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Monday, December 26, 2016

More on Republican economics and trade deficits, corporate raiders and all

by John MacBeath Watkins

I've been giving more thought to the curious fact that we had very little experience with trade deficits before voodoo economics reared its head in the 1980s.

What changed? Well, several things. In fact, our whole attitude to economics seemed to change.

There was a major shift in the tax load. Ronald Reagan famously lowered the top marginal tax rate from 70% to 28%. This encouraged the accumulation of wealth by the highest earners. But tax receipts only went from 18.2% of GDP to 18.1% of GDP. Did that mean that voodoo economics worked?

No, just funnin' ya. It means that while high earners got a lower top marginal rate, others paid more tax, and some was shifted from one pocket to another. Payroll taxes, for example, have been rising for a long time, and that's part of what he did, but the government kept getting just about as much of its income from individual income taxes as before.

Source: Wikipedia

It's just that different people were paying the tax. In addition, the long-term trend for lowering corporate taxes continued. In about 1970, the government started collecting more tax from payrolls than from corporate income tax. In 1952, tax receipts from the corporate income tax amounted to 33% of revenue, in 1982 it was closer to 7%, and it's settled to something less than 10% in most years.

Now, the Tax Foundation argues that high corporate taxes have caused business owners to set up "pass-through" corporations whose only function is to pass income through to the owners without paying corporate income tax. This is because Reagan lowered individual taxes more than corporate taxes.

The Tax Reform Act of 1986 reduced the corporate tax rate, but reduced the individual tax rate further, and raised taxes on corporations in other ways. That marked the peak of U.S. C corporations, at 2.6 million in 1986. As of 2011 (most recent data), there are now 1 million fewer corporations, at 1.6 million. In contrast, S corporations grew from about 800 thousand in 1986 to 4.2 million in 2011, and partnerships grew from 1.7 million to 3.3 million.

It would seem that this encouraged the use of a tax loophole to dodge the higher corporate income tax. The Tax Foundation, based on this information, argues rather improbably that this is wrong, that the reduction in corporate tax receipts is owing to a shrinkage of the corporate sector -- even though their own figures show an explosion of (pass-through) S-corporations. If, in our innocence, we assume that S corporations are corporations, this notion that the corporate sector has shrunk cannot possibly be true.

And since individual tax revenues have pretty much held steady, that means that the big change has been shifting the tax burden from corporations to payrolls. Payroll taxes are paid half by employers and half by the employee, and there is some controversy about whether total compensation to the employee should include the employer's share. But the point of payroll taxes is that both sides of the tax are really costs to the employer, whether the employee regards them as pay or not.

In essence, what we've come to call Reaganomics involves making it more expensive to hire employees and letting corporations keep more money (or pass it through to their owners.)

At the same time, healthcare costs were going through the roof, and the only practical way for most people to have health insurance was to have it through the employer. So again, the cost of employing Americans was going up.

The Affordable Care Act, AKA Obamacare, was in part an attempt to "bend the curve" of healthcare cost increases, which it seems to have succeeded in doing, and in part an effort to decouple health insurance from employment.

Both are things that need to happen if hiring Americans to make things and export them is to continue to  be a viable enterprise.

Now, increases in payroll taxes are a long-term trend that didn't start under Reagan, and the decline in corporate tax revenues started long before he came into office as well. What was new?

For one, the claim that tax cuts didn't have to be paid for, that we could cut taxes on the rich and it would stimulate the economy so much that tax revenues wouldn't fall. This was obviously wrong by the mid-1980s, and should have been obvious it was wrong even before it was tried, but the same old snake oil comes on the market with every Republican administration.

The old Keynesian consensus was that you needed to stimulate the economy in downturns and reduce the debt-GDP ratio in good times. Reagan, and later the Cheney administration for which George H.W. Bush's son was a figurehead, changed that calculation. The economy needed to run large deficits during Republican administrations, and cut spending regardless of economic conditions during Democratic administrations.

The result can only be workable as economic policy if by coincidence.

