Tuesday, October 31, 2017

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

Saturday, October 28, 2017

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.  There, everything is going great, so we are going to change not a bit of it, except for some of the leaders.

Barkley Rosser

Friday, October 27, 2017

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 success, and is the fountainhead for the entire order-issuing apparatus.  This is the case for many small and medium-sized enterprises but fundamentally false for most of the corporate world.  To some extent, the transaction cost theory can be tweaked to adapt to the corporate economy, but in the process it loses much of its explanatory power.  (2) Coase focuses on what I regard as a secondary aspect of the existence (why do firms exist?) and boundary (make or buy) problems.  Transaction cost factors are real but pale in importance beside the role played by the presence or absence of interaction effects between activities.  Firms exist in the first place because they bundle activities that would have little value (and would therefore not be undertaken) separately.  Or, if you prefer formalism, they exist to internalize nonconvexities.  This is equally an explanation for make-or-buy choices.

Coase’s analysis was compelling for economists because it reconciled nonmarket organization (the internal coordination of firms) with the assumption of the efficiency properties of a competitive market.  The much stronger argument based on nonconvexities is a harder sell because it also calls into question the premise of market efficiency.

Wednesday, October 25, 2017

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

Monday, October 23, 2017

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.

Thursday, October 19, 2017

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 and is catastrophe theory, which was very much out of fashion at that time.  Let me note that as a sub-part of bifurcation theory, catastrophe theory is back in various parts of economics and ecology and other related disciplines. Pretty much any nonlinear system that shows multiple equilibria will be subject to bifurcations and dynamic discontinuities as they move from one basin of attraction to another.  While the economy did not collapse after Black Monday, and the stock market did not continue to decline, it remained well below where it had been prior to Black Monday for quite a long time.

I note that the very first paper in economics that used catastrophe theory was the second paper ever published in the Journal of Mathematical Economics back in 1974.  Without getting into the technical details, I note that it drew on a much older setup long discussed in the financial markets literature, one where two sets of agents were identified.  One was fundamentalists whose behavior is stabilizing and tends to push the market back toward its fundamental (assuming there really is such a thing), while the other set are the chartists or trend chasers, whose pursuit of bubbles as they rise and their dumping of assets when they fall tend to destabilize the market.  The paper, "The Unstable Behavior of the Stock Exchanges," was written by E. Christopher Zeeman, a major figure in the mathematics of catastrophe theory.  His story was one of a shifting balance of dominance in the market between these two sets of agents, with stability and instability oscillating back and forth within a cusp catastrophe setup, which included the possibility of a market crash.

I note that this basic sort of setup had been modeled in the 1950s by people like William Baumol in long forgotten papers without any fancy nonlinear dynamics.  More recently complexity economists have developed models that follow this Baumol-Zeeman approach, such as the Santa Fe stock market model using agent based modeling in the 1990s, by people like Blake LeBaron and William (Buz) Brock, along with others.  Models with multiple agents who shift their strategies according to recent performance and move back and forth between stabilizing behavior and destabilizing behavior are all over the place and continue to be studied, if not necessarily getting published in the top journals. But these models look pretty good as ways of analyzing these sorts of dynamics.

Addendum:  One other outcome of Black Monday also was that it was the beginning of the end for the dominance in economic theory of the rational expectations axiom.  Yes, it is still around and strong in the whole DSGE modeling world.  But increasingly people take more behavioral assumptions seriously, and Black Monday was a body blow to ratex big time.

Barkley Rosser

Wednesday, October 18, 2017

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 open air violence occurred largely between the two buildings and I had my first taste of tear gas (not my last), although I managed to avoid getting billy clubbed.

This would open up an inevitable divide between me and my conservative and hawkish father, who was Director of the Army Math Research Center that would get bombed on August 24, 1970 by the New Year's Gang, resulting in the death of a physics grad student.  My father's office in Sterling Hall was very near where the Dow demo took place, and all enraged and tear gassed I went to his office to complain about the police actions, only to learn that he fully supported them.  And so it went.

