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Annals of the Economically Incorrect

Updated: 2017-11-18T16:11:47.868-05:00


ARAMCO CEO Is Delusional


Financial Times reported yesterday that Amin Nasser, the CEO of the Arabian American Oil Company (ARAMCO, currently 100% owned by the Saudi government, although originally founded by four former US oil company majors), has declared that investors should feel pleased that Crown Prince Muhammed bin Salman has arrested and purged over 200 Saudi princes, government officials, and private businessmen.  This is because this was strictly an anti-corruption move, and foreign investors can be assured that there will now be no corruption in the Kingdom. Really, he said this.

Now I declared in my post title that Nasser is delusional, but I doubt it.  I suspect that he is a very smart guy. The question is whether he can convince any potential buyers of the upcoming possibly $2 trillion Initial Public Offering of 5% of ARAMCO stock that indeed this purge sends a good signal to them about buying ARAMCO stock.  Wow, the nation will now be rid of corruption, and, no, future investor, you need have no fear of being arbitrarily arrested or having your assets seized by MbS, none whatsoever, not that you were worrying about those things previously, but now you really do not need to worry about them at all.

Of course on the very same page of the FT there was another article about how MbS's purge has rattled world oil markets, with oil prices now sharply falling after sharply rising after he made his purge.  Nobody knows what the implications are or what the heck is going on, but, hey, no problem, no need to worry, Inshallah bukra maalesh (God willing tomorrow no problem, a fave line in KSA).  In any case, Nasser's public statement will undoubtedly completely reassure everybody, and all will become extremely calm before we know it.

Oh, there is also the matter of where this IPO will happen, touted to be the largest in history.  New York and London stock exchanges have actually been competing with each other to host it, but in fact in the end this may not be such a good idea and they may not be in the running for real anyway.  According to the FT the Saudis are also considering Hong Kong and Tokyo, but at the end of the article it was floated what I have all along expected and predicted: that the IPO will be handled out of Riyadh's own exchange with specially targeted sales to specially targeted individuals, with a lot of them being local big money Saudis.  So maybe Nasser's speech was not for all the foolish foreigners, but for the well-off locals: buy when we tell you to or else you can join the officially designated-to-be-corrupt 200 plus..

Barkley Rosser

Stranded Assets Rewind


There’s a Dangerous Bubble in the Fossil-Fuel Economy, and the Trump Administration Is Making It Worse...
"In reversing many of Obama’s keystone climate and environmental policies, Pruitt and Trump are conveniently ignoring these market signals in order to help out the fossil-fuel millionaires and billionaires who put them in office. Their actions could have disastrous consequences, not only for the climate but also for the global economy."
Where are the economists on this? Oh, right -- talking about tax cuts and Fed rate hikes. Using Economist's View as my sample, I found no links whose title indicated it was about the stranded assets carbon bubble in the two weeks following publication of the above article by Carolyn Kormann in the New Yorker on October 19th. Zero. 

I actually think that Kormann is unduly optimistic in her analysis. My suspicion is that there was already a massive carbon bubble prior to the 2016 election that was being wound down excruciatingly slowly. The election of the coal-guzzling orange groper stopped that winding-down in its tracks and ushered in a fossil-fueled feeding frenzy at The Last Chance Texaco.

And where are the economists?

Saudi Crown Prince Attempts To Destabilize Lebanon


Of course that is not what Muhammed bin Salman (MbS) or his mouthpieces claim, but it is pretty much what every commentator I have seen outside of Saudi Arabia thinks is the likely outcome of his most recent actions, taken on the heels of his purge/arrests of over 200 people, with apparently more possibly about to be swept up in a supposed anti-corruption drive, although as Anne Applebaum put it, "In some countries a person is charges with corruption and then arrested, while in others they are arrested and then charged with corruption, with Saudi Arabia being among these latter."  An unfortunate aspect of the current situation is that there are many loose ends and uncertainties, with many people in Lebanon making accusations that are being denied by Saudi authorities, but with no credible denials of the charges coming from those most affected and involved.What KSA has done is invite the premier of Lebannon, Saad al-Hariri to visit KSA and then have him announce Riyadh his resignation from that position.  While he seems to have said little of any substance in his resignation speech and has said basically nothing since then nor made any public appearances that I am aware of, Saudi authorities said that the reason for this resignation was that he was in danger of being assassinated by Hezbollah or other enemies, which had happened to his father Raif in 2005, making this suggestion/accusation have some credibility.  Raif had also been premier, a position guaranteed to a Sunni as part of the Syrian government and Hezbollah, the latter a longstanding relationship.As it is, nobody in Lebanon has accepted al-Hariri's resignation, including the members of his own party, the Forward Movement, although they have so far defended the Saudis against criticism of their actions.  All the major political figures have demanded that he return to Lebanon so that he can resign there if he so wishes, including both his rivals such as Aoun and Nasrallah, the Hezbollah leader, as well as the members of his party.  Those in the rival parties, although all in the coalition together, have charged the Saudis with putting al-Hariri under house  arrest and forcibly preventing him from returning to Lebanon.  What he actually can do or wants to do is unknown.It is reported today in WaPo that the Saudis have forced al-Hariri to step down for not confronting Hezbollah and trying to reduce Iranian influence in Lebanon and its ruling coalition.  Reportedly they are trying to convince his older brother, Bahaa, to take over as premier, but Bahaa is refusing so far.  They also have urged other brothers (I do not know how many there are) who are hanging out in KSA (where their father made over a billion dollars) to return to Lebanon to support this effort and to pick a fight with Hezbollah.  So far apparently none of them have responded favorably to these entreaties.I shall only briefly note that MbS has been making a variety of seriously dumb moves.  I guess we shall have to wait and see if his purge/arrests of over 200 high level Saudis will work out internally beyond simply temporarily cementing his power and wealth.  However, his two foreign ventures prior to this matter have turned into complete botches, with one a full-blown disaster.  That would be Yemen, where a massive cholera outbreak is happening, along with famine, both of these aggravated by the recent blockade put in place against the Houthis. MbS started a war against them two years ago, with all the noise being that they would make short work of the Houthis, but it has not come to pass, only a massive humanitarian disaster. Of course, President Obama supported this war by KSA against Yemen, if not as enthusiastically as President Trump reportedly has.The other botch, not nearly as humanly destructive, has been the Qatar farce, with MbS leading UAE, Bahrain, and Egypt into their boycott and embargo and numerous demands against Qatar for being supposedly too friendly with Iran ([...]

Freedom of Speech for Fascists?


