THINGS THAT SHOULDN’T BE AND SOME THAT SHOULD

Be realistic: Plan for a miracle. ~ Osho

Reflecting on the past 12 months, I offer here my resolutions about things that shouldn’t be around (but are) and things that should remain (please).

things that shouldn’t be

The Republicans’ fiscal follies.  As I noted previously, the Republicans’ hasty, nasty, damaging tax “reform” foibles will impede growth, exacerbate income inequality, eventually hike taxes of all who aren’t already wealthy, provide large, unneeded tax reductions for the 1% and require giant, growth-deflating deficit-financing. The passage of this miserable “reform” will initiate the Republicans’ long-desired slicing of Medicare and Medicaid expenses among other government discretionary expenditure reductions; all in the hypocritical name of deficit reduction. What’s not to loathe?  

A yellow light for autonomous cars.  Call me a Luddite, but I vote to take the “auto” out of autonomous (self-driving) vehicles (AVs), or at least be very cautious about AVs. The wheeled techies’ acceleration for introducing software-driving cars is foolhardy hype. Autonomous vehicles face very large challenges (beyond mere code) that advocates underrate. It only took one hour for the recently-launched Las Vegas autonomous shuttle to get into an accident that displayed an overabundance of “A” and a lack of sufficient “I” (as in autonomous-driving’s AI). Remember the accident that killed a Tesla driver in Florida last year? What could possibly go wrong when in the all too near future (according to proponents), herds of AVs start sharing the road, any road, with scads of unpredictable, entirely human drivers? I seriously doubt it will be pretty. Raising more caution signs and yellow blinking lights for AVs now is compulsory. More on this later.

Fees for luggage placed in planes’ overhead bins are very high highway robbery. This grievance is particularly directed at you, Maurice Gallagher, CEO of Allegiant Airlines, but unfortunately not limited just to you. Airlines’ unbundled pricing has steadily gained altitude since American Airlines began separately charging for checked baggage in 2008. Last year the airlines’ “ancillary revenues” totaled as sky-high $82 billion. Such stratospheric over-monetization of services should be permanently grounded, now.

The FICA tax wage limit, currently set at $127,200. No one pays social security tax on income over this wage limit. There should be no upper wage limit for the FICA payroll tax that underwrites the Social Security (SS) Trust Funds. In October, Social Security benefits, totaling $77.87 billion that were provided to 67.76 million recipients. The wage limit makes the FICA Social Security tax unnecessarily regressive and deprives SS of millions of dollars every year. For almost one-half of unmarried middle class beneficiaries, SS provides at least 90% of their total income. US median household income increased by just 3.2% last year. American CEOs got an 8.5% raise in 2016, their biggest pay increase in three years.

The top 16% of income-earners make $127,000 or more. They can afford the 6.2% FICA/SS tax; why aren’t they paying their share on all their income like the other 84% do? Oh I remember, the Republicans always protect their wealthy, VIDs (Very Important Donors). Among several advantages, eliminating the FICA/SS wage limit would shore up the Social Security Trust Funds that are expected to be exhausted by 2035 and may extend the solvency of the fund by 58 years. I know it’s a dream, but eliminate the FICA/SS tax wage limit.

Dark new energy subsidy.  The administration has recommended a new energy subsidy that shouldn’t happen. The Secretary of Energy recently proposed that electric utilities operating coal-fired power plants be mandated to have an extra 90-day supply of fuel at each plant to enhance the “reliability and resiliency” of the electric power grid. This is utter twaddle. A decision from the Federal Energy Regulatory Commission is expected by January 10. Extra fuel stockpiling is unnecessary and costly for rate-payers (you and me) and everyone else. If the FERC does its job properly (rather than taking a political low-road), each Commissioner will vote down this bunkum proposal. Creation of this subsidy for coal producers flies in the face of well-established plant and grid operations, rationality and market reality. The tax-expenditures for this nasty subsidy will cost plenty in terms of atmospheric CO2, NOx and SOx.

Critics have called this “emergency” coal supply proposal a misguided “cash for cronies” scheme to help the coal industry that has strongly backed the president. Their interests as well as those of other fossil-energy producers are well represented in the current administration’s Cabinet and senior policy-makers. This costly change will continue coal-fueled electricity generation that produces an unhealthier, browner future. Speaking of which…

Coal-fired power plants.  Each of the nation’s 381 coal-fired power plants (down from 616 in 2006) should stop operating tomorrow. Burning coal to produce electricity despoils the environment and contributes to higher personal and public health costs. Last year, fossil fuels accounted for about 65% of the nation’s electricity generation mix, coal accounted for 30.4%. Total renewable energy that includes hydropower, wind, biomass, solar and geothermal accounted for 14.9%; nuclear energy was 19.7%. My local utility, PG&E, has 30% renewable sources and no coal. Thankfully, there is not one coal-fired generation plant anywhere in California. The sun is justifiably rising for solar, wind and other renewable generation; it should set ASAP for wholly horrid coal.

Removing protections from America’s wild places.  The president’s recent removal of at least 1,143,800 pristine wild acres within Canyonlands and Bears Ears National Monuments for private uranium, petroleum and gas development reflects yet another misguided facet of the president’s fundamentally mistaken priorities. Go Patagonia! Keep America as wild as possible.

Scott Pruitt, Administrator of the US Environmental Protection Agency. This man and his title is a first-order oxymoron, with emphasis on the last word’s second syllable. Remove him.

The final thing that shouldn’t be is our zero-sum, Kylo-like President Donald J. Trump. QED.

WHAT I’M THANKFUL FOR

Despite my listed nine “things that shouldn’t be,” there are, fortunately, five superior items in my life that more than compensate for the previous nine. I remain an Optimista because of them. I’m thankful for these important, valued (but usually unspoken) people, places and things.

Upbeat Music.  Music of all sorts is a joy to listen to. I’m thankful for this curiously surprising story that concluded “Sad songs have become less common all over the world.” It presents results of researchers from my grad school alma mater that found during the past seven years English-language songs are more upbeat than before. The media incessantly presents the world and our neighborhoods as going to hell in a handbasket, and that the world is in persistent “crisis” of one sort or another. Maybe we should listen to music more and be Optimistas rather than Pessimistas. It’s a wholly worthy thought. Are our musical glasses half-full, rather than half-empty? I hope so. Upbeat music makes it far easier.

