Marx my words

It was intensely frustrating that the 30-year experiment in economic conservatism could collapse so spectacularly and yet liberalism seemed to have so little to offer as a counter ideology. Some occupiers decry what they call "neo-liberalism", by which I think they mean post-Carter moves by Democrats to liberalize international trade and moderate regulation, but that's a painfully simplistic argument. The problem with the left isn't that it has evolved improperly, but rather that it hasn't evolved enough.

Too much leftist thinking relies on an outmoded Marxist framework where the most significant economic dynamic is a fundamental clash between the owners of capital and the owners of labor. But things have changed in the 140 years since Das Kapital was written, including a shift in business structure to shareholder-owned corporations. The result has been a complete dissolution of the distinction so crucial to much leftist ideology. Consider, for example:

• According to research sponsored by the Centre for Economic Policy Research, as of 2006 roughly half of all stock issued by US corporations was owned by workers, primarily through pension funds and 401(k) plans. This is more than a ten-fold increase since 1945.

• CALPERS, the pension system for California state public employees, has a $200 billion investment portfolio, bigger than Berkshire Hathaway's market capitalization, by comparison, and is broadly recognized as "a recognized global leader in the investment industry, and "one of America's most powerful shareholder bodies."

• Pension funds are major investors in the sort of private equity and hedge fund vehicles that some make hay out of vilifying as job destroyers and market manipulators. It's hard to get data on these assets, but consider that the membership of the ILPA, a private equity investor advocacy group that boasts of representing over $1 trillion in private assets, is over 60% pension funds and university endowments. 

Workers hold a significant ownership stake in corporations, and their retirement savings are driving much of the financial activity that seems to upset some would-be reformers. I'm not arguing that Marx's theories should be entirely dismissed - I don't have the energy or smarts for that - but the left would do well to broaden its intellectual underpinnings. One notable attempt to do so is in Cornell economist Bob Frank's highly recommended latest book, in which he makes a compelling argument for the explanatory power of Darwinism to understand our economic state of affairs.

Equal opportunity, my hat

Some conservatives (I'm looking at you, Mitt Romney and David Brooks) try to sound even-keeled by describing their ideological differences with liberals as being the difference between being concerned with equal economic opportunities versus being concerned with equal economic outcomes. In other words, instead of playing Robin Hood, let's focus on making sure everyone has a fair shake. Sounds nice and it has a simple elegance, but do not be fooled: it's utter malarkey.

As an example of the problem here, ask how someone dedicated to creating conditions for equal opportunity can object to affirmative action, a policy pilloried by the right, yet one squarely aimed at providing historically disadvantaged people a hand getting up to the starting line? I suspect that what conservatives are really trying to express is ultimately a libertarian fantasy centered on the misguided notion that games would be played more fairly if only the referees would get out of the way.

This wouldn't be such a problem if the stakes weren't so high. Consider the shocking disparity outlined in the chart below (courtesy of Pew Research Center) and try to imagine a credible and fair solution that involves less government. We should remember this if at any point in the next year any of us catch ourselves wondering if Romney wouldn't be so different from Obama.

The end of capitalism

It is reasonable to question the economic system that brought about the fiasco of the last few years, and many op-ed pages and activist movements have been obliging us. Still, there are two important aspects of this that tend to get overlooked and as a result end up distorting the picture.

First, debates about taxation and regulation are not debates about capitalism. Sometimes people point to the Western European nations as being socialist states, but that's ridiculous. Their economic systems are pretty much the same as ours; the differences are incremental levels of taxes and resulting government services. Similarly, the effort to reform financial services regulation is more accurately described as being about about two things: replacing the regulation Clinton and Bush dismantled and modernizing the oversight framework.

Second, I haven't seen much serious discussion about alternatives (and for good reason, as we'll get to in a second). There's plenty of media questioning capitalism, but they tend to have a common thread of getting small when it comes to solutions. A lot of people are raising questions and are challenging the assumptions underpinning our society - as well they should be, always - but in general I'm hearing a lot more questions than answers. Maybe I'm just missing out - let me know if you are seeing different.

To be sure, these debates are a healthy reaction to what could be fairly described as a massive systemic failure, but the proposed solutions tend to be more about tweaking the current system to address its now obvious shortcomings than about actually changing the nature of how resources are owned and allocated in our society. Both the reformers and their opponents would be well-served to keep this in mind as we move forward. Indeed, the absence of credible alternatives strengthens the premise. I think this quote from Economist editor Matthew Bishop (from this recommended set of interviews by David Brancaccio) sums things up nicely:

"I think the worst thing we could do would be to actually throw out capitalism and I think the second worst thing we could do would be to actually fail to reform it."