I just finished reading the Chronicle of Higher Ed’s profile of Mark Bray, author of Antifa: The Anti-Fascist Handbook.  I don’t know how accurate it is as a portrayal of Bray and his ideas, but it seems like a sober, fair-minded overview of the debate over anti-fascist tactics and freedom of speech.What the article doesn’t say, however, is that there are two very different bases for opposing public appearances by white supremacist and similar groups.  One is dangerously wrong, the other, which Bray presents, makes much more sense.First the wrong approach, that groups should not be permitted to express themselves in public if they cause emotional distress to me or other people I care about.  You hear this one a lot: speech that I find demeaning is a form of violence, and there can’t be freedom for it.  There’s no difference between saying something horrible to me and punching me in the face.  No freedom for one, no freedom for the other.This argument has its roots in a mindset that has become popular in much of the left, that the ultimate political goal is equal well-being for all, that well-being is essentially having a positive emotional state (or not being in a state of stress/despair/fear/etc.), and that actions should therefore be judged by the emotional response they engender, especially among marginalized groups.  It’s a deeply subjectivist conception of life and politics, one that puts feelings above “objective” conditions like economic status, access to social or institutional networks, risk of physical harm, or other measurable outcomes.  In fact, the primacy of subjective feelings is often asserted by denying the very possibility of “objective” anything.  (Objectivity is said to be a tool of knowledge/power to silence the oppressed.)From a logical point of view, the identification of personal well-being with a series of transitory positive emotional states is indefensible.  First, there’s more to life than that.  Second, and crucially, one’s subjective emotions at one moment are weak predictors of future happiness; those much-derided objective conditions do a better job on that front.  As a teacher, I sometimes engender frustration in students, temporarily lowering their emotional hedonometer.  If I’m doing my job well, this is more than compensated by increased learning, which will be of more benefit down the road than an extra hour of emotional ease.  Feelings matter, a lot, but not at the expense of everything else.  And speech that causes negative feelings can’t be evaluated just on that basis; you have to think about the other consequences, direct and indirect, of listening to it, allowing it but not listening, or not allowing it at all.Politically, the ideology that subjective feelings are everything is catastrophic.  It’s a claim with a long history on the repressive right: if students don’t recite the pledge of allegiance each morning at school my feelings are insulted, or if they burn a flag, or if professors denounce America, or if athletes take a knee.  It’s the same argument, just a different group’s feelings being hurt.  The only counterargument of the left is that some people’s feelings (people of color, gender nonconforming, etc.) count more than others’ feelings, but really, do you want to hang your politics on this?At the deepest level, the struggle for social change butts up against the force of cognitive dissonance.  People have made commitments to the existing order.  They have dedicated their lives to getting a job and moving up, if they can.  They or their parents or children have served in the military, exposing themselves to horrific risks of violence (and not just speech) with often horrific results.  They have supported politicians hoping to get a better break on some government policy.  Then a social change activist comes along and says, these commitments [...]

President Trump Must Release His Tax Returns


I know, boring boring boring old news.  But now that he has had his hind end kicked by the recent off-off election results, it is time to get real.  He has managed to cover up massive amounts of crimes and violations of ethical norms because he has violated so many.  Nobody could keep track of them. But now that he has his behind kicked, and Mueller is zeroing in on him, it is time for him to deal with his most important violations and 'fess up.So, in my view the biggest violation of them all has been his refusal to release his tax returns.  Of all the humongously numerous violations of ethical norms and actual laws, this refusal on his part increasingly becomes clear to be the most important.  Of all the mistakes the American people made in electing this worst president ever elected, this is the worst mistake of all, electing a person who refused to release their tax returns.There are two clear reasons why he must release his tax returns, and I call on all media to begin demanding relentlessly and repeatedly, every day, even though the media views this as a dead and boring issue, that President Trump release his tax returns. The way I see it, every day that passes that he does not release his tax returns is another day piling up that he should not only be removed oa as  president, but that  he should be put in jail for a very long time.So the first reason is just obvious and immediate.  The Republicans in Congress have proposed a major change in the US tax system.  It is not obvious that any such change is needed, given that the economy is doing pretty well, but, anyway, we have the biggest proposal for a tax change since 1986.  I am not going to get into the details of this proposal or how it is far less worthy than the one in 1986s, which it is, but there is this screaming out loud problem that this proposal appears to  have at least five if not more provisions that personally benefit him and his family, possibly to the tune of one than a billion dollars. However, the American people do not know and cannot know the exact size of this massive benefit he will personally receive until he releases his personal tax returns, which he promised to do and has not done so.  This tax proposal should not be passed until he releases his tax returns and lets the American people know just exactly how much he and his family will benefit from this tax proposal, misleadingly labeled a "reform."The second reason is one he will resist more, but it is just sitting out there and stinking.  It is the matter of just how much money he owes Russians.  This may be why he will resist really hard releasing his tax returns, and why he had done so so fervently previously.  After all, when one of his returns did get out (from 2005, I think), he jumped on bragging about how he had taken advantage f all loopholes he could to pay as little as he could.  He said it showed what a good businessman he was, and lots of people bought this, and it distracted from this more unpleasant issue of his multiple financial relations with various Russians.It may well be that this latter issue is why he refuses to release his tax returns.  But I thin kthat the former matter is why the American people must  now demand that he release them.  He and his family stand to gain from this proposal in the billions of  dollars.  Maybe the people and the  Congress will decide that this is just fine.  But we should know how our utterly corrupt and incompetent president and his family will gain from this current proposal before it is passed.The American people must demand that President Donald J. Trump release publicly all of his tax returns as have all presidents for the last 40 years, including even Richard Nixon when he was under impeachment proceedings.  There is no longer any excuse for him not to do so, and this demand is so supreme it must over[...]

An Important Centennial


Today marks the centennial of the Great October Socialist Revolution, known when I was young in the US as the Russian Revolution, and also perhaps more accurately described as the Bolshevik Coup. On March 8, 1917, people rose up from the streets behind women marching on International Womens' Day, leading troops to refuse to fire on them, a real revolution, which led to the overthrow of Tsar Nichoalas II and the putting in place of a democratic government eventually led by Alexander Kerensky.  He failed to end the war with Germany, and riding on a peace and "land to the peasants" platform, Lenin led the Bolshevik coup on November 7 that overthrew Kerensky's regime. Peace was made with Germany, and peasants did take land from aristocrats, even if more than a decade later they would have to give it up during the Stalin agricultural collectivization.  Arguably this taking of land by peasants did constitute a revolution, and certainly a different regime was put in place, the first officially inspired by the socialist ideas of Karl Marx.  Many would say that it would fail to follow ideals laid forth in Marx's writings, especially the horrors under Stalin, although others would argue that the bad things that followed were inherent or implied in his writings, if not explicitly there.In any case, given the many Marxist-Leninist revolutions that followed, with the world's largest nation currently ruled by a party that adheres doctrinally to this view, which has recently been reinforced officially by a party congress, the second Russian Revolution in November is of world historical significance, for better or worse.  It is curious that in Russia itself it is currently viewed with mixed feelings.  There is a special this week on TV on Lenin, which is apparently showing his life with warts and all.  There is also one on Trotsky as well, amazingly enough, although he played a far more important role in the revolution than did his great rival for power, Stalin.Views of these figures now in Russia are not what one might have expected.  Indeed, both Lenin and Trotsky are viewed as mixed figures, partly good, partly bad.  The figure who is undergoing full-blown rehabilitation with the support of Vladimir Putin is in fact Stalin, now viewed favorably by 50% of the population. Bookstores are full of books praising him to the skies.  Of course it is not his role as a great communist or socialist leader that is emphasized.  It is his role as the leader of the nation in the victorious Great Patriotic War against Germany ruled by Adolf Hitler.Which brings us to how this centennial was celebrated earlier today in Moscow, which ceremonies I have now watched on RT.  Putin was not there, nor Premier Medvedev.  There was no mention of Lenin or Trotsky or Stalin. Rather there was a military parade that focused on the city of Moscow itself, with the highlight and emphasis being on recreating the November 7, 1941 parade in Red Square that presaged by just under a month the counterattack against the German troops then just a few miles outside of Moscow, a successful counterattack that coincided with Pearl Harbor and indeed was able to happen because of the non-aggression pact between the USSR and Japan, which allowed the Soviets to bring troops from Siberia, who were represented by soldiers in white uniforms, along with others dressed in historical costume.  The main part honoring this counterattack was preceded by older history, with people in period costumes depicting the Alexander Nevsky resistance against the invading Teutonic knights, people resisting the Polish conquest of Moscow in 1613, also ones resisting Napoleon in 1812, and, with the only reference to the centennial itself, some depicting partisans defending Moscow during the civil war that followed November 7, 1917, and then those depicting the World War II troops in great detail.The whole th[...]