Good health.  With the staunch support of my family and friends, together with my own active efforts, I’ve managed to retain reasonably good health as I’ve become a septuagenarian. Here’s hoping it may continue for me, and you.

Yosemite National Park and each of the other 57 national parks. I take only Yosemite for granite. Thank goodness for Half-Dome, Crater Lake, Valley Forge, the Grand Tetons, Zion and the Everglades, among others. Thank you, Teddy. We need to keep all 58 vital.

My marvelous friends and my treasured family: Courtney, Lindsay, Cody, Ainslie, Elias, Liam and Alder. You’ve given me fun, hope, smiles, reward, satisfaction, education and promise. Thank you.

And most of all, Patrice.  Thank you dear Patrice for being the best part of my life and for putting up with my eccentricities and shortcomings. 

PUTTING THE GINI BACK IN ITS BOTTLE

A tax loophole is something that benefits the other guy. If it benefits you, it's tax reform. ~ Sen. Russell Long

Liberals have been understandably concerned about the distribution of income and wealth in the US. Over the past four decades an ever-higher share of the nation’s total income and wealth has been garnered by a small number of rich, wealthy Americans. This blog discusses the vicissitudes of income and wealth inequality over the past seven decades and how this inequality is related to the Republicans’ current legislative focus, their Tax Cuts and Jobs Act.

This unequal distribution is seen as the few very rich people gaining control of a growing amount of our nation’s income and wealth. Such concentrated control likely has serious implications and consequences.

Economists commonly account for the nature of a nation’s income and wealth distribution using the Gini index. The Gini index is a measure of inequality of a nation’s distribution of income (or wealth). It was pioneered by the Italian statistician and demographer Corrado Gini in his 1912 paper, “Variabilità e mutabilità” (Variability and mutability). The Gini index has a maximum value of 1 (signifying total inequality) and minimum of 0 (signifying complete equality). A perfectly equal distribution of income would be when each income decile of a nation’s households accounts for 10% of its total earned income, including the highest- and lowest-deciles of households. The lower the value of the Gini index, the more equal is the underlying income (or wealth) distribution. The higher the index is, the more unequal the distribution of income becomes.

The table below shows the share of US income and wealth held by the Top 1% rising since the since the 1940; the income-based Gini index is also presented from 1955 to 2015. Both the 1%’s share of income and wealth and the Gini index have steadily risen since 1975, signifying growing inequality.

Economic Inequality in the US, 1940-2015

Year	Share of Top 1% for Gross Income	Share of Top 1% for Total Net Wealth	Gini Index (Household Income)
1940	15.7%	39.7%	NA
1955	9.2%	27.5%	0.377
1975	8.0%	22.8%	0.371
1995	13.5%	27.9%	0.433
2005	17.7%	32.1%	0.450
2015	18.4%	37.2%	0.454*

Source: Chartbook of Economic Inequality. *2014 value, last year available.

In 2016, the Top 1%ers had household income of $430,600 and net worth of $10,374,030. The inequality of wealth distribution has long been far more pronounced than of income, as shown in the table. You can readily see that control exercised by the 1% over the nation’s wealth is roughly twice that of the nation’s income.

The 75-year period shown in this table spans significant economic growth and change as well as economic booms and busts. The Gini index grew more than 20%, the income and wealth shares increased much less. Between 1940 and 2015, the US real GDP grew by 13 times.
To state the obvious, the Republican tax “reform” legislation now has no economic or social justification. Following the widely-accepted view, expansionary fiscal policy (broadly lowering tax rates and increasing government spending) should be enacted when the nation is suffering from a recession. Like what was happening in 2009 when unemployment was 9.9% and GDP shrank by 2.7%. Since 2010, the US has enjoyed steady if minimal economic growth, in no small part due to the Obama stimulus legislation. The Republicans vehemently opposed Obama’s 2009 $787 billion fiscal stimulus because it would increase federal deficit and debt.

Hypocrisy now abounds. The US is already at full employment, the unemployment rate is 4.1%, 0.63% below the natural (full-employment) rate of unemployment. The Republican inequality-enhancing tax “reform” bill would increase the national deficits at least $1.5 trillion, probably much more, over the next decade. This time, nary a word of opposition has been heard from the two-faced Republicans with regard to this significant deficit escalation. This fiscal policy “reform” that overwhelmingly supports the 1% is not needed for any economic reason except to compensate the Republicans’ most important donors.

If your legislative preferences conflict with the narrow fiscal priorities now espoused by those who exercise political power in Washington DC, you’re likely to be grasping at short straws for some time to come regarding somehow remedying inequality.

Higher inequality and slower growth have created market warriors and market worriers. An example warrior in the news now is the Federal Communications Commission (FCC) Chairman, Ajit Pai, who is strongly pushing to slay “net neutrality” and give ISPs more power. Two other market warriors are Representative Paul Ryan and Senator Mitch McConnell who have led the Congress in nearly passing the Republican Tax Cuts and Jobs Act that will increase inequality by providing the already-wealthy with significant tax reductions and thus even more income and wealth, despite what these two warriors deceptively claim.

Example worriers include Senator Elizabeth Warren and economists Paul Krugman and Thomas Piketty, who envisage economic and social havoc arising from ever-escalating inequality. Sen. Warren and Dr. Krugman are irate about the Republicans’ tax “reform” success and its expected deleterious effects on many middle-class families.

Although the Republican tax bill hasn’t yet been finalized, it’s easy to see that the many changes likely to be approved by the House/Senate Conference committee will ultimately increase income and wealth of the already rich. These gains appear to be the principal goal of the Act, notwithstanding Republican pronouncements. Inequality will rise.

The Tax Cuts and Jobs Act will reduce taxes for upper-income people, and especially for corporations (which after a series of Supreme Court decisions, including Citizens United, are “people” too). About 67% of the Act’s total tax cuts will benefit corporations.

