Economist.com Fires Back with Respect to its Alleged Backdoor Employment Tax Cut

When I criticized this, I should have placed the following in bold:

So the total taxes paid to the government do not fall – just who ends up directly paying the government.

The rebuttal goes something like this:

The assumption of highly inelastic labour is important, but I would argue that it does not always apply in typical labour markets, especially with respect to a single employer.

Actually, the assumption as to the elasticity of either the supply or the demand schedule is not important for the experiment described as follows:

One participant, who writes about technology, remarked that it is not unusual for tech firms to fire their employees and rehire them the next week as consultants. This is essentially a backdoor payroll tax reduction for the employer. When a worker is considered a contracter they become responsible for their full tax burden to Social Security and Medicare (and the cost of health and pension benefits).

Let’s do a very simple example of an employer-employee relationship where the employer ultimately pays $10 an hour for the services of the worker but the government collects $1.50 an hour in payroll taxes leaving the worker with $8.50 an hour after taxes. If the initial burden of the tax system were split evenly between the employer and the employee, both pay $0.75 an hour to the government with the employer paying the worker $9.25 an hour. Now if the employee becomes an independent contractor, he ends up paying all $1.50 an hour to the government but his check from the employer is $10 an hour. Notice something – I made no assumption about elasticity of demand or supply.

Why does this work out this way? In fact, we had a tax cut for the employer and an equivalent tax increase for the worker. Since the government tax bite has neither increased nor decreased, there is no net effect for either the before-tax wage paid by the employer or the after-tax wage paid by the worker.

To be fair, this demand equals supply model assumes that the labor market clears. I would hate to be accused (again) of “selective quotation” so let me note the following:

In an extremely loose labour market the employee will bear the full tax burden because his labour supply becomes more inelastic. Enough so an employer has the leverage to make that burden explicit and shift it entirely to his employee.

Since we are in a recession, maybe the whole use of demand and supply curve models is a bit misleading. But if one wishes to use such models, maybe one should start off the comparative statics exercise by first noting that the overall tax bit has not changed in the experiment being discussed.

While it is true that the effective wage for workers is likely to fall during periods of weak aggregate demand, this occurrence is not due to some reduction in the tax bite. Maybe the mechanism becomes the shifting of the tax burden without an offsetting increase in the before-tax wage. But the same effect could have been accomplished by simply reducing the wage rate. I guess one could postulate that wages are somehow sticky so employers look for ways around this fact by cutting compensation through some other means – as was once argued by Walter J. Wessels in Minimum Wages, Fringe Benefits, and Working Conditions. But to say that changing the primary incidence of who pays for an unchanged tax bite is the same thing as a tax cut is highly misleading.

Herbert Hoover Democrats

If we were at full employment, I might agree with what Evan Bayh wrote for the Wall Street Journal:

The Omnibus Appropriations Act of 2009 is a sprawling, $410 billion compilation of nine spending measures that lacks the slightest hint of austerity from the federal government or the recipients of its largess. The Senate should reject this bill. If we do not, President Barack Obama should veto it. The omnibus increases discretionary spending by 8% over last fiscal year's levels, dwarfing the rate of inflation across a broad swath of issues including agriculture, financial services, foreign relations, energy and water programs, and legislative branch operations. Such increases might be appropriate for a nation flush with cash or unconcerned with fiscal prudence, but America is neither.

Bayh later notes that we are in an “economic downturn” noting that this fact requires that we need “new policies”. Is Bayh saying we should excuse fiscal irresponsibility during periods of strong aggregate demand but then turn all Hoover-ish when aggregate demand is weak? As Manu Rasu reports, Bayh is not alone:

Moderate and conservative Democrats in the Senate are starting to choke over the massive spending and tax increases in President Barack Obama’s budget plans and have begun plotting to increase their influence over the agenda of a president who is turning out to be much more liberal than they are. A group of 14 Senate Democrats and one independent huddled behind closed doors on Tuesday, discussing how centrists in that chamber can assert more leverage on the major policy debates that will dominate this Congress. Afterward, some in attendance made plain that they are getting jitters over the cost and expansive reach of Obama’s $3.6 trillion budget proposal.