Saudi Crown Prince Consolidates Power With Anti-Corruption Arrests


Everybody is against corruption, so it has become the new cool way to concentrate power in dictatorial societies to engage in an anti-corruption drive, as Putin and Xi Jinping have done.  Actually corrupt people may well be arrested, but somehow included in the set of those arrested are rivals of the leader who are conveniently disposed of.

So we now see it in Saudi Arabia, where Crown Prince Muhammed bin Salman has been leading a special anti-corruption committee approved of by the Saudi ulama, and now it has arrested 11 princes accused of corruption.   As in other countries, many of them, possibly all of them are guilty, but included among them are some rivals of Muhammed's for power, and, indeed the full set of names has not been released.

The most important in terms of being a rival is the now former commander of the SANG, the Saudi Arabian National Guard, which was long commanded by Prince Meti bin Abdullah, son of the long time former King Abdullah.  Before Meti commanded SANG, Abdullah did so for decades and had the HQ of SANG on his own palace grounds within a wall.  SANG has long been the rival military in Saudi Arabia to the regular military under the Defense Department, which has been under the control of the crown prince since his father became king, succeeding Abdullah.  SANG has a base among the tribes, and it was SANG that finally defeated the Muslim Brotherhood (Ikhwan) uprising in 1979 that had led them to seizing control of the Grand Mosque in Mecca.  Abdullah was SANG commander at that time, and he had the reputation of having excellent relations with tribal leaders.  His sone was clearly a threat and rival to the crown prince, and now he is out.  The commander of the Saudi navy has also been replaced, although not clear if he has been arrested.

Among the others who are out is the Minister of the Economy, and among the arrested is one of Saudi Arabia's wealthiest men, Prince al-Waleed bin Talal.  His father was long the leader of the secularizing and liberalizing faction among the sons of Saudi Arabia's founder, Abdulaziz. 

The crown prince has also  been making speeches about how he wants to encourage a moderate form of Saudi Islam.  I wish him luck on that, and his move to allow women to drive starting next June does provide some credibility on this front, although probably with major limits.  As it is, Saudi Arabia is apparently funding the building of many madrassas in Southeast Asia, including Bangladesh and Indonesia, where the local forms of Islam are far more moderate than even a moderate form of Saudi Wahhabism would be.

In any case, under the guise of cleaning up corruption, which he may be doing at least partly, it looke like Crown Prince Muhammed bin Salman is cementing his power, following in the footsteps of such role models as Vladimir Putin and Xi Jinping.

Barkley Rosser

The Virginia Governor's Race


I rarely talk directly about specific political races, but I live in Virginia where in less than a week there will be the most closely watched election in the nation for governor.  It is very close, and the Republican, Ed Gillespie, might well win, even though his Dem opponent, Ralph Northam, leads by narrow margins in most polls.  Sound familiar?  Sure, but why am I going on about this?

It is because even the pro-Dem national media seems to have bought into inaccurate characterizations of Northam's positions.  Most specifically, Chris Matthews on Hardball just had a guest on and they both were repeating the false claim that Northam supports taking down all Confederate monuments in the state, although accurately noting that this is a tough issue in the Commonwealth that Gillespie has been using to effect against Northam.  If Gillespie wins, this issue will be part of it.

The problem is that Northam's position is not that they should all be taken down, although he has expressed dislike of the Confederate monuments.  His position is that this is a matter of local control over locally controlled statues, which is the case.  He has said he would take down those "at the state level," but there are very few Confederate monuments put up at the state level.  As a matter of fact, current state law is against local control, asserting that local municipalities do not have the right to move such monuments.  This is a live and hot issue in Charlottesville, where the city council voted to move the statues of Robert E. Lee and Stonewall Jackson off public parks.  However, they city has been blocked from doing so thanks to court rulings based on current state law.  This effort to move the statues is what led to the demonstrations and rioting and death in Charlottesville in August.

Of course the latest is that a Latino activist group has been forced to withdraw an ad against Gillsepie since the terror attack in New York yesterday.  That ad showed minority children running from a pickup truck with a Confederate flag flying and a pro-Gillespie sign on it.  Sure,  nasty,  but then we did see somebody killed by a Nazi running a car over somebody. Yeah, the ad was pushing the edge, but the hard fact is that the GOP has been running nasty and false ads against Northam relentlessly, which I am sick of seeing, which may be why I am boring everybody with this whiney post.

So, the Gillespie ads have been charging Northam with supporting the MS-13 gang, with horrendous photos of prisoners in El Salvador covered with ugly tattoos, with charges that Northam supports sanctuary cities, of which there are a big fat zero in Virginia.  There have also been scads of ads from the NRA against Northam, although some of these look sort of silly, at least to somebody like me who does not like the NRA.  So they have one where they show Northam saying, "I have a D- rating from the NRA," with them then shattering that with "That is a lie! He has an F!" but he was speaking to people against the NRA and he has spoken strongly against the NRA, but clearly the NRA is trying to get its people out to vote.

Another worry I have is a supposed "boredom" reported by WaPo about the race, which is why I worry that this darned New York terror attack and all these statues and NRA ads will get the Trump supporters out while the Northam people sit at home going "ho hum" like we have seen in so many off-presidential years.  I admit that I shall be totally disgusted if the Gillespie wins with these ads, which are repeated three times in a row.  They even have Northam aiding child pornography.

Barkley Rosser

Barzani Out, Puigdemont In Belgium


It seems that the two recent independence referenda have largely collapsed.  One was in Iraqi Kurdistan, with President Massound Barzani having it done with the eye that it would give him leverage in negotiations with the Iraqi central government.  That did not work, with the referendum triggering the central government to move to seize control of the oil producing areas the Kurds had controlled and quite a bit of other territory they had controlled, especially Kirkuk.  Barzani had not stepped down two years ago when he was supposed to.  Two days ago he announced he will step down from his position.  Looks like this is basically over.

Then we have Puigdemont, the prime minister of Catalunya/Catalonia.  He also put in place a probably badly timed and unwise independence referendum.  This was followed up on the weekend by the Catalan parliament voting for independence, even though many polls suggest a majority do not support independence (although a solid majority voted for the independence referendum, with a a low turnout).  Now the central government has cancelled the Catalan government and imposed direct central rule.  Puigdemont has fled to the Flemish part of Belgium where he has been given asylum.  So, it looks like this independence referendum has also ended up as a disaster.

I note that in my earlier posts I expressed more sympathy with the Kurdish declaration, even as it looked like very bad timing for it.  I had and have much less sympathy with the Catalan one given the level of autonomy they have over so many areas, with the main effect being a selfish economic result that would have them no longer sending money to poorer parts of Spain. The amount of self-righteousness on their part in regard to this I find pretty indefensible. The Kurds have suffered far more at the hands of those who rule them than have the Catalans, even accounting for the old Franco period when indeed the Catalans did suffer vicious repression, although I do not support violence on the part of the Spanish central government to impose their direct control.