Barkley Rosser

Tuesday, October 17, 2017

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

Monday, October 16, 2017

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:

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 just doing what he had to do to win. So where does that leave us in October 2017? My, my, look at all the rhinestone Rambos!

Saturday, October 14, 2017

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 the case, and Iran has been in full compliance with the JCPOA agreement as agreed by all observers, including even the senior US officials such as SecDef Mattis before a Congressional committee, Trumps and a few Israeli officials plus some from
 Saudi Arabia and a few others,Iran has been in full compliance with the agreement. If Trump insists on ending the agreent, he will have only the support of Israel and Saudi Arabia and a few of its immediate neighbors.

Addendum:  It would appear that to the extent Trump is even thinking, what he (and those in Israel and Saudi Arabia who support this nonsense) want is "regime change" in Iran.  It is not good enough to have a relatively moderate Islamist government that obeys a treaty that limits its nuclear program, which was not directed at weapons in the first place anyway.  In this regard they resemble the wildly messed up views of George W. Bush regarding both North Korea and Iraq.

I have posted here on this before, but it remains not widely known, that North Korea was not in violation of the nuclear agreement with it when the WBush admin went after them on the matter.  Just as there is nothing in the JCPOA about missiles, there was nothing in the 1994 agreement about uranium enrichment, although most Americans believe the North Koreans were in violation of 1994 due to their enriching uranium.  It was about plutonium, and they were following the agreement on that when WBush told South Korea's leader in March, 2001, to forget about the peace process, which Colin Powell supported, but the neocon hawks led by Cheney and Rumsfeld did not.  They wanted to pull a Soviet Union a la Reagan and Bush Senior: regime change.  That has not happened and now the North Koreans have nuclear weapons.  Imitating this nonsense, Trump is in danger of getting the same outcome, although we can hope that Khameini keeps his fatwas in place at least for awhile.

As it is, while not pursuing a nuclear weapons program and opening to the world seems to be popular in Iran as expressed in their semi-free elections that reelected the government that negotiated the JCPOA, the "Green Movement" does support civilian nuclear power and also Iran maintaining a reasonably strong military to protect against unfriendly neighbors such as the Saudis, whose current leader has openly talked of war against and even in Iran.  So, getting them to stop testing missiles and so on is not a likely outcome from any popularly elected government in Iran.  If we brought back the Shah, well, maybe, but he is dead, and I doubt the Iranians would accept his son as a leader.

In Iraq, there was a majority ready to take over when semi-democracy was put in place after the US invaded under WBush and overthrew the Saddam dictatorship.  Unfortunately, as the then Saudi leadership warned, who convinced Bush Sr. not to go all the way to Baghdad after throwing Saddam out of Kuwait, that majority is Shia and friendly to Iran.  So, now Iraq is ruled by people friendly to our supposed super enemy, Iran, and their role in Iraq is one of those things that the Israelis and Saudis are unhappy about, along with their supposed role in Syria, Lebanon, Yemen, and some other places. 

Bottom line is that if WBush had not dumped the Korean peace negotiations and invaded Iraq, our current president would probably be dealing with a less difficult situation in the Persian Gulf and maybe not even be facing a nuclear weapons armed North Korea.  But our current president seems bent on doing his best to make sure that future presidents will have to deal with both a nuclear armed North Korea (no way they are giving those babies up, even if Kim Jong Un is overthrown) and a nuclear armed Iran, not to mention a world that simply mistrusts US leaders and has not interest in any diplomatic negotiations with the US about anything.

Barkley Rosser

Friday, October 13, 2017

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).

My hunch is that the proclivity toward viewing social problems as individual moral failings stems from the political reversals suffered by the organized left over the past four decades; it avoids what might otherwise be a painful sense of collective failure.  It helps people to feel good about themselves even if, objectively speaking, little is actually being done to reverse the drift toward ever worse outcomes.  But it also reinforces failure by redefining social change as the spread of personal virtue rather than the change in laws, institutions and flows of resources we truly need.

Thursday, October 12, 2017

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 manipulation with a grain of salt. And as has been noted, the ability to manipulation transfer pricing has little to do with the effect of corporate tax rates on how productive activity is sourced.

