When Economists Write, It's Not About Economics

I read a lot of articles written by economists.  I know.  Boring, right?  But fun for geeks like me.  Lately, I have come to a conclusion about their writings.  For the most part, they don’t write about economics.  They write about their political views.

Many who have done break-through work have become celebrities of a sort, at least among the business press.  Robert Shiller predicted the dot.com bust while most were smoking cigars and drinking Champaign.  He also won the Nobel Prize for Economics in2013.  He recently wrote about FDR’s coining of the phrase “The only thing we have to fear is fear itself”.  He would have us believe that the main reason that consumers and businesses are not spending enough to boost economic growth is fear manifesting itself as “performance anxiety”. His follow up point is that such anxiety becomes a self-fulfilling prophecy. 

Fair enough. 

He extends this metaphor to our government’s failure to invest in infrastructure at a time when interest rates are at historic lows.  Is that the result of fear? I think not.  It’s the result of political dysfunction.

Shiller’s political views are not as much in evidence as some of his colleagues.  Fellow Nobel winner Joseph Stiglitz is a former chair of the President’s Council of Economic Advisors.  In a 27-page whitepaper, he lays out his prescriptions for reforming the tax code.

There is little doubt that the “hollowing out” of the middle class, as he puts it, affects the performance of the economy.  However, he connects this factor to the presumption that “one of the reasons that our economy is not performing is the high level of inequality”.  The middle class has suffered as a result of other macroeconomic factors, globalization and technology for example.  Inequality didn’t cause those things.

Stiglitz goes on to propose more complexity for our already onerous tax code.  He proposes higher tax rates on the rich “who save a large fraction of their income” having an effect on aggregate demand.  He fails to mention that, in economic terms, savings equal investment and investment creates jobs. 

Stiglitz also decries the schemes that corporations use to legally avoid taxation and lobby for preferential treatment in the tax code.  I quite agree with him on that point.  However, his prescription is to raise the corporate tax rate without regard to the impact on investment capital.  The high marginal tax rates we endured in the 1950’s had a terrible long-term effect on capital investment.  We paid the price in the 60’s and 70’s when we couldn’t compete with German and Japanese manufacturers and their newer plants and equipment. 

Robert Reich, another liberal economist, does a great job of presenting his views in short YouTube videos.  Generally, he supports the perspective of Democrats in Washington even when he contradicts himself.  Recently he argued in favor of the President’s proposal on corporate taxes despite having suggested doing away with them in his 2009 book, Supercapitalism: the Transformation ofBusiness, Democracy and Everyday Life.

Then, he argued that eliminating the corporate income tax would make corporate profits subject to a progressive personal tax and create greater equality for middle class investors.  It’s a sound argument.

Everyone has a bias.  However, learned economists who become thought leaders have an obligation to raise the level of political dialog above the petty, partisan politics we endure daily.  Presenting your political opinion as though it is derived from analysis is simply punditry.  Do we really need more punditry?

WHO WILL LEAD?

Robert Reich, the corporate income tax and the middle class

Robert Reich

I enjoy the writings of Robert Reich despite his liberal leanings.  He is intelligent and articulate and, most importantly, not dogmatic.  On his Facebook page last week he voiced his support for President Obama’s one time tax on the overseas profits of American corporations to rebuild America’s infrastructure.  In a 2 minute video he laid out his case that American corporations enjoy the protections of American trade policies without the penalty of being taxed. 

I immediately thought this was at odds with his prescription for corporate taxes in his 2009 book, Supercapitalism and the Transformation of Business, Democracyand Everyday Life.  But is it?

Then he argued that corporations should not be treated as people and that such treatment distorts their effect on government policy.  This is from page 218…

“The result of this anthropomorphic [treatment of corporations] is to give companies duties and rights that properly belong to people instead. This blurs the boundary between capitalism and democracy, and leads to a host of bad public policies. Consider, for example, the corporate income tax. The public has the false impression that corporations pay it, and therefore they should be entitled to participate in the democratic process under the old adage “no taxation without representation.” But only people pay taxes. In reality, the corporate income tax is paid—indirectly—by the company’s consumers, shareholders, and employees. Studies have attempted to determine exactly how the tax is allocated among these three groups, but the distribution remains unclear. What is clear is the corporate income tax is inefficient and inequitable.

“It’s inefficient because interest payments made by corporations on their debt are deductible from their corporate income tax while dividend payments are not. This creates an incentive for companies to over rely on debt financing relative to shareholder equity, and to retain earnings rather than distribute them as dividends. The result, in recent years, has been for many corporations to accumulate large amounts of money that the company then uses to purchase other companies or to buy back its shares of stock. Capital markets would be more efficient if these accumulated profits were redistributed to shareholders as dividends. “Decisions by millions of shareholders about how and when to reinvest these funds are likely to be, as a whole, wiser than decisions made by a relatively small number of corporate executives. Abolishing the corporate income tax would thus help capital markets work better.

“The corporate income tax is inequitable in that retained earnings representing the portion held by lower-income investors are taxed at a corporate rate that’s often higher than the rate they pay on their other income, while earnings representing the holdings of higher income shareholders are taxed at a corporate rate often lower than they pay on the rest of their income. As we have seen, under Supercapitalism, investors have far more power than they did decades ago. Their decisions about where to put their money to maximize their returns are similar to any other decisions they make about how to increase their earnings. Logically, there is no reason why their ‘corporate’ earnings should be taxed differently than their other earnings. Abolishing the corporate income tax and treating all corporate income as the personal income of shareholders would rectify this anomaly.”