Barkley Rosser




Everything Is Going Great, So Let's Change It


Well, the actual headline on the front page of the Washington Post below the fold today reads, "Economy shows strong growth, could provide GOP momentum."  The strong growth is the 3.0% annual growth rate of GDP in the third quarter (supported by a strong stock market), with the momentum not being the obvious point that this might lead to general popular electoral support in the future for the GOP, but more specifically that this somehow might aid the GOP in Congress to change the current apparently successful fiscal and monetary policies inherited from Barack Obama.  Everything is going great, so let's change it.On fiscal policy, of course, this refers to the still not clearly formulated tax change ("reform" in the words of the GOP).  As we know cutting taxes for the rich is the one thing that seems to unite the party, so gosh darn it, they will probably do it, even if it takes a lot of effort.  As expected all those loud fiscal hawks from the Obama period are now fine with adding at least $1.5 trillion to the national debt, which will probably end up being more as some of the revenue increasing parts of the possible plan look like they may not pass.  After all, while Trump says the middle class will gain, indeed everybody, is going to get the hugest tax cut ever and it will pay for itself somehow.  But estimates have 80% of the cuts going to the top 1 or 2%, given the emphasis on cutting corporate taxes.  Anyway, here we have a pretty good growth performance that supposedly justifies a move to change the tax policy and system that has existed while this good performance happened.  Frankly, I do not know what the effect on growth will be as a result of whatever they pass, as they will pass something, although I doubt it will be all that big one way or the other on aggregate growth.The more amusing part of this is the argument apparently been given by Treasury Secretary Mnuchin and others in the last few days that is decidedly ironic.  It is that the stock market increase we have seen has at least partly been fueled by the expectation of a nice big corporate tax cut that will boost profits, along with all the deregulation that has been going on .  So, the argument goes, if the tax plan (or some tax plan, heck, anything) is not passed, well folks, that nice stock market increase might be threatened.  No tax plan passed, well, maybe a sharp decline of the stock market!  I find this hilarious, although it might be true.  The stock market has begun to look a bit elevated, near the boundary of getting into bubble territory by some measures, so, you had better watch out!The other matter has to do with monetary policy.  Everybody, including even Lou Dobbs, is telling Trump to reappoint Yellen, oh, with the exception of some House Republicans who want John Taylor and apparently Mnuchin who favors current Fed governor, Jerome Powell, a Republican appointed by Obama, who reportedly would more or less follow the Yellen policy, although be more open to ending the regulations on banks that Obama put in, which Yellen has publicly supported.  On Lou Dobbs' show, Trump said he had spoken with Yellen, and he kind of likes her, but also that he "wants to make a mark," which he indicated hurts the chances of Yellen, and WaPo yesterday said it is now down to just Powell versus Taylor.  I mean, hey, she was appointed by Obama, and simply nothing that Obama did must be allowed to stand, even when you have all sorts of Wall Street Republicans saying she should stay, and even populist looney Lou Dobbs as well.  Gotta go so Trump can make his mark and complete the changing of everything Obama, even though it is all just going so great.BTW, this is just the opposite of what is going on in China.[...]

A Serious Misreading of Coase


Corey Robin is very insightful about a lot of things.  I think his take on conservatism, that the thread running through it is opposition to attempts to demolish pre-existing hierarchies, explains ideological twists and turns that would otherwise remain mysterious.  Don’t take this post as an expression of anti-Robinism.But CR seriously misreads economic texts that abut political theory.  I felt this way about his analysis of Hayek, which simply ignores the centrality of his lifelong revulsion at Vienna-school-style positivism, with its echoes in a certain style of economic formalism.  (Yeah, Hayek bought into a lot of the elitism of the right, but so did nearly every other conservative; that’s not what made him consequential.)  And now he gives us a terrible interpretation of Coase.According to CR, “Coase divides the economic world into two modes of action: deal-making, which happens between firms, and giving orders, which happens within firms.”  He then goes on to paint Trump as an über-Coasian, at least in his own self-presentation, since these are the only types of action he recognizes.  I won’t dispute the portrait of Trump, but Coase?  Not a chance.Coase is proposing a theory of the make-or-buy decision which faces every firm.  (This is the case even for firms in a socialist economy, assuming they can transact in some way with other enterprises.)  What goods does a firm produce internally, and what do they acquire from the outside?  Do you hire your own accountant, or do you buy the services of some accounting firm?  Does Toyota make its own seat cushions for its cars, or does it get them from a supplier (or group of suppliers)?Coase assumes that going out onto the market is always best, in the sense that someone out there can do it better and cheaper than you can (or at least no worse and more expensive)—this is the market creed, with competition and all that—so there must be some other consideration at work.  He says the missing ingredient is transaction costs: sometimes the cost of negotiating and enforcing a contract, which is what “buy” implies for inter-firm business, is so great as to negate the intrinsic benefits of using the market.  The reason firms exist and have the boundaries they have (the result of a myriad make-or-buy choices), according to Coase, is the variegated presence of transaction costs.(Oliver Williamson goes one step further and identifies the most crucial such cost as that of ensuring that one’s counterparty doesn’t lie, cheat, steal or hold you hostage to exploit your reliance.  CR might take note that the Williamson interpretation of the authoritarianism of the firm is essentially the same as Marx’s, except that Williamson thinks the boss is the repository of virtue.)What makes CR’s reading of Coase so strange is that, in a Coasian world, “deals”, understood as singular, complex transactions that absorb immense effort in negotiation and enforcement, should be rare.  Only a failure of competition, due for instance to barriers thrown up by a regime of intellectual property rights, would put firms in a situation in which they had to submit to deal-making rather than internal production.  Businesses, if they followed Coase’s formula, would shun deals to the maximum possible extent.The core problem with CR is that he doesn’t see that, for Coase, a “deal” is a very different creature from a routine market transaction, and this difference is what the whole theory is about.Incidentally, there are many problems with Coase’s formulation.  Here are the two I believe to be the most important: (1) Coase assumes a unitary entrepreneur who owns the firm, profits from its succes[...]

Marxism-Leninism In China Update


The once-every five years Chinese Communist Party conference is now over.  It appears that Xi Jinping has not identified an heir to himself as his two predecessors did at the time of this equivalent meeting during their presidencies.  Furthermore, unlike either of them, Xi has joined Mao and Deng Xiaoping in having his work identified in the Chinese constitution as being an official part of Chinese ideology.  Most observers consider this a sign that even if Xi gives up one or maybe even two of his official positions, he is likely to continue to be the Paramount Leader in practice beyond the next five years.  A key part of his thought is the superior role of the Communist Party and its foundation on Marxist principles, even if a mixed economy is to be followed, "socialism with Chinese characteristics."  So, the assertion of Marxism-Leninism in China by Xi apparently means a justification for him to remain in power in China for the indefinite future.

The obvious way that Xi could pull off staying in power without changing the constitution would be to hang on to being Party Secretary as well as Chair of the Central Military Commission.  The job that has a two term limit is President, with him just starting his second five year term as that.  In five years he could easily select somebody who  is willing to obey him to replace him as President while he hangs on to the other two positions, which have no term limits to them.  The one rule he will have to break, although apparently it is not in the constitution and merely a recently accepted policy, is the upper age limit of 68.  That is apparently for all positions.  In five years he will be 69, so that would have to go as a rule, at least for him.

