Daily Archives: November 24, 2011


Why America Should Spread the Wealth

I know that this idea is disparaged by the people who have the wealth, but the article Why America Should Spread the Wealth by Mark Thoma puts some intellectual backing to the economic utility of the idea.  I’ll quote a few paragraphs to set up the premise.  You’ll have to navigate to the article itself, if you want to read the whole story.

Many economists worry that making societies more equal through income redistribution or other means lowers economic growth. This “big tradeoff” between equality and efficiency, which is supported by comparisons of capitalist and socialist countries, implies that there is a limit to how much redistribution a society should pursue. At some point the tradeoff of more equality for less output – which worsens as we push toward more and more equality – becomes intolerable. However, while the tradeoff is quite unfavorable as we push to extremes, recent experience suggests there is a wide region where the tradeoff is hard to detect. Thus, worries about this tradeoff appear to be overblown.

For example, the Bush tax cuts were justified, in part, by the claim that equity had overshadowed efficiency in tax policy decisions. Taxes on the wealthy and the inefficiencies that come with them were much too high, it was argued, and lowering taxes would cause output to go up enough to lift all boats substantially. Accordingly, the lower end of the income distribution would fare much better after income trickled down than it would under redistributive policy.

The economy did grow after the Bush tax cuts, but the rate of growth was unremarkable, especially for jobs, and there’s little evidence that they caused large increases in output growth as promised. In fact, there’s little evidence that the Bush tax cuts had any effect at all. The tradeoff simply wasn’t there.

And the tax cuts at the upper end of the income distribution did nothing to correct for the fact that although worker productivity was rising, wages remained flat – a problem that began in the mid 1970s. This was an indication that something was amiss in the mechanism that distributes income to different members of society. Workers were helping to increase the size of the pie, but income did not trickle down as promised and their share of the pie was no larger than before.

In all things, and economics especially, when someone proposes a theory that sounds reasonable, you should always ask two questions.

  1. Under what circumstances does this theory make sense (and what circumstances make the theory inappropriate)?
  2. Are the current circumstances the environment where the theory works or is it currently the environment where the theory does not work?

The reason for asking these questions is that the Republicans (and Democrats) frequently come up with theories that on their face seem to make sense. They don’t bother to tell you (if they realize it themselves) that at the current time, the theory is not applicable. Inapplicability has been the case for much of the past 30 years of the Reagan/Bush/Clinton/Bush era. On into the Obama administration, the Republicans are still promoting the theory whose time has passed, but may return sometime in the future.   The more they hang onto it now, the longer it will be before it becomes appropriate again.

The unfortunate part for the hangers on to a theory that is past its prime, is that their tenacity in hanging on when it is inappropriate, makes it harder for them to promote the theory when the circumstances return to the ones that make it appropriate.  (A stopped watch is right twice a day.  However, once  you know it is stopped, you are never going to bother with it again, even though somebody may have put new batteries in it and reset it to the correct time.)


Wonkbook: The GOP’s dual-trigger nightmare

In the article Wonkbook: The GOP’s dual-trigger nightmare, Ezra Klein explains:

Imagine if the Democrats offered Republicans a deficit deal that had more than $3 in tax increases for every $1 in spending cuts, assigned most of those spending cuts to the Pentagon, and didn’t take a dime from Social Security, Medicaid or Medicare beneficiaries. Republicans would laugh at them. But without quite realizing it, that’s the deal Republicans have now offered to the Democrats.

So now there are two triggers. One is an extremely progressive spending trigger worth $1.2 trillion that goes off on January 1, 2013. The other is an extremely progressive tax trigger worth $3.8 trillion that goes off on…January 1, 2013. If you count reduced interest payments, the two policies alone would reduce future deficits by about $6 trillion. That’s far more than anything the supercommittee came close to discussing. It’s distributed far more progressively than anything the Democrats have even considered proposing. And all that needs to happen for it to pass is, well, nothing.

…Democrats don’t seem particularly interested in pressing their advantage.

Of course that last sentence explains where it will all go wrong for the 99%.  As the article explains there are many things for the Democrats not to like about the deal they have stumbled into.  However, they should not fritter that deal away by trading for something that is not even as good.  Past history shows this position won’t prevent President Obama and the Congressional Democrats from snatching defeat from the jaws of victory.

 


Roubini: Supporters of a Gold Standard Are Lunatics and Hacks

The article Roubini: Supporters of a Gold Standard Are ‘Lunatics and Hacks’, Nouriel Roubini explains:

Earlier this week “Dr. Doom” Nouriel Roubini and Currency Wars: The Making of the Next Global Crisis author James Rickards got into a war of words on Twitter over the return of the gold standard. (Read the exchange.)

As Rickards explained last week on The Daily Ticker, he believes a return to the gold standard will do a lot to fixing the current troubles in the global financial system and the U.S. economy.

In the accompanying interview with Aaron Task, Roubini continues to disavow Rickards of his claim.

“That’s total nonsense.” Roubini then goes even further, calling the gold bugs who support a return to the gold standard a, “bunch of lunatics and hacks.”

Why?

Roubini says the gold standard would be dangerous. In fact, he claims, the gold standard was a major reason for the Great Depression.

Here is the video:



The Supercommittee Should Have Gone Really Big and Turned Against the One Percent 2

The actual headline on Dean Baker’s article was, The Supercommittee Should Go Really Big and Turn Against the One Percent, as it was written before the committee staved off disaster by wisely doing nothing.

Baker has a number of ideas for raising revenue that would have cut the deficit.

Over the longer term there will be budget issues, but they mostly stem from our broken health care system. If the United States paid the same amount per person for its health care as people in other wealthy countries we would be looking at huge budget surpluses, not deficits.

We can get a huge amount of saving from cutting what we spend on the military. If defense spending were the same share of GDP over the next decade as it was in 2000 we would save $2 trillion over the next decade.

And, if we want some more tax revenue there is no better place to start than by directly taxing the 1 percent’s trade on Wall Street. A modest financial speculation tax can easily raise more than $1 trillion over the next decade.

The “debate” as it is reported in the media rarely tells you where there are such huge sources of revenue and savings other than cutting the benefits paid by Social Security, Medicare, and Medicaid.


How Pursuit of Profits Kills Innovation and the U.S. Economy

Forbes, of all places, has the article Clayton Christensen: How Pursuit of Profits Kills Innovation and the U.S. Economy.

Christensen recalls an interesting talk he had with the Morris Chang the chairman and founder of one of the firms, TSMC [TSM], who said:

“You Americans measure profitability by a ratio. There’s a problem with that. No banks accept deposits denominated in ratios. The way we measure profitability is in ‘tons of money’. You use the return on assets ratio if cash is scarce. But if there is actually a lot of cash, then that is causing you to economize on something that is abundant.”

Christensen agrees. He believes that the pursuit of profit, as calculated by the ratios like IRR and ROA, is killing innovation and our economy. It is the fundamental thinking drives that decisions that he believes are “just plain wrong”.

Back in the 1960’s, when Morris Chang was the VP of the division of Texas Instruments where I worked, I thought he was a wise person. Over the years, I have had no reason to change that assessment.

I think the investment strategy that I have adopted fits in with the lesson here. My investment in dividend paying companies does try to maximize current income, but I also look for income growth. It is the growth factor that keeps me from just looking for companies with maximum present day dividend yield. To get long histories of dividend growth, the company has to grow. It cannot depend on maximizing short-term profits. (Or am I kidding myself?)