Wednesday, October 11, 2017

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 high-tax jurisdictions. The imports from Ireland and Singapore could be for pharmaceuticals destined for the U.S. market, and the active ingredients for the finished goods exported to Rotterdam and Antwerp may be coming from the United States.
Litigations between the IRS and companies such as Eaton, Guidant, and Medtronic show that certain multinationals are still trying to pretend that the Puerto Rican affiliate deserve a significant amount of profits. As Paul Krugman notes:
As Setser notes, Puerto Rico used to be a major tax haven for manufacturing corporations. Much of this tax advantage has now ended, but its legacy is still visible in trade statistics. Specifically, PR runs, on paper, a huge trade surplus in pharmaceuticals – $30 billion a year, almost half the island’s GNP. Yes, “N” not “D” – very important in this case, as in Ireland . But the pharma surplus is basically a phantom, driven by transfer pricing: pharma subsidiaries in Ireland charge themselves low prices on inputs they buy from their overseas subsidiaries, package them, then charge themselves high prices on the medicine they sell to, yes, their overseas subsidiaries. The result is that measured profits pop up in Puerto Rico – profits that are then paid out in investment income to non-PR residents. So this trade surplus does nothing for PR jobs or income.
Paul’s real issue, however, was a recent speech by Kevin Hassett – which I also noted:
What does this have to do with Hassett? Well, he told TPC – while insulting the institution and impugning its integrity – that transfer pricing driven by high nominal US corporate taxes is responsible for half the U.S. trade deficit, and that cutting these taxes would therefore be a big job creator. Never mind whether his estimate is right: even if it were, as Gleckman says, changing the transfer pricing would affect the accounting, but nothing real. It would be exactly like Puerto Rico’s pharma surplus: a phantom improvement, statistically impressive to the uninformed but signifying nothing.
Here is where I have a favor to ask for those who are better at understanding the breezy way Hassett used and abused certain literature. Paul and I both have our doubts as to this claim that transfer pricing manipulation is responsible for half of the U.S. trade deficit – a claim that Hassett made around the 19th minute of his speech to the TPC (see my post or Gleckman’s for a link to it). Hassett does mumble something about an NBER paper that used a “formulary apportionment” approach, which strikes me as not the right way to capture these things. But I want to be fair and actually read this alleged NBER paper, which alas I have not been able to find. I would love it if someone actually gave us a proper citation so we can check on this bold claim even if it has little to do with the real debate as to the alleged employment effects from corporate tax rates.

Tuesday, October 10, 2017

On Richard Thaler Receiving The Nobel Prize

This is a Sveriges Bank Prize in Economic Science in Memory of Alfred Nobel that I should approve of unequivocally, and I do approve of it.  Dick Thaler has long been known to be on the list of likely recipients since at least when Daniel Kahneman shared it with Vernon Smith back in 2002, although I sort of thought the award just a few years ago for Robert Shiller would put Thaler's off a bit.  Nevertheless, I approve of behavioral economics, so I was mistaken not see another award being given for it this soon, and with Thaler clearly a deserving and top candidate for it.

Indeed, I am the founding editor-in-chief of a journal called the Review of Behavioral Economics (ROBE), and back between 2001-2010 I edited the Journal of Behavioral Economics and Organization (JEBO).  One of Thaler's most important papers back in 1980, his fourth most cited, "The Pure Theory of Consumer Choice," in which he introduced the concept of mental accounting, the first item cited by the Nobel committee in announcing his award, and the paper that I know he long considered the one that would get him the prize (which he long expected to receive), was the second paper ever published in JEBO, which should make me even more pleased.  Indeed, I recognize that there is an important element of justice in his prize given that he "wandered in the wilderness" for many years, publishing in oddball journals such as JEBO in its beginning and Marketing Science and other such, until much later when his ideas became more accepted, and he finally began hitting the top journals.  So, he deserves credit for struggling with ideas that were not accepted and helping to make them become accepted, such as through his column in the Journal of Economic Perspectives on "economic anomalies" from 1987-1990, with some people saying he is the first  person to get a Nobel for having a column in the JEP, not entirely false that observation.