Barkley Rosser

Corporate Profit Tax Cuts and Wages: the UK Experience


Kimberly Clausing and Edward Kleinbard have each written some interesting papers on transfer pricing. Here they team up on a different topic: The President’s Council of Economic Advisers claims that slashing the corporate tax rate to 20 percent would boost the average American’s wages by $4,000 per year (“very conservatively”) — and perhaps by as much as $9,000. If true, that would be a remarkable gain for working Americans. Unfortunately, it’s extraordinarily unlikely to be true. The two of us can think of dozens of objections to the CEA claim, presented in an official report, but perhaps the place to start is with the United Kingdom, which has already run this experiment. Over the past decade, the United Kingdom has slashed its corporate tax rate, in several steps, from 30 percent down to 19 percent. At the same time, the United States has kept its corporate tax rate constant at 35 percent. Like the United States, Britain has a large open economy, investors in British firms come from all over the world, and Britain provides a sound legal and regulatory environment. They next document the decline in real median wages in the UK since the UK began its experiment with lower corporate tax rates. They then note: Of course, the UK example is just one case, but this comparison is a great deal more relevant to the CEA’s claims than the slapdash comparison it presents near the start of its report. The report compares US wage growth over three years to wage growth in 10 unnamed “low-tax” developed economies. But the United States is simply not comparable to small-economy tax havens like Ireland and Switzerland. What’s more, the CEA comparison focuses on average wage growth, while our chart uses median wages. Their critiques of what the CEA under Kevin Hassett continue. But let’s stick to the idea of using the experiences of other nations who have also reduced corporate profits taxes. KPMG provides corporate profits by nation over the 2003 to 2017 period. Other nations have followed the UK lead. For example, Japan’s rate has been lowered from 42% to less than 31%. One has to ask why didn’t the CEA do comparisons based on nations like Japan and the UK. Update: This CEA report touts Figure 1: the covariation between the trajectory of inflation-adjusted wages and statutory corporate tax rates (Federal and sub-Federal) between the most-taxed and least-taxed developed countries (OECD) over recent years, visible in Figure 1, is indicative of these papers’ findings. Between 2012 and 2016, the 10 lowest corporate tax countries of the OECD had corporate tax rates 13.9 percentage points lower than the 10 highest corporate tax countries, about the same scale as the reduction currently under consideration in the U.S. The average wage growth in the low tax countries has been dramatically higher Figure 1 shows the average real wage growth from 2013 to 2016. A lot of these nations have had low corporate tax rates for years so why only show the latest four years? And the term “dramactically” strikes me as hyperbole. One also has to ask what role does transfer pricing abuse play into the measured series? I get what Kimberly Clausing and Edward Kleinbard meant by: Of course, the UK example is just one case, but this comparison is a great deal more relevant to the CEA’s claims than the slapdash comparison it presents near the start of its report. The report compares US wage growth over three years to wage growth in 10 unnamed “low-tax” developed economies. But the United States is simply not comparable to small-economy tax havens like Ireland and Switzerland. [...]

Remembering Black Monday


The largest single one day decline in percentage terms of the Dow-Jones average (22.6%) happened 30 years ago today, on October 19, 1987.  It was a Monday, hence "Black Monday."  Although unlike after the second largest such one day decline in percentage terms (12.8%) on October 28, 1929, the US economy did not go into a decline, much less anything remotely resembling the Great Depression.  Indeed, the very next day, after starting to decline further in the morning, the market turned around and starting rising, led by the futures and options markets in Chicago.  Although the market would decline far more between August, 2007 and March, 2009 at the front end of the Great Recession, there was no single day during all that when the market fell nearly as much as on either of these two days listed above.Robert Shiller has written an interesting column in the New York Times about Black Monday (linked to by Mark Thoma on Economists View).  He did a survey after it happened of participants and found that they were driven basically by pure panic.  The Brady Commission report said that it was about the trade deficit and a possible tax change, and also program trading via portfiolio insurance.  Yes, Shiller says that latter was some of it, but in fact he determined that fear of it was probably more important than the actual program trading.  There was very little going on with fundamentals, but vague rumors and reports set off a huge crash, the biggest one day one ever, even if in the end it did not really amount to much.  But Shiller says it can happen again (and, if he were alive, the late Hyman P. Minsky would probably agree).Let me add a few observations of my own, based on things I was working on back then and have since, if with less attention than Shiller.  In particular I was worrying about how one could model such financial market crashes by considering financial markets as complex nonlinear dynamical systems.  The big candidates for helping to understand such phenomena coming out of that field were catastrophe theory and chaos theory.  As it happened, October 1987 was around the time that chaos theory was at its height as the intellectual fad du jour.  Indeed, it sort of looked like maybe chaos theory might be useful.  It is famous for the "butterfly effect," where supposedly a butterfly flapping its wings in a rain forest in Brazil can cause a hurricane in Texas. So, this apparent lack of anything really major happening in the economy or the markets prior to Black Monday brought forth a lot of commentary along the lines of "Wow, this looks like the butterfly effect and chaos theory!"Well, the heyday of chaos theory has passed.  For better or worse, the econometrics of identifying whether or not a time series is actually chaotic or not is pretty hairy.  There are no significance tests.  Lots of time series, including plenty of financial ones, that exhibit the basic characteristics of having a butterfly effect (sensitive dependence on initial conditions, a positive Lyapunov exponent, to be more technically precise).  But estimated models based on these do not do well forecasting, not much better than random walks.  Actually, the nature of such butterfly effects is that if they exist, one should not expect to be able to make good forecasts. In any case, even though many such time series look like they might chaotic, we have all lost interest.  But, as it is, quite aside from all that, I do not think chaos theory is(was) really the best explainer of what happened on Black Monday.Rather, of the family of complex dynamics, I think the relevant one was a[...]

The Dow Chemical Demonstration In Madison, October 18, 1967


A half century ago today on the University of Wisconsin campus in Madison, Wisconsin was the first seriously violent demonstration against the war in Vietnam, which resulted in 76 injuries.  It brought a resounding end to the naïve idealism of the "Summer of Love" atmosphere that had gripped Madison and other parts of the country earlier during 1967, the peak year of flower power hippie love movements.  A hail of tear gas and billy clubs brought such views to a hard end in Madison on October 18,. 1967.The protest was not initially violent.  Students attempted to block other students from interviewing for jobs with Dow Chemical Company, which manufactured napalm.  These interviews were being held in what was then the Commerce building, today Ingraham Hall, which then housed the Business School, now in Grainger Hall.  The hallway was narrow and when police came in to break up those blocking the doorway to the interviews, scuffling broke out and some initial violence.  As pretesting students left the building, full-scale violence broke out as the police began using tear gas and billy clubbing students.  Some observers claim they were provoked to do this by students chanting insults ("pigs") and making Nazi stiff armed salutes at the police, some of whom were WW II vets.  The reaction to this violence by the police against students (in later demos students would fight back and throw objects and so forth, but not that day; it was all one-sided) was major shock by the rest of the campus population, with a 1700 person march to the State Capitol three days later to protest the police actions. A leader of that march was Paul Soglin, now in his third round of serving as mayor of Madison, and rumored to be contemplating a run for governor of the statre.  A recently put together account from six different witnesses/participants of varying views is here.  A much more detailed account can be found in the best-selling book by David Maraniss, They Marched into Sunlight.  David walked into the demonstration thus personally witnessing it, without having been involved in the effort to block the interviews.  His book also tracked events in Washington and Vietnam at that time, with the latter focusing on the ambush that was covered at the end of the fourth episode of the recent Ken Burns documentary on the war.  According to Maraniss, this ambush convinced LBJ that winning the war was not possible, although he would not say so publicly then.My own involvement with the demonstration resembled that of Maraniss.  While I had held hawkish views on Vietnam several years earlier, I had become gradually less supportive and more critical as time passed, becoming fully opposed to the war about a year prior to this demonstration after I read histories of French colonial rule in Vietnam that convinced me it was a nationalist cause with the US simply having taken over the role of the French.  However, at the time of the Dow demonstration, I was not for blocking students from interviewing for jobs with Dow, so did not participate in the opening part of the demonstration (described in some detail in the link provided above).  I walked into it as I was heading for an intermediate macroeconomics class (taught by Peter Lindert, an economic historian still active and now at UC Davis) that was to be in the building across the street from the Commerce building, then called the Social Science Building, now Sewell Hall (ironically named for the liberal sociologist, William H. Sewell, who was then chancellor of the campus and called in the police to the demonstration).  The ope[...]

