Sunday, December 9, 2012

Phantom Tax Credit for Elderly and Disabled


A Tax Credit in Name Only (TCNO)

- By: Larry Walker, II -

A couple of weeks ago I wrote about how during this year’s continuing education courses it suddenly dawned on me that the base amounts used in calculating the taxability of social security benefits are exactly the same in tax year 2012 as they were in 1985. Well here’s another example of elder abuse. Congress has failed to inflation adjust the limitations on the Credit for the Elderly or the Disabled since it was last upgraded back in 1984. I am frankly surprised that this credit is still around, since in its present form it’s completely useless to 99.999% of taxpayers. Why is it still taking up space in IRS instruction booklets?

Back in 1981, when my study of tax law began, it was known simply as the Credit for the Elderly. It initially applied to persons over the age of 65, or under 65 if they had taxable income from a public retirement system. In tax year 1984 it became known as the Credit for the Elderly and the Permanently and Totally Disabled. It was also in 1984 that the same limitations that are in place today were established. Since 1988 it has been known simply as the Credit for the Elderly or the Disabled.

Although it sounds appealing, due to the failure to adjust for inflation, it has become a tax credit in name only (i.e. completely useless). How’s that, you say? Well, like I said, its name may have changed over the years, but the initial amounts and income limitations have not.

Maximum Credit

The maximum amount of the credit is limited to 15.0% of the following initial amounts, based on one’s filing status. (Note: For the disabled, the initial amounts used in calculating the tax credit cannot be more than the amount of the taxpayer’s taxable disability income.)

  • $5,000 if Single, Head of Household or Qualifying Widow(er)

  • $7,500 if Married Filing Joint and both spouses qualify

  • $5,000 if Married Filing Joint and only one spouse qualifies

  • $3,750 if Married Filing Separate and you did not live with your spouse at any time during the tax year.

Thus, on paper, the maximum amounts of this nonrefundable tax credit (at 15.0% of the initial amounts) are limited to the following:

  • $750 if Single, Head of Household or Qualifying Widow(er)

  • $1,125 if Married Filing Joint and both spouses qualify

  • $750 if Married Filing Joint and only one spouse qualifies

  • $562.50 if Married Filing Separate and you did not live with your spouse at any time during the tax year.

Since this is a nonrefundable tax credit, even if you are magically somehow able to qualify, you can only actually use the credit if you have a regular income tax liability. In other words, the credit cannot be used to offset self-employment taxes, penalties on retirement distributions, or other taxes found on lines 56 to 60 of Form 1040. The credit is figured on Schedule R and entered on line 53 of Form 1040.

Limitations

It sounds fantastic, and maybe it was in 1984. But since hardly anyone can qualify for the credit anymore, it’s really meaningless today. The main problem here is that the same income limitations in place in 1984 are in effect in 2012. So who can qualify today?

If your adjusted gross income (AGI) is equal to or greater than the following amounts, then you do not qualify for the tax credit.

  • $17,500 if Single, Head of Household or Qualifying Widow(er)

  • $25,000 if Married Filing Joint and both spouses qualify

  • $20,000 if Married Filing Joint and only one spouse qualifies

  • $12,500 if Married Filing Separate and you did not live with your spouse at any time during the tax year.

Additionally, if the nontaxable part of your Social Security and other nontaxable pensions is greater than the following amounts, you are also excluded from the credit. No, really.

  • $5,000 if Single, Head of Household or Qualifying Widow(er)

  • $7,500 if Married Filing Joint and both spouses qualify

  • $5,000 if Married Filing Joint and only one spouse qualifies

  • $3,750 if Married Filing Separate and you did not live with your spouse at any time during the tax year.

Finally, if one-half of your Excess Adjusted Gross Income (defined as adjusted gross income minus the following limits), plus the nontaxable portion of your pensions is greater than the initial amount of the credit, you are also disqualified.

  • $7,500 if Single, Head of Household or Qualifying Widow(er)

  • $10,000 if Married Filing Jointly

  • $5,000 if Married Filing Separate and you did not live with your spouse at any time during the tax year.

In other words, you must reduce the initial amount of the credit, by one-half of your Excess AGI and your total nontaxable pensions.

The Problem

Think inflation. The average monthly Social Security benefit for a retired worker was about $1,230 at the beginning of 2012. So a single retiree with an average benefit would receive around $14,760 per year. A married couple with an average benefit would receive around $29,520 per year. So with that, let’s see whether or not it’s even possible to qualify for this tax credit.

Example 0: Let’s say you are single, over the age of 65, and receive social security benefits of $14,760. Since social security isn’t taxable until half of your social security plus your other income (both taxable and tax exempt) exceeds $25,000, if that is your only source of income, then none of it is taxable, and the Credit for the Elderly or the Disabled doesn’t apply. So let's try to figure out the precise circumstances under which the credit does apply.

  1. In order for 50% of your social security benefits to be taxable, your income from other sources (both taxable and tax exempt) must be greater than $17,620 [17,620 + 7,380 (½ of social security benefits) = $25,000].

a) But if this is the case, then your adjusted gross income is also likely to be more than the AGI limit of $17,500, so you will not qualify for the credit.

b) And since only half of your social security is taxable, because the nontaxable portion of $7,380 (14,760 / 2) is greater than the $5,000 limit for nontaxable pensions, you don’t qualify.

c) Also, since your adjusted gross income is likely greater than $17,500, subtracting the limit for excess adjusted gross income of $7,500 leaves $10,000, which when divided by 2 is equal to or greater than the initial amount of $5,000, which means you don’t qualify. Got it?

  1. In order for 85% of your social security benefits to be taxable, your income from other sources (taxable and tax exempt) must be greater than $26,620 [26,620 + 7,380 (½ of social security benefits) = $34,000]. But then, you are also likely disqualified due to both (a) and (c) under #1 above. Got that?

  1. And there’s another problem. Because the standard deduction for a single person over the age of 65 in 2012 is $7,400 [5,950 + 1,450], and the personal exemption allowance is $3,800, your adjusted gross income must be greater than $11,200 to even have an income tax liability. In other words, if your adjusted gross income is under $11,200, you don’t qualify. But if your AGI is between $11,200 and $17,500, and the nontaxable portion of your social security benefits is less than $5,000 (item #1 (b)), then you might qualify.

a) However, if your AGI is between $11,201 and $17,499, then in this example, the nontaxable portion of your social security benefits will be greater than $5,000 which disqualifies you under item #1 (b).

  1. Even if you don’t receive social security, and the nontaxable portion of your other pension income is less than the $5,000 limit, when calculating the credit, you must then subtract one-half of your excess AGI plus your nontaxable pensions, from the initial credit amount, in order to determine your limited tax credit. So at the low end, your Excess AGI would be $3,700 (11,200 – 7,500), and at the high end it would be $10,000 (17,500 – 7,500). But this poses further problems.

a) The initial amount of your tax credit is limited to $5,000, but this must be further reduced by one-half of your excess AGI, which will either be $1,850 (3,700 / 2) at the low end, or $5,000 (10,000 / 2) at the high end, plus the nontaxable amount of your pensions (i.e. up to $5,000). So at the low end, assuming a nontaxable pension of $5,000, the initial amount of your credit is limited to -0- (5,000 – 1,850 – 5,000), and at the high end it is also reduced to -0- (5,000 – 5,000 – 5,000).