So why am I not jumping up and down as much as I probably should be and might be?  Maybe for  me this is like the prize for Paul Krugman, which I also think was deserved, but which I thought should have been shared with others.  I think that is kind of what I am thinking, although I recognize that there is a fairly long list of people who might be the others sharing, with such figures as Camerer, Rabin, Loewenstein, Fehr, Gintis, List, and more as possibilities.  It is not obvious which of these should be pushed forward to share it with him now.  Indeed, if one looks at Google Scholar citations, one finds him somewhat ahead of all  those, with over 110,000, while several of those have around 80,000 and none of them more than that.  So, they are not far behind, but they are behind, and it is not obvious again, which of them should be pushed ahead of the others.

In this regard, this prize may resemble that for Jean Tirole.  At the time many other names were pushed forward as perhaps deserving to share it with him, I shall not reproduce it, but, as with this one, the list was long, and it was not obvious which of those should be pushed forward. And, curiously, Tirole's Google Scholar citations are about as numerous as Thaler's, and he was also  clearly ahead of this other batch, many of whom were bunched together.  So, maybe I should just stop second guessing this one and simply be pleased that behavioral  economics is again getting recognition, and that one who long struggled "in the wilderness" with many good and original ideas has indeed received it.

 Addendum, 10/10:  I think I know part of what has me bothered.  It is much of the poorly informed commentary about this prize, especially claims that seem to suggest that Thaler along with Kahneman and Tversky invented or "fathered" behavioral economics, a view that has been enhanced by Kahnemans's own public comments.  When Vernon Smith, "father of experimental economics," shared the prize with Kahneman in 2002, many were worked up that Charlie Plott did not share it, but the Nobel committee made it clear the missing man was the then already dead Amos Tversky, with in effect Thaler another missing man.  So, he has clearly been way up on the list.  What he has done has probably succeeded both through JEP and his Nudge book and his public policy work and appearance in a movie, convinced lots of people that behavioral econ should be taken seriously.  That is certainly important, but being a good publicist is not the same thing as inventing, although he has been respoinsible for many new ideas in behavioral econ.

So, in 1978, the year before Thaler met Kahneman and Tversky to supposedly "father" behavioral econ, Herbert Simon received the Nobel for discovering "bounded rationality."  He also coined the term "behavioral economics," and given its then still unacceptability, his award was criticized by many economists, especially some at Chicago such as George Stigler.  Even those at MIT did not like it and continued with their usual fully rational homo economicus models, even if they were less loud about criticizing the award to Simon, who had died by the time Kahneman and Vernon Smith got their prize in 2002.  So, Simon should be viewed as the "father" of modern behavioral economics, although many earlier economists, including Keynes, but also many classicals, expressed and discussed what we now view as behavioral economics ideas.  An early classic of the view, now faddishly cited by many behavioral economists (and written about at length by Vernon Smith) is the excellent Theory of Moral Sentiments by Adam Smith, which went into three editions, and which he considered  to be his most important work, well ahead of his more orthodox Wealth of Nations. 

Barkley Rosser 

Monday, October 9, 2017

Social Justice: Debt, Solidarity or Care?

Mozi: scholar and activist

How do we think about the obligation of social justice?  The dominant American political culture is based on individualist values: you have a right to do whatever you want, and the main problem is how to prevent you and other rights-bearing individuals from getting in each other’s way.  Without extra considerations, social justice in such a universe is a matter of taste and inclination, which is to say charity.  You offer help to others when you feel like it.

But there is an important extra consideration, debt: our freedom in an individualist world is constrained by obligations to repay the debts we have incurred.  This may result from a purely financial transaction like a mortgage or a student loan, but we also recognize what might be called social or moral debts, where one person has benefitted at the expense of someone else and therefore owes compensation in return.  This might not be recognized in a court of law, but it makes an ethical claim that can cause people to feel a sense of obligation.