Marxism-Leninism And The Chinese Communist Party Congress


At this moment I am watching live on Bloomberg News the opening speech by President/Party General Secretary/Chairman of the Military Commission Xi Jinping of the once-every-five-years Chinese Communist Party Congress.  This is far more important than what one finds on other TV networks whether pro-Trump right now (how great his tax plan/tromping on immigrants and football players are) or anti-Trump (what is the latest gossip from the Mueller investigation and will Republicans in the Senate stand up to Trump).  A major theme seems to be a reassertion of party power and discipline, with a reinvigoration of the State-Owned Enterprises, with Communist Party cells to operate in nominally private enterprises, socialism with Chinese characteristics, with a reaffirmation of the foundation based on Marxism-Leninism.  Yes, he used that term.

While there all kinds of issues about the future path of economic, social, political, environmental, and military policies, and also the big question of the unveiling of the new leadership for the next five years in terms of the membership of Politburo and above it the ruling Standing Committee of the Politburo (of the Central Committee of the Communist Party of China), with all this to be ratified by the 3000 delegates at this Congress, taking place on the Great Hall of the People on Tiananman Square (with reportedly super high security there in place), the really big question is whether or not Xi Jinping will follow recent practice and plan to retire in five years and recognize a likely successor at this Congress, or will he clearly lay out a plan for him to continue in power after that.  This remains unclear as of this point, but he was just referring to Marxism-Leninism again and the heroic past of the party.  Offhand this looks like possibly laying the groundwork for becoming the new Mao and seizing greater and more permanent power.

Addendum, 12:10 AM, 10/19:

Xi Jinping is still speaking, now having passed three hours.  He has now covered nearly everything.  A major theme does seem to be mostly affirming a status quo, although with nods to "deepening reform."  Markets are important, and supposedly there will be opening to foreign direct investment and possible loosening of foreign exchange rate policy.  But "deepening reform" also clearly includes increased emphasis on the importance of the state and especially the party as noted above.  He has talked about just about everything.  One observer is forecasting that five out of the seven members of the ruling Standing Committee of the Politburo will be replaced, but that is a rumor.  Again, really big issue is whether Xi will indicate an heir or assert a third term for himself after five years from now.  Given the general strong man authoritarian trend in the world, the latter looks highly possible, and his emphasis on the importance and power of the party would fit with that.

Barkley Rosser

Iraq Conquers Kirkuk


The central Iraqi government based in Baghdad has conquered oil-rich and ethnically-mixed Kirkuk from its recent Kurdish rulers, who hoped to continue ruling it as part of their recently declared independent state of (Iraqi) Kurdistan, clearly consisting of three provinces, but which they also wanted to include the fourth one of Kirkuk province.  This now appears not to be going to happen.

Juan Cole has made an excellent discussion of this, noting 7 reasons why this is not about Iran as many commentators in the US claim.  I shall  not repeat most of his arguments here but suggest people look at the link.  I shall note the crucial point that what looked like it was going to be a major military conflict over Kirkuk thankfully turned out not to be is that the Kurdish Pesh Merga, who were ruling Kirkuk, actually are tied to the main opposition party in Kurdistan, the Patriotic Union Party (PUK) led by the Talabani  family,whose old patriarch, once a president of all of Iraq, has just died.  The Pesh Merga has simply withdrawn peacefully from Kirkuk, handing a major embarrassment to Massoud Barzani, the current president of newly independent (maybe) Kurdistan, who leads the center right Democratic Party of Kurdistan (DPK).  This suggests that while the opposition nominally supported Barzani's independence referendum, they lack enthusiasm, and Barzani may end up in trouble as things are not going well with this.  As I noted in a previous post, Barzani is in a tight position because he canceled an election in 2015, and Kurdistan's economy has been weak due to low oil prices.

I also add that apparently the fall of Kirkuk temporarily shuts down 350,000 barrels of oil per day production, which will add to the ongoing increase in world oil prices.

Barkley Rosser

The Case of the Spitting Legionnaire


A couple of days ago, the New York Times published an opinion piece by Jerry Lembcke "The Myth of the Spitting Antiwar Protester." Lembcke wrote a book a few decades ago debunking that myth but it is still going strong... stronger than ever, actually. The trope of "they're spitting on our veterans" is popular with anti-kneeling fanatics who maintain that athletes who protest during the national anthem are "spitting on the graves" of those who died to defend the flag and the freedom to do as you're told and stand during the national anthem.I have always found Lembcke's argument and evidence compelling but I don't like to take anything for granted. So I did a little extra digging. Some of that was digging through a stash of old Amex/Canada magazines that I have held onto for 45 years or so. A Vietnam veteran named Al Reynolds wrote an account published in the May-June 1973 issue reporting on the Vietnam Veterans Against the War contingent in the "Home with Honor" parade staged in New York City at the end of March of that year.As far as I know that is the only contemporaneously published eyewitness account of veterans being spat upon. The veterans in question were anti-war protesters and the alleged culprit was a presumably "patriotic" spectator. Reynolds' account, by the way, is substantially corroborated by the FBI's file on the VVAW. Although it doesn't mention spitting, it does refer to jeering and to three thwarted attempts by angry spectators to climb over barriers presumably to attack the protesters.I also searched several news databases to see if I could find any other contemporaneous accounts of either that event or others. Here is where things get intriguing. The New York Times carried a review of a play by Tom Cole, titled Medal of Honor Rag that referred to an American Legionnaire in Seattle who waited at the gate in the airport to spit on returning G.I.s because they were losing the war. I suspect that this alleged "legionnaire" is actually a fictionalization of the VVAW "Home with Honor" parade episode. All of the standard elements of the spitting myth are present in Cole's play: the airport, the spitting, and the anti-war hippies screaming "baby killers" at the arriving servicemen. The one difference is that it is a pro-war "patriot" doing the spitting.Medal of Honor Rag was first performed in Boston in April of 1975 and is supposed to be set in 1971. The first of the "Rambo" movies, First Blood was released in 1982. It contained the following transparently plagiarized bit of dialogue: allowfullscreen="" class="YOUTUBE-iframe-video" data-thumbnail-src="" frameborder="0" height="266" src="" width="320">Rambo: Nothing is over! Nothing! It wasn't my war. You asked me, I didn't ask you. And I did what I had to do to win. But somebody wouldn't let us win. Then I come back to the world and I see all those maggots at the airport. Protesting me! Spitting! Calling me baby killer and all kinds of vile crap! Who are they to protest me? Huh? Who are they? Unless they been me and been there and know what the hell they're yelling about.So there it is, folks. The making of a myth. An older woman in a fur coat, with carefully teased hair, her face distorted with rage, spitting at Vietnam veterans protesting against the war is transformed into a Legionnaire, with a red face, waiting at the airport gate to spit on returning G.I.s for not winning the war and finally into anti-war "maggots" protesting poor little John Rambo who was j[...]