The list of this Act’s likely stipulations that will accelerate inequality is unfortunately long. They include: reducing the marginal tax rate for high-income individuals that among other effects will increase their disposable income – relative to lower-income people – and provide disincentives for those people to provide tax-deductible charitable donations that provide significant financial assistance to the less fortunate. Drastically lowering corporate tax rates will principally benefit the already-rich and will likely decrease the well of money going into the Low Income Housing Tax Credit that funds affordable housing. Less affordable housing will be built.

Among other wrongs, the House bill removes the deduction for student loan interest. Unlike other tax deductions, the student loan interest deduction is usable even if you don’t itemize your deductions, so it won’t lose its value as the standard deduction rises. For the majority of college students who borrow money to get college educated, their costs will rise, their disposable income will fall and fewer will be able to afford going to college. For the very first time, graduate students will have to pay tax on the value of their tuition waivers in the House bill; both the House and Senate bills will require private universities to pay tax on their endowments’ capital gains.

But how to rein in the growth of inequality – putting the Gini back into a smaller bottle – is far from agreed, and deviously difficult to implement within an existing political system. Many revolutions have been fought through history to enhance equality; peasants and indentured farmers-servants finally rose up to improve their lives. An example is the 1789 French Revolution whose rallying cry was Liberty, Equality, Fraternity. 

Reducing inequality through specific legislation or economic policy has rarely been attempted. Most direct legislative remedies are not politically popular or feasible because they involve raising taxes on well-connected, powerful, upper-income people. As shown in the table above, the last time inequality dropped in the US was during the decade or two after the end of WWII, which was a startlingly exceptional time for our nation. This post-WWII drop in inequality was an historic exception. The norm for the past 70 years and before, is that inequality has been present and gradually risen.

The only way anyone can even partly rationalize the Republicans’ tax “reform” effort is to concede it as an article of faith for true believers in the Covenant of the Latter-Day Wealthy, to which Mr. Ryan, Mr. McConnell and the president are its triumvirate of leaders. The Republicans’ unified support behind this deeply-flawed, mean legislation shows them shedding their ephemeral disguise as sponsors of working-class interests. In the Senate bill the much-flaunted increases in the “reform’s” personal deductions and child tax credit are scheduled to disappear entirely in 2025. This triumvirate probably believes (with reason) that most of the voting public doesn’t care much about seven years from now. They only care about this year and next year, when Trumpian voters will likely see their taxes drop some.

The issue of rising inequality has been at a slow to medium boil on liberals’ political stoves for a while, but it’s not a new issue. Nope, significant income and wealth inequality have been present for millennia, in far greater degrees than now.

Thomas Piketty’s best-selling Capital in the 21st Century showed sizeable inequality was present in the 18th Century. More recent analytical excursions into the past using paleo-data on house-size as a wealth proxy illustrate the virtually-eternal challenges of reversing wealth and income inequality going back 10,000 years. This study’s authors who suggest that inequality was present in later Neolithic societies blame the advance of formal agriculture. Inequality rose steadily after the shift into settled agriculture.

Solutions to inequality such as an international tax on capital that Mr. Piketty recommended are impractical. While worthy of momentary consideration, having the UN improbably establish the legal ability to enact and then enforce a global wealth tax on every very rich person on Earth has absolutely no practical value as a realistic solution. No nation has ever established inequality-reducing taxes on the already-wealthy of the sort Mr. Piketty suggests; an annual levy starting at 0.1% and increases to a maximum of perhaps 10% on the greatest fortunes. He also suggests a retributive 80% tax rate on incomes above $500,000 or so. Good luck with that Thomas.

We now live in a period when our government is proposing to eliminate entirely the very narrowly-defined estate tax. No nation – capitalist, socialist or communist – has punitively taxed wealth, but several have simply absconded with privately-held land, capital and/or assets. In the longer-term, few such seizures have worked out that well for anyone. For example, China’s Cultural Revolution or most recently Venezuela’s chaotic confiscation of property and businesses owned by the elite.
So how about taking a one-way ride in Doc Brown’s DeLorean back to allegedly more-equal early Neolithic society? I didn’t think so.

Here’s a heretical thought. Potentially inequality may effect economic and other harms. But if inequality has been present for most recorded human history (think Queens, Kings, Dukes, Princes, Genghis Kahn and Pharaohs), is it really a serious problem or more a “feature” of human society that may even have contributed something to humanity’s stunning progress over many centuries? What I’m suggesting is that income-wealth inequality may not necessarily be nasty per se, but is problematic beyond some as-of-yet undefined level. Although the literature includes a fair amount of qualitative discussion about such potential harm, little quantitative evidence seems to exist about inequality itself actually causing economic and socio-cultural damage. Is the post-hoc fallacy at work here? Perhaps.

But turning the clock forward to the present, there’s little doubt the Republicans’ tax “reform” will cause rising inequality in the US over the next decade. They’re gleeful; the rest of us, including many middle-class Trumpians, may not be as the clock keeps ticking.

OUR FRENZIED FISCAL FUTURE

Often wrong, but never in doubt. ~ Ivy Baker Priest 

So here we are, attempting to figure out how much we may benefit or lose from the ever-changing Republican tax “reform” proposals now winding their way at nearly legislative warp speed through the lobbyist-infested Congress. What is a knowledgeable citizen to do – let alone the vast majority of taxpayers who haven’t a clue about macro- or micro-economic fiscal policies?

Here’s a cast-in-concrete general canon about any change in tax legislation, rules or regulations:

Tax reform always creates winners, losers and unintended consequences.

The winners quietly chortle. The losers loudly cry, complain, moan and commiserate, and hope their public upset will change the rules to lessen their expected torment. Others hope they're not negative unintended consequences. 

I’d suggest we pay some attention now to discussions about who will come out ahead and who will suffer from the Republicans' currently-proposed tax changes. My advice also includes applying a very large discount to the mandated 10-year forecasts that accompany each and every change in federal fiscal policy for the simple fact that making such macro predications are always challenging, and rarely accurate. The Economist posted an assessment of “budgetary crystal balls” that illustrates forecasting’s fallacies. Most forecasters recognize this inevitable problem, but only mention it sotto voce. Outwardly, forecasters firmly stand by their predictions. But as Ivy Baker Priest, a Republican US Treasurer in the 1950s cogently stated, forecasters are “often wrong, but never in doubt.”