  1. Finally, if none of your income is from social security, you don’t have any other nontaxable pensions, and assuming all other criteria are met, then in order to qualify for the tax credit, the adjusted gross income of a single taxpayer is limited to being between $11,201 and $17,499. Simple, right?

a) However, since the amount of the actual tax credit is further limited to 15.0% of the initial amount (after the reduction of one-half of excess AGI), the maximum amount of the credit can be no greater than $472.50 [(5,000 – ((11,201 – 7,500) / 2)) * 15.0%], and this would be further limited to the amount of income tax actually owed.

b) At the low-end, a single retiree with AGI of $11,201 qualifies for the maximum credit of $472.50 [(5,000 – ((11,201 – 7,500) / 2)) * 15.0%], but would have an income tax liability of $0 [(11,201 – 11,200) * 10.0%]. Thus, the credit is useless.

c) In the mid-range, a retiree with AGI of $14,350 would have a tax liability of $315 [(14,350 – 11,200) * 10.0%], and would qualify for a tax credit of $236 [(5,000 – ((14,350 – 7,500) / 2)) * 15.0%]. That would about cover the cost of calculating this monstrosity.

d) At the high-end, a retiree with AGI of $17,499 would have a tax liability of $630 [(17,499 – 11,200) * 10.0%], and would qualify for a tax credit of $0 [(5,000 – ((17,499 – 7,500) / 2)) * 15.0%]. Thus, the credit is once again useless.

Summary: In order for a single retiree to qualify for the Credit for the Elderly or the Disabled, his Adjusted Gross Income must fall between $11,201 and $17,499, and he must either not be on social security, or the nontaxable portion of his combined pension income must be less than $3,150 (5,000 – 1,850). The mid-range amount of the final tax credit for such a rare individual would be around $236 (between -0- and $472.50), while the maximum credit would only be available against an income tax liability of -0-. Thus, in order to qualify for the optimal credit, a single retiree would have to have an adjusted gross income of around $14,350, with no income from social security and no other nontaxable pension income.

The results for married couples and the disabled are similar. The example above is just a long way of proving that the Credit for the Elderly or the Disabled has become obsolete due to the failure of Congress to adjust its 1984 initial amounts and limitations for inflation.

Solution

The table below shows the limitations in force in 1984 and 2012, along with the inflation adjusted amounts. As you can see, a simple inflation adjustment would more than double the income limitations, likely causing at least some elderly and disabled taxpayers to qualify. So why hasn’t this been done? Is it too hard, or has Congress simply forgotten?

The maximum amount of the credit would increase to 15.0% of the following initial amounts, based on filing status. (Note: For the disabled, the initial amounts used in calculating the tax credit cannot be more than the amount of the taxpayer’s taxable disability income.)

  • To $11,131 from $5,000 if Single, Head of Household or Qualifying Widow(er)

  • To $16,697 from $7,500 if Married Filing Joint and both spouses qualify

  • To $11,131 from $5,000 if Married Filing Joint and only one spouse qualifies

  • To $8,348 from $3,750 if Married Filing Separate and you did not live with your spouse at any time during the tax year.

Thus, on paper, the maximum amounts of the nonrefundable credit (at 15.0% of the initial amounts) would increase as follows:

  • To $1,670 from $750 if Single, Head of Household or Qualifying Widow(er)

  • To $2,505 from $1,125 if Married Filing Joint and both spouses qualify

  • To $1,670 from $750 if Married Filing Joint and only one spouse qualifies

  • To $1,252 from $562.50 if Married Filing Separate and you did not live with your spouse at any time during the tax year.

Now that’s more like it. It’s not all that, but it’s better than what we have today. Inflation Indexing should be an integral part of tax reform. It’s not right to screw our seniors and disabled out of a tax credit, when an automatic adjustment is granted in other areas of the tax code. We should have more respect for the elderly and disabled.

The following example is based on one used by the IRS. It calculates the tax credit before and after the proposed inflation adjustments:

Example 1 (before) – You are 66 years old and your spouse is 64. Your spouse is not disabled. You file a joint return on Form 1040. Your adjusted gross income is $14,630. Together you received $3,200 from social security, which was nontaxable. You figure your credit as follows:

You cannot take the credit since your nontaxable social security (line 2) plus your excess adjusted gross income (line 3) is more than your initial amount on line 1.

Example 1A (after) – The same circumstances as in example 1, except that all limitations have been adjusted for inflation.

Your potential tax credit is now $1,189.65 which will be limited by the amount of income tax shown on line 46 of your Form 1040 tax return.

Example 1B – This is the income tax calculation for the couple in Examples 1 and 1A.

Since the sum of the taxpayers' standard deduction, additional standard deduction for one spouse being over the age of 65, and the deduction for personal exemptions are greater than their adjusted gross income; the taxpayers' do not have a tax liability. Thus, in this case, although they qualify for the tax credit in Example 1A, they are not able to, and do not need to use it. However, what’s changed is that after the inflation adjustment, the couple could potentially have up to $38,000 of adjusted gross income (or around $24,000 more than in the example) and still qualify for the tax credit.

Conclusion

The Credit for the Elderly or the Disabled is a Tax Credit in Name Only (TCNO). In its present state it is completely useless to 99.999% of Americans. It’s easier for a camel to go through the eye of needle than to qualify for this phantom credit. Its initial amounts and limitations should immediately be adjusted for inflation (although the numbers probably need a bit more tweaking). If Congress refuses to make these simple adjustments, then all references to this tax credit should be purged from the Internal Revenue Code, from all income tax forms and publications, and from the IRS’s computers. It costs money to print B.S., and frankly, it’s a waste of time to calculate and explain to a senior or disabled person why they are not qualified.

Related:

Taxing Social Security Taxes

#Taxes

References:

U.S.Inflation Calculator

2012 Schedule R

2000 Schedule R

1990 Schedule R

1985 Schedule R

1984 Schedule R

1983 Schedule R

1981 Schedule R

1980 Schedule R

Wednesday, December 5, 2012

The Fiscal Responsibility Cliff


Talk About Crazy Bastards...

- By: Larry Walker, II -

Hiking tax rates now, in advance of the pending 2013 Medicare Tax Increase from 2.9% to 3.8% on those making $200K ($250K if married), the new 3.8% Medicare Tax on Investment Income including capital gains, the 2014 health insurance tax on individuals of $695 to $2,085 (plus inflation) depending on family size, and the 2014 shared responsibility penalty of $2,000 per employee on companies with 50 or more part-time employees (working 30 hours or more), probably isn’t wise. Legislator's must pare any further tax increases with the hikes already baked in the cake.

Many of the provisions commonly referred to as the Bush Tax Cuts were phased in gradually between 2003 and 2010 culminating in maximum favorability in 2010. Since Congress has already extended these temporary provisions for two years, I would have no problem with returning to the pre-2008 tax law right now (i.e. the laws in effect prior to the Stimulus package which only added to the current morass). I would hesitate to call removing the 2010 concessions and Stimulus subsidies a tax hike, because each were designed to be temporary in nature, not extended ad infinitum. However, if Congress insists on raising income tax rates, then any such increases should be gradual (i.e. phased in over a 7 to 10-year period), not jammed in all at once.