I can understand the desire to restrain the growth of Federal spending over the long-term, but I do not understand the call for fiscal austerity now.

Does Economist.com Understand Incidence of the Payroll Tax?

Backdoor Payroll Tax Cut lays out a silly argument:

One participant, who writes about technology, remarked that it is not unusual for tech firms to fire their employees and rehire them the next week as consultants. This is essentially a backdoor payroll tax reduction for the employer. When a worker is considered a contracter they become responsible for their full tax burden to Social Security and Medicare (and the cost of health and pension benefits).

So the total taxes paid to the government do not fall – just who ends up directly paying the government. Not to praise anything from the Heritage Foundation, but even Stephen Entin can explain the standard view with respect to who bears the incidence of the payroll tax:

The relatively elastic demand for labor, coupled with the assumption of a highly inelastic supply of labor, means that labor bears most of the initial economic incidence of taxes on labor income. It has become common to assert that all taxes on labor income fall on the worker, including the employers’ share of the pay¬roll tax, the employees’ share of the payroll tax, the unemployment compensation tax, and the portion of the income tax that falls on wages and salaries.

As the primary burden on the employer for paying this tax has been shifted to the worker, the standard model says that the wage rate being paid by the employer to the worker rises in an exactly offsetting fashion.

Funny Economics Cartoon

http://comics.com/frank&ernest/?DateAfter=2009-02-26&DateBefore=2009-03-03&Order=d.DateStrip+DESC&PerPage=1&x=42&y=10&Search=&Page=4

What is a Recession

Lou Proyect posted posted an AP story to my pen-l list today about Depressions, which had this discussion of the origin of the term recession. I had not heard this before: Any comments?

Associated Press. 2009. "The D-Word: Will Recession Become Something Worse?" (2 March).

"Before the 1930s, any serious economic downturn was called a depression. The term "recession" didn't come into common use until "depression" became burdened by memories of the 1930s, said Robert McElvaine, a history professor at Millsaps College in Jackson, Miss. "When the economy collapsed again in 1937, they didn't want to call that a new depression, and that's when recession was first used,'' he said."

World Growth To Be Negative In 2009 For First Time Since WW II

Previously here I reported on the IMF forecast of a positive one half of one percent world GDP growth rate, the worst since WW II. Now, given more rapid declines in US, UK, EU, and much of Asia, there is a forecast for 2009 that has that now at about a negative one half of one percent, the first actually negative global growth rate since WW II. This new projection is by the chief economist of BNP-Paribas, Philippe d'Arvusenet, at a site with the longest url I have ever seen (.pdf).

Anyway, whether or not I got that url right, this is not good news.

Arnold Kling and Amity Shlaes on Social Security

Arnold Kling attended an economic bloggers forum hosted by the Kauffman Foundation and provides us with this commentary:

Shlaes argued against cutting payroll taxes. She was making a comment during a discussion, rather than a formal presentation, so she might not agree with my interpretation of what she was saying. Economists take the view that Social Security benefits and Social Security taxes are basically disconnected, so it does not matter if you substitute another tax for payroll taxes to pay for benefits. Shlaes said that what economists would call the illusion that benefits and taxes are linked is actually a key to maintaining American exceptionalism and avoiding a welfare state. That is, our Social Security system falls within a tradition of individual contracts and obligations rather than a tradition of socialism. Cutting payroll taxes and substituting other taxes would be a cultural shift toward socialism. I may be putting words in her mouth, but I think that is what she was saying.

Never mind the fact that Amity Shlaes is not an economist having received a B.A. in English. Not all economists would agree with the proposition that “Social Security benefits and Social Security taxes are basically disconnected” as at least some of us consider the sum of the current Social Security Trust Fund reserve and the present value of expected future contributions to this fund as something that should be devoted to the present value of expected future Social Security benefits. By at least some forecasts, the sum of the current Social Security Trust Fund reserve and the present value of expected future contributions come very close to paying for the present value of expected future Social Security benefits. Which is why we get very concerned about GOP calls to cut Social Security benefits to pay for those General Fund deficits run up during Republican administrations since 1981. After all, President Reagan suggested back in 1983 that the increase in the payroll tax was supposed to go to paying for our future Social Security benefits and not an excuse to give reductions in tax rates for capital income. President George W. Bush, however, saw the Social Security Trust Fund reserve and the Social Security surpluses we’ll likely see through 2017 as a giant piggy bank to raid precisely to give fiscal goodies to his “base”.