Futures that are directly influenced by political dogma and whims, er policy, are especially problematic. The proposed House and Senate tax bills change the principal corporate income tax rate from 35% to 20%, the pass-through rate for subchapter S corps and partnerships drops to 25%.

Intuitively, we can readily realize that despite the Republicans’ unfounded declarations that all this additional corporate welfare will produce higher wages and higher growth (relationships that are not founded on past empirical data), we can understand that businesses and corporations will greatly benefit and most individuals won’t. To recognize these tax changes’ effects we don’t need to rely on complex macro models that involve hundreds of equations and scads of variables – variables in addition to the very necessary but never-talked-about add-factors and mul-factors. 

Nevertheless, such models show that the Republicans’ reforms likely will provide a stunning 67% of the deficit-financed tax benefits to corporations, not citizens, as a Vox article showed. Here’s a summary of that analysis:

Type of Tax Change	Dollar impact over 10 years	Percent of total tax cuts
Individual tax cuts	$3.3 trillion (T)
Individual tax increases	-$3.0 T
Net individual tax cuts	$0.3 T	20%
Business tax cuts	$2.2 T
Business tax increases	-$1.2 T
Net business tax cuts	$1.0 T	67%
Estate tax repeal	$0.17 T	11%
Total tax cuts	$1.5 T

Source: Committee for a Responsible Federal Budget via Vox.

Notice the $3.0 trillion of individual tax increases. Also noteworthy and thoroughly unsurprising is that of 47.5% of the total federal tax reduction will be directed to the top 1% of income-earners. This large share does not include the benefits of repealing the estate tax that will aid only the already-wealthy. The middle 20% of income-earners (aka, the middle class) will receive but 8.7% of federal tax changes (worth on average $320). The Top 0.1%ers will benefit from receiving a disproportionate 25.1% of tax reductions, worth a tidy $278,370. Is this in any way equitable? Not in the slightest.

The Senate bill offers beneficence to high-roller GOP contributors that the House bill does in spades. These dispiriting results are likely to persist when the ultimate legislation has been agreed to by the Congressional conference committee and signed by our deeply-uninformed, don’t-connect-any-dots president. 

There are interesting stories about which slice of the “middle class” will or won’t benefit from the latest version of the House and Senate tax bills; or how residents in high-tax mostly blue states, student-loan holders, future electric vehicle and solar panel purchasers and low-income housing developers will surely suffer. And distressingly, these precursor bills probably have all too much to do with the likely final legislation.

At this point, it’s the many potential losers who are understandably audible. Unfortunately, I remain cynical enough to doubt that individual citizens or worthy causes can motivate any Republican legislator to make reasoned, broadly-beneficial changes to these biased tax change proposals so they can produce more effective and efficient tax policy. Why? Because of flawed Republican dogma and the herds of corporate lobbyists who are now attempting to further twist legislators’ arms and minds.

The Congressional rules that dictate calculating a decade’s worth of impacts are absurd on their face. They’re mostly a cover for false legitimacy. After long-disparaging President Obama’s effective fiscal stimulus legislation in 2009, the Republicans now dismiss any and all concerns about adding at least $1.5T to the national debt. Yet another example of hypocritical political double-speak.

We’ve known since last November that Republican tax reform was unlikely to help many people who need assistance, including countless people who voted for the president. Nevertheless, as Tacitus mentioned several millennia ago, and perhaps reading into the 2017 collective Republican mind, the unknown always passes for the marvelous. The Republican tax reform legislation won't be marvelous for all too many people. 

AN ALMOND TREE, LUTHERAN HOPS AND GREEDY WEED BUREAUCRATS

A fool sees not the same tree that a wise man sees. ~ William Blake 

Here’s a belated trick or treat. These three related events occurred during the just-past Halloween. Each one features a plant that is grown in the Golden State.

A tree grows in Hughson, not just Brooklyn.  This is an all too rare, whole-hearted good news story about caring people and an almond tree planted near Hughson, a small town in California.

Last year, the millions and millions of California almond trees that cover about 800,000 acres of Central Valley farmland, produced total cash receipts of $5.16 billion (B). California almonds represent the entire US almond crop and 82% of the global crop. That’s a lot of almonds.

But here I’m talking about a single, unique almond tree, shown in the pictures below. The Modesto Bee discovered this tree’s marvelous story.

This particular almond tree stands in the corner of an orchard near Hughson. It’s decorated each year on Halloween, Christmas and Valentine’s Day in commemoration of Danielle Genzoli, who died in a car accident 12 years ago when she was 16.

The tree had failed to thrive, and David Genzoli, Danielle’s father, planned to rip it out. But Danielle objected. “She was a nature girl and just loved the trees,” Kimber Genzoli, Danielle’s mother, said. “So it became their project to save this little tree. Before her death Danielle and her dad started the tradition by hanging a single bulb on the tree during the holidays.

The year Danielle died, David Genzoli didn’t have the heart to continue the tradition. But one day, when he and Kimber went by the tree they found that someone had hung homemade ornaments on it. They never found out who did it, but suspect it might have been a neighbor. “And it kind of morphed from there; people coming by just started adding to her tree,” Kimber Genzoli said. “It’s became a community project, and we are grateful for the people who contribute to this tree.”

Kimber Genzoli said Halloween was Danielle’s favorite holiday, so a few years later she hung some small pumpkins from the tree. This also was adopted by the community, with people stopping by regularly to add decorations.

From a single bulb, the tree at Christmas is now covered in ornaments and lights and even has a star at its top, as you can see above in the right-side picture.

Friends and strangers alike add ornaments, some personalized with pictures or their family name and the year.

People have left letters to the Genzoli family about Danielle’s kind heart and how she affected them, like one from a fellow student at Hughson High School who said Danielle one day sang “Don’t Worry Be Happy” to her when she saw her crying at school.

One year, Danielle’s first-grade teacher had her students make paper Valentines that hung from the tree in February. The tradition, too, has continued with Valentines from a new class each year, as shown in the left-side picture.

