Archive for January, 2013

Republican Governors: Take from the Poor, Give to the Rich, and Suck the Federal Teat

January 29th, 2013 Comments off

These local stories in Louisiana, Kansas, Nebraska, and North Carolina speak quite eloquently for themselves.

Gov. Bobby Jindal is proposing to eliminate Louisiana’s income and corporate taxes and pay for those cuts with increased sales taxes

Gov. Dave Heineman made a bold proposal … end the income tax for working Nebraskans and corporations. It would also end the taxation of small business, Social Security and retirement income. … As a means to make up for the lost revenue, Heineman’s proposal would also end $5 billion in sales tax exemptions.

State personal and corporate income taxes would be eliminated, sales taxes would be charged on services, and North Carolinians would pay state sales tax on groceries under a tax reform proposal with significant support in Raleigh.

Brownback: Keep full sales tax, cut income taxes further

These proposals all lower revenues collected. This will give these red states more bargaining power when they run into the inevitable fiscal crisis, so they can suck the Federal government teat even more effectively than they do now.

Fiendishly clever.

Cross-posted at Angry Bear.

Do Businesses Borrow to Invest in Productive Assets? Does the Business-Interest Tax Deduction Encourage That?

January 25th, 2013 7 comments

J.W. Mason at The Slack Wire gives us a telling and trenchant analysis of that question:

Short answer: They used to, but not any more. The correlation in the U.S. between fixed-capital investment and a) debt levels and b) change in debt levels has been vanishingly small since the late eighties.

…in the 1960s and 70s, a firm that was borrowing heavily also tended to be investing a lot, and vice versa; but after 1985, that was much less true.

It’s gotten really bad lately:

Regressing nonfinancial corporate borrowing on stock buybacks for the period 2005-2010 yields a coefficient not significantly different from 1.0, with an r-squared of 0.98.

As CEOs and their cronies have moved from being business-runners to financial arbitrageurs,*

the marginal dollar borrowed by a nonfinancial business in this period was simply handed on to shareholders, without funding any productive expenditure at all.

This goes far in explaining an amazing fact about Dell, recently revealed by Floyd Norris:

It has spent more money on share repurchases than it earned throughout its life as a public company.

This is not an anomaly. Floyd pointed out to us some time ago that:

From the fourth quarter of 2004 through the third quarter of 2008, the companies in the S.& P. 500 — generally the largest companies in the country — reported net earnings of $2.4 trillion. They paid $900 billion in dividends, but they also repurchased $1.7 trillion in shares.

As a group, shareholders were paid about $200 billion more than their companies earned.

Floyd’s post is aptly titled “Easy Loans Financed Dividends” (and buybacks).

I would take issue with one seemingly judicious caveat in JW’s piece:

It is quite possible that for small businesses, disruptions in credit supply did have significant effects.

Based on one piece of evidence that I’ve cited repeatedly, not so. Here from December 2009 (follow “Related Links” for more discussion and evidence):

Small businesses consistently put financing and interest rates at the very bottom or near-bottom of their lists of business constraints. That has been true for many years [almost three decades now…], it was true throughout the recent crisis, and it remains true at this very moment.

It really makes a fellow wonder: given all the (sensible) talk about ending the mortgage interest deduction for homeowners, why we aren’t hearing a similar quantity of talk about ending all interest deductions — especially the money-funnel sweetheart deal for the rich that is the business-interest deduction?

Anyone thinking we’ve become a Great Stagnation, or wondering why?

* JW describes that shift from businessperson to financial prestidigitator more fully (emphasis mine):

In the era of the Chandler-Galbraith corporation, payouts to shareholders were a quasi-fixed cost, not so different from bond payments. The effective residual claimants of corporate earnings were managers who, sociologically, were identified with the firm and pursued survival and growth objectives rather than profit maximization. Under these conditions, internal funds were lower cost than external funds, as Minsky, writing in this epoch, emphasized. So firms only turned to external finance once lower-cost internal funds were exhausted, meaning that in general, only those firms with exceptionally high investment demand borrowed heavily; this explains the strong correlation between borrowing and investment.

But since the shareholder revolution of the 1980s, this no longer really holds; shareholders have been much more effective in making their status as residual claimants effective, meaning that the opportunity cost of investing out of internal funds is no longer much lower than investing out of external funds. It’s no longer much easier for managers to convince shareholders to let the firm keep more of its earnings, than to convince bankers to let it have a loan.

Cross-posted at Angry Bear.