Lawmakers should be careful not to turn a blind eye to what’s already beneath the icing while cooking up the next barrage of tax law changes. In my opinion, the Obama Administration is not qualified to address income tax matters; it lacks mathematical fortitude. Its words are mere noise, good for little more than forefinger exercise in locating the mute button, at least for me. You crazy bastards have already screwed up everything for three years in a row. We really don't have the time or patience for anymore of this nonsense. You've talked enough. It's time to get off the T.V. shows and do some work. Step one should be a mandatory crash course in income tax law for all legislators and the White House. You really should take a timeout to contemplate the monstrosity you've already created before making another move.

References:

Under Obamacare, Medicare Double Taxation Begins in 2013

Obamacare’s Effect on Small Business

Get ready to fill out Obamacare’s individual mandate tax form

IRS issues proposed regs. on 3.8% net investment income tax

Proposed regulations - Net investment tax

Related: #TAXES

Sunday, December 2, 2012

Tax Fairness | Reverse Parity

It’s Magic!

- By: Larry Walker, II -

The current 2012 Tax Rate Schedule is shown below. Applying the Obama-Doctrine, single filers making over $200,000, and married filers making over $250,000 would get a tax hike. However, since there is no cut-off at either $200,000 or $250,000 in the current tax rate schedule, the 33% bracket would need to be split, resulting in a sharp tax increase for a handful of unfortunate individuals.

Thus, taxpayers with taxable incomes between $200,000 ($250,000 if married) and $388,350 would see their taxes rise by 20%, while those with incomes over $388,350 would get that plus a marginal increase of 13.1% on income above the new ceiling (see tables below).

So what’s the effect?

We’ll use the married filing joint filing status in the following examples to determine the overall effect.

# 1 – If you’re married and have taxable income of $400,000, your taxes will increase by 19.4%, or by $9,667.

# 2 – If you’re married and have taxable income of $1,000,000, your taxes will increase by 14.3%, or by $37,267.

# 3 – If you’re married and have taxable income of $10,000,000, your taxes will increase by 13.2%, or by $451,267.

# 4 – If you’re married and have taxable income of $20,000,000, your taxes will increase by 13.2%, or by $911,267.

# 5 – If you’re married and have taxable income of $100,000,000, your taxes will increase by 13.2%, or by $4,591,267.

What’s wrong with this picture?

First of all, those with taxable incomes below $200,000 ($250,000 if married) get to keep the tax rates they’ve had for the last 10 years, plus all the other garbage in the tax code, which is being called –– a tax cut. So in other words, for 95% of Americans, nothing is the new something.

Secondly, those who already pay the highest tax rates will receive a 13.2% to 20.0% tax hike, which is being called –– fair. However, tax rates will go up the most not on millionaires and billionaires, but rather on single individuals with taxable incomes between $200,000 and $388,350 and married couples with taxable incomes between $250,000 and $388,350.

So why not just admit it? This isn’t a tax cut for the middle-class. And it’s not so much a tax hike on millionaires and billionaires. What it represents is a massive tax hike on those with taxable incomes between $200,000 ($250,000 if married) and $388,350, and a more modest hike on millionaires and billionaires. Got it?

If a top marginal rate of 33% has been proven to raise more revenue than higher rates, due to the Laffer Curve (see video: Do High Taxes Raise More Money?), then why are we even talking about raising rates above the 35% mark? Aren’t rates already too high? Couldn’t we achieve the same parity by keeping top rates where they are and simply cutting tax rates on the 95% of Americans with incomes below the new ceiling? Why, yes we could. And here’s what the new tax rate schedule would look like if we were to do just that.

The 10%, 15%, 25%, 28% and 33% brackets are reduced by 13.2% (the same amount of increase currently being proposed on the wealthy), and are thus lowered to 8.7%, 13.0%, 21.7%, 24.3% and 28.6%. Note that the 35% bracket is still lowered to include those with taxable incomes over $200,000 ($250,000 if married), so that those making between $200,000 ($250,000 if married) and $388,350 will still see a modest increase of around 6%, but isn’t this the group we we’re trying to screw anyway? Yep! So there you go.

You say, “But what will your plan do for the deficit”? I say, what does the one on the table do for the deficit? Score them both dynamically (skip the static nonsense) and see which plan raises more revenue in the long-term. Not that it really matters though, since the main goal here is fairness, right? Well, that’s what my plan achieves.

Reverse Parity Tax Effects

So here’s how the Obama-Doctrine stacks up against the reverse parity plan. At current tax rates, married taxpayers filing jointly pay the following taxes (see table below).

Under the Obama Doctrine, married taxpayers filing jointly get nothing at taxable incomes below $250,000, and realize a 13.1% (rounded down) tax increase at upper levels. This means income tax burdens would increase by $451,267 to $4,591,267 for those with taxable incomes between $10,000,000 and $100,000,000, respectively (see table below).

But under the Reverse Parity Plan, married taxpayers filing jointly will realize a 13.2% tax cut at taxable incomes below $250,000, and only negligible savings at upper levels. This means income tax burdens will decrease by $875 to $7,842 for married couples with taxable incomes between $50,000 and $250,000, respectively (see table below). At the same time, income tax burdens will fall by $5,074 for those with taxable incomes over $1,000,000, representing a negligible decline.

It’s the same thing the White House is striving for, except in reverse. The big difference is that under the reverse parity plan the middle-class gets a genuine tax cut, not just smoke and mirrors, while the upper-class pays an effectively higher tax rate, roughly 13.1% more than those with taxable incomes under $200,000 ($250,000 if married), and this is achieved without actually raising tax rates. The only exception, of course, is those poor saps stuck between taxable incomes of $200,000 ($250,000 if married) and $388,350, but that’s life, right?

It’s real simple. If ‘no change’ for 95% of Americans can be deemed a tax cut, then ‘no change’ for the remaining 5% can likewise be deemed a tax hike. It’s magic! Ninety five percent of taxpayers receive a stimulative tax cut, the top five percent get nothing, the Laffer Curve is respected, and fairness is restored. Problem solved. Now it’s time to tackle the real problem, those elusive spending cuts.

Related:

Taxing Social Security Taxes

#Taxes

Thursday, November 15, 2012

Taxing Social Security Taxes


The Fiscal Responsibility Cliff

- By: Larry Walker -

When I went to work for the IRS back in 1988, the first few weeks were spent in tax law courses. I distinctly remember, at the time, that the base amounts used in determining the taxability of Social Security benefits were $25,000 for single taxpayers and $32,000 for married taxpayers filing a joint return. For some reason when the topic came up this year, during annual continuing education, with all the talk of looming fiscal responsibility (errantly referred to as a cliff), combined with having been read the riot act by several seniors over the past year, it suddenly dawned on me that the base amounts are exactly the same in tax year 2012 as they were in 1985 –– $25,000 and $32,000. What’s wrong with this picture? The same thing that’s wrong with Barack Obama’s $250,000 top tax bracket argument, a failure to adjust for inflation.