The Incidence of the Obamacare Subsidies


Justin Fishel and Mary Bruce covers Trump’s dismantling of Obamacare:
The White House announced Thursday night that the administration will slash Obamacare subsidy payments to insurers. The "cost-sharing reduction payments," worth an estimated $7 billion this year, are intended to reduce out-of-pocket costs for low-income Americans on Obamacare ... House Democratic leader Nancy Pelosi and Senate Democratic leader Chuck Schumer issued a joint calling the action "pointless sabotage." "Sadly, instead of working to lower health costs for Americans, it seems President Trump will singlehandedly hike Americans' health premiums," they said in a joint statement. "It is a spiteful act of vast, pointless sabotage leveled at working families and the middle class in every corner of America."
Trump’s counter is that the health insurance companies are very profitable because they are reaping the benefits of these subsidies. I would argue that health insurance company profit margins are high in large part because we have not enforced the anti-trust laws and allowed a lot of market power. Brad and Michael Delong made this point last fall:
The United States’ Affordable Care Act (ACA), President Barack Obama’s signature 2010 health-care reform, has significantly increased the need for effective antitrust enforcement in health-insurance markets. Despite recent good news on this front, the odds remain stacked against consumers ... It is not surprising, then, that in 2015 some of the largest private American health-insurance companies – Anthem, Cigna, Aetna, and Humana – began exploring the possibility of merging. If they could reduce the number of national insurers from five to three, they could then increase their market power and squeeze more profits from consumers.
Even five health insurance companies are two few. But suppose we did have real competition in the health insurance market – what would be the effect of subsidies. Let’s consider this primer on the incidence of taxes:
The tax incidence depends on the relative price elasticity of supply and demand. When supply is more elastic than demand, buyers bear most of the tax burden. When demand is more elastic than supply, producers bear most of the cost of the tax.
Most economists know this and we know how to translate this into the implications for the incidence of a subsidy. We have to admit, however, that Trump is really awful at economics. But he does have economic advisors. Trump is implicitly assuming a very elastic demand for health care or a very inelastic supply of health care. But where is his evidence for these claims? I guess when Kevin Hassett produces his “analysis, we might see a link from Greg Mankiw.

Trump Fails To Certify JCPOA Iran Nuclear Deal


I wish to be very precise here on this extremely important matter. President Trump has not "decertified" the JCPOA Iran nuclear deal.  Now Congress must ultimately be responsible. He has, after a lot of discussion and intervention by his national security team, failed to certify the deal.  This is not something that was part of the deal, but an epiphenomenon put in place by the US Congrees as part of a deal agreed to by former President Obama to get the deal through, a matter of every 90 days the US president certifying that Iran is complying with the agreement.  Two times running, President Trump certified it, confronted by the hard fact that Iran has been complying with the deal according to every official body in the world.  But, he has said he would not certify it, and reportedly he has blown up over this matter with screaming fits his c.  So his NatSec team has cooked up this partial save: OK, boy, fail to certify, putting it on Congress to really undo the deal.In the face of way more to say than I shall here, let me point out odd items most will not. So one of those is a positive.  Even if the Congress fails to do what is right and reasonable and keeps the deal going, probably Iran will not pursue an active nuclear weapons acquisition program.  There are two reasons for this, which could easily be undone if Trump continues to insanely go after them.The first is that this whole negotiation with Iran was an unnecessary farce to begin with.  Vilayet-al-faqih Ayatollah Ali Khamenei was issuing fatwas against the building of nuclear weapons as far back as the G.W. Bush admin.  Pres Bush even accepted two official National Intelligence Estimates (NIEs) that declared that Iran was not actively pursuing a nuclear weapons program. He did it twice.  The fatwas by Khomeini were the ultimate reason why these hard fought and deeply studied NIEs came forth, representing after all a consensus of every one of 17 plus US intelligence agencies, who have a wide variety of perspectives, some of them almost insanely hawkish.  But twice during the G.W. Bush presidency they came together to make this super official certification: Iran did not have an active nuclear weapons program, even though it had one earlier, one that dated back to the Eisenhower admin when the US supported their program under the Shah.  But, the bottom line is that while Khamenei is alive, there will be no Iranian nuclear program.What this means is that ultimately Obama's massive effort to negotiate a halt to the nonexistent Iranian nuclear program was ultimately a worthless empty exercise, much as I have on occasion praised it.  I mean, it was a noble and heroic and difficult effort,  Obama supported John Kerry in getting the Russians and the Chinese, as well as the EU and other obvious US allies, to go along with economic sanctions, which actually had an effect, given that Iran is actually a semi-democratic regime, so that even the hardliners associated with Khameini went along and agreed.  And beyond Iran, it was a big deal, the UN officially supporting it along with the Russia, China, UK, France, Germany, and the UN Security Council (oh, sorry, a part of the UN), as well as most of the rest of the world, aside from a handful of countries (not to be listed, although in most cases their intel/militery support it).The second is that even given this nonexistent fact that Iran was pursuing a nuclear weapons program, which all the US intel agencies said was [...]

Enslaved to an Individualist View of Social Change


I note with some interest the debate over whether it is ethically necessary to refer to slaveholders as “enslavers” in order to convey our disapproval over their actions.  The obsessive use of the enslaving terminology in The Half Has Never Been Told (Baptist) bothered me at the time, and now I see he was part of a trend.I understand the motivation—up to a point.  Anyone who participated in the slave system had a share in the responsibility for it.  It is not anachronistic to look at it this way, since many members of slave-owning households had the same feeling and chose to opt out.  Of course, this moral judgment applies not only to those who directly owned slaves, but also those whose livelihood was predicated on enslavement, which includes financiers accepting slaves as collateral and business owners producing goods for slave maintenance and exploitation.  To some extent, in my opinion, it even applies to workers for those slavery-based businesses: I’d like to think that I would never have taken such a job if I had been around back then.Nevertheless, the insistence on language that parcels out responsibility to each participating individual implicitly distracts attention from the systemic, collective basis for slavery.  In what sense was an individual slaveholder an enslaver, personally responsible for the enslavement of his or her chattel?  An individual is responsible for whether they will be the one with the whip, but not whether individuals will be placed in bondage to someone.  The institutions of slavery, which encompassed the political, legal and financial mechanisms that defined, enforced and managed enslavement, took care of this.  Language that foregrounds individual responsibility backgrounds the institutional basis of the system.The linguistic debate matters because it reflects a disagreement over how to achieve change, one that simmers today.  Emphasizing personal responsibility inclines us toward individual action: refusing to purchase slaves in centuries past, boycotting the most objectionable corporations today.  And, to be clear, I have no problem with individual action; doing good is doing good.  But collective action does the heavy lifting.  It took a civil war to (mostly) eliminate slavery in the United States, and it was the failure of the federal government to follow Reconstruction through to the end that left us with a system of massive racial inequality.  Our most important individual responsibility is the one we bear as citizens, to do what we can to change the institutions that oppress and exploit.Just as the history of slavery is being reinterpreted as an epidemic of individual moral failing, there is a tendency today to see social and economic inequality, the unfolding horror of climate change and other urgent problems as matters of personal virtue or vice.  For instance, I sometimes give talks on child labor, and invariably, no matter how much I emphasize the systemic aspects of the problem, I get the question, “So what should I buy?”  Yes, an ethical individual cares about choices like this.  No, child labor will not be overcome by more mindful consumerism.  If you want the world’s children to have a better life, you should carry the banner for a global economic order that can eliminate mass poverty, beginning at the very least with the modest ideas of the Leading Group (of which the US has shamefully never been a member).[...]