Since I was not at this forum, I do not know whether Arnold Kling’s interpretation of what Amith Shlaes said is accurate. But if it is – she has this whole thing exactly backwards. But hers is not a bad question for those who would have had the fiscal stimulus focused more on reductions in payroll taxes. How would the resulting Social Security shortfall be paid for?

Update: Amity Shlaes leaves a long comment over at Arnold’s blog with the key features being:

Any U.S. government, GOP or Democrat, should be shoring up its social contract with citizens. It can do that without promising more, and instead saying: "Here's what I can give you, and here's what I can't. At least I'll be truthful." … So I will tell you now that there isn't enough money there if we keep the current system. Let's make a few adjustments, and have reduced payouts but a commitment to at least make those payouts.

OK – President Obama should be a lot more truthful than President Bush was in 2005. Maybe a “few” (as in small) adjustments will be needed but truth be told – those advocating larger adjustments are hoping to use the Social Security Trust Fund to bail out the General Fund deficit. And when I hear folks uttering “there isn't enough money there if we keep the current system”, this is the kind of dishonesty that Steve Benen called “conversation enders”.

The pulp and paper industry – a paradigm for Australia’s annihilation.

The economic strength of a society relies on their being adequate health care, a clean environment, broadly-based prosperity and the meeting of social needs in general. Yet the mode of operation of the now worldwide capitalist economy destroys all of these things because those in government (representatives of the most powerful economic players) seek to ensure monetary profit for a narrow elite. Such an objective is continually pitted against the public and planetary interests. The global pulp and paper industry represents an excellent study of how an industrial paradigm can bring economic and ecological collapse to an entire nation. The very idea of turning vast stands of pristine old-growth forests into woodchip for the superfluous consumption of paper and packaging - firstly by the global corporations [1] and, secondly, the consumer masses - was made possible by the dominance of a corporate media to promote a wasteful consumption lifestyle and over-development. The use of oil as a major energy source was also a major element in this unfolding. It allowed industry to enjoy virtually unfettered access to previously inaccessible wild forests and eased the way for greatly expanded unequal exchange of commodities around the world.

Here's a quick history of the pulp and paper industry in Australia.

In 1938 Australian Newsprint Mills Pty Ltd became incorporated. The Herald and Weekly Times and John Fairfax and Sons were major shareholders. The two major Australian newspaper companies funded research into paper making using Australian native trees. “….their chemists had eventually succeeded in matching the pulp of the long-fibred softwoods of the northern hemisphere with Eucalyptus regnans, the Tasmanian swamp gum, of which there were [then] vast stands in the Florentine and Styx tributaries of the Derwent River.” The Tasmanian government assisted the aspirations of these powerful interests by granting vast logging concessions as well as subscribing to 20% of the corporation’s initial capital. [2] [3]


In 1936 Associated Pulp and Paper Mills Ltd (APPM) was formed by Amalgamated Zinc, North Broken Hill, Broken Hill South and Consolidated Zinc. In 1938 APPM started the Burnie paper mill in North West Tasmania. Initially it used imported pulp. However by early 1939 the Burnie pulp mill was making bleached eucalypt soda as the major component of its printing and writing papers. The technology of kraft pulping of the eucalypts was attractive for the industry because this process gave a stronger pulp than either the soda or sulphite processes then widely in use. “Moreover a new method had just been developed in Canada -the Tomlinson recovery process -which greatly improved the economics of chemical recovery from spent kraft pulping liquor (black liquor).” [4]

The softwoods found in the northern hemisphere continued to be an important component of paper pulp around the world because the fibres improved ‘strength and runability’, an important quality for packaging. [4]

It wasn’t long before the spiraling environmental impacts of this more ‘efficient’ industry became apparent far and wide. In 1946, Pulitzer Prize winning author, Robert Penn Warren, wrote in his book, All The King’s Men:

“There were pine trees here a long time ago but they are gone. The bastards got in here and set up the mills and laid the narrow-gauge tracks and knocked together the company commissaries and paid a dollar a day… Till, all of a sudden, there weren’t any more pine trees. They stripped the mills. The narrow-gauged tracks got covered with grass. Folks tore down the commissaries for kindling wood. There wasn’t any more dollar a day. The big boys were gone, with diamond rings on their fingers and broadcloth on their back. But a good many of the folks stayed right on, and watched the gullies cut deeper into the red clay.”