The you-owe-it-to-them argument is used on behalf of coffee-growers, for instance.  Those on the sipping end of the industry, when they hear stories about how hard these growers work and how little they get for it, rightfully feel obligated to go out of their way to make amends.  They buy fair-traded beans and patronize cafes that share, or seem to share, these same values.  If you benefit by drinking, you are indebted.

Ta-Nehisi Coates, who I discussed in an earlier post, strongly pushes this framing of racial justice in America.  White people benefitted from centuries of un- and underpaid black labor, and from racial domination in general, and in this way they have accrued an immense debt.  Justice will not be achieved until the debt is acknowledged and paid back.

In fact, the “white privilege” language used to analyze racial inequality implicitly draws on this same notion of debt obligation.  Inequalities are assumed to all take the form of zero-sum relationships, where some (whites) have more because others (blacks) have less.  Thus the difference in outcomes can be understood as a debt that the better-off owe to the worse-off.  It’s politically effective insofar as it appeals to this deep theme in our culture, justice as the retiring of debts.

The debt frame has considerable merit on an aggregate level.  As a country, economically and politically, America drew much of its strength from racial and other forms of exploitation.  This creates a historic obligation to reverse as much of the resulting inequalities as possible.  The reality of slavery, for instance, and its contribution to American economic development, does obligate the country to adopt policies to make up for past injustice.

One problem with relying on debt repayment as a basis for social justice, however, is that it doesn’t work well at an individual level.  America has an obligation to undo the ravages of slavery and the racial exploitation that still continues, but what about me?  How much have I personally benefitted from this history, and which individuals should I compensate?  There’s no way to answer this, because the debt is collective, not individual.  As a citizen, I have a responsibility to promote just policies, but I don’t have calculable personal debts to other individuals.  The fact that most racial inequality is not zero-sum pertains to this—indeed, if the divide-and-rule theory of class exploitation is correct, quite a few whites would be better off in a more racially equal society.

I suspect that a lot of the current unease around the politics of racial (and related) justice is due to the push to apply debt obligation to the daily life of individuals.  There is a stream of discussion about whether one form of oppression is “greater” than another, as if to determine whether a given person is a net debtor or net creditor according to some moral calculus.  The claim that you or I am personally responsible for and have benefitted from past historical crimes (whose existence I don’t for a moment question) is almost always fictitious, but doubting it is interpreted as an attempt to avoid paying up.  Worse, debt obligations are mandatory.  They must be repaid.  The casting of social injustice as accumulations of personal debt gives rise to the morally coercive tinge that justice activism has acquired.

But unmodified individualism is not the only basis for thinking about our place in the world, and debt is not the only source of personal obligation.  Here are two more framings for social justice, solidarity and equal care.

Solidarity is based on the view that our well-being largely depends on the outcome of class and other social conflicts; this is how we might obtain democracy, a fairer economy, a sustainable environment, peace, and respect for human rights.  For most of us, our power is not in wealth or position but in numbers, so to work for ourselves we need to work with each other.  This mutual support is what we mean by solidarity: I stick with you in the expectation that you will stick with me.  Racial justice, from a solidarity perspective, is part of a larger set of commitments that span multiple inequalities—class, gender, and nationality, to name just a few.  White support for blacks confronting unequal treatment would be premised on a shared ethic of standing together.  This, like historic debt, works best at an aggregate level, but it also applies to many individual situations.  If you and I are both actively engaged in an array of political or social conflicts, each of us can benefit from the other’s solidarity.  (Note the difference between solidarity and allyship, as discussed here.)

But the view of social life as an interlocking set of collective struggles that underlies solidarity is not an altogether accurate representation of how we really live.  Collective gains through conflict are only one determinant of our well-being—we do (and undo) a lot for ourselves individually as well—and the “people’s” side in one conflict doesn’t always match up with that side in others.  Consider class conflict and the struggle for a better environment, for instance.  In an ideal world it might be that the people fighting for economic equality and ecological values would largely overlap, but in this one they are often quite different.  Returning to racial justice, I wouldn’t want to hold it hostage to first achieving a congruence between this and lots of other movement constituencies.