Jim Manzi Disappoints on the Devastation of Lead and Crime

January 23rd, 2013 3 comments

And Kevin Drum disappoints in his own defense.

Regular readers will know that (at least sometimes) I like to seek out and highlight the very best, most cogent and convincing arguments countering my beliefs, trying to figure out what might be wrong with those beliefs, and hoping to understand what’s really going with the subject I’m considering.

Jim Manzi — a guy with a decidedly conservative/libertarian bent — has often been my go-to guy on that front. His thinking about global-warming mitigation, for instance, doesn’t try to deny the IPCC conclusions. He accepts and adopts them, building on them for further thinking and calculation about the costs and benefits of mitigating the undeniable — and undeniably human-caused — climate changes that we’re facing. (I’m not saying his reasoning or conclusions there are flawless, by any means. But at least he starts by accepting a large dose of reality that many or most among his conservative cohort prefer to deny, distort, or just blithely dismiss.)

But in his recent response to Kevin Drum’s article on lead and crime (a subject I’ve gone on about), Jim disappoints me utterly. (And Kevin’s response — which limits itself to answering Jim’s cherry-picked objections to one bit of evidence without pointing out all the evidence that Jim inexplicably ignores — is decidedly limp-wristed.)

Short story, Jim looks at one study (Reyes 2007) that Drum talks about, and pokes procedural holes in its analysis and conclusions. “There might be confounding variables! She should have controlled for X!” I can’t tell right off whether he actually looked at the paper, or just responded to Kevin’s description of it.

Well okay, yeah, the Reyes study is in no way definitive. No single study ever is. He’s absolutely right that the Reyes study, all by itself, “is way short of making a convincing case for spending $400 billion of taxpayer money.” No duh.

Which points out the real problem: Jim doesn’t seem to have even looked at any of the the (other) research available on the subject (at least he doesn’t mention it), notably the body of work — robustly highlighted in Kevin’s article — by Rick Nevin. (Meanwhile Jim refers to Reyes’ work as Kevin’s “key econometric source” — which it isn’t; it’s just one of them, and not the strongest source, which is what I would expect Jim to address.) Nevins shows correlations between lead and crime across nine countries over many decades. It’s pretty convincing stuff that you’d think Jim would have looked at and considered if he really wanted to understand what was going on.

Even more surprising: Jim’s main question is whether it’s worth spending $20 billion a year over 20 years (which he presents as an undiscounted figure of “$400 billion”) to mitigate lead in the environment. But he doesn’t seem to have looked at or considered the paper that analyzes exactly that question, in the very terms he prefers when making his own arguments (Zahran, Mielke, et. al. 2010).

I can point out many other problems with Jim’s response.

• When discussing what evidence that might support the lead/crime hyphothesis, he fails to note that a higher concentration of lead in the blood of convicted criminal as adults would be rather convincing.

• He points out that Reyes doesn’t find a correlation between environmental lead and burglary, but he doesn’t note that Nevin finds (because he apparently hasn’t even looked at Nevin) a significant correlation between blood lead and that conservative bogeyman, unwed pregnancy.

These are niggling (though important) details. But they’re representative. There’s a lot know out there, and Jim doesn’t seem to have any interest in knowing it — only in shooting (certainly, potentially, valid) holes in a single study.

I find in Jim’s response, much to my disappointment, a prima facie case for confirmation bias — a small-minded and unconvincing effort to undercut and dismiss information that strongly suggests conclusions contrary to core conservative and libertarian beliefs:

1. Expert research can provide more useful and actionable information than market prices, and

2. Government action — including quite restrictive regulation — can provide hugely positive returns on investment.

He’s making another (in this case, dispiritingly lame) stab at the argument that’s lurking right at the heart of his book Uncontrolled: because the world is so complex,  whatever we’re doing right now must, obviously and inevitably, be the best of all possible worlds, and absent massively overwhelming evidence that’s universally agreed upon, we shouldn’t do anything different because we just don’t know enough. We should instead rely on market forces and the price mechanism — the only capable social calculator — to solve any problems.

Jim will deny he believes that, or hews to that belief dogmatically, but I believe this lead/crime response, with its obvious confirmation bias, strongly suggests otherwise.