My first brush with tax law was actually through a Junior College course in 1981. I helped prepare tax returns commercially for several years thereafter while attending college. Needless to say, I left the IRS in 1994 and moved on to brighter horizons. I returned to my first love in the year 2000 and am still involved in the industry today. With that out of the way, what’s both interesting and disturbing to me is the fact that Social Security benefits were tax-free prior to 1985, but then Congress, in its wisdom, changed the law to ensure that wealthy seniors were paying their fair share, which by my logic merely amounted to forcing them to pay taxes on the taxes they had already paid.

It was in 1985 that a neat little formula was devised whereby if one-half of a taxpayers Social Security benefits plus their other income (both taxable and tax-exempt) was more than the base amount (mentioned above), then up to half of their Social Security benefits would become taxable. As a consolation, if a senior’s sole source of income was Social Security, in other words if they were living near or below the poverty line, then none of the benefits were taxable.

According to the formula, if you are single or married filing separate and did not live with your spouse for the entire year, the base amount is $25,000. If you are married and file a joint return, the base amount is $32,000. And if you are married filing separate but lived with your spouse at anytime during the year, the base amount is $0. To determine how much of your benefits are taxable, you add one-half of your Social Security benefits to other income received from pensions, interest, dividends, capital gains, rental income, business income, tax-exempt interest, etc…, and then subtract from this the applicable base amount. If the result is positive, then the taxable amount of your Social Security benefits is the lesser of one-half of the result, or one-half of your Social Security benefits. Got it?

The obvious dilemma is that the base amounts are exactly the same today as they were in 1985 –– $25,000 and $32,000. Something is deftly wrong with this, because when adjusted for inflation the base amounts become $52,263 and $66,896. That’s a material difference, more than double. In my opinion, if Congress would simply index all limitations, base amounts and tax brackets for inflation (the AMT comes to mind), then the U.S. income tax system would be fair, but as it stands today for many it is not.

Making matters worse, beginning in 1994 Congress decided to up the ante. Taxing 50% of Social Security just wasn't enough for really rich old folks, so Congress added a second set of base amounts, whereby up to 85% of benefits could become taxable. To distinguish wealthier seniors from the rest, the original base amounts were raised by $9,000 for single filers and by $12,000 for joint filers. Thus, if one-half of your Social Security benefits, plus other income (both taxable and tax-exempt) was greater than $34,000 or $44,000, respectively, then up to 85% of the difference, or 85% of your Social Security benefits were taxable, whichever was less. The same amounts are in force today. There has been no inflation adjustment to the 85% base amounts since 1994.

If the 50% and 85% base amounts were rightly adjusted for inflation, then the former would rise from $25,000 and $32,000, to $52,263 and $66,896; and the latter would increase from $34,000 and $44,000, to $65,923 and $85,110 (see table below).

Now that’s more like it. It’s not all that, but it’s better than what we have today. Inflation Indexing should be an integral part of tax reform. It’s not right to screw our seniors out of money, when an automatic adjustment is granted in other areas of the tax code. We should have more respect for our elders. But even though my proposal would be an improvement, still the premise behind taxing Social Security benefits is errant.

Can you understand why so many seniors complain? Here’s what one fellow said to me recently, “What do you mean 85% of my Social Security is taxable? It wasn’t taxable at all last year. Just because I was finally able to make a little extra money this year, you mean to tell me that now I have to pay half of what I made in taxes? You’re telling me that I’m going to owe about half of what I’ve been able to save this year in taxes. I paid into the system my whole life, that money should be tax free. I might as well just stop working if I’m going to owe half of what I make in taxes, but then how am I supposed to live?”

I basically agreed with him. What he said is true. If you are self-employed and on Social Security, and make around $50,000 on the side, by the time you add in 85% of your Social Security benefits, $50,000 suddenly becomes $60,000 or more. Then when you add together the applicable self-employment taxes, federal income taxes and state taxes, the marginal tax rate quickly approaches 50%. I opined that I think anyone over 65 should be exempt from paying into Social Security while they are receiving benefits, and that the benefits should be tax free. I qualified this by adding that I don’t write the laws, I just apply them.

Congress should recall that we pay Social Security taxes in order to receive a basic subsistence in the future. The Social Security taxes we pay are a tax. Then the federal government has the nerve to turn around and tax seniors on the taxes they have already paid throughout their lives. In effect, what seniors are asked to do is pay a tax on a tax. How much sense does that make in the era of fair this and fair that? You have to admit that this is messed up. So fix it! It’s real simple.

Congress should either increase the Social Security base amounts for inflation, or go back to the pre-1985 policy making Social Security benefits non-taxable, and let the cards fall where they may. Make a choice and live with it. Anyone in Congress, or the White House who doesn’t have a clue about what’s in the current tax law, should study up, shut up, or just resign. Anyone who takes the time to examine what’s actually in the Code will come to the realization that some of this stuff is completely ridiculous. Under current law, it is entirely possible to make over $250,000, write it all off through new equipment purchases, other credits and gimmicks, and end up paying nothing in taxes. Yep, that’s right!

In my opinion, what we need to do is get rid of all of the temporary 2010 provisions including –– repeal of the Personal Exemption Phase-Out (PEP), repeal of the Itemized Deduction Limitation (Pease), 0% Capital Gains Tax, expanded Child Tax Credit, expanded Dependent Care Credit, increased Adoption Credit, increased Earned Income Credit, refundable Education Credit, Alternative Minimum Tax (AMT) patch, Bonus Depreciation, extended Section 179 Deduction, Payroll Tax Cut, and the vast array of Energy Tax Credits, and then go back to the 1986 Code and adjust all limitations, base amounts and tax brackets for inflation. In most cases, just like with Social Security benefits, the results will favor those who are the most deserving. We got by without this chaos before 2010, and we can get by without it today.

Fiscal responsibility isn’t a cliff, it’s an opportunity to correct our errant ways. Respect your elders. By the way, the notion of lowering the top income tax bracket from the current inflation adjusted amount, to the 1993 unadjusted top bracket of $250,000 is equally offensive. That’s not forward thinking. In fact, it’s so backwards it’s laughable. Think inflation!

References:

U.S. Inflation Calculator

1985 IRS Publication 915

1993 IRS Publication 915

1994 IRS Publication 915

2011 IRS Publication 915

Related:

Obama's 1950s Tax Fallacy

Sunday, November 4, 2012

Black Unemployment Jumps 10.9% on Obama


Are you better off today than four years ago?

- By: Larry Walker, Jr. -

According to the latest report from the Bureau of Labor Statistics, the official unemployment rate for all Americans rose by 1.3% since Barack Obama took office. But over the same period, the unemployment rate for Black Americans jumped by 10.9%, and the number of unemployed Black Americans climbed by 19.1%. So are we better off than we were four years ago? You might be, but the Black Community as a whole definitely is not. So will 90% of Blacks vote to re-elect Obama anyway? You betcha, because it’s not about tangible results, or even the content of one’s character; shamefully for many it’s about the candidate’s skin color.

Per the first chart above, the Official Unemployment Rate has increased slightly from 7.8% on January 31, 2009, to 7.9% by October 31, 2012, an increase of 1.3% (0.1 / 7.8). So the official unemployment rate isn’t any better than it was when Barack Obama took office, it’s about the same, or slightly worse. What about that?