The deepest problem with solidarity, however, is that intra- and intergroup commitments often conflict, even structurally.  The logic of collective action is that individuals need to feel they can rely on the support of others in the cause, but meaningful support is a costly commodity.  One can feel sympathetic to an unlimited number of collective struggles but provide material solidarity to only a few.  In practice, a solidarity ethic tends toward balkanization of activism, despite the noble vision of the most eloquent activists.  For every cross-racial or cross-national labor mobilization, for example, there are many others in which solidarity was only one-dimensional.  This is often blamed on the political or cultural shortcomings of the people being mobilized—with justification—but appeals to what sets a particular group apart, not what connects them to others, are often the most effective at eliciting mutual commitment.

And there is a third way to think about justice.  For this we can go back to Mozi, the legendary philosopher, political activist and opponent of offensive war who lived in China in the years surrounding 400 BCE.  As he looked at inequalities of power and wealth, Mo argued that the core problem was “unequal love”, that people cared more for those in their own family or other social group than anyone else.  In an extreme form, this led to wars of domination or conquest, since the rulers valued the soldiers and the population of the regions they were attacking less than their own kin.  War, he thought, was obviously mass murder, and yet it was viewed as glorious.  His remedy was to promote an equality of caring; given this, he thought, injustice could not be possible.

I realize there have been many formulations of this universalism in the intervening 2500 years, with greater sophistication over time, but it’s relevant that the equality-of-care basis for social justice goes back a long, long way.  Perhaps more activists have drawn on it than on any other frame.

When we think of the most powerful appeals to moral action, they typically rest on our potential to care equally for people who might otherwise be distant from us.  The famous schematic of a slave ship, used effectively by early English abolitionists, invites us to imagine ourselves or our loved ones shackled body-to-body in a nightmare cross-Atlantic passage.  The photo of a young girl fleeing a napalm attack in Vietnam works on us to the extent we see her as worthy as any child of our love and protection.  Arguably, the proliferation of cell phone videos has had a profound impact on justice activism by making oppression intimate—close visually and ethically.

Here’s another example: consider the phrase “black lives matter”.  It’s a bit ambiguous; you could interpret it in more ways than one.  Its most persuasive interpretation, however, goes like this: over and over, black people are killed by police, and the official response is inaction.  Black victims of violence are treated as if their lives are worth less than others, and this is unacceptable.  Black lives matter!  There should be just as much outrage over such murders as if the victim were rich, white and famous.  If Mozi were among us today he would immediately recognize this demand, and no doubt he would be out on the streets in support.

There are two problems with the equality of care framing, equality and care.  Humans (and other socially cognizant species) have a penchant for distinguishing between the groups they belong to and those regarded as “other”.  Family, ethnic and national preferences are widespread.  But we have also demonstrated throughout history the capacity to transcend these divisions, and over long spans of time the circles of respect and care have widened enormously.  It may be that mediated forms of communication like writing and now audio-visual depictions provide a cognitive basis for a more universal sense of who “we” are.

Perhaps the tougher nut is getting people to see they have an obligation to care.  In theory, individualism does away with that: you are obligated to care for you, and I’m obligated for me; anything else is extra.  In practice, of course, we can’t exist without care: care for the young, for the old, for the sick, for those under attack, and for people who are just stuck in one way or another, because all of us have been and will likely be in that type of situation at some point.  In the high theory of individualism—Locke etc.—this was sidestepped because an “invisible” class of people, women, were assigned the role of fulfilling care responsibilities.  Today there is no excuse for failing to see that responsibility to care has a claim on us alongside individual choice.  But it takes time for this awareness to sink in and redirect a culture based on what was always a mythical universalization of self-regard.  In the meantime, some people are more care-conscious than others, which means social justice activism has a double task: getting people to recognize that care is not optional and then getting them to extend it equally across social boundaries.  It sounds like a lot, but activists have been doing this for generations.