I won’t argue all the merits of the lead-abatement issue here, or the evidence supporting it. I will simply state what I’ve concluded by looking at lots of different research on the subject, sifting it, and steadily adjusting my priors based on my evaluation of the how convincing that research is:

1. Lead in the environment (resulting largely from the auto/gas industry’s profit motives) has cost us trillions of dollars in measurable economic damage over the decades, and has had a devastating, unmeasurably destructive effect on hundreds of millions of lives. (Lifetime income doesn’t really quite capture or measure the value of a robust life endowed with one’s full, inherited endowment of cognitive, emotional, and social skills…)

2.  That damage continues, due to the residue of lead in buildings and dusty soil that is still poisoning our children, constantly, every year.

3. A mitigation effort as suggested in the literature on the subject would deliver an excellent, really massive, return on investment before even considering the unmeasurable manifest benefits to humans whose brains would not be stunted and retarded by mitigatable poisoning.

Mitigatable through collective action, and only through collective action. Which means: government action that is often the only counter to destructive market forces.

Cross-posted at Angry Bear.



Question for Krugman: Can the Rich Provide All the Demand?

January 12th, 2013 3 comments

I’ve long been troubled by a Paul Krugman comment from 2008:

There’s no obvious reason why consumer demand can’t be sustained by the spending of the upper class — $200 dinners and luxury hotels create jobs, the same way that fast food dinners and Motel 6s do.

And I find in his concluding comment from his recent AEA session that he remains completely uncertain on the issue:

…we do not know how rising inequality interacts. There are more poor people who are liquidity constrained but they have less spending power, so we are not sure how it goes.

I’m kind of astounded by this thinking, and even more by his apparent lack of curiosity about the issue. It strikes me as being absolutely central to any discussion of public policy. (Viz: all the talk about a strong middle class vs. trickle-down.)

I’ve poked at this question a couple of times:

In my model here and here looking at how (re)distribution of wealth affects demand, hence production, and

In discussions of imaginary ultra-high-productivity worlds in which a single person could own an atomic fabrication machine that produces everything that everyone needs (and hence receive all the income from that production).

Paul has clearly been shifting his thinking to encompass the possibility of a post-Luddite-Fallacy world. I wonder if his thinking has also developed on the related issues of inequality and distribution, and their effect on demand.

Cross-posted at Angry Bear.

Platinum Currency: What’s The Fed’s End Game?

January 6th, 2013 6 comments

Steve Randy Waldman as usual gets practical about Treasury issuing platinum coins. JKH in comments there does typically likewise.

Suppose the Department of the Treasury says:

“We have a statutory obligation to pay all amounts that have been authorized by Congress — both expenditure and debt obligations. Since the borrowing limit has been reached and Congress won’t let us sell bonds to make the payments they’ve authorized, we are now issuing physical currency, in the form of platinum coins, to meet those obligations. We are required to do this by statute.”

Let’s say the coins are worth $1 million each.

Treasury would have to issue about $100 billion in coins per month, which is about what it currently issues in bonds. The coins would be effectively the same as zero-interest, perpetual bonds.

It doesn’t matter conceptually whether Treasury deposits that currency at their bank (the Fed) then pay bills normally using checks and wire transfers, or issues the coins to payees. Payees will deposit them at their banks, banks will deposit them in their accounts at the Fed, and the result is the same. The Fed has a bunch of platinum coins in its vault, and the government has met its obligations.

Ditto if Treasury sells the coins to primary dealers/banks/sovereign-wealth funds:

1. A transfer of Fed reserves/deposits from dealers/bankers to Treasury. Treasury has money to  spend.

2. Dealers/bankers deposit their coins at the Fed.

3. The Fed issues reserves to dealers/bankers in return.

But: Suppose the Fed starts feeling inflation looming. So it sells bonds and receives bank deposits (reserves) in return, to sop up excess money/reserves. This is called “sterilizing” the platinum money creation. (We’ll ignore for the moment the fact that the sold bonds may/will just get repoed in the private market in return for cash.)

But the Fed’s only got about $3 trillion in bonds to sell. What happens when it runs out? Can it still control inflation?

(At that point, monetary policy is effectively managed by congress’s taxing and spending decisions. Budget deficit = easing. Budget surplus = tightening. That is not a promising prospect.)

The Fed could start selling its platinum coins, draining reserves/”money” out of the system. (Assuming those coins aren’t used for exchange, but are held in vaults just like other “reserves”/stores of value.)

But why would dealers buy them?

The answer seems to be negative interest on reserves (IOR). If the Fed charged .25% (or whatever) to hold banks’ money for them (negative quarter point of interest), banks/dealers/sovereign-wealth funds would have an incentive to trade those reserves for platinum coins (at 0% interest) to hold in their vaults.