After Halloween and Christmas, the Genzolis take down the decorations and store them until the following year, and every year the collection grows. Danielle’s wonder-filled tree and its spirit is one more reason I enjoy eating almonds.

Lutheran Hops.  This Oct. 31st marked the 500th anniversary of Martin Luther’s protest to the Catholic Church. That’s because Oct. 31st isn’t only Halloween, it’s also Reformation Day, which celebrates Luther’s nailing his 95 Theses to the door of the Wittenberg Castle church in Germany on Oct. 31, 1517. His theses challenged the authority of the Catholic Church, and inspired the historic split in Christianity known as the Protestant Reformation. Apparently, historians now question whether Luther actually nailed his theses to that door. They think he might have merely mailed them to the archbishop. But beyond quibbling about whether they were mailed or nailed, it started something momentous.

That something wasn’t limited to changes in religious precepts. Nope, it also had to do with changes in beer production.

Every trendy craft brewery today touting hoppy beers should tip a brew towards Luther and thank him and his followers for stimulating the use of hops. Luther did it as an act of insurrection against the Catholic Church. He and his disciples provided a reformation in the production of beer. For the record, California grows a tiny amount of hops; much of our domestic hops come from Washington State, Oregon and Idaho. Here’s the story of Lutheran hops.

In the 16th century, the Catholic Church had a near headlock on beer production. History is repeating itself. My previous blog, “Wither My Craft IPA,” mentioned the heady concerns I have about today’s beer market where a very small number of producers (e.g., two) now dominate almost 40% of global beer making and distribution.

But let’s get back to the 16th century. The church’s control of the beer market came from its monopoly on the herbs and spices (e.g., sweet gale, mug wort, heather, rosemary, juniper berries, ginger and cinnamon) used to flavor and most importantly preserve the beer. The church taxed these needed beer ingredients.  

In an age when you risked your health by drinking plain water, beer was drunk by everyone. This widespread use of much safer fermented beverages was the norm in Germany and beyond for centuries. In the New World, beer and hard apple cider, whether it was made by Johnny Appleseed or not, was consumed by virtually everyone for the same reason. Treatment of public water wasn’t common until the late 19th century. Paisley Scotland seems to be the first Western European city to filter its water in 1832.

Fortuitously for Luther and other early German beer-makers, hops were not taxed by the Church. The Church’s priestly brewers considered hops unworthy, nasty weeds. In addition, Middle-Ages folklore which the Catholic Church adopted held that hops might not be healthy or good for you. Little did the Church know.

 

       Hops flowers

Beyond its being untaxed, hops were a far better preservative than herbs. Hopped beer thus contributed to local public health. It also contributed to regional and international business as hops’ preservative qualities allowed hopped beer to be safely sold further away from its brewery. This is why high-hopped beers like what came to be known as India Pale Ale could be transported across several oceans without problems. So, if you were an early Protestant brewer and also wanted to scorn the Church, you used hops instead of herbs. Such brewers changed the world of beer.

These Protestant brewers included Luther’s wife, Katerina. She opened a successful brewery that produced large amounts of hopped beer. Luther was delighted. Lord Katie, as he kindly called her, had assured him a steady supply of his favorite drink. We should thank Martin Luther for his bravery in pushing hops into beer. I’ll drink to that.

Some folks consider Luther’s strong promotion of hopped beer his second Reformation, and perhaps the most important one that many benefit from every day, not just Sundays.  

Greedy Weed Bureaucrats.  This tale is a coda to my blog last month, “The High Price of Getting High,” about marijuana, which California grows plenty of. One knowledgeable policy analyst said that high marijuana tax rates "will prevent the minimization of the black market,” a clear policy goal of marijuana legalization. More information about the California marijuana taxes became available on Halloween.

The expected price of California’s recreational marijuana sold legally after January 1st keeps growing. Why? In large part because marijuana is California’s single biggest cash crop. Cannibas’ production value is roughly 50% greater than that of grapes, the state’s second most lucrative crop. Thus, local authorities see legalization as a big new revenue-enhancement opportunity. They are proposing multiple large taxes on marijuana consumers, distributors and growers. Revenue-hungry municipal and state agencies will, in effect, feed the black market by increasing the tax-inclusive price of legal, recreational marijuana. The price of getting high in the Golden State is getting higher.

The fundamental economic relationship that tax authorities may have forgotten is this: high prices of legal marijuana will reduce its sales and will allow California’s existing, large black market weed to prosper. This is in spite of the relatively price inelastic nature of the demand for cannibas.

A new study issued by Fitch Ratings and reported by CNN on Halloween notes the breadth and height of these expected taxes on California recreational marijuana. They are shown in the table below.

California’s Proposed Taxes and Costs for Recreational Marijuana

Tax Type	Tax Rate or Level
Consumer sales tax	22.25% to 24.25% (includes 15% state excise tax)
Local business/distributor tax	1% to 20% of gross receipts or $1 to $50 per square foot of plants
Grower’s tax	$9.25/oz. flowers and $2.75/oz. leaves
Grower’s cost for registration and environmental compliance	$100,000 (est.)

Source: Fitch Ratings and CNN

These proposed consumer and distributor tax rates may total 45%. Notice also the hefty potential costs of growers registering and complying with the state’s environmental regulations. Such substantial “entrance fees” for the thousands of California’s illegal growers will act as a large disincentive for them to enter the legal market.

These sizable tax rates have a familiar ring to them. My experience with public authorities in several states’ municipalities is few have any systematic sense about how consumers or businesses may respond to their tax increases. They seem to believe that if for example they increase a tax by 10%, then tax revenues will also increase by 10%. This is a naïve expectation, especially when there is a substitute good not subject to the tax, like Emerald Triangle cannibas.

The authorities appear to believe businesses and consumers have virtually no sensitivity to high taxes; they will supply and buy the same amount of marijuana regardless of the taxes’ rate. This is a mistaken belief.

The tax-induced high prices of legal recreational marijuana in California will be good news for growers of black market weed. There will certainly be new buyers of marijuana after the New Year who will pay the high legal price because it’s legal and a less risky transaction. However, it’s also likely that other consumers (including many existing buyers of Emerald Triangle marijuana) or price-sensitive shoppers will buy from black-market suppliers and doubtlessly enjoy lower prices, just like happened in Washington State.