From the 1960s onward the forests of Tasmania were being gutted at an alarming rate. “The Japanese pulp and paper industry played a brilliant ….strategy when it looked to Australia in the 1960s to secure a stable wood supply” from somewhere else and in order to protect its own forests. “…Japanese leaders understood the risks of purchasing unprocessed raw materials from a nation that harboured fresh war memories - especially prisoner-of-war memories - and whose people were becoming more strident about their nation's development. To cocoon itself from the potentially fatal political expression of these emotions, the Japanese woodchip buyers (at least initially) let Australian or majority Australian-owned companies export the chips, a trade that began in the early '70s. The Japanese paper companies then saturated them in profits.” The destruction of native forests gained enormous momentum as a result….” “Today, 80 to 90 per cent of the log cut in Australia's main native-forest logging regions is woodchipped.” [5]

In 2005 Jared Diamond observed, from his book ‘Collapse – How Societies Choose to Fail or Survive’ that “Ecologically the Australian environment is exceptionally fragile, the most fragile of any first world country except perhaps Iceland….“Australia is the most unproductive continent”, whose soils have on average the lowest nutrient levels, the lowest plant growth rates and the lowest productivity. As a consequence of low soil fertility, most of the nutrients in Australian forest are in the trees themselves. When we wood chip our forest we destroy the support system our life depends upon.” Diamond warned Australians that deforestation is the major cause of societal collapse of many civilisations such as Easter Island. If we continue to damage our forests, soils and climate then the same collapse will happen in Australia. [6]

Not surprisingly agroforestry tree plantations in Australia generally don’t do so well. With the low soil nutrient levels add low and unpredictable rainfall. The trees grow slowly and are far less profitable than 12 out of 13 countries that are among Australia’s principal competitors. The Tasmanian Blue Gum, grows much faster and more profitably in the plantations established in Brazil, Chile, Portugal, South Africa, Spain and Vietnam than in Tasmania itself. On the other hand, given Australia’s extremely limited resource in the way of fertile soil in areas of adequate rainfall it would be a crime to devote those small areas to a low value crop such as plantations for woodchip, as has been pointed out many a time in government public ‘consultation’ forums.

This month is the first time I have ever believed (in fact, ever thought) that Australia may be facing imminent collapse. But a closer examination of Australia’s recent industrial, climatic and bushfire history reveals many frightening omens.

Ever since the automobile became the most popular means of transport in the 1960s Australia has experienced a general warming trend that is consistent with human-induced climate change. “The south-east of Australia is also experiencing a long period of unusually dry weather….They are two of the critical elements that are needed to create a fire. The other two are low humidity and high wind speeds”[7]. The south-east of Australia is precisely where deforestation and the spread of fuel intense industrial eucalyptus plantations is most concentrated. Above 30 degrees centigrade eucalypt oil becomes gaseous and ignites readily as a ‘fireball.’ “On the day the bushfires started claiming lives, Melbourne reached a record 46.4 degrees for the first time in 154 years of record-keeping.” [7]

The industrial tree plantations established across Victoria are concentrated in heavily populated regions close to major towns and cities. In August 2003 the Fire Chief in New South Wales told an interviewer on ABC TV’s ‘7:30 Report’ that “to have any hope of ‘managing’ such a fire, fuel build up would need to be as low as 4-5 tonnes per hectare or less. This degree of fuel loading is apparently reached in plantations by 3-7 years.” Sure enough, firefighters in Victoria are reporting that the intensity and scale of the fires meant there was little they could do beyond watching with despair as small grass fires reached into and exploded industrial tree plantations where the flames then jumped quickly into one tourist towns after another. “Marysville, Narbathong, Buxton, Taggerty, Camberville, Kinglake, Pheasant Creek, Flowerdale, Glenburn, Humevale, Strathewen, Whittlesea, Strath Creek, Upper Plenty, Clonbinane, Reedsdale, Reedy Creek, Mittons Bridge, Wallan, Wondong, Heathcote Junction, Healesville, ChumCreek, Toolangi, Yarra Glen, Dixons Creek, Steels Creek, Christmas Hills and St Andrews….” [8] And from there onto the outer suburbs of the city of Melbourne itself. Large intense fires continue to straddle many other electorates.