And according the second chart above, the Unemployment Rate for Black Americans jumped from 12.7% on January 31, 2009, to 14.3% by October 31, 2012, for an increase of 10.9% (1.6 / 12.7). So the unemployment rate for Black Americans has continued to rise at a recessionary pace, in spite of Hope and Change. So what about that?

And according to last chart, the number of unemployed Black Americans has continued to surge at a recessionary pace, climbing from 2,254,000 on January 31, 2009, to 2,684,000 by October 31, 2012, for an increase of 19.1% (430,000 / 2,254,000). So the number of unemployed Black Americans, those who refuse to go on welfare or disability and remain in the labor force, has risen due to the countermanding policies of Barack Obama. What countermanding policies you say?

To name a few:

  1. Threatening to hike tax rates on the people who might have given someone a job instead.

  2. Forcing employers to provide health insurance to current employees, leaving no room for expansion or new hires.

  3. Spending borrowed money to subsidize solar panels, wind turbines, and battery operated vehicles, while the U.S. electrical grid remains vulnerable.

  4. Allowing strict EPA regulations to stifle jobs in the oil and gas, and mining industries.

  5. Increasing deficit-financed expenditures on Welfare, Food Stamps, and Disability as if that’s what Americans are demanding.

  6. Running up $5.3 trillion of debt in 4 years, the largest increase in our history, resulting in the first sovereign credit downgrade in American history.

Well, you can’t have it both ways. You don’t achieve job creation through raising taxes, forcing employer mandates, social engineering, killing current jobs, offering free rides, or destroying the nation’s credibility. So admit it, Obama’s policies didn’t work. They didn’t work for Franklin D. Roosevelt, they have never worked, and they aren’t working today. So what now? More of the same, or will you dare to be different? Common sense dictates that if you want a different result, you must try something different. See you on Tuesday. Be there!

If the unemployment rate don’t fit, vote for Mitt!

Data:

Worksheets on Google Drive

References:

Bureau of Labor Statistics: CPS Data Table A-2

Bureau of Labor Statistics: CPS Data Table A-1

Related:

Black Employment | Back to the 1970s

Has Obama Created More Jobs Than Bush Yet?

Saturday, November 3, 2012

U.S. Jobs Deficit Sticks at 11.6 Million in October

32 Years from Full-Employment

- By: Larry Walker, Jr. -

In the fairest sense, the U.S. Jobs Deficit has improved by an average of 30,000 jobs per month since January 1, 2011. And although this may be good enough for indifferent Obama loyalists, what it really means is that based on Barack Obama’s very best job creation averages to date, full employment is still another 32 years away. Based on yesterday’s Employment Situation Report, 171,000 nonfarm jobs were added in the month of October. However, since the U.S. needs to add a minimum of 320,850 jobs each and every month for the next 60 months in order to return to full-employment, October’s result fell short of the mark by 149,850.

When the entire Obama record is analyzed, it turns out that U.S. employers have only added a total of 194,000 nonfarm jobs since February 1, 2009 (133,755,000 – 133,561,000). The jobs deficit has increased by 5,521,000 during Barack Obama’s 45-month term, from 6,110,000 on January 31, 2009 to 11,631,000 on October 31, 2012. The average number of nonfarm jobs created on a monthly basis in 2012 is 157,000, which is ironically the same as in 2011. In contrast, the average number of jobs created in 2010 was 86,000, compared to an average loss of (422,000) per month in 2009.

So an average of 157,000 jobs a month, over the past 22 months, is the best that Barack Obama’s policies have been able to accomplish. This may sound great to some folks, but since 127,000 new jobs are required each and every month just to keep pace with population growth, what it really means is that we are clearly locked on a trajectory that chips away at the present 11,631,000 jobs deficit by a mere 30,000 jobs per month. So what does this mean in plain English? In other words, how many jobs must the U.S. create each and every month going forward in order to reach full-employment, and how long will it take?

Updated Jobs Benchmark

Updating Paul Krugman’s original benchmark with the latest figures, we discover that to be meaningful, the number of jobs needed to return to more or less full employment by December of 2014 (the original target date), or within the next 26 months, is now 574,346 jobs a month, as follows:

In order to keep up with population growth, we would need to create 127,000 jobs times 26 months, or 3,302,000. Add in the need to make up for the jobs deficit and we’re at around 14,933,000 (3,302,000 + 11,631,000) over the next 26 months — or 574,346 jobs a month.

But since that’s never going to happen under the countermanding policies of Barack Obama, we are forced to extend the time frame. However, even when we extend the target date to 5 years from today, which will be more than 8 years from the time the recession ended, the number of jobs needed to return to more or less full employment by October of 2017, or within the next 60 months, is now 320,850 jobs a month, as follows:

In order to keep up with population growth, we would need to create 127,000 jobs times 60 months, or 7,620,000. Add in the need to make up for the jobs deficit and we’re at around 19,251,000 (7,620,000 + 11,631,000) over the next 60 months — or 320,850 jobs a month.

Did the U.S. add 574,346 jobs last month? No. Did we add 320,850? No. In fact, according to the Bureau of Labor Statistics, the U.S. has only added 194,000 nonfarm jobs since Obama took office (i.e. February 1, 2009) (see related table). So what does that tell you? It tells me that Barack Obama’s economic policies have failed miserably. He’s the one who said, “If I don’t have this done in three years, then there’s going to be a one-term proposition.” So don’t blame conservatives and independents when the earth slides from under his feet on Tuesday.

Fair Enough?

In the fairest sense, when we average the number of jobs created over the last 10 months, we arrive at 157,000 a month. And when we average the number created in 2011 we ironically get 157,000 as well. Do the math. So in other words, there has not been any improvement this year over last year. So we’re not moving forward after all, we’re stuck in neutral. And since we know that it takes a minimum of 127,000 jobs a month just to keep up with population growth, we are only chipping away at the 11,631,000 jobs deficit by 30,000 jobs a month (157,000 – 127,000). Thus, on the current trajectory, full-employment is roughly 388 months — or 32 years away.

[For the mathematically challenged, take the jobs deficit of 11,631,000 and divide it by the twenty-two month average improvement of 30,000, and you get 388 months. Now divide 388 months by 12 and you get 32 years.]

So four more years of Obama’s trickle-down-government approach places us on the track to reach full-employment by around the year 2044. And that’s giving him the benefit of the highest job creation averages achieved during his entire presidency. I’ll be 84 years old by then, and my one year old twin granddaughters will be 33. I’m sorry, but no matter how you spin the numbers, Barack Obama isn’t worthy of a second term.

Until the number of Nonfarm jobs is expanding by a minimum of 320,850 a month for a sustained period of at least five years, anything short is bad news. The Romney-Ryan Team is the only one on the ballot with a plan targeted to come anywhere close to what’s needed. Aside from that, with the national debt already beginning its ascent towards $20 trillion, with 25 million Americans unemployed or underemployed, with the Federal Reserve devaluing our currency by printing money to purchase mortgage-backed debt on an unlimited basis, with our tax and regulatory structure mired in uncertainty, with a foreign policy meltdown, and with the price of gasoline hovering above $3.25 for a record 86 consecutive weeks, there is absolutely, positively, no reason to consider a second Obama term. None!