California’s marijuana policy-makers should learn about and/or remember Washington State’s, Oregon’s and Colorado’s early legalization experiences that forced these states to lower their initial,-uncompetitive, high tax rates. Given their fiscal greediness, I’m not sanguine that California’s marijuana tax authorities will remember basic economics and other states’ experiences. Time will tell as January 1st approaches.

THE HIGH PRICE OF GETTING HIGH

Let me get to the point / Let's roll another joint / Turn the radio loud / I'm too alone to be proud. ~ Tom Petty 

State marijuana markets are becoming white as well as black. More states are passing laws or propositions that legalize recreational and/or medical marijuana; creating legal white, regulated markets. Currently, 29 states and the District of Columbia have laws broadly legalizing marijuana in some form.

Despite characterizations by advocates, there is no national market for marijuana because of strict federal rules and regulations from the Justice Department’s Drug Enforcement Administration (DEA). According to federal statute, no marijuana (not even a single preroll) can be legally transported across state lines. All markets for medical or recreational marijuana are thus legally confined to individual states. Each state has its own rules and regulations for cultivation, production, sale and use of marijuana.

The Department of Justice Secretary Jeffrey Beauregard Sessions has clearly expressed his distaste for marijuana of any sort. As Alabama Attorney General he strongly supported an Alabama law that would have established mandatory death sentences for a second drug trafficking conviction, including for dealing marijuana. It was never enacted. Other cannibas-related statements by Mr. Sessions include: “Good people don't smoke marijuana;” marijuana reform is a "very real danger;" and it is “not the kind of thing that ought to be legalized.” I’d say Mr. Sessions is the kettle calling the pot black.  

According to federal statute, marijuana remains classified as a Schedule I drug, along with heroin and peyote. Schedule I drugs are those that have “no accepted medical purpose and a high potential for abuse” according to the DEA. Classifying marijuana as a Schedule 1 drug is a farce. If Mr. Sessions believes marijuana’s Schedule I designation is correct, then alcohol should be added to the list of Schedule I drugs, because its “high potential for abuse” is a matter of demonstrable knowledge (just ask one of the 2 million AA members). Oops, then he’d be battling the alcoholic beverage industry  that had sales totaling $223.2 billion in 2016. Not gonna happen. Like all too many of the president’s cabinet who play follow the leader, Mr. Sessions espouses his faith in inconsistent, misbegotten policies. States’ rights are fine and dandy when they “enhance” religious freedom or school choice, but nasty when they relax outmoded federal policy.

I believe marijuana/cannibas legalization for recreational and medical use is worthy and worthwhile. There are several useful objectives that can be met with legalization. The potential benefits from shelving prohibition and establishing publicly-regulated (white) marijuana markets – that The Economist terms “reeferegulation” – include: protecting consumers, promoting improved health, reducing penal sentencing of non-violent (mostly black) youth, saving the police money, raising tax revenues and putting criminal black markets out of business, as well as extending personal liberty. Beyond direct marijuana sales are benefits involving increased property values and more jobs (both in government and in marijuana production and distribution). Hey Mr. President, perhaps you should provide training and travel vouchers for former coal miners from WV and WY to head for states that have already legalized weed, where jobs are budding.

I highlight in this blog how stakeholders in legalized marijuana markets – producers/distributors, consumers and particularly state regulators – have affected its white market price.

Marijuana’s market price is a crucial factor and serves as a foundation for several available policy choices to achieve the above-cited benefits, especially dousing criminal black-markets and raising tax revenue. Despite the lengthy and expensive War on Drugs conducted by the DEA, the black-market supply of marijuana has never been acutely compromised. Curiously, pro-legalization advocates now echo the same benefits – lower criminal activity and increased tax revenue – that champions of Prohibition repeal proclaimed over 80 years ago with passage of the 21st  Amendment.

As mentioned above, legalized marijuana markets continue to expand across the US and beyond. This coming January, California expects to begin establishing the nation’s largest recreational marijuana market alongside those already operating in Colorado, Washington State, Oregon, Alaska and Nevada. In these states the legalized market for marijuana operates proximate to the traditional, illegal black market.

One of the important, repeatedly-mentioned goals of legalization is to eliminate black market marijuana supplied by criminal enterprises, a crucial goal that states need to achieve if they want to avoid federal intervention under the 2013 Cole Memo. It is a basic policy challenge for the regulated white market price to reflect this goal.

Public agency intervention with taxing and regulating white-market marijuana is a balancing act. This involves both interceding with the demand of legalized marijuana and its supply. Public authorities in each of the eight states now dealing with white market marijuana have confronted this challenge differently. If the tax rate is set too high, thus escalating the retail price, demand for white-market marijuana may be stunted. If growers and distributors believe that authorities have imposed too many or too stringent licensing and related regulations and not permitted sufficient numbers of retail dispensaries, then the supply of legalized marijuana may be inadequate. In either case, post-legalization customers can return (or remain) where they were before, in the underground black market. Also, if the price of the newly-legalized marijuana is much higher than the black market “street weed,” marijuana consumers may stay with their traditional sources rather than switch to the white market. If this happens, optimistically-forecast marijuana tax revenues won’t be collected, as happened in Washington State.

The growth of legalized medical and recreational marijuana sales has been impressive. In 1996, California became the first state to legalize medical marijuana when voters approved Proposition 215. Five years ago recreational marijuana wasn't legal anywhere in the US. Yet in 2016, sales of legal weed grew to $6.6 billion (B), according to New Frontier Data that includes $4.7B for sales of medicinal marijuana (in 29 states and Washington DC) and $1.9B for recreational weed (in Colorado, Washington, Oregon and Alaska).

The table below presents several facets of the 8 state recreational marijuana markets where it’s been legalized so far. The table lists states in chronological order of legalization. Cannibas shops that sell legal recreational marijuana and “edibles” have been open for business in Colorado and Washington since 2014, in Oregon since 2015, in Alaska since Oct. 2016 and in Nevada since July. The industry as a whole is projected to exceed $24B in sales by 2025, an annual growth rate of 16%. Despite its widening legality, if you show up for work and flunk a drug test due to marijuana use in these states, you still can be fired.