The forest industry in Australia is a powerful vested interest group that is not amenable to logic, reason or reform if it gets in the way of profits. In fact corporate documents have reassuring statements to investors about their company’s intent to focus on profits even in the context of widespread community anger at their practices. The activities of the corporation, investors are told, are “not subject to any particular or significant environmental regulations under a Commonwealth, State or Territory law.” [9] So it’s not surprising to read submissions to government that express dismay about a failure to learn from previous fire experience. [10]

Whilst the full extent of damage from this summer’s fires in south east Australia is not yet known – indeed the fires are still raging across Victoria at present, the destruction tallied so far is at astronomical levels. This is the worst bushfire month in Australia’s recorded history. Around 250 people have died and many more are injured. About 7,000 individuals are homeless with hundreds now relying on daily food aid to subsist.

It’s hard to think of a more damaging industrial paradigm than the global pulp and paper industry. The inherent irrationality of consumerism whereby individuals purchase superfluous and easily replaceable paper products at the cost of destroying all the elements of the natural world that keeps our children and our own selves alive. The air is polluted with huge industrial burn-offs of forest biomass. The water is sucked up from the streams and rivers by the thirstiest trees known to man. The soils are depleted by short rotations. Rural towns and communities are burnt to the ground by the inevitable and intense infernos that go hand-in-hand with high fuel loads in a warming and dryer environment. All in the name of getting rid of the wealth-destroying fetters of regulation. Hey! To Australia’s National Security Hotline: I see something suspicious. When all it takes to become an effective terrorist in Australia is to throw your cigarette out of the car on the next hot day.

[1] It could be argued that the transnational corporation, itself, it the world’s biggest consumer of paper and forest products. Packaging represents most of world paper consumption.

[2] ‘The Media’ by Keith Windschuttle. Penguin Books, 1988. ISBN 0 14 011689 3. pp 132-133.

[3] “…the allocation of forest resources on Crown land in Tasmania can be seen as a continuation of a process (now almost complete) which began with, and is typical of, the colonial era. The distribution of land which is ‘unsettled’ (at least by the white colonizing society) provides a path to economic development which is both economically and politically easy. Little need be said on the ease with which economic development can be fostered. *
*See, for example:
(a) TURNER FJ 1920; ‘The Frontier in American History’; Henry Holt & Co., New York; or
(b) POTTER DM, 1974; ‘People of Plenty; Economic Abundance and the American Character; University of Chicago Press, Chicago.
The exploitation of the previously untapped resources of a colony swelled the coffers of many a colonial power; the problem for most colonies and former colonies (including Tasmania) has been to achieve some long-term basis for economic development which is not dependent upon simple resource extraction and export…”
As quoted in ‘Perspectives on Forest Policy in Tasmania’ edited by Aynsley J Kellow. University of Tasmania. Environmental Studies Occasional Paper 18. 1984. ISBN: 0 85901 257 3. Page 4.

[4] Technology in Australia. 1788 – 1988. Eucalypt pulp production begins
http://www.austehc.unimelb.edu.au/tia/247.html

[5] ALP up the wrong tree
Governments have bungled forest policy for decades, writes Judith Ajani, describing what can happen when myopic union leaders influence political decisions
The Australian
July 07, 2007 12:48am
http://www.news.com.au/story/0,25197,22029499-5001986,00.html

[6] Why our forests are so precious
Clive Blazey introduces Jared Diamond's latest book, 'Collapse', and its significance to our declining forests.
http://www.diggers.com.au/articleWhyOurForestsAreSoPrecious.shtml


[7] ‘The end of climate certainty’ February 14, 2009
All signs point to the climate becoming more extreme, write Marian Wilkinson and Ben Cubby.
* My country, my tyrant. David Marr Stay or go? A question everyone still asks
http://www.smh.com.au/environment/global-warming/the-end-of-climate-certainty-20090213-876f.html?page=fullpage#contentSwap1

[8 ]Fran reports to Parliament on the Victorian bushfires
Tuesday, 24 February 2009
http://franbaileymp.com/Pages/Article.aspx?ID=442

[9] “The operations of the Trust are not subject to any particular or significant environmental regulations under a Commonwealth, State or Territory law.”