One problem with these changes is that although the numbers sometimes obscure this fact, economics is a science of values. When you increase tax on work and reduce tax on ownership, you are sending a message that you wish to discourage work and valorize ownership. Pretty much everything we've done with economic management since the 1970s, the financialization of everything and the way the change in the basic mission of corporations allowed management to break implicit contracts and go to war against their employees.

As Larry Summers and Andrei Schleiferwere pointed out in their 1988 paper, Breach of Trust in Hostile Takeovers, the financialization of the economy and the breakdown of companies were linked.

When takeover artists could raise huge sums in junk bonds to do a hostile takeover of a corporation, their plan was not actually to make the company more productive. Summers and Schleiferwere put it, "The industrial diversity of many raiders' holdings suggests that their particular skill is value redistribution rather than value creation."

The reason that companies exist, rather than having individuals doing all the tasks of the company on a contract basis is that the transaction costs of contracting everything would be enormous.(see R.H. Coase, The Nature of the Firm, Economica, Nov. 1937.) Value creation requires implicit contracts which enable large groups of people to work for a common goal.

But the credo of the corporate raider was to make war on their own employees, get them to take less pay, and pass the larger profits on to the management and the shareholders. Companies that had for years worked for a partnership between workers and management found they were under financial pressure to do the same, or be a takeover target.

Starting in the 1970s, public corporations stopped being about what Coase had said firms exist for, working together to create value for customers, and became a game of takeaway.

And that's about the point where America started running large trade deficits. As I've previously pointed out, there were some pretty substantial other factors, like the oil shock of 1973 and Chinese financial sterilization in the 1990s and early 2000s. Still, it does seem a bit of a coincidence that we stopped exporting as much as we imported about the time that public corporations stopped being about creating value and started being about redistributing it upward to the managers and shareholders. And that this all happened while the tax burden increasingly discouraged hiring and encouraged speculation.

But then, I"m an amateur. What do I know?

Thursday, December 22, 2016

Trumponomics, trade, and stateless money

by John MacBeath Watkins

We're hearing a lot about the trade deficit lately, and Donald Trump got elected in part based on his claim that he could turn this around.

How will he do that? Well, if the recent Carrier deal is an example, by bribing companies with tax dollars and browbeating those businesses. He's also claimed he would put a 35% import duty on goods produced by factories relocated outside the United States (but not, apparently, on the foreign companies they compete with.)

Import substitution, that is, raising duties and attempting to have more things built in the homeland, did not work very well for Argentina, and is unlikely to work well for the United States. Furthermore, it appears he intends to give big tax breaks to the rich. I believe there are ties between inequality and trade, at least in the American economy.

Now, here's a chart from The Motley Fool showing the history of the U.S. trade deficit.

When Europe started rebuilding after World War II, we had massive trade surplus. How could other countries afford to pay for that? Well, we were shipping them plenty of capital, though the Marshall Plan and private investment. Then, we went through an extended period when trade was roughly balanced, from about 1950 to the mid-1970s, when the oil shocks changed everything.

It was after this that the great decline came, and not just in the trade deficit. Current accounts went into deficit as well.

Essentially, we've been borrowing money and spending it on foreign goods. In part, this is because of deliberate sterilization by China, that is, buying U.S. debt so that the Chinese trade surplus would not cause its currency to appreciate, which would tend to correct for the imbalance. China started doing this in the 1990s. In 2005, they began letting their currency appreciate, but they don't seem to have slowed up on building their dollar reserves until around the end of 2013.

That's only part of how consumption has been paid for. Other capital flows would be earnings parked overseas for tax reasons, foreign money parked in America by nervous foreigners looking for safety, inflows of private investment, money spent by tourists here and abroad, etc. The biggest factor in the current account is the trade surplus or deficit. All in all, the current account shows whether a country's net foreign assets are increasing or decreasing, and ours have been decreasing since about 1982, with upticks in the late 1980s as the price of oil declined and after the Chinese allowed their currency to appreciate after 2005. Aside from those, rising consumption is being paid for with borrowed money. And the Chinese example of sterilization shows how that's possible.