Would (negative) IOR be a sufficiently effective monetary instrument for the Fed to manage monetary policy? Other implications?

Cross-posted at Angry Bear.

The Human and Economic Devastation of Leaded Gas: How the Visible Hand Saved the Day

January 6th, 2013 Comments off

With all the well-deserved attention going to Kevin Drum’s excellent Mother Jones article on crime rates and lead in gasoline (more here), I thought it worth revisiting my post on the subject from a year and a half ago, which was itself prompted by Angry Bear’s own inimitable Robert Waldmann.

Government Gets the Lead Out, Crime Plummets

In which I said:

We’re seeing it in spades: the history of tetraethyl lead (read it and weep) is a tragic textbook case of market/profit interests eviscerating the commons and making us all (including the rich) far worse off, in the name of “the invisible hand” making us all better off.

That ebil gubmint man with his heavy-handed regulations impinging on honest businesspeople (who are just trying to make a buck, for everyone’s benefit) sure did have a pernicious effect, huh?

I can only imagine how many trillions of dollars that lead-driven crime wave has cost our country, and how many tens of millions of lives that lead poisoning has destroyed.

But don’t worry: you can rely on profit-making companies to “allocate our resources most efficiently.” Trust me on this.

Cross-posted at Angry Bear.

Does Unemployment Insurance Explain (and Cause) High Unemployment?

January 5th, 2013 2 comments

Casey Mulligan would very much like you to believe it does.

“cutting unemployment insurance would increase employment, as it would end payments for people who fail to find work and would reduce the cushion provided after layoffs.”

Here’s one pretty well-done data point (several, actually) suggesting that he’s wrong:

In theory, greater employment protection should dampen the effects of output movements on employment and therefore reduce the Okun coefficient. In Figure 10 (right panel), we test this idea by plotting the coefficient against the OECD’s overall EPL index (averaged over 1985-2008, the period for which it is available). The relationship has the wrong sign, and it is statistically insignificant.[9]

[9] For New Zealand, the EPL index is available over 1990-2008. We also find no relationship between the Okun coefficient and the various components of the EPL index.

Screen shot 2013-01-05 at 10.14.57 AM

Cross-posted at Angry Bear.


Republican Strategy: “When you’re playing with house money, it makes sense to go all in on every hand.”

January 3rd, 2013 1 comment

David Atkins succinctly nails the situation we face:

No matter what Obama does, Republicans won’t care and won’t fold

…This is what makes the poker analogy so often used to criticize the President’s negotiating tactics such a weak metaphor. Obama is often said to be the worst poker player in history, consistently bluffing then folding. But the problem with that analogy is that Republican House members aren’t playing with their own chips: they’re playing with the country’s. The Republican electoral chips are stashed safely in gerrymandered hands, and any losses over fiscal cliffs or debt ceilings only hurt the President and the nation’s perception of government. There’s no downside for the GOP in bluffing every time in the hopes that the President will fold. Why not? When you’re playing with house money, it makes sense to go all in on every hand.

When you’re playing chicken and your opponent has thrown their steering wheel out the window, the only alternative to losing is  to do likewise. Obama is justifiably reluctant to do so, because he actually cares about America and the rest of the world, and is unwilling to destroy them for electoral advantage.

For the gritty details of Republican gerrymandering and Democratic-voter disenfranchisement, see Sam Wang here and here.

The Republicans have gerrymandered a structural advantage that lets them play poker using other people’s chips. So the only only real solutions are structural and long-term. Atkins again:

The advantage Democrats have in this situation is that majority public opinion and the majority of actual American voters are on their side. The only thing that allows Republicans to take their hostages in the first place is a series of arcane rules that give the minority undue influence. Among those rules are:

    • Gerrymandered Congressional districts
    • Dysfunctional filibuster rules
    • Disproportionate Senate representation
    • Corrupt lobbying laws
    • Campaign finance laws that give outsized political influence to a few billionaires
    • Archaic electoral college rules
    • Discriminatory workday elections

And that’s just a start. If we want a future in which we do more than simply determine which hostages to save and which ones to shoot, the American People will need to figure out how to make these and other reforms to our broken political system that disempowers rational majorities in favor of extremist ideological minorities with nothing to lose. As the Republicans continue to suffer demographic decline, their base will only become more desperate and extreme.

They’re cornered, with their backs against the seawall, and a demographic tidal wave is looming over them. That makes them very, very dangerous.

Cross-posted at Angry Bear.