The bull case for US stocks

Despite what you might hear, it is pretty much impossible to consistently generate outsized investment returns. It's not enough to be skillful in evaluating complex economic situations; it also requires a deeply contrarian attitude, because essentially what you doing is trying to predict a change in everyone else's predictions. Basically, to beat the market you have to be the Quixote whose windmill turns out to really be a dragon. How often does that happen?

With that caveat (that is, if you are smart, you will stop reading now), I think US stocks offer a better than average long term investment opportunity right now. Popular opinion has been slow to acknowledge our improving prospects and at the same time is overly concerned with the potential impact of Europe's problems.

The US economy is improving. Almost every economic indicator in the last couple of months has come in better than consensus expectations. The "conventional wisdom" is only slowly coming around to this, but unless you are a soft-serve ice cream aficionado, you must admit it's been a while since you heard talk of a double dip. I won't go through all of the data here, but I would like to briefly discuss one statistic that has been the source of recent hand-wringing: the labor force participation rate. 

Bears note that a major driver of the recent improvement in the unemployment rate is that people are dropping out of the labor pool at a historically high rate. To the extent these drop-outs are occurring out of frustration, it's a big problem. However, most of the media coverage I have seen omits the impact of the nascent wave of baby boomer retirements. This insightful Pew Research Center report observes that starting this year, on a daily basis 10,000 boomers are reaching traditional retirement age and will continue to do so until 2030. It may be reasonable to expect boomers to retire later than previous generations, but still the overarching trend is undeniable: without substantial immigration, the labor force participation rate will decline. And while this is a serious threat to our long run growth prospects (see: Europe, Japan), assessments of the health of our current labor market need to take this factor into account, and I haven't seen many that attempt to do so.

Europe's problems may not be as big a threat to the US economy as people seem to think. The euro is facing an existential threat, and last week's summit deal doesn't inspire confidence. However, not only is it hard to say how a euro break-up might affect the US economy, I don't think China would let it happen in the first place. 

To my thinking, there are two areas where the fallout will be felt in the US if the EU breaks up: trade volume and credit availability. This WSJ blog post argues that the crisis has had little effect on US trade so far, and that's not surprising, given that only about 10% of our exports go to Europe. Furthermore, the longstanding trend, recently bolstered by Obama's efforts to boot Asian trade, is for decreasing reliance on exports to Europe in the future. Moreover, most of our trade with Europe is with the stronger countries, so even a profound recession in Europe isn't likely to tank overall US export demand. 

The other potential issue is with a potential credit freeze if what's been a slow-motion run on European banks accelerates. The reason why I don't think this is likely to be as significant a problem as it was when Lehman went down is simply that US policymakers and financial institutions more or less just spent the last 3 years learning how to deal with liquidity panics, so they are likely to be more aware of the warning signs and better equipped to manage them than they were the first time around. 

Meanwhile, China's prosperity is heavily dependent on trade with Europe. Not only does China's economy generally rely more on exports than the US economy does, the 27 EU nations are collectively China's biggest export destination. China can't afford for Europe to slide off a cliff and thus when push comes to shove it's likely China will deploy their massive cash reserves to forestall any of the more extreme scenarios.

US stocks are relatively cheap. It's next to impossible to determine the intrinsic value of a stock, but there are some indications that stocks are cheap relative to other types of investments. One indicator I find useful is to compare the dividend yield on stocks to the yield on 10-year US Treasury debt. In other words, comparing the immediate income potential of owning stocks to that of owning bonds. Right now, and for most of this year, the yields have been pretty much the same, and this is unusual. Since the 1950's, government bonds have had higher income yields than stocks, usually significantly so, as investors look to be compensated for the fact that stock investors have more potential for capital appreciation and less exposure to inflation risk. 

Maybe my argument boils down to nothing more profound than the suggestion that if you're feeling quixotic, take a tilt at US stocks. What's your take? How do you see things playing out in the US economy?

Why I passed on the 24 CD audiobook of Rumsfeld's memoir at the Border's liquidation sale

In reading this review of Condoleeza Rice's memoir, I was reminded of the moral bankruptcy of Bush's foreign policy. No wonder the GOP presidential candidates focus on domestic issues - as hard as it must be for Conservatives to maintain the cognitive dissonance necessary to promote a failed economic ideology, can you imagine trying to bear the mental weight of the disastrous neocon agenda? And as long as it may take the Conservative movement to evolve its take on economics, it's going to take them that much longer to come up with a new set of foreign policy principles - they are very much in the "stove-hot!" phase of that process.