Now, the question remains, what happened in 1982? We know what happened later in the decade, the Japanese Yen increased in value and the terms of trade no longer allowed our (then) largest trading partner to keep building huge trade surpluses, and lower oil prices reduced the trade deficit.. But aside from that reprieve, trade deficits have tended to grow.

I'm inclined to suspect that this has something to do with changes in the structure of our economy. Changes in banking allowed raiders to finance hostile takeovers of established companies, the top tax rate went from 70% to 28%, the country became a more hostile place for unions, and rules were changed to allow stock buy-backs to become common. One result of all this was to move income from the lower and middle classes and up to the top earners. A side effect of this was to make capital more mobile.

Middle class people tend to keep their money in savings and investments that they can quickly get at is circumstances require. If they start a business, it's likely to be a local business, a hardware store, a hair salon, something that keeps the money local. But there again, they run into rules changes. For example, when Reagan came into office, the Justice Department changed the way it enforced anti-trust rules. Anti-competitive practices like predatory pricing used to be treated as illegal. Now, in most cases, the Justice Department is only interested in collusion to raise prices. This has tended to favor the Walmarts of the world over the mom and pop stores.

Those at the top level of income are more likely to invest internationally, and as we saw when the Panama Papers became public, they may move money abroad to avoid taxes. Of course, they might have done that before the 1980s, but when wealth is very concentrated, as it is now, more of it belongs to people who see large benefits in tax havens. And even that may be dwarfed by the amount of stateless money corporations are keeping abroad to reduce their taxes.

I'm not sure there is anything like a 1:1 correspondence of inequality and stateless money, or of stateless money and trade deficits, but I think it's time to examine the question. Something has gone haywire, and the timing suggests to me that changing the rules of the game so that more of the money went to those at the top played a key role.

America used to be the most active country for small and medium-sized business startups. That pattern has changed, with a steady decline since the 1970s.

As someone who has started a business, I can tell you, your own savings are the most reliable source of funds, and many startups are done with family money. As Harry Truman observed, a bank will loan you money if you can prove you don't need it. Inequality makes it harder for small businesses to get started, because it reduces the amount of savings available to the middle class.

And if you want more jobs to stay in America and more companies fit to export, you aren't going to get there by bullying or bribing existing large companies. A more equal distribution of income will allow people to buy things without borrowing the money, and more people to start up businesses to serve that demand. Cutting taxes on the rich will not serve this purpose.

Monday, December 12, 2016

Language and the social contract: Word, spirit, and reason

by John MacBeath Watkins

Thomas Hobbes, in Leviathan, argued that the basis for the social contract is that in a state of nature, we see a war of each against all, so we must form a social contract to have a leader in charge of enforcing order, or we will die a violent death. I believe that was more a description of the breakdown of order during the 30 Years War, just ending when Leviathan was published. John Locke, for reasons we explored in the chapter on him and his radical activities, argued that we form a society to protect property, which includes our own lives.

Both wrote in the 1600s. I believe it may be time to update the notion of the state of nature. First of all, the Hobbesian notion that we formed society to avoid violent death would apply to any animal capable of fear, and I think human society is fundamentally different from most or all other animal societies.

Second, property is a term Locke never really defined. It cannot be objects, which exist whether they are owned or not. Property is the rules and customs regulating the human use of objects. It is, if you like, what objects mean to people. It is a province in the realm of meaning, and meaning is what makes human societies different.

The Hobbesian notion that we form a society to free ourselves from the threat of violent death explains why we have been ruled so long by force. It does not explain why we have been ruled so long by faith and custom, as well. The answer to that lies in the symbolic side of human society. What makes human society a civilization or a culture is this symbolic world, a sort of virtual realm consisting of meanings, which is invisible to animals other than humans. Human culture is one of the strangest things on the planet, and religion is one of the strangest and most powerful things in that ethereal, symbolic world.

Reason is not the basis of religion. In fact, it is not the basis for civilization. People learn to live together by living together, and codify what they have learned into institutions, culture, and stories. The most important of those stories, such as the origin story that binds the community together and the story of what happens to the wicked in the afterlife, are in the keeping of one of the most powerful institutions, religion.

