further federal estate taxation being due whenever any of these lineal descendants themselves subsequently died.

The term “generation skipping trust” was a misnomer. The trust didn’t skip any generations. The tax did. Families could continue to enjoy and grow inherited wealth in trust without paying federal estate taxes.

In 1986, Congress prospectively outlawed this planning technique by imposing the federal GST. The GST backstops the federal estate tax by assessing a tax on a death-related transfer of wealth in trust whenever an equivalent transfer outside of a trust would trigger the estate tax. Thus, with the GST in place, families can no longer use trusts to avoid taxation on intergenerational transmissions of large fortunes. Rather, federal taxation must be paid at least once in every generation.

However, Congress grandfathered from the GST transfers of wealth from trusts which were in existence and irrevocable on September 25, 1985.

This exemption creates for federal tax purposes an unfair and unconvincing distinction between new wealth (think Michael Bloomberg) and old wealth (think the Kennedys and the Rockefellers). Because of the federal GST, families inheriting new wealth now pay a federal estate tax or its equivalent at least once every generation. However, families inheriting old wealth live estate-tax free by virtue of the grandfathered status of tax-avoiding trusts established by such families’ patriarchs and matriarchs on or before September 25, 1985.

There are respectable arguments for and against federal estate taxation. However, if there is to be an estate tax, there is no convincing reason to treat differently old wealth from new wealth.

If, as the President Obama and the current Congress apparently believe, federal estate taxation represents sound social and tax policy, there is no warrant for continuing to exempt from such taxation some families simply because they had the good luck to make their fortunes before 1985. As part of its legislation continuing the federal estate tax, Congress and the President should eliminate the immunity from generation skipping taxation for intergenerational wealth transfers accomplished by irrevocable trusts established on or before September 25, 1985. For federal tax purposes, all inherited wealth should be taxed the same, whether it is “old” wealth or “new” wealth. The GST grandfather exemption should be abolished.


Edward A. Zelinsky is the Morris and Annie Trachman Professor of Law at the Benjamin N. Cardozo School of Law of Yeshiva University. He is the author of The Origins of the Ownership Society: How The Defined Contribution Paradigm Changed America.

2 Comments on Tax “Old” Wealth By Abolishing the GST Grandfather Exemption, last added: 2/11/2009
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10. Used to be is the reason …


There used to be a middle class, strong and upwardly mobile, many house holds only needed one bread winner and divisions between the classes were blurred most times.
This system did many things good for our nation, it gave the poorest of our people a thought that there was a way forward and out of their poverty by degrees. The fact that they may not be instantly rich was tempered by the fact the a comfortable life was attainable and they didn’t have to be a Basketball star or drug dealer ( these days one in the same some times) to get out of the slums and grip of poverty. With no middle class the view from the bottom seems imposable unless you go for the only channels left for you to advance in with no middle resting place. Greed will, it seems , always be with us and lead to gang mentality among the rich as well as the poor if there is no buffer. Them or us leads to gangs on one side and hired mercenaries on the other for protection, neither of which is a healthy way to live, just ask them in Iraq or Afghanistan, Mexico, you name the country.
With no middle class there becomes a giant pool of potential soldiers with no other options and a dangerous environment.
Creating and maintaining a large and stable middle class is the best way to stabilize societies in my view. Giving them enough wealth so that one person in the partnership can physically stay with the children and raise them in communities where all the parents have a say and control of their lives and know that values are taught not from the school where you send them but at home with a parent there to provide support and strength when children go astray. A society where it doesn’t matter if God is taught in school because he is taught at home by parents who have the time to watch their children and instill the values they want their children to have. Schools need more wood shops, home economics classes, metal shops , all the classes that teach ways to work. They need art and athletics as well to keep their students well rounded and give more opportunities for them to find things that they like and do well in that are constructive.
Government needs to stop the well-fair state mentality and start the work ethics again. Stop regulating safety and make it the responsibility of the people as individuals. We may have some stupid mistakes made and innocent people hurt now and then but we will not have to have a camera on every corner or prisons overflowing with poor that had no place to advance. Government will naturally shrink with no need to legislate rules when the people are given adequate room to live lives that have meaning and attainable realistic goals.
Just my thoughts.
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1 Comments on Used to be is the reason …, last added: 4/16/2009
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11. Martian Happiness

Peter Singer, in an interview with Christine Smallwood at The Nation:

You're a utilitarian. Utilitarianism tries to maximize the net surplus of happiness over misery in the world. What if billionaire Larry Ellison's yacht makes him really, really happy?

This is what some call the utility monster argument. We would have to assume that Larry Ellison actually has capacities for happiness that are vastly greater than anyone else's. Ellison's yacht cost $200 million, and if we assume that $400 can repair an obstetric fistula, that means that the suffering relieved by 500,000 obstetric fistula repairs is not greater than the happiness that Ellison gets from his yacht. That, I think, is not physically possible. But if we ever encountered Martians who could convince us that they had a vastly greater capacity for happiness than we do, then it could be a problem.

Then the moral position would be to let the Martians colonize Earth and make us their slaves.

Yes, that does seem to be the implication of the theory. A lot of people do think that's a damning objection to utilitarianism.

1 Comments on Martian Happiness, last added: 5/18/2009
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12. Interesting 1500’s Trivia


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Have you ever thought about how things were in the 1500’s compared to now?  Here are a few facts you may not know about.

  1. Where did the saying “dirt poor” come from?
  2. How did the saying “bring home the bacon” get started?
  3. I am sure you have heard “raining cats and dogs”, but where did it originate?
  4. Where did the tradition of brides carrying a bouquet of flowers at a wedding come from?
  5. “Don’t throw the baby out with the bath water,” sounds peculiar right?  Well how did this saying get started?
  6. What do you think their food customs were like?

Now, let’s see if you got the answers correct!

  1. “Dirt poor” was when poor people had dirt floors.  Those that had money were able to obtain something to cover the dirt, but those that were poor were stuck with the dirt.
  2. The more wealthy people were able to buy pork, and when visitors would come they would hang up the bacon to show off.  The owners of the meat would cut a little piece off to share with their guests who weren’t as financially endowned.
  3. In houses that had thatched roofs, they had straw piled up high with no wood underneath, is where they kept their animals.  When it would rain it would become slippery and the animals would sometimes fall.
  4.  Back in the 1500’s, people would take a yearly bath.  A wedding would usually take place in July because the bride would take her yearly bath in May, and so by July she would not smell too horrible.  To help cover up the smell, the bride would carry a bouquet of flowers when they got married.
  5. When they took their yearly bath in the 1500’s,  they took them in a big tub filled with hot water.  They would not empty the water out until everyone was finished.  The man of the house was first, followed by other males and older sons, then the women and children.  They kept the babies until the end, when the water was at its dirtiest.  It was said to be so dirty that they could lose someone in it, and there was born the saying.
  6. The wealthy people were able to buy plates made of pewter.  Food with lots of acid would cause some lead to get into the food, which caused lead poisoning.  Needless to say, for about 400 years, tomatoes were considered poisonous. 

Another interesting fact about food:

Bread was divided by status.  Workers got the burnt bottom of the bread.  Family members got the middle of the bread.  Guests got the top, or the upper crust of the bread.   

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