That I could forget speaks to how successful Obama was in turning the page (cue: Seger). And while some felt he turned it too quickly in not prosecuting Bush's henchmen, I like to think in that decision was some consideration for the voters that reelected Bush. As much as I wanted to move on, these people's sense of self-worth demanded that we do so. Do you remember how pained they were in the later years of the Bush administration? I used to get sympathy migranes just talking to those among my friends and colleagues who had the courage to fess up.

At this point you may reasonably conclude that I don't really know what I'm talking about when it comes to foreign policy, so let me upgrade this post with a smarter offering from a smarter economist, a recent tweet from Richard Thaler: "What exactly is wrong with 'leading from behind'? isn't that what great QBs and point guards do?"

The letter the New York Review of Books didn't want you to read

I can't blame them for not publishing this: my letter is playing small ball on an otherwise insightful piece. Still, in reading this review I came to the realization that environmental economists are misguided in prescribing national energy taxes as a cure to the negative side effects of energy consumption - it's a global issue and individual nations acting on their own can't do much to fix it. p.s. I added some pictures at the bottom to depict the scenario I inadequately described in the second paragraph.

RE: “Energy: Friend or Enemy,” William D. Nordhaus, October 27, 2011.

To the Editors:

Dr. Nordhaus introduces an important explanation of the global oil market with his bath tub analogy, but his ultimate policy proposal is unfortunately inconsistent with the analogy. He proposes that the US implement a tax on oil consumption to ensure that its full social cost is paid for by the consumer. However, the very insight his analogy provides is that the oil market is fully globalized; accordingly, an oil tax would need to be imposed on all oil consumers to be effective, not merely US oil consumers.

Consider the effect of a US-only oil tax. The cost of oil in the US increases, decreasing US oil consumption. But while the cost increase is localized, as the bath tub view notes the demand drop is felt globally, driving down the global price of oil. This in turn drives up non-US oil consumption and negates the positive environmental effects of the US oil tax. 

No matter where in the world energy is consumed, its environmental costs are felt globally.  Therefore, only a globally-coordinated response can effectively deal with the social costs of energy. Moreover, this is likely to be a more palatable approach for those concerned with putting the US at a competitive disadvantage to its trading partners.  Indeed, this could be the (all-too) rare case where political expediency and effective environmental policy coincide.

Want to really occupy Wall Street? Occupy the board room!

Below is my comment on Steven Davidoff's piece in today's New York Times, where he points out that weak oversight by MF Global's board of directors had a role in its spectacular demise. It's a good piece, but unfortunately he kind of phones in the ending, calling for more regulation and noting that "hard questions" need to be asked. 

Fortunately, some of the answers aren't so hard to come by: perhaps MF Global's board's oversight wasn't more rigorous because the board was chaired by Corzine himself.

It defies reason to expect a board to meaningfully oversee management on behalf of shareholders when they are effectively overseeing themselves. And yet if only this problem were limited to MF Global; however, the Corporate Library's research indicates that fully two-thirds of the S&P 500 have a board whose chair is also the CEO.

To Mr. Davidoff's call for regulation, readers should be forgiven if they are unenthusiastic about pinning their hopes on Congress. Still, shareholders could empower themselves if they could find a way to organize their interests. As it stands, it's surprising to me that we haven't yet seen much shareholder activism from organized labor, as their pension funds are among the biggest corporate investors going. To take the thought one step further, given the longstanding trend to 401k plans (which predominantly invest in mutual funds), index fund providers looking to differentiate themselves should start offering funds that will take more activist roles with their proxy votes. Given that Federal Reserve studies show that a majority of all US stock is owned either by pension funds or mutual funds, these vehicles have great potential as voices for shareholder interests.

The letter The New York Times didn't want you to read

...presumably because their editorial standards wouldn't countenance it (and understandably so), but still I'm too lazy to let anything go to waste. Basically I was just trying to say that Livingston's argument couldn't survive the fact that he was confusing correlation for causation and effect for cause. Still, I appreciate his attempt to lend a new perspective; it's just that his has holes you can drive a truck through - and that's something both of our pieces seem to have in common.


To the Editor:

In "It's Consumer Spending, Stupid" (Op-ed, Oct. 26, 2011), James Livingston offers a provocative but ultimately confused take on our economic woes. Business investment's shrinking share of GDP is better understood as improvement over time to capital efficiency (compare the cost difference of launching Google or Facebook to earlier counterparts such as GE or Ford). Furthermore, elevated corporate cash balances were a reaction to, not a cause of, the bursting housing bubble and ensuing credit crunch.

