Cascajun

The New York Times reports on Representative Charles Rangel’s expanding tax problems:

Representative Charles B. Rangel’s legal team is reviewing his tax records to determine whether the congressman received a homestead exemption on a house he owned in Washington while living in several rent-stabilized apartments in New York City.

[…]

Rent laws in New York City and the state require that tenants occupying rent-stabilized apartments use those units as their primary residences. At the same time, the District of Columbia’s Office of Tax and Revenue extends the homestead tax deduction only to properties that are primary residences.

[…]

Mr. Rangel, a 19-term congressman, has been under scrutiny since July, when The New York Times reported that a developer had allowed him to lease rent-stabilized apartments, including one that he used as a fund-raising office, in violation of state regulations.

He has since drawn criticism on other issues: his use of Congressional stationery to seek donations for a City University of New York school of public service that will bear his name; his failure to report on federal or state tax returns that he earned more than $75,000 in rental income from a villa he has owned in the Dominican Republic since 1988; and his failure to report that he had paid no interest for more than a decade on a mortgage extended to him to buy the villa.

This is really incredible; Rangel is chairman of the House Ways and Means Committee, which writes the nation’s tax laws and is one of the most powerful panels in Congress. I suppose he believes he is above those laws, as Rangel claims he has “done nothing morally wrong.”

If the Democrats were sincerely interested in bringing change to Washington, they would demand Rangel’s resignation.

UPDATE: More from the New York Times, “The Congressman, the Donor and the Tax Break.”

Congressional records and interviews show that Mr. Rangel was instrumental in preserving a lucrative tax loophole that benefited an oil-drilling company last year, while at the same time its chief executive was pledging $1 million to the project, the Charles B. Rangel School of Public Service at C.C.N.Y.

The company, Nabors Industries, was one of four corporations based in the United States that were widely criticized in 2002 and 2003 for opening offices in the Caribbean to reduce their federal tax payments. Mr. Rangel was among dozens of representatives from both parties who bitterly opposed those offshore moves and, in 2004, pushed unsuccessfully for legislation to make the companies pay more tax.

But in 2007, when the United States Senate tried to crack down on the companies, Mr. Rangel, who had recently been sworn in as House Ways and Means chairman, fought to protect them.

Amid the discussion of the NIC 2025 Project Leo Linbeck III gives a lesson on the creation of wealth in the comments of a post at the Belmont Club.

So, I haven’t read the entire report, and I doubt I will. Why? I started reading the executive summary, and on the first page, I read this:

In terms of size, speed, and directional flow, the transfer of global wealth and economic power now under way—roughly from West to East—is without precedent in modern history.

This sentence betrays, in one sentence, a level of historical and economic ignorance that should cast doubts upon the quality of everything that follows, indeed the 2025 effort itself, and the entire intelligence community. [Ed: to our readers, that’s a bit much, but don’t stop him, he’s on a roll…]

Let’s start with the economic. The idea of “wealth transfer” makes no sense. Let’s say I purchase a new Chinese-made drill press for $500. At the close of this transaction, I have the drill press, and the Chinese manufacturer has my $500. (I’m ignoring retail markups, distribution costs, taxes, etc.) Strictly speaking, there is no transfer of wealth. My personal balance sheet has $500 less cash, and $500 more PPE (property, plant, and equipment). My wealth, measured in either assets or equity, is unchanged.

Now, if the CIA report said that there had been a transfer of currency, that would be correct. But they could have characterized this as a transfer of equipment, and been equally correct. Neither is particularly meaningful in itself.

Wealth is created, not transferred. Strictly speaking, wealth is only transferred through gifts, like inheritances or charity. So the question is: what do we each do with our new asset? The Chinese probably put their $500 in the bank, which turns around and buys US treasury debt. So they get a whopping 0.5% return on their asset.

What about my drill press? Well, there are two things I can do with it: make something with it, or consume it. In the first case, let’s say I use it to make specialized parts for oilfield equipment. To make these parts, I need $10 worth of material, and I can sell the part for $25. Without the press, I can make 1 part per hour. With the press, I can make 2 parts per hour. I can make 5,000 parts before the drill press breaks. So, I’ve increased my hourly pay from $15 to $29.80 ($30 of profit, less 20 cents of drill press cost, or 10c per part times 2 parts in an hour). I have created a lot of wealth in the process: if I work 2,000 hours, I’ve created $29,600 per year of L3 wealth. Nice.

My other choice is to consume the drill press. I do this by smearing it with elephant dung and bolting it onto a picture of the Virgin Mary, and hanging this in my 20-month-old’s room. This way, I can enjoy the profound message radiating from my modern art installation every time I change his diaper.