To sum up, there are different ways to make the claim that we are obligated to act on behalf of social justice.  The debt-based approach has merit at a collective level, but it has been overused as a basis for individual obligation and is largely counterproductive.  Solidarity has much to recommend it, especially in comparison to allyship, but there are many situations in which it has little practical force, while in others solidarities may be in conflict.  The strongest basis is equality-of-care.  It is ethically consistent and universally relevant.  True, it struggles to overcome ancient parochialisms and the presumptions of an individualistic culture, and this forces us to supplement it with other appeals when we can, but it is the value that best defines what we mean by social progress.

Does Kevin Hassett Understand Transfer Pricing?

Howard Gleckman does:
It is true that bringing US corporate rates in line with our trading partners may reduce incentives for improper transfer pricing. But there is a flaw in Hassett’s argument: While these practices are aimed at reducing tax lability, they do not represent real economic activity. And limiting income shifting won’t significantly increase domestic employment.
He was noting this presentation:
Kevin Hassett, chair of President Trump’s Council of Economic Advisers, argued today that the corporate tax cuts in the Sept. 27 Republican Unified Framework would boost overall economic growth. How? In large part because its corporate tax rate reductions would encourage firms to shift jobs from overseas to the US. But the claim is unsupported by the evidence. In a speech at the Tax Policy Center today, Hassett said that the GOP plan would not only increase domestic employment but also raise worker wages by an average of $7,000. That is quite a promise, but after unpacking his argument, it seems improbable at best. His claim: Making statutory US corporate tax rates competitive with the rest of the developed world would encourage firms to stop inappropriate transfer pricing, corporate inversions, and other income-shifting practices. Half of the US trade deficit, he said, results from transfer pricing.
Half of our trade may come from related party transactions and in some cases, transfer pricing manipulation may be significant. But to claim that half of our trade deficit is due to non-arm’s length pricing seems to be quite the stretch. Let me also suggest that this corporate inversion discussion is a distraction as all that does is to turn the tax system into a territorial one where the repatriation tax disappears. Isn’t ending the repatriation tax one of the Republican proposals? OK – we might see a lot of foreign sourced profits coming back home but this simply means shareholders get their dividend checks sooner. Any claim that it would dramatically increase investment is not only bad finance but also rejected by the evidence from our last experiment with a repatriation tax holiday. Gleckman also notes:
the territorial tax system that the Big Six outline contemplates could further encourage US firms to shift revenue to lower-tax jurisdictions since that model would exempt the income of foreign subsidiaries from US tax.
While this could be an issue with ending the repatriation tax, other nations have addressed this by more aggressively enforcing their transfer pricing rules. We could do the same if the Republican Party decides it is time to properly staff the IRS.

Friday, October 6, 2017

Why I Lack Sympathy For The Catalan/Catalunyan Independence Movement

Because like the neo-fascist Lombard League of northern Italy, they are a rich region of a nation that does not want their money going to the poorer regions of that nation.  That is it. Sorry, this is not about language suppression or  anything else.  Catalalunya/Catalonia achieved autonomy on education, health, and local law enforcement a long time ago.  The only thing they lack is all that money they are sending to the rest of Spain.

Yes, they will probably get to keep their money in the future.  I thought it was conservative Spanish  PM, Mariano Rajoy of the PP, who stupidly ordered national police to attempt to break up the independence referendum, who engaged in violence of shooting rubber bullets, clubbing people with billy clubs, and dragging people by their hair, leading to hundreds injured, although nobody dead.  This order that will probably lead to full Catalunyan independence was ordered by a Spanish national constitutional court judge who had ruled the referendum illegal.  If he really thought he was going to stop the vote, he is an idiot.  All he has done is guarantee that "reasonable people" will support the 90% outcome of the vote, with only a 42% turnout, given that opponents apparently boycotted it.  But like those who did not want Crimea annexed by Russia, boycotting a vote organized illegally by those who want a certain outcome, only plays into the hands of those who want that certain outcome.