His concerns about economic justice are admirable, but it’s counterproductive to pit profits against wages, as not only do they not stand in conflict (most companies cannot sustainably grow profits without increasing payroll), but pension funds and 401(k) plans are among the biggest shareholders. Indeed, while recent events have highlighted serious flaws in corporate governance, concerned citizens should look to their considerable collective power as owners, not workers or voters, to effect real change.  

blame game blues

From the very early days of the economic crisis up through this very moment, a considerable amount of energy has been put toward finding someone to take the blame.  While yes, there are some bad guys out there, there always were and always will be bad guys, and the core of the problem is systemic: weak regulation and screwed-up incentives did more damage than any criminal or unethical behavior.

If we're truly interested in preventing this from happening again, the scapegoating has to stop.  Not only is it a horribly destructive force (consider that the last great global economic crisis inspired its own desperate scapegoating that led to the bloodiest war in history), it's a cheap out in that it's easier to point a finger at someone else than to consider how our own behavior may have contributed to our problems.  In this case, I think our collective shortcomings were largely ideological, with major errors on both sides of the political aisle. So, I propose that we call off the dogs and instead focus our efforts on addressing three concerns:

1. Re-regulating the financial system: The key principle to appreciating the importance of regulating the financial services industry more than others is that in capitalist societies, the financial system acts as a crucial utility and thus should be regulated in a manner similar to how we regulate other utilities, such as the electrical power industry (i.e., heavily, rendering it decidedly boring).  This was a lesson we learned in the Great Depression but somehow collectively un-learned in recent decades, and did so in a bi-partisan fashion.  While deregulation is a central cause of the Libertarian movement, in fact it was Jimmy Carter who kicked off the whole deregulatory hootenany with the airline industry in 1978, and the Clinton administration played a singular role in deregulating the financial services industry (namely, with the repeal of the Depression-era Glass-Steagall act and in deliberately choosing to not let regulations keep pace with the "innovation" occurring in the derivatives markets).  I think Dodd-Frank was a good first step but more needs to be done to address the global nature of our financial system.  This is not an easy lift by any means, but in the long run we will need much more coordination among global regulators in order to properly oversee things, and the difficulty of the task only demands that more effort be put toward it.

2. Correcting the incentives in our tax system: Supply-side economic theory is based on the observation that, all things being equal, increasing supply does more to improve social welfare than increasing demand does because, while both make more goods available to more people, increasing demand is eventually counterproductive because it is inflationary.  It further contends that the most efficient way to increase supply is to lower the costs of production.  I have no qualms with this insight and accept it as a given.  My complaint is with the manner in which it has been applied.  To put it plainly, the entire idea of a "trickle down" effect of disproportionately lowering taxes for the wealthy is downright stupid.  The argument you hear for subsidizing rich people, repeated as recently as last year by the GOP during the debate over extending the Bush tax cuts, is that much of the income in question is actually business income generated by sole proprietorships.  However, the data indicates otherwise.  Still, regardless of how you interpret the data, it's hard to argue that if your aim is to lower the costs of production for companies it wouldn't be vastly more efficient to lower corporate taxes than personal taxes. Hell, I would consider eliminating corporate taxes entirely, but that's an argument for another day.  In any event, it wouldn't be too hard to offset the hit to government revenue with a combination of increases in taxes on rich people and on the dividends corporations pay their shareholders (and in a paragraph I'll show you data suggesting that taxes on dividends are highly progressive, as regular working stiffs tend to hold their stock via pension funds and other tax-deferred retirement accounts).  I believe this would also have all sorts of positive side effects I'll get into another time.  Also, bolder people like the great Robert H Frank (perhaps the most insightful economist alive) have even better ideas.