Source: Annual report to investors
Year end to 30 June 2008
Concord Australian Equity Fund (which is a major investor in Gunns Ltd, the woodchipping and tree plantation company that dominates the Tasmanian forest industry. The responsible entity for Concord Equity Fund is Macquarie Investment Management Limited (MIML) which is a wholly owned subsidiary of Macquarie Group. Macquarie Group, in turn, enjoys a huge stable of former Australian politicians… Bob Carr, Alan Stockdale, Warwick Smith, Ross Cameron, Rob Knowles etc)
ARSN 116 355 465

[10] See for example:
Submission on the Green Paper on a Carbon Pollution Reduction Scheme
Mick Harewood, August 2008-09-01
http://www.climatechange.gov.au/greenpaper/consultation/pubs/0118-harewood.pdf
“…Section 5.3 : Fire Protection. This section seems to have been written without regard to lessons learned from the behaviour of the Canberra bushfires of January 2003. The description printed in the Canberra Times of the fire convection column by Wendy Catchpole, mathematician at the Australian defence Force Academy with
an interest in fire behaviour modelling, is informative. Wendy Catchpole said that the fuel loads in the pine plantations near Canberra were so high that, under conditions of high temperature, the fire created its own convection column and winds from all directions were drawn to the base of that column. The strength of these winds caused the trunks of fully grown Pine trees to snap well before the fire front had reached them.”

The Wall Street Journal and Golf

Besides an editorial denouncing Senator Kerry as "Secretary of Golf" for his concern about corporate golf tournaments, the papers' Golf Journal has been discussing the issue:

Newport, John Paul. 2009. "Golf Journal: Deals Amid the Distress." Wall Street Journal (20 February).

Since October, when American International Group was put in the stocks for staging a luxurious $400,000 weeklong retreat at a resort in California, one week after receiving $85 billion in federal bailout funds, corporations have been slithering under rocks when it comes to golf-related activities. Goldman Sachs, for example, last week canceled its big annual hedge-fund conference, scheduled for March, at the Fairmont Turnberry Isle resort in Miami. A company spokesman cited "the current environment." The Ritz-Carlton resort at Half Moon Bay, Calif., said more than 30 business groups have canceled retreats there since last fall, at a loss of more than $2 million in revenue. Wells Fargo took out a full-page ad in several newspapers last weekend to defend its practice of rewarding employees with outings -- it called such events "the heart of our culture because our product is service" -- but nevertheless canceled all of its major employee-recognition events for 2009.

The author concludes that the downturn offers golfers good deals.



Newport, John Paul. 2009. "Golf Journal: No Entertaining, Please -- It's Golf." Wall Street Journal (28 February).

The TMZ posting on Tuesday, concerning the title sponsorship of last week's Northern Trust Open at the Riviera Country Club near Los Angeles, read to me like a parody in the Onion of a local news outlet pouncing on a supposed outrage. "We're told Northern Trust paid millions to sponsor the PGA event which ended Sunday, but what happened off the golf course is even more shocking," TMZ said.

Northern Trust wasn't just treating clients to Diet Cokes while they walked around the course. It staged "lavish parties," "a fancy dinner" and concerts for clients "with famous singers" such as Sheryl Crow and Earth, Wind and Fire. TMZ's reporters spotted courtesy cars (standard at PGA Tour events) driving onto and off the Riviera property with people inside. Guests were reported to have left various functions with goodie bags.

[...]

Northern Trust accepted $1.6 billion in Troubled Asset Relief Program funds, despite record profits of $795 million and a solid balance sheet. The bank, in a letter to shareholders this week, said it didn't seek the funds but accepted them to accommodate "the government's goal of gaining the participation of all major banks in the United States".

[...]

Understandably spooked, Morgan Stanley, which received $10