To be fair, the two comments are taken out of context and provide Dr. Reich’s answer to two different questions.  In his book, he is advocating a policy that would favor the middle class by lowering the tax burden of owning corporate stock and mutual funds, cause corporations to be smarter about how they invest their capital, reduce corporate lobbying in Congress and create jobs in America rather than overseas.  His Facebook comments are made in the narrower context of the budget proposal submitted by the President to Congress earlier this month. 

His argument that American corporations enjoy the benefits of US trade policies is somewhat suspect, however.  Those policies are more favorable to our trading partners than to American corporations. 

Enacted in 1994, the World Trade Organization (WTO) has enabled emerging economies to participate in free trade with the industrialized world and has helped to alleviate poverty in those countries.  The rapid expansion of the global economy is among its myriad benefits.

However, the WTO puts every nation and every corporation on an equal footing and precludes the US from taking direct action to pressure trading partners to eliminate barriers to US exports and other unfair practices. Under this regime, American corporations do well to invest overseas.

If we want to help the middle class, lets address the underlying causes of their distress.  Overhaul of tax and trade policies is a good place to start.

WHO WILL LEAD?

Rules? What Rules?

"My, we seem to be a little short on brotherly love round here." 

-- Butch Cassidy, as played by Paul Newman in Butch Cassidy and the Sundance Kid

I got into a Facebook Fight last week. Have you ever been in one? It's kind of like that scene from Butch Cassidy and the Sundance Kid. You know the one where Butch has to get into a knife fight with a really big, scary guy. He asks him, "What are the rules?" Big Scary Guy replies: "Rules? In a knife fight? No rules!"  He no sooner gets the words out of his mouth than Butch kicks him in the groin. Well, there are no rules in a Facebook Fight either.

I use different internet tools for different purposes. LinkedIn for business; Facebook for personal stuff, pictures and messages to friends and family, etc. So, when I woke up at my usual 5 AM to a posting on my Facebook wall supporting the Wisconsin 14, I went off the deep end. Last year, I had de-friended members of my own family for posting their support of the Arizona immigration law. So, why am I waking up to some commie crap on my damn wall? By a so-called friend no less.

Now, 5 AM is not my best time of day. I could have deleted it. I could have blocked the friend from posting on my wall. I could have de-friended him. But, no-o-o-o! I responded aggressively.

My opponent was a very well read Ph.D. And worse, he was abetted by an old high school chum of mine with whom I haven’t spoken since graduation day. In fact, I am not sure I even spoke to him then. Two against one. That’s not fair! Oh yeah, there are no rules in a Facebook Fight. My H.S. buddy is a school psychologist according to his Facebook page. So, he is right there with the Ph.D.

Ph.D. hits me with Robert Reich. I parry with Freidrich Hayek. He’s never heard of him. Hah! Take that, Ph.D.

I am a fan of NY Times columnist, David Brooks. I never miss a column. He mostly writes about political and policy issues and represents a moderate voice that does not adhere to any political dogma. I guess that’s why I like him. His new book is called The Social Animal. I understand from the reviews and summaries that it is a fictional representation of the ways in which we form relationships and connect ourselves to ideas and social norms. Though not an expert on brain science, Brooks has written of our new understanding of it and how it has affected us. Think of all those bright business school grads on Wall Street and how they self destructed during the financial crisis of 2008/09.

So, here I am parrying the thrusts and jabs of my formidable opposition and it occurs to me that Brooks is right about all this. I am fairly well read myself and yet could not convince either of these guys of the wisdom of my thinking any more than they could convince me of theirs. It’s not that their thinking was irrational. Indeed, their thoughts might be considered to be a rationalization of their beliefs.

All their reading and learning had been directed to support their values and biases. So, were mine. There was no winning this Facebook Fight for any of us. No way, no how.

Isn’t that what’s happening across the nation? Don’t you get emails from your friends and colleagues that either reinforce your views or infuriate you? So, how can we solve the big national problems when we are all so enamored of what’s going on in our own heads that we can’t compromise?

A recent speech by Republican Governor Mitch Daniels of Indiana to the Conservative Political Action Committee provides some insight on how we might answer that question. He counsels his right wing followers to put everything on the table including tax increases and defense spending to resolve the problem of our deficits and debt.

He reminds his followers that “big change requires big majorities” and that we will “need people who never listen to Rush or Glenn or Laura or Sean”. He also reminds us that the founders “made compacts and concessions and, yes, compromises” in the cause of creating one union from the 13 colonies who won their freedom from the British crown.

NPR called it a Grown Up brand of GOP politics. We need that from both sides of the aisle. A recent report from economist John Mauldin found that a “majority of voters incorrectly believes the federal government spends more on defense/foreign aid than it does on Medicare and Social Security (63%). Also, a similar majority (60%) incorrectly believes problems with the federal budget can be fixed by just eliminating waste, fraud and abuse.”

The President created his own version of Grown Up politics with the Simpson Bowles Commission aimed at resolving our national debt. Their controversial proposal is dying a slow death like those of most Presidential commissions.

Our debt problem is serious and addressing it will be painful. What is called for is the equivalent of Ronald Reagan’s dollar bill speech in 1981. He held up a dollar bill and opened with “This is a dollar bill…..”

We guffawed about it the following day on the trading floor at Goldman Sachs. But, that’s the kind of communication that is called for now. Reagan explained to voters how every dollar they earn is divided up. The equivalent of a PowerPoint pie chart.

The pie chart needs to be updated. If nothing changes, every dollar of tax revenue will go to paying interest on the national debt within 10 years. Nothing left for national defense. Nothing left for social programs. Nothing.

The only question is: WHO WILL LEAD?