The path to this has been a mess.  The referendum was voted for by the current Catalan parliament that has a 72-63 members split between those favoring independence and those opposing it.  Like the US, Catalonia/Catalunya favors rural voters in representation, and rural voters are more pro-independence than urban ones, largely in Barcelona.  A poll taken by the government as recently as July showed 48% opposed to independence with only 41% for it.  The pro group has at times beaten the anti group in polls, but in fact the pro group has never gotten above 50% in a poll, although they got 90% in this illegal referendum, which will be taken very seriously by world history, given that this stupid judge sent the national police in to beat people up.

The problem runs deeper.  While indeed the province has autonomy in education and language, many charge that the school system has been taken over by nationalists who are trying to eradicate the Spanish language. Still 60% of the provincial population speaks Spanish as their mother tongue.  This is a very close call, but the critics charge that the nationalists have been going out of their way to suppress their opponents in an undemocratic way.  I can dismiss the national Spanish courts and the EU supporting them, but in fact members of the current government quit in protest over the way the move to push this referendum was done in the Catalan  parliament itself was handled.  They may accuse their opponents of being remnant Franco Phalangist-fascists, but their own tactics resemble that ideology more than those of their critics, just as the Lombard League in Italy goes neo-fascist.

My own personal observations on this really involve a visit I made in 1973 to Barcelona.  I note I was taken to Spain (not Barcelona to my knowledge) in 1954 at Easter time by my parents when I was six and unaware of politics.  I remember getting upset when my sister and I were left in our car in some small town while my parents got something, and a crowd of people came and banged on our car begging for money.  I suggested to my father that we give them some, but he said that there were too many, and if we gave any to some, others would demand more than we had.  Later I saw penitents looking like KKK guys in Toledo.  We bought a figure looking like them and many decades later my grandson Charlie was frightened when young when shown this odd figure. Then in Granada, we saw people living in caves. Really.

Anyway, getting back to well-off Barcelona in 1973, Franco was in charge then, and indeed he totally suppressed  all languages other than Castellano Spanish and maintained a strongly centralized control.  Every sign was in Spanish in Barcelona, but I heard people speaking Catalan, which I figured out because the words they used were neither French nor Spanish, although more like French (and later I figured out more like Italian really).  They did so obviously when no authorities were around, and it was clearly an act of resistance against the dictatorship. I was sympathetic.

Since then they have achieved sufficient autonomy that their language is everywhere and now taught in schools.  Any claim by Catalunyan nationalists that their language is being suppressed is just a pile of horseshit, to use a technical  term.  I have seen now the opposite when visiting Barcelona: people being humiliated and rebuked for speaking Spanish in public.  This disgusts me just as much as the 1973 suppression of Catalan under Franco disgusted me.  I have no sympathy for  these rich and spoiled crypto-fascists with their arrogant public behavior toward anybody speaking Spanish openly, although I oppose any effort by anybody in the central government to engage in violence to suppress the obviously burgeoning and almost certain to succeed independence movement.

A final note is that my old friend Paul de Grauwe, one of the fathers of the euro, has posted (sorry, too lazy to link) comparing the Catalunyan independence movement to the Brexit movement, and implicitly to the Trump movement in the US.  Obviously there are differences, but the similarities are striking.  Among them are outright delusions, particularly for the Catalalunyans that once they are independent they will  be in the EU and have great economic outcomes.  Ooops, but no.  They will have one economic gain: not sending tax monies to the poorer regions of Spain.  Beyond this, they will lose. They will not be in the EU, and will not be let in soon and will not get those benefits, just like the UK, where lots of idiots voting for Brexit thought they were going to get their cake and eat it too, but are now gradually waking up to the fact that this will not happen.  They are going to pay and pay big time.  I shall not draw out in any detail the comparison with the US situation.

Anyway, I think this is tragic, and I think it is partly a response to the election of Trump in the US: irresponsible lying creeps feel free to override normal procedures and rules to seize power and push forward racist nationalist agendas all over the place.  This one is less likely to end up in outright war and people dying, aside from the several hundred injured in this referendum vote, but I fear that there will be nothing at all good  coming from this, nothing, and quite a bit bad, both for those in Catalunya/Catalonia, as well as the rest of Spain, and possibly in the rest of Europe and the world.

Barkley Rosser