The State of State Recreational Marijuana Markets

State	When Legalized	First Month Sales ($M)	Aver. Mkt. Price* ($/oz.)	Sales Tax Rate
Colorado	2014	$15	$242	22%
Washington	2014	$3.8	$324	37%
Washington DC	2014	NY	$600	0%**
Oregon	2015	$15	$210	17%
Alaska	2016	$0.75	$298	$50/oz.
Nevada	2016	$27.1	$270	15%
California	2016	NY	$250	15%
Massachusetts	2016	NY	$340	3.75%
Maine	2016	NY	$297	10%

Sources: Priceofweed.com, The Cannabist, Tax Foundation. NY: Not Yet.

*Price of “high-quality” marijuana. **Federal law prohibits DC from taxing weed.

From the table, first-month sales of marijuana and related products have varied quite a bit for the 5 states where legal retailing has occurred. Nevada’s first-month revenues are the largest so far, by a wide margin. Because only Nevada-grown marijuana can be legally sold there, many dispensaries soon closed their doors after opening them. They had no product to sell because demand had far outstripped supply. After July, legal supply has become more available for the increased number of dispensaries.

The last column shows each state’s tax rate on marijuana as of January 2017. These rates can include either retail sales or excise taxes on marijuana, but don’t include wholesale taxes, optional local taxes or standard sales tax.

Washington DC’s rate, 0%, an obvious outlier, was set by Congress. After DC voters approved legalization in a 2014 an initiative, conservative members of Congress, who at times seem to work in DC, were upset, especially Rep. Andy Harris (R-MD). Medical marijuana has been available in DC for almost two decades. Rep. Harris did not want legal recreational marijuana on the streets around or beyond his Longworth Building office. Luckily for him, the House of Representative holds complete fiscal power over DC’s budget. Republicans have passed annual spending bills since 2015 that contain a rider written by Rep. Harris that prohibits the DC Council from using any appropriated funds for taxing or regulating marijuana. If you come to or live in Washington DC, anyone over 21 can legally possess up to 2 oz. of marijuana, but you cannot legally buy or sell it anywhere in the District. So it goes.

Beyond DC, state sales taxes vary considerably. Washington State’s marijuana tax remains the highest (37%), even though it was reduced in 2016. Massachusetts’ 3.75% is the lowest. States’ marijuana tax rates have tended to diminish after the first two states – Colorado and Washington – allowed legal sales.

Looking at Colorado and Washington illustrates the trade-offs and consequences arising from “more lenient” versus ”stricter” regulation. Colorado initially set its marijuana taxes fairly low, at 28%. It also took a somewhat lenient approach to licensing sellers, meaning there were many of them. In 2016 there were 698 storefronts in Colorado that sold medical or retail marijuana, more than triple the number of Starbucks in the state. Colorado has more than 2.5 times the marijuana dispensaries than Washington State initially had, after accounting for the population of each state.

First-month total revenue in Colorado was $15M, four times higher than Washington State’s. Perhaps not surprisingly, Colorado is now the most popular spring vacation destination for US college students; the Colorado Cannibas Chamber of Commerce (yes!) has done its job. Beyond spring, almost one-quarter of Colorado’s 77M yearly visitors, and one-third of those between 25-34 years, said that availability of recreational marijuana was a reason they chose to visit the state.

In 2015 Washington initially set its taxes much higher, at an effective rate of 44%, and was much stricter with licenses for growers and retailers. Only 334 retail shops across the state were approved by the State Liquor and Cannibas Board. First-month sales were $3.8M. The Board hastily increased the total licensed retailers to 556 after it became obvious that there were too few outlets (and tax revenue). Given supply and demand and all that, Washington State’s legal marijuana prices were 67% higher than Colorado’s in 2014. Washington’s Board has since reduced the effective tax rate but it’s still the highest of any state. The legal white market marijuana price in the state is often higher than the black market price.

As a consequence, Washington’s legal sales accounted for only about 30% of the state’s total estimated cannibas market (both the white and black markets), whereas Colorado’s legal sales met about 70% of total estimated demand in Colorado. Hence, a strong majority of Washington marijuana users continued to buy from existing black market sellers after legalization. This outcome was not only due to Washington State’s early higher prices but because there were fewer licensed sellers, especially when compared to Colorado. Price differences remain; Colorado’s current average market price is $82/oz. less expensive than Washington’s.

Lower marijuana tax rates may reduce overall tax revenues, but essentially can increase the market share of legal marijuana relative to the total demand, and make life harder for black market suppliers.

The crowd-sourced average market price for “high-quality” marijuana, posted by priceofweed.com, also varies considerably. The table shows that Oregon has the lowest market price, $210/oz. Washington DC’s price of $600/oz. stands out as the highest, but remember DC as yet has no legalized recreational marijuana sales due to Congress’ restrictions. It’s a fair assumption that in DC the quantity of marijuana demanded strongly exceeds the quantity supplied, hence high market prices.

In general, market prices in eastern states exceed those in western states. The average market price in northeastern states – DC, DE, MA, ME, NY, PA and VT – is $376/oz. The average price in western states – AK, AZ, CA, CO, NV, OR and WA – is $270/oz. A fair amount of premium-priced California marijuana ends up on the East Coast as well as points in between.

The chart below shows how US wholesale prices have dropped between April 2015 and June 2017, as state-legalized marijuana sales have dramatically expanded. 

Source: Cannabis Benchmarks. Wholesale price in dollars per pound.

The marijuana harvest usually occurs each fall, as shown with price decreases on the chart for the latter part 2015 and 2016. The expanding legal markets in Oregon, Colorado and Nevada contributed to the dramatic reduction in the 2016 fourth quarter price according to Cannabis Benchmarks. Wholesale cannabis prices dropped 18.6% in the first half of 2017.

The “biggest Kahuna” California market for legalized recreational marijuana is to begin in less than three months. But all is not going smoothly in the Golden State. Taxing white market marijuana is not likely an issue – the prospective marijuana tax rate for consumers is 15%. One concern centers on the long-time existence of a sizable black market whose suppliers have been loath to adopt new supply-side regulations. Another problem is that localities have important responsibilities for establishing rules and licensing retail dispensaries, but local and county governments are behind schedule in these essential duties.

