...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.
Sunday, October 30, 2011
Monday, October 10, 2011
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!
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.
Sunday, August 28, 2011
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.
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.
Saturday, August 13, 2011
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.
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.
Friday, June 3, 2011
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.
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