But where did religion come from, and why do virtually all human societies have one?

Humans, relative to other animals, have giant brains. The brain is an expensive organ, consuming about 25% of your body's energy when it is in a resting state, but it pays dividends. One result is our ability to solve problems, such as how to get a piece of fruit down from a tree without breaking our necks. Another is our use of language, and symbolic thought.

We see signs of tool use as much as three million years ago. That is a sign of instrumental thought, problem solving. Symbolic thought is much more recent, appearing and disappearing a few times before it finally “took” permanently (we hope) about 35,000-40,000 years ago.

Language must first have been used instrumentally, to warn of danger, coordinate defense, communicate what plants are edible and how to prepare them, and talk one's lover's mate out of killing you.

But we see the revolution of symbolic thought in the creation of jewelry, and tools that are beautiful as well as functional. We see these as signs that our ancestors thought these things were not just useful, they had meaning.

We are creatures who make meaning; it is the essence of being human, and allows us to have larger civilizations that would otherwise be possible.

Most animals only coordinate with others of their species who are relatively closely related to them. Humans are different, in part because of their dual nature. As Richard Dawkins wrote in The Selfish Gene, living creatures can be seen as things that exist to perpetuate their genes. These are chemical strings of information that define what the creature is.

But we have other strings of information, symbolic ones that define who we are as much as our genes do. Dawkins invented the word memes to describe them. They are a major part of what our minds are made of, the brain's software that has evolved to allow us to function in society. They give us, for example, ideas about honor and decency that prevent us from acting badly and selfishly.

Our minds are made up of the memes we have been in contact with. You might say, what we accept into ourselves defines who we are, and what we reject defines the boundaries of the soul. But in the end, a large part of what we are made up of is each other, everyone we've known, spoken to, read, or watched as they went about their lives around us. In fact, so much of what we are is in our memes, we can transmit much of what we are to those with whom we share few genes. We certainly feel closer to our friends than to our second cousins, and feel they share more of who we are.

But how does the symbolic link up with the spiritual?

Consider what a wonder language is. You have a tree, you know its smell, recognize its shape, perhaps eat its fruit or nuts. The tree is a solid thing, growing in one place and firm in its reality.

But then, you have a word for the tree. In fact, you have a word for trees. It is as if the tree, and all trees, have grown a new dimension. The tree now has an existence in the physical world and another existence in the new, symbolic world.

How are we to interpret this?

One way would be to regard that second existence as spirit. The tree now has a spirit, perhaps we could speak of it as a wood nymph, the brook has not just the sound of moving water but the babbling of the water sprites.

This is a mythopoetic understanding of the world. We understood this new dimension in the world by calling it spirit, and inhabiting the world with a new sort of creature that existed only in the realm of magic.

In our materialistic age, we tend to think of the world and society in materialistic and instrumental terms. But this would not necessarily be the dominant mode of understanding for all of history. In a slowly changing world, we could construct a society of customs and myths that caused people to act in ways that made the crops grow and the social order to remain stable. This would be a world Edmund Burke could admire, in which the customs and myths society imbued its members with were the cumulative wisdom of the society.

There is a branch of philosophy called pragmatism, which says ideas have an evolutionary life, in which the fittest ideas survive. For millennia, this could work slowly, and the ideas only had to work, they did not need to be literally true. Humanity could live by its myths.

When the world changed quickly, as in the late bronze age collapse of about 1200 BCE, this system did not work well enough. The new technology of iron meant the old powers fell. In the following dark age, many cities were leveled, never to be built again on those sites. Populations fell, civilizations failed.

It took around 800 years for civilization to recover. And from that dark age came a flowering of reason we now think of as the Greek golden age. Instrumental logic, combined with language, became philosophy. It was a precursor to the age of reason.

We entered a new dark age when Rome fell, and society relied more on religion and custom for centuries. Then came the Enlightenment, and we began to try to reason our way to the good society again.