[Note: Paul Krugman and other left-wing cronies are now trying to push the idea that, since July 2011 only 90,000 jobs have been required to keep up with population growth. “The number used to be higher, but baby boomers are getting old — the same thing that affects the household survey.” However, even if such a radical 30% shift had occurred within the last four years, it would only alter the current jobs deficit by a diminimus amount — 592,000 jobs, from 11,631,000 to 11,039,000, so phooey! There’s no turning back now, we're sticking with the original benchmark which Mr. Krugman laid out in December of 2009.]

Data:

Worksheet on Google Drive

Related:

U.S. Jobs Deficit Improves by 1,000 in September

U.S. Jobs Deficit Increases by 72,000 in August

U.S. Jobs Deficit Holds at 11,760,000 in July

U.S. Jobs Deficit Grows by 47,000 in June

The Real Jobs Deficit | Moving in the wrong direction.

Obama Jobs Scorecard, Part 3 | The American Dream

Wednesday, October 31, 2012

Has Obama Created More Jobs Than Bush Yet?


:: Card Stacking ::

MythBuster III: Rational or Ridiculous?

- By: Larry Walker, Jr. -

Card stacking, or selective omission, is one of the seven propaganda techniques identified by the Institute for Propaganda Analysis. It involves only presenting information that is positive to an idea or proposal and omitting information contrary to it. Card stacking is used in almost all forms of propaganda, and is extremely effective in convincing the public. Although the majority of information presented by the card stacking approach is true, it is dangerous because it omits important information. The best way to deal with card stacking is to get more information.

Back in October of 2010, the left-wing media and White House tried to spin the myth that, "Obama created more jobs in 2010 than Bush did in eight years.” However, this delusion was busted in the first MythBuster series (here), simply by proving that at the time, not one single solitary job had been created during the Obama Administration. In fact at the time Mr. Obama was proudly presiding over a 2,991,000 loss in private sector jobs. So where are we today, 2 years later and 44 months into Mr. Obama’s agenda? Has Obama created more jobs than Bush?

Current Employment Statistics: No Shot

Let’s turn to the Bureau of Labor Statistics, focusing first on the Current Employment Statistics (CES). The CES is a monthly survey of about 141,000 businesses and government agencies, representing approximately 486,000 individual worksites, in order to provide detailed industry data on employment, hours, and earnings of workers on nonfarm payrolls, also known as Table B.

When we add up the total number of nonfarm jobs created during Mr. Obama's 44-month tenure (February 1, 2009 to September 30, 2012), we find that a total of 61,000 jobs have been lost (133,561,000 – 133,500,000). Thus, Mr. Obama’s job loss average is 1,386 jobs per month. Oops!

And when we add up the total number of nonfarm jobs created during Mr. Bush’s 96-month tenure (February 1, 2001 to January 31, 2009), we find that a total of 1,095,000 jobs were created (133,561,000 – 132,466,000). So Mr. Bush’s job creation average was 11,406 jobs per month.

Therefore, in terms of the CES, Mr. Bush’s job creation record was 922.9% greater than Mr. Obama’s [(11,406 + 1,386) / 1,386]. Oops!

Current Population Survey: Fair Shot

Just to be fair, we’ll return to the Bureau of Labor Statistics, this time focusing on the Current Population Survey (CPS). The CPS is a monthly survey of households conducted by the Bureau of Census for the Bureau of Labor Statistics, also known as Table A. The CPS is a broader survey, which includes those who are self-employed or who work for smaller companies. It’s also the data set used to calculate the official unemployment rate.

When we add up the total increase in the employment level during Mr. Obama's 44-month tenure (February 1, 2009 to September 30, 2012), we find that a total of 787,000 jobs have been created (142,974,000 – 142,187,000). That’s an average of 17,886 jobs per month, which is at least positive, although far short of the four or five million he esteems.

Yet, when we add up the total increase in the employment level during Mr. Bush’s 96-month tenure (February 1, 2001 to January 31, 2009), we find that a total of 4,409,000 jobs were created (142,187,000 – 137,778,000). That’s an average of 45,927 jobs per month.

Thus, in terms of the CPS, Mr. Bush’s job creation record was 256.7% greater than Mr. Obama’s (45,927 / 17,886). Oops!

Officially Busted!

The claim, "Obama created more jobs than Bush did in eight years,” is officially busted. Although I could cherry-pick and find a period where nonfarm jobs growth was up by 7 or 8 million during Mr. Bush’s term, for example from 2003 through 2007, and use that to pummel Mr. Obama’s record into the ground, I choose to remain among the rational. I don't want to hear another word about Obama having created four of five million jobs over some arbitrary period.

Most of us would agree that Mr. Bush’s job creation record was pretty dismal, but compared to Mr. Obama’s record, we were far better off during the Bush years. The truth is that the number of nonfarm jobs (CES) grew 922.9% greater during Bush's 96-month term, in spite of the massive losses incurred during two recessions, than during Mr. Obama’s 44-month term. And likewise, the employment level (CPS) grew 256.7% greater during Bush’s term, than during Mr. Obama’s.

We are currently around 4 or 5 million jobs short of where we were before the Great Recession. Frankly, Mr. Obama’s job creation record is ridiculous, pathetic, and unacceptable. He should be ashamed, as should anyone attempting to spin such trifle. It’s time to throw the bums out.

References:

Institute for Propaganda Analysis (IPA)

Bureau of Labor Statistics: CES Data

Bureau of Labor Statistics: CPS Data

Related:

MythBuster: Has Obama Created More Jobs Than Bush?

MythBuster II: Has Obama Created More Jobs Than Bush?

Sunday, October 28, 2012

High Gasoline Prices and the 2012 Recession, Part II


Artificial Demand ::

“Real demand is not artificial. We should resist as much as possible the notion of providing things that are not actually demanded by anyone.” ~ American Consensus

- By: Larry Walker, Jr. -

The price of any product or service is normally determined by two variables, supply and demand. In economics, prices rise as demand increases, as supply decreases, or a combination of the two. It’s only when supply keeps pace with demand that the price of gasoline stabilizes or declines.

Since we know that the world’s population is increasing, not decreasing, more gasoline production is constantly required, not less. It doesn’t take a rocket scientist to figure that out. Thus, the only way to reduce gasoline prices, in the face of rising global demand, is through greater production. Yet, U.S. oil production has been on the rise since 2009, while demand has declined. So, why is gasoline stuck above $3.25 a gallon?

Was there suddenly a great demand for solar panels, biofuels, windmills and electric cars in 2009? The answer is no. Do cars and trucks run on solar panels and wind turbines? The answer is no. Yet, the 2009 stimulus set aside $80 billion in deficit financing to subsidize politically preferred green energy projects, which had little or no demand at the time. In fact, there is little demand for such products today. What the world demanded in 2009 is the same thing it demands today, more gasoline. So why is the federal government involved in providing things that are not actually demanded by anyone?