3. Improving corporate governance: The first two items were mainly about reversing two significant, multi-decade economic policy trends, but this one is about fixing something that, like a drought exposing rocks that were previously lurking under the pond surface, relates to design defects that were always there but were made much more dangerous by the regulatory and tax changes.  Improving corporate governance doesn't need to be a partisan fight, but there is (almost literally) all the money in the world stacked up against it, which probably makes it more difficult to make progress on than even the most intractable political squabble.  Nevertheless, it doesn't take a policy wonk to look at the cases of Lehman Bros., Bear Stearns, and the like and note that flaws in compensation and management systems inadvertently encouraged excessive risk-taking that proved harmful to shareholders and, ultimately, because these firms acted as crucial utilities, the harm spread to taxpayers.  The board of directors is supposed to be beholden to shareholders but the system is rife with "you be on my board and I'll be on your board" cronyism.  Meanwhile, the rules are written in such a way that it's very difficult for shareholders to have a meaningful say in who serves on the board.  For evidence of the problem, ask yourself in what world does it make sense for the chief executive of a company (i.e., employee #1) to also serve on the board of directors - and as the chairman of that board, no less?  This is a classic case of the fox guarding the hen house, and yet this is the precisely how over two-thirds of the companies that make up the S&P 500 are governed. Given the fact that union pension funds make up some of the biggest shareholders in the U.S. (as well as that 70% of all U.S. stock is held in a tax-deferred retirement plan of one sort or another, indicating that U.S. companies are owned by the labor that powers them), it's absolutely dumbfounding to me that corporate governance reform doesn't rank on the Liberal agenda. It's not uncommon to hear Liberals talking about corporations in an adversarial sort of way; I have a big beef with this view that I'll have to save for another rant, so suffice it to say that this is a seriously outmoded perspective that should be replaced by seizing the mantle of reducing the principal-agent conflicts present in corporate management.

Now, make it so!

Doom loop blues

It's damn depressing to see partisans on both sides use Bernanke's Jackson Hole speech to point fingers (sample right here. sample left here.) What does it say about the content of the "debate" that they both can interpret the same words to mean that the other side is in the wrong? 


Let's face it, both liberals and conservatives could benefit from some soul searching about how the events of the last couple of decades have exposed serious flaws in their ideologies. Or, as Bo Diddley put it, before you accuse me, take a look at yourself.  Until that happens, all this sound and fury is serving no purpose but to accelerate the doom loop.


Liberals: the post-WWII conditions on which much of your ideology is based are not likely to be repeated in the future.   Conservatives: the 30-year experiment in economic elitism has failed.  Talk among yourselves.

Romney is right (things I never thought I'd say, chapter 1)

Corporations are people, or at least owned by them, ultimately.  And many are union workers, public employees, and nearly everyone else who has a pension or 401(k). Liberals should stop seeing publicly-owned companies as the enemy and embrace them for their potential to cheaply achieve policy objectives.

Radical idea for liberals to consider: rather than harping on corporations to "pay their fair share", maybe the best jobs program would be to cut corporate taxes, increasing the incentive for them to invest here rather than abroad. Make it palatable to deficit-obsessed legislators by offsetting the tax loss with a hike in personal taxes on rich people, or possibly even in dividends and capital gains tax rates. Let's consider the effects (beyond the aforementioned U.S. job creation):

1. Nominally revenue neutral, likely revenue positive in the long run as more jobs (and income taxes) would get created in the U.S. than you would otherwise expect.

2. Progressive tax solution.  Taxing dividends and capital gains is highly progressive, for two reasons.  First, the dividends and capital gains most middle class people see are in tax-favored accounts, like pensions, 401ks, and IRAs.  Second, rich people receive a much higher proportion of their income from investment earnings than their day jobs.

3. Calls GOP's bluff about being the party of "job creators", not just the party of rich people.  Conservatives say that raising taxes on the wealthy hurts job creation because many of the wealthy are small business owners. A tax policy that favors corporations over sole proprietorships, partnerships, and other forms of businesses will push business owners to incorporate, allowing policymakers to distinguish between "job creators" and merely rich people.

4. Reduces risk of future recessions by reducing financial risk of corporations.  Interest on debt is a tax-deductible business expense, so reducing the tax rate also reduces the incentive for corporations to borrow money. The less beholden companies are to creditors, the easier it will be for them to weather adverse business conditions.

Liberals hating on corporations is like Pogo's famous "I have seen the enemy, and it's us" - people own these corporations.  Let's do what we can to encourage corporations to invest in the U.S. by shifting their tax burden to the people who own them.

Upcoming unemployment report

A little nervous about the unemployment numbers about to come out; however, so is everyone else, so maybe markets are more likely to be surprised to the upside than down.

I'm also more than a little frustrated with the lack of fiscal policy on this front. Ben Bernanke has been doing all the recent heavy lifting in terms of trying to stimulate demand across the economy, but at a certain point monetary policy loses its leverage - while I think he deserves praise for creativity, there's only so much the Fed can do.

Meanwhile, our politicians are focused to a fault on austerity and deficit reduction. To me, this is like donning a winter coat in July because you know eventually winter will swing around and you'll freeze without it. No doubt about that, but that's the last thing we need now - water now, wool later.

new era

Everything before this post was for a class on digital media (very interesting class, too, and you could do worse than to read some of the sources linked in my posts). Everything after it, well...