So here we are, with reason and faith often at odds. The world is changing too rapidly for mythopoetic systems that have evolved over the ages to adapt quickly enough, but there is great resistance to leaving them behind, and for good reasons. The Enlightenment, after all, produced philosophies that led to the Terror, the Stalinist purges, the killing fields. There is enough wisdom in myth to make it still useful. Its claims to truthfulness are usually not testable, and beside the point in any case.

But reason and faith are not the only things at odds. Both can be used to justify either authoritarian or democratic regimes. The violent regimes justified in the name of “science,” such as the fascist and communist governments, have been pretty thoroughly discredited at this point. But we are now seeing violent reactions against liberalism from people motivated by religion and tradition. We are used to thinking of democracy as a better form of government to live under, but there are plenty of people fighting for or living under authoritarian regimes. The rights to life, liberty, and the pursuit of happiness are not valued in these societies, and a surprising number of people seem to be just fine with that.

Monday, December 5, 2016

Reality, truth, & facts, versus the Republican will to power

by John MacBeath Watkins

Some on the right seem to regard reality as a mere inconvenience. Recently, Trump supporter and CNN commentator Scottie Nell Hughes went so far as to assert that "There’s no such thing, unfortunately, anymore, as facts."

It would be interesting to know when there ceased to be facts. Was it during George W. Bush's first term, when an administration official (almost certainly Karl Rove) claimed that "we create or own reality?" Certainly Republicans had a history long before that of acting as if facts were irrelevant. They've continued to assert that lowering taxes increases tax revenue long after that was shown to be untrue.

Now, there is a philosophical position that "truth" is impossible. In The Will To Power, Friedrich Nietzsche asserted as much:
Against [empiricism], which halts at [observable] phenomena—‘There are only facts’—I would say, no, facts is precisely what there is not, only interpretations. We cannot establish any fact ‘in itself’: perhaps it is folly to want to do such a thing. 
‘Everything is subjective [for example, a figment of your reasoning mind],’ you say; but even this is interpretation. The ‘subject’ is not something given, it is something added and invented … [Is] it necessary to posit an interpreter behind the interpretation? … 
In so far as the word ‘knowledge’ has any meaning, the world is … interpretable, otherwise it has no meaning behind it, but countless meanings—‘Perspectivism’. 
It is our needs that interpret the world; our drives … Every drive is a kind of list to rule; each one has its perspective that it would like to compel all the other drives to accept as a norm.
Nor is this rather malleable notion of the truth new to the right. As I've noted before, German fascism did not consider even science to be capable of objective truth:
Each nation had a science natural to them, they maintained, and any science that claimed to be universal was "Jewish" and false. The "science" of racial hygiene was far more acceptable.
I believe the source of the error here is a failure to understand the relationship between reality, facts, and truth.

Truth is a species of belief. It is a word we use to describe that which we believe without question. Reality is what is there whether we believe it or not. As I write this, it is winter, and the thermometer in the room I currently occupy reads 63 degrees Fahrenheit. That is a simple, observable fact. I know that the thermometer in question is not the most precise, but I can report what it says without fear that my interpretation has contaminated the reading, and I can be certain that it accords to a reasonable degree with reality.

Now, lest you think I've taken the statement from Hughes out of context, or that I'm being pedantic about "facts," here is her statement in context. As a call-in guest on the Diane Rheme show, she was asked what she thought about some fact-checking that showed much of what Donald Trump tweets is lies.
“On one hand, I hear half the media saying that these are lies. But on the other half, there are many people that go ‘No it’s true,’" Hughes said. "And so one thing that has been interesting this entire campaign season to watch, is that people who say ‘facts are facts,’— they’re not really facts." 
“Everybody has a way—It’s kind of like looking at ratings, or looking at a glass of half-full water. Everybody has a way of interpreting them to be the truth or not true. There’s no such thing, unfortunately, anymore, as facts,” she added.
I think here we see the basic problem between those of us in what Rove termed the "reality-based community" and those in the conservative bubble. We think there are facts -- observable, objective representations of reality -- while Hughes and her ilk think there is only opinion.