According to the Energy Information Administration, global oil consumption declined slightly in 2008, 2009 and 2010, while global supply has kept pace with demand (see chart above). In 2010, global supply actually exceeded demand, but as of 2011, the latest statistics available, world demand set a new record of 87,421,000 barrels per day, up from 83,412,000 in 2010. Yet global supply has kept pace with demand. So why have U.S. gasoline prices climbed by more than 90% since January 2009? The answer doesn't involve oil supply and demand, it has to do with the decline of the U.S. dollar.

The purchasing power of the consumer dollar has declined by 24.3% since 2001 (see chart below). The dollar actually strengthened for a brief 5-month period, from September 2008 to January 2009, but then resumed its decline, having fallen by 8.9% since January 2011. What happened to the price of gasoline during the five-month’s that the dollar strengthened? It declined dramatically, from $3.72 a gallon to $1.64 (see Part I). And what happened to the price of gasoline after January 2011? It shot past the $3.25 per gallon breaking point, where it remains today.

What caused the dollar to decline? The U.S. monetary base, the total amount of a currency that is either circulated in the hands of the public or in the commercial bank deposits held in the central bank's reserves, has increased by 324.2% since 2001. The money base grew from $616.7 billion in 2001, to $2.6 trillion as of September 2012. You can see in the chart below, that $256 billion of this increase occurred between January 2001 and September 2008. But from September 2008 to January 2009 the monetary base increased by $858 billion. However, this initial increase actually strengthened the dollar, and was, evidentially, the precise temporary stimulus needed at the time. The only problem with this brilliant strategy was that it wasn’t temporary.

Instead of winding down at the end of January 2009, what had been a well timed temporary stimulus was unfortunately doubled. Since then, the monetary base has been jacked up by another $886 billion. Instead of a temporary stimulus, what we wound up with was a permanent doubling-down of the original amount. Is this what the economy needed? What was the result? This time instead of strengthening, the purchasing power of the dollar plummeted.

Thus, by the time Barack Obama was inaugurated, the economy had already received the temporary stimulus it required. How do we know? The proof is the decline in the price of gasoline, to near its historic inflation adjusted norm of $1.73 a gallon (see Part I). But ever since then, the price of gas has risen from $1.88 to $3.65. That’s the proof. What we have witnessed during the Obama Administration has been reckless and unnecessary deficit-financed spending, which not only added six-months to the Great Recession, but has lead to a prolonged period of stagnation.

The Federal Reserve should have started reducing the monetary base in February 2009, but was unable to, due to the Barack Obama’s unprecedented $832 billion stimulus plan. In addition, as a result of Mr. Obama’s $1 trillion-plus annual budget deficits for the past four consecutive years, instead of being able to control the money base, the Fed has been forced into the unlimited printing of dollars, vis-à-vis QE3.

Based on the current trajectory, what we can expect with another four years of Barack Obama is a continued decline in the purchasing power of the dollar, and higher gasoline prices, in spite of improved U.S. supply and falling demand. The problem with high gasoline prices is they lead to recessions, while lower prices foster economic expansion. The target price for gasoline is the 1992 inflation adjusted price, $1.86 a gallon. The current price is $3.65.

In the midst of the Great Recession, the average price of gasoline only exceeded the breaking point ($3.25 a gallon) for a total of 31 weeks. In contrast, the current price has remained above the breaking point for a total of 86 consecutive weeks, from February 28, 2011 to present. What does that tell you? It leads me to believe that the U.S. is currently in recession. The cause: Inflation due to excessive money printing, necessitated as the result of an $832 billion stimulus, and unprecedented trillion dollar budget deficits due to Barack Obama’s inability to govern. Is there a witness?

One month ago, the Economic Cycle Research Institute (ECRI), the same organization which successfully predicted the last recession, and which over the last 15 years has gotten all of its recession calls right while issuing no false alarms, declared that the U.S. is in recession. In an article entitled, The 2012 Recession: Are We There Yet?, ECRI stated, “Back in December, we went on to specify the time frame for it [the recession] to begin: if not by the first quarter of the year, then by mid-2012. But we also said at the time that the recession would not be evident before the end of the year. In other words, nine months ago we knew that, sitting here today, most people probably would not realize that we are in recession – and we do believe we are in recession.”

The policies of Barack Obama didn’t deliver us from the Great Recession, they prolonged it. The $832 billion stimulus plan merely created an artificial demand for U.S. dollars, and is directly responsible for re-inflating the same imbalances that existed prior to the recession. How can we tell whether or not we’re better off than we were four years ago? Well, here’s what’s different today. We are more than $16 trillion in debt, 25 million Americans are either unemployed or underemployed, instead of reducing the money base the Federal Reserve is printing more money to purchase mortgage-backed debt on an unlimited basis, our tax and regulatory structure is mired in uncertainty, we are suffering from a foreign policy meltdown, and the price of gasoline has remained over $3.25 for a record 86 consecutive weeks.

The Obama Administration has done everything in its power to hide the truth from us, but we’re just not going to take it anymore. Americans can take a lot, but one thing we won’t tolerate is government officials who try to deceive us. The federal government can easily manipulate unemployment statistics, since the numbers are basically made-up anyway, but it cannot so easily engineer the price of gasoline. To do so would entail releasing oil from the Strategic Petroleum Reserve, which is in place to mitigate national emergencies, not sway elections.

Four years of Barack Obama's policies solved nothing. We are currently teetering somewhere between back where we started from, to worse off than we have ever been. And with a looming fiscal cliff, another four years of Obama will only make things worse. America can’t take another four years of trifling rhetoric, high gasoline prices, or another government-prolonged recession. It’s time to wash our hands of the Obama Administration, and time to turn toward mature, experienced, and responsible leadership. You know what time it is!

“A lie hides the truth. A story tries to find it.” ~ Paula Fox

Reference:

Weekly U.S. All Grades Conventional Retail Gasoline Prices | U.S. Energy Information Administration

The 2012 Recession: Are We There Yet? | Economic Cycle Research Institute

The Malaise of 2012 | Part IV

Related:

High Gasoline Prices and the 2012 Recession, Part I

Manipulation 101: The Real Unemployment Rate

High Gasoline Prices and the 2012 Recession, Part I


Truth is not easily hidden.

- By: Larry Walker, Jr. -

Conventional retail gasoline averaged $3.65 a gallon in the most recent week ended October 22, 2012, yet when Barack Obama was sworn into office the price averaged $1.88. When questioned about the 94.2% increase which occurred on his watch, Mr. Obama remarked that the reason gasoline prices were so low when he entered office was because the U.S.was “in the middle of an economic depression.” However, the question wasn’t why prices were so low when he entered office, but rather why they ballooned by 94.2% on his watch. We’re still awaiting his answer.

In the second presidential debate, Barack Obama stated that, “oil imports are at the lowest levels in 16 years.” But as I pointed out in Debate 2 | Obama’s Oil & Gas Rhetoric, the gasoline I need to fill my tank only cost an average of $1.23 a gallon in 1996, the equivalent of $1.81 today. And later in the same debate, Obama proclaimed that, “oil imports are down to the lowest levels in 20 years.” Well, which is it Mr. President? I pointed out in the same post, that the 1992 price of regular unleaded averaged $1.13 per gallon, the equivalent of $1.86 today. Is the price of gasoline $1.81 to $1.86 today? No. So then what was Obama’s point?