IMF Fiscal Monitor: Progressive Taxation Need Not Deter Growth


The latest from the IMF is a must read for progressives even if it runs contrary to the nonsense coming out of the White House:
At the global level, inequality has declined substantially over the past three decades, but within national boundaries, the picture is mixed: some countries have experienced a reduction in inequality while others, particularly advanced economies, have seen a significant increase that has, among other things, contributed to growing public backlash against globalization. Excessive levels of inequality can erode social cohesion, lead to political polarization, and ultimately lower economic growth, but whether inequality is excessive depends on country-specific factors, including the growth context in which inequality arises, along with societal preferences. This Fiscal Monitor focuses on how fiscal policy can help governments address high levels of inequality while minimizing potential trade-offs between efficiency and equity. It documents recent trends in income inequality, including inequality both between and within countries, then examines the redistributive role of fiscal policies over recent decades and underscores the importance of appropriate design to minimize any efficiency costs. It then focuses on some key components of fiscal redistribution: progressivity of income taxation, universal basic income, and public spending policies for achieving more equitable education and health outcomes. The analysis relies on the existing theoretical and empirical literature, IMF work on inequality and fiscal policy, country experiences, and new analytical work, including various static microsimulation analyses based on household survey data. Simulations using a dynamic general equilibrium model calibrated to country-specific data and behavioral parameters illustrate the potential impact of alternative budget-neutral tax and transfer measures on income inequality and economic growth.

Hassett’s Evidence on Transfer Pricing and the U.S. Trade Deficit


In my last post, I questioned Kevin Hassett’s claim that transfer pricing manipulation was responsible for half of our trade deficit and asked what was the paper he referenced. We have the text of his speech: There is another important factor to consider when thinking about how these changes will affect the economy. A recent NBER working paper (Guvenen, Mataloni, Raisser and Ruhl 2017) argues that profit shifting by large multinational firms causes part of their economic activity to be attributed to their foreign affiliates, leading to an understatement of U.S. GDP. Moreover, this profit-shifting activity has increased significantly since the mid-1990s, resulting in an understatement of measured U.S. aggregate productivity growth. The authors correct for this mismeasurement by “reweighting” the amount of consolidated firm profit that should be attributed to the U.S. under a method of formulary apportionment. Under this method, the total worldwide earnings of a multinational firm are attributed to locations based upon apportionment factors that aim to capture the true location of economic activity. The authors use equally weighted labor compensation and sales to unaffiliated parties as proxies for economic activity. Applying the formulary adjustment to all U.S. multinational firms and aggregating to the national level, the authors calculate that in 2012, about $280 billion would be reattributed to the U.S. Given that the trade deficit was equal to about $540 billion, this reattribution would have reduced the trade deficit by over half in 2012. Formulary apportionment can take on many forms. One form is to allocate taxable profits by sales but this approach would likely lead to a different allocation of income than a true arm’s length approach especially for a nation that imported a lot of sourced produced abroad. Wasn’t this realization central to that debate over the Destination Based Cash Flow Tax idea? This NBER paper, however, does something else as noted by this summary: To correct for this mismeasurement, we use confidential MNE survey data collected by the Bureau of Economic Analysis to construct apportionment factors that distribute total transactions in income on FDI among the parent and affiliates in the MNE. We consider both labor compensation and sales to unaffiliated parties as apportionment factors, as these variables are most likely to identify the real production taking place in each location. Using BEA data to infer the extent of transfer pricing manipulation is a Herculean task so I guess we should applaud any effort to do so. And while the addition of labor compensation might improve upon the formulary approach over a pure sales based apportionment, this approach still strikes me as misleading. The value-added under arm’s length pricing can be seen as the sum of labor compensation and profits from the tangible and intangible assets created in a jurisdiction. Unless capital to labor ratios are internationally equal, apportionment based on labor compensation still misses the mark. Apportionment based on sales rewards the distribution function ignoring where the product was produced. Of course measuring the market value of capital is difficult especially if capital includes intangible assets and multinationals often transfer the rights to intangible assets to tax havens at valuations far below fair market value. As such, I would take these estimates of transfer pricing manip[...]

Puerto Rico, Transfer Pricing, and Kevin Hassett


Scott Greenberg provided a nice summary of what section 936 was and how its expiration had contributed to Puerto Rico’s economic and fiscal difficulties: beginning in 1976, section 936 of the tax code granted U.S. corporations a tax exemption from income originating from U.S. territories. In addition to section 936, the Puerto Rican corporate tax code gave significant incentives for U.S. corporations to locate subsidiaries on the island. Puerto Rican tax law allowed a subsidiary more the 80% owned by a foreign entity to deduct 100% of the dividends paid to its parent. As such, subsidiaries in Puerto Rico had no corporate income tax liability as long as their profits are distributed as dividends. When section 936 was in effect, U.S. corporations benefited greatly from locating subsidiaries in Puerto Rico. Income generated by these subsidiaries could be paid to U.S. parents as dividends, which were not subject to U.S. corporate income tax under section 936, and were deductible from Puerto Rico’s corporate income tax. Because of these generous tax incentives for business, Puerto Rico grew rapidly throughout the 20th century and developed a substantial manufacturing sector, though it remained relatively poor compared to the U.S. mainland. However, because section 936 made foreign investment in Puerto Rico artificially attractive – creating, in effect, an economic bubble – it left the island vulnerable to a crash if the tax provisions were ever to be repealed. The story is that starting in 2006, the IRS would treat the Puerto Rican affiliates of life science companies as contract manufacturers which would greatly reduce the transfer pricing manipulation made legal under section 936. Greenberg notes: 2006 also marked the beginning of a deep recession for Puerto Rico, which has lasted until today. Puerto Rico’s high corporate taxes on domestic corporations along with low taxes on U.S. subsidiaries had skewed the Puerto Rican economy toward foreign investment from the U.S. When section 936 was repealed in 2006, foreign investment began to flee. Without a strong domestic corporate presence to fill the void, the economy began to contract, along with tax revenues. Brad Setser has been examining certain trade data finding something that might seem surprising: The largest supplier of imports to Puerto Rico? Ireland. The second largest? Singapore. Tax trumps gravity, it seems. Incidentally, Switzerland jumped into third place in the 2016 league table, leaping past other exporters of chemicals and Puerto Rico’s suppliers of fuel oil, diesel, and the like. It isn’t exactly hard to figure out what is going on here. Puerto Rico’s imports tend to be specialty organic chemicals and pharmaceutical products, and, well, they tend to be supplied from countries that are known to specialize in helping multinationals optimize their global tax bill. And, setting aside trade with the fifty states for the moment, where are Puerto Rico’s biggest export markets? Belgium and the Netherlands. The big ports and distribution centers in northwest Europe. Europe is almost certainly buying packaged pharmaceuticals—Puerto Rico’s biggest export to the world translates from trade jargon to “medicine, in measured doses, packaged for retail.” It is a bit too simple to say Puerto Rico imports active pharmaceutical ingredients from low-tax jurisdictions and exports finished pharmaceuticals to h[...]