Given the definition of "truth" I've given above, it should be clear that I think it is possible for people to maintain that something is "true" -- that they believe it without question -- while not being in accord with the facts -- objective representations of reality. Hughes seems to mean that if people claiming a thing is true actually believe that, and are not lying, that's as good as having a belief that aligns with observable reality.

Those of us in the reality-based community tend to think people saying this are in effect claiming their ignorance is as good as actual knowledge. In fact, they think their ignorance is better if it wins.

That is a very Nietzschean notion of truth (well, rather cruder than Nietzsche.) Donald Trump himself, asked if his dishonest and heated rhetoric during the campaign had gone to far, replied in this same mode:
"No. I won," he said.
This is perhaps the clearest statement yet of how conservatives have come to regard claims made in the political sphere. In Neoconservatism: The Autobiography of an Idea, Irving Kristol wrote of supply-side economics,  "I was not certain of its economic merits but quickly saw its political possibilities."

The political possibilities involved being able to lower taxes on the rich while claiming they were neither cutting programs for those less fortunate nor exploding the deficit. The fact that supply-side economics never worked was a feature, not a bug. It allowed conservatives to argue that the deficit they had created was too large, and we needed to cut programs like Social Security.

Neoconservatives have long believed themselves a sort of intellectual vanguard, who have no merely the option, but the obligation, to mislead people in order to lead them.

Paul Krugman is fond of saying that "reality has a well-known liberal bias." But why is that? Perhaps it's because conservatives and liberals have a very different relationship with reality and truth.

Conservatives are all about conserving traditional values, beliefs, and power structures. Their truth is already established, through long-standing tradition. Liberals are trying to discover the world and human nature, and discover the best way for people to interact with the world. Liberalism is a child of the Enlightenment, conservatism has been with us as long as culture has.

We see this in their relationship with the press, as well. Starting with Nixon, the conservative take on the press has been that the important thing is, are they with us or against us? Prior to the advent of Fox News, when reality conflicted with traditional values, beliefs, and power structures, the press would present facts, which might establish that the truth was not what we had believed before. This is very annoying to people who know the truth without reference to the facts.

This became particularly noisome from the conservative point of view when they were reporting on the civil rights movement or the Vietnam War. Fox News found an opportunity here, providing "news" that did not conflict with traditional values, beliefs, and power structures; if the facts were a problem, they ignored them or changed them.

When Donald Trump claimed he would "Make America Great Again," he was not talking about greatness in the sense of some objectively quantifiable fact. He was promising to restore -- wait for that phrase again -- traditional values, beliefs, and power structures.

No, he can't bring back the jobs lost in the West Virginia coal mines, and perhaps the West Virginians who voted for him don't really expect him to. In fact, they may not expect him to change objective facts in their lives at all. What he represents to them is the will to power for the formation of a different kind of truth, about traditional sex roles, about the power structure that existed in that lost world of the 1950s.

As L.P. Hartley wrote, "The past is a foreign country: they do things differently there." The world has changed too much for us to return to a time when being white and male and willing to work made the world your oyster, or any other mollusk you chose. It's no accident that the 2016 election took place against the backdrop of a controversy over transgender bathroom use and white backlash against the Black Lives Matter movement. Nor is it an accident that the champion of tradition did badly among the young.

Those who can adjust to reality are doing so. For the rest, truth is known from tradition, and reality is an inconvenience.

(I should note that in my opinion, Nietzsche would not have approved of Donald Trump. He was opposed to tribalism and nationalism, and wanted to see a unified Europe, whereas Trump is very much about tribalism.. And Trump does not resemble the ubermensch so much as the last man, who is decadent and resentful, fearful of progress, comfort-loving and backward-looking. In Thus Spake Zarathustra, the titular character, finding people reject his teaching on the ubermensch, gives them an example of someone so disgusting he assumes they will be repelled by him, der letzte Mensch, or last man. Instead, they embrace him. That makes me think of how the pundits thought Trump was too disgusting to be elected, and were dismayed when he was. But in truth, Trump does not fit the image of either ubermensch or letzte mensch very well.)