So, the problem we’ve got is not “wealth transfer.” The problem is that we’ve been consuming our assets at a faster rate than we’ve been creating the wealth that feeds our consumption. The result is a correction, commonly called a recession. For a while, we consumer fewer assets and create more wealth. Eventually, things get back into balance. That’s bad for struggling artists, but it’s good for wealth creators. But if we use the recession as an excuse for taking away the newly created wealth from its creators and give it to artists through a generous NEA grant so that they can “spread it around” in the form of pachyderm poop, well, the recession will last a lot longer. But I digress.

Bottom line: the “wealth transfer from West to East” notion is intellectually sloppy. What they should have said was there there is enormous wealth creation taking place in low-income, highly-populated countries in the developing world. But this probably would sound too positive to make it past the thought police in charge of this document.

If we take the CIA report as saying that there has been a huge “currency transfer” instead of a “wealth transfer” (a notion I attacked above), their claim might make some sense. But to claim it is without precedent in human history is ridiculous.

The right way to measure currency transfer is to think about it in terms of the transfer of liquid assets. These are assets that can quickly and easily be converted into other assets. These days, we use national currencies for this purpose, but historically the liquid assets of choice were precious metals like gold.

Over the past 5 years, it has been claimed in the Washington Post that oil-producing countries and companies have received $2 trillion. Let’s use this number, although it does not account for any costs. During that same period, the total global economic production has been more than $250 trillion, so this means the transfer has amounted to less than 1%. This is, well, not a big number.

But maybe they meant a transfer of relative wealth. Sorry, that doesn’t work any better. In terms of relative wealth, from 1970 to 1998, the US share of world GDP fell from 22.0% to 21.9%. By 2007, it had risen to 25.3%. Oops! Wrong direction. It’s getting better!

Still, let’s look at another change in relative wealth from history (from Angus Maddison):

The British Empire, from 1820 to 1870: 5.2% to 24.1%
China, same time period: 32.9% to 17.2%

This is the obvious example. There are probably others.

Unprecedented? I do not think that word means what they think it means.

From the PeoplesARTCoOP:

The obliviation of antediluvian excrescences postulates a didactic promorphistic inclusionary ascensional sine qua non, perhaps rectifying the recidivisual deconcurrence of reductive influences, remaining not ineffectual per se though expressing a certain contradissonance trending towards mass disembarkation. We seek to reconfirm the aforementioned while attaining a hitherto unforeseen unknowability.

I know those guys; they really do trend toward a mass disembarkation.

Was Earth Headed for the Mother of All Ice Ages Before Global Warming?

Before we humans came along with our Industrial Revolution and our greenhouse gases, the earth was hurtling towards an intense ice age that could have covered much of the northern hemisphere with deep ice sheets as soon as 10,000 years from now, according to a tentative new study.

There’s quite a bit of commentary about climate change and ice ages on the NYT science blog.

The Wall Street Journal reports: Intelligence Policy to Stay Largely Intact. “President-elect Barack Obama is unlikely to radically overhaul controversial Bush administration intelligence policies, advisers say, an approach that is almost certain to create tension within the Democratic Party.”

The causes of the current financial crisis are complicated, just wait until we start trading carbon. Lawrence Solomon writes about risk in the carbon allowance trading markets:

The ‘marketplace’ for carbon allowances will be one in which both supply and demand are set by governments, in which intense corporate lobbying for changes to both supply and demand is all but certain, and in which moral hazard — in the form of an expectation of a government bailout — is an absolute certainty. Valuing the toxic instruments created by Fanny Mae and Freddy Mac, that corrupted the pool of debt securities, will seem like child’s play in comparison.”

Hat tip: Belmont Club

Wikipedia defines conscription as “a general term for involuntary labor demanded by an established authority.”

This is from President-elect Barack Obama’s official transition web site (This is a link to the original, cached version. See the update comment thread, below.):

Obama will call on citizens of all ages to serve America, by developing a plan to require 50 hours of community service in middle school and high school and 100 hours of community service in college every year.

This sounds like conscription to me. I understand this is a well meaning plan, but as the saying goes: “The road to hell path to destruction is paved with good intentions.”

Update: The America Serves web site has been updated since my post and no longer uses the word require. It also includes details about refundable tax credits. As it reads now, Obama’s America Serves project is a substantially different proposition than outlined previously. I’ve updated my link above to hit the cached version. I’m not sure how long that will work.

As I noted in the comments, I think it’s fine for local school districts to include public service in their curriculum. I don’t believe the federal government should mandate it, especially for college. I’m all for public service, as long as it’s voluntary. I have volunteered (i.e. served) in the military and with various civic organizations. The experience was great and I encourage everyone to volunteer.

Election Day is finally here. Go cast your ballot, if you haven’t already. Then take some advice from Glen Reynolds, “Whoever wins, chill a bit.”