Are we supposed to believe that it took an economic depression to bring gasoline prices down to $1.88 in the week ended January 19, 2009, when that would actually have been higher than the average inflation adjusted price of $1.73 at that time? I don’t know what that tells you, but it tells me that gas prices were in a bubble before the Great Recession, a bubble which finally burst during month 8 of the 19-month downturn. High gasoline prices were actually one of the factors leading to the Great Recession, the subsequent decline merely brought prices in-line with the historic norm.

If this is true, then hasn’t the price of gasoline been in the midst of another bubble since 2011 (see chart below)? And if a bubble currently exists, does that mean the U.S. is either in or near recession? To know the answers, we must venture back in time and analyze what actually took place prior to the Great Recession. The following analysis focuses on all grades of conventional retail gasoline.

Gasoline Prices and the 2001 Recession

Gasoline prices generally rise during the first six months of the year, and fall during the remainder. The 2001 recession began in March and ended in November, as indicated by the first shaded area in the chart above. Going back to January 1, 2001, according to the U.S. Energy Information Administration, we find that conventional grades were selling for an average of $1.42 per gallon. Once the recession commenced prices peaked at $1.70 in May, before the normal seasonal decline. But due to the recession, followed by a post-911 reduction in demand, prices continued to fall reaching a low of $1.08 by the week ending December 18, 2001. This represented a decline from the peak of roughly 36%, over 32 weeks.

Based on the 1992 price per gallon of $1.13, the 2001 equivalent price should have been $1.43 (as represented by the solid blue line). Due to the recession, gasoline prices temporarily declined below the inflation adjusted level, but would eventually regain equilibrium, reaching $1.46 towards the end of 2002. All in all, gasoline prices remained at or near equilibrium between 2001 and 2003. It was in 2004 when prices began to spin hopelessly out of control. The reason for the subsequent price hike was initially blamed on a significant number of refineries being offline, and later by rising crude oil prices.

Prior to the Great Recession, a record high of $3.25 per gallon was set in the week ended May 21, 2007. The chart above contains a green dashed-horizontal line at the breaking point, the pre-Great Recession record of $3.25 a gallon. The solid blue line represents the annual inflation adjusted price of 1992 gasoline. Although gas prices may currently be on the decline, until they dip below $3.25 a recession threat remains. At the same time, any price above $1.86 is not optimal. So where are we today?

Gasoline Prices and the Great Recession

The Great Recession commenced in December of 2007. At the time, gasoline was averaging $3.03 per gallon, but within the first eight months the price would set a new record of $4.10 per gallon in the weeks ending July 7 and July 14, 2008 (see chart above). But then something phenomenal happened. From the peak, prices declined to $3.17, or to below the $3.25 breaking point within just 14 weeks. And prices continued to fall all the way to a low of $1.64 by the week ending December 29, 2008, within another 11 weeks. So from peak to trough, gasoline prices declined by 60% in just 25 weeks, a notable difference from the 36% decline over 32 weeks at the end of the 2001 recession.

After the 2001 recession prices remained relatively stable for two years, but that wasn’t the case with the Great Recession. This time, when prices hit bottom the recession wasn’t over. It probably should have been over at that point, and perhaps it would, had it not been for artificial demand, induced by an unprecedented amount of deficit-financed government intervention. By the time the Great Recession ended, the price of conventional gasoline had risen from a bottom of $1.64 to $2.64. So from an early Great Recession surge to $4.10, prices finally flushed out at $2.64.

To summarize, during the Great Recession, gasoline prices rose by 35% before declining by 36%. By comparison, during the 2001 recession, prices rose by 20% before declining by 36%. That seems fairly harmless on its own, but what’s missing is the fact that gasoline prices doubled, from $1.50 to $3.08, during the previous recovery, between January 2004 and December 2007. That’s the key. There’s the bubble. So what was the cause?

According to information from the U.S. Energy Information Administration, there was a notable rise in U.S. petroleum demand, and a corresponding decline in U.S. supply from 2004 to 2007, as indicated by the shaded area in the chart below. In fact, the phenomenon of rising demand and declining supply actually commenced in 1986.

A quick study of the chart leads to two questions. Is the U.S. currently producing more oil than it did in 1985? The answer is no. Is the U.S. consuming more petroleum than it did in 1985? The answer is yes. Yet in 2009 there was a noticeable decline in demand and a corresponding uptick in supply, the combination of which contributed to lower prices at the pump. And, it appears that U.S. oil supply is continuing to trend upward, while demand has leveled off. So since demand is stable and supply is increasing, gasoline prices should be dropping like a rock, but instead we have witnessed a 94.2% price increase since January 20, 2009.

So was Obama right to blame the 94.2% price hike, on what he refers to as the extraordinarily low prices he inherited as a result of an economic depression? No, because by inauguration day the price of gasoline had settled right about where it should have, on an inflation adjusted basis. Recall that in 1992 the price of regular unleaded gasoline was $1.13 per gallon, which would have been equivalent to $1.73 in 2009; and the national average was $1.64 on December 29, 2008, and $1.88 on January 19, 2009. Thus, at that time, the price of gasoline was barely above its inflation adjusted value (see the first chart).

Going back to the original question, the reason prices have risen on Obama’s watch has nothing to do with supply and demand. The root cause is unprecedented government intervention vis-à-vis his $832 billion stimulus plan (see Part II). The stimulus program merely re-inflated a price bubble that existed prior to the recession, the first caused by lack of supply, and the second by devaluation of the dollar. It was this artificial deficit-financed demand that caused gasoline prices to rise from the $1.88 he inherited to $2.64 by the end of the recession, so that by June of 2009, gasoline was only 19% below its pre-recession record of $3.25.

Gasoline would remain below $3.00 from June 2009, until the week ending December 27, 2010. It was during this period that the economy showed its most promising signs of recovery. But ever since then, the price of gasoline has never fallen below $3.00. Instead, in the week ended February 28, 2011 the price once again accelerated past the $3.25 breaking point, where it has remained for the last 86 consecutive weeks.

With regard to 2010 being the end of the Obama recovery, the proof is that Real Gross Domestic Product (GDP) contracted by -3.1% in the year 2009, as gasoline prices surged from $1.64 to $2.62. Then in 2010, GDP grew by 2.4% as prices stabilized and remained below $3.00. But economic growth again slowed to a rate of 1.8% in 2011, as prices climbed above $3.25. GDP further slowed to a growth rate of just 1.3% through the second-quarter 2012, as gas prices remained above $3.25.

Note: The third-quarter 2012 advance estimate that GDP grew by 2.0% is just that, an estimate. In fact, according to the Bureau of Economic Analysis, “the third-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency. The "second" estimate for the third quarter, based on more complete data, will be released on November 29, 2012.”

Continued: High Gasoline Prices and the 2012 Recession, Part II

Reference:

Weekly U.S. All Grades Conventional Retail Gasoline Prices | U.S. Energy Information Administration

The 2012 Recession: Are We There Yet? | Economic Cycle Research Institute

The Malaise of 2012 | Part IV

Related:

Manipulation 101: The Real Unemployment Rate

Photo Via: Midwest Energy News