Voter approval of Proposition 64 legalized recreational marijuana last November. It also decriminalized the possession of certain amounts of marijuana (it’s now a misdemeanor, not a felony), allowed individuals to grow six plants at home, set rules for the sale and cultivation of regulated plants, and sought to better manage the largely unregulated medical cannabis system. Unlike other states that embarked on creating a white market for marijuana, California has had a well-known, substantial black market that produces high-grade weed. California’s newly-enfranchised marijuana regulators face a unique conundrum that can be summed up in two words: Emerald Triangle.

Growers in Northern California’s Emerald Triangle region have produced large amounts of mostly outdoor, superior marijuana for decades. It’s the largest cannibas-producing area in the US. According to Arcview, its market value is about $7B. Many connoisseurs believe it’s the best in the world and are quite willing to pay high prices. California produces seven times more marijuana than it consumes, according to one estimate. Because the potential rewards are so significant, the Emerald Triangle along with the rest of California is almost certain to remain a major (illegal) exporter to other states even after the white market becomes established. However, the huge wildfires in Northern California aren't just destroying homes and vineyards; cannibas cropland is also going up in flames. For cultivators whose crop hasn't been directly destroyed, the fires' heavy smoke will reduce the value of their crop.  

So far only about 3,500 marijuana growers in the Emerald Triangle have applied for permits to farm within the white market. This number sounds like a lot of cultivators and would be in virtually any other region. But it represents just 11% of all growers in the Emerald Triangle. Many cultivators/growers have been dissuaded by what they consider significant effort needed to obtain a permit, as well as the fees, taxes and enduring regulatory requirements. If they stay beyond the new, white market system, these growers probably face lighter punishments and avoid paying taxes, fees and the costs of meeting environmental standards. The way one local grower put it, “Why do I have to get permits? My parents didn’t have to and my grandparents certainly didn’t have to.” Confirming this reluctance, Bruce Smith, a lieutenant with the Mendocino County Sheriff’s Office who leads the county’s efforts to shut down illegal marijuana farms stated, “The vast majority aren’t permitted.”

If these trifling levels of white-market participation continue through January, California may face the ironic circumstance of producing an insufficient amount of legal marijuana, despite being the nation’s largest domestic producer. That situation won’t reflect much balance between demand and supply; legal prices will likely spike and make the task of slaying the black market marijuana dragon difficult.

Can California sufficiently merge its large, existing black market with its nascent white market? It’s the key question that will influence the success of California’s initial foray into legal recreational marijuana. This issue hopefully can be resolved through discussions with growers, regulators, sellers and consumers before the New Year. Paraphrasing the late, great Tom Petty, I doubt if these discussion participants will be too alone, but they may be too proud. 
A Coda on Greedy Weed Bureaucrats.

New information became available on Halloween about the expected total taxes to be charged on California's legalized, recreational marijuana. One knowledgeable policy analyst said that high marijuana tax rates "will prevent the minimization of the black market,” a clear policy goal of marijuana legalization. Minimizing California's sizeable black market for marijuana is not likely.

The expected price of California’s recreational marijuana sold legally after January 1st keeps growing. Why? In large part because marijuana is California’s single biggest cash crop. Cannibas’ production value is roughly 50% greater than that of grapes, the state’s second most lucrative crop. Thus, local authorities see legalization as a big new revenue-enhancement opportunity. They are proposing multiple large taxes on marijuana consumers, distributors and growers. Revenue-hungry municipal and state agencies will, in effect, feed the black market by increasing the tax-inclusive price of legal, recreational marijuana. The price of getting high in the Golden State is getting higher.

The fundamental economic relationship that tax authorities may have forgotten is this: high prices of legal marijuana will reduce its sales and will allow California’s existing, large black market weed to prosper. This is in spite of the relatively price inelastic nature of the demand for cannibas.

A new study issued by Fitch Ratings and reported by CNN on Halloween notes the breadth and height of these expected taxes on California recreational marijuana. They are shown in the table below.

California’s Proposed Taxes and Costs for Recreational Marijuana

Tax Type	Tax Rate or Level
Consumer sales tax	22.25% to 24.25% (includes 15% state excise tax)
Local business/distributor tax	1% to 20% of gross receipts or $1 to $50 per square foot of plants
Grower’s tax	$9.25/oz. flowers and $2.75/oz. leaves
Grower’s cost for registration and environmental compliance	$100,000 (est.)

Source: Fitch Ratings and CNN

These proposed consumer and distributor tax rates may total 45%. Notice also the hefty potential costs of growers registering and complying with the state’s environmental regulations. Such substantial “entrance fees” for the thousands of California’s illegal growers will act as a large disincentive for them to enter the legal market.

These sizable tax rates have a familiar ring to them. My experience with public authorities in several states’ municipalities is few have any systematic sense about how consumers or businesses may respond to their tax increases. They seem to believe that if for example they increase a tax by 10%, then tax revenues will also increase by 10%. This is a naïve expectation, especially when there is a substitute good not subject to the tax, Emerald Triangle cannibas.

The authorities appear to believe businesses and consumers have virtually no sensitivity to high taxes; they will supply and buy the same amount of marijuana regardless of the taxes’ rate. This is a mistaken belief.

The tax-induced high prices of legal recreational marijuana in California will be good news for growers of black market weed. There will certainly be new buyers of marijuana after the New Year who will pay the high legal price because it’s legal and a less risky transaction. However, it’s also likely that other consumers (including many existing buyers of Emerald Triangle marijuana) or price-sensitive shoppers will buy from black-market suppliers and doubtlessly enjoy lower prices, just like happened in Washington State.

California’s marijuana policy-makers should learn about and/or remember Washington State’s, Oregon’s and Colorado’s early legalization experiences that forced these states to lower their initial,-uncompetitive, high tax rates. Given their fiscal greediness, I’m not sanguine that California’s marijuana tax authorities will remember basic economics or other states’ experiences. Time will tell as January 1st approaches.