The flawed logic of the silly Karl Denninger "Downturn Moderating? More LIES!" post
June 11, 2009
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I don't know who this Denninger guy is. I read a ton of blogs, Calculated Risk, Big Picture, etc... but I've never read his before (I don't read that Mish guy's blog either). However, a post by him that Gold cut and pasted here on CAPS received a huge number of recs.
I find this funny because the logic of the post is completely flawed (link). Let me begin by saying that I am not one who believes that we are headed for a rapid "V" shaped recovery and that everything will return to "normal" soon. I am fairly bearish on the economy and believe that the recent rally has gotten ahead of itself. The new "normal" will be much slower economic growth, at least in terms of U.S. GDP, than we have become accustomed to over the past two decades.
On to my criticism of the "Downturn Moderating? More LIES!" post. Here's the main part that I have a problem with:
The state's [California] revenues from personal income taxes tumbled by 39.3 percent in May from a year earlier while revenues from corporate taxes fell by 52.1 percent and revenues from sales taxes sagged by 7.6 percent, according to a report released by Chiang's office.
The bold part is the important one.
See, sales taxes are (1) almost never gamed as there is little point, (2) , (3) the penalties for cheating are draconian and the audits frequent, and (4) they apply to nearly all goods (except food in some states.)
Therefore, if sales tax revenue is down 7.9%, you can reasonably presume that economic activity at the consumer level is down somewhere around 7.9%.
Since the consumer is 70% of the economy, it is not hard to figure out that we are approaching the 10% "top-to-bottom" decline level that defines economic depression.
California is a huge state with a huge economy that's bigger than the economies of many entire countries. It is very important to the United States, but it is not representative of the entire U.S. It is an extreme example of what is happening. It was one of areas that was hit the hardest by the housing bubble. One cannot look at the sales tax revenue for the area of the country that is by far in the worst shape and then just assume that it is indicative of what is happening everywhere else.
Doing so would be like only scouting the absolute worst player on a sports team and then assuming that the entire team stinks. Or drinking a Milwaukee's Best aka Beast Light and assuming that all beer sucks. One cannot reasonably assume that sales tax revenue is down by nearly 8.0% nationally just because that is the case in one of the areas that is in the worst shape.
Here's another statement in this post that I have a major problem with. It does not materially impact my previous argument, but it does say something about the author's credibility. Later on in the message Denninger said:
See, sales taxes are (1) almost never gamed as there is little point, (2) they're paid by consumers but collected by businesses who have little incentive to cheat
Huh? What a Pollyanna, laughable statement. What planet does this guy live on? I have dealt with TONS of businesses over the years that don't collect sales tax. Businesses have a huge incentive not to report sales. Any sales that a business collects sales tax on are reported and the business then has to report and pay tax on its income from the transaction. Have you ever been to a pizza parlor and had the cashier sell you pie without collecting tax? Have you ever bought a large ticket item or had some work done for you and said "How much if I pay you in cash?" What a bizzare, incorrect statement to make.
As far as income tax goes. Of course California's income tax revenues are down, unemployment there is way up. CA is the fourth worst state in the country in terms of its unemployment rate (11% as of April). To take the income tax figures from the fourth worst state in the country and apply them to the nation as a whole is absurd.
Talk about a hypocrite. It's funny that this Denninger fellow calls an overly optimistic and misleading Bloomberg article "outrageous and irresponsible" when he's doing almost exactly the same thing...just on the negative side instead of the positive side. Oh well, I suppose that his post and the article that he was mocking cancel each other out.
As it usually does, the real truth lies somewhere in the middle. This is not the end of the world, but things are not going to recover as quickly or as dramatically as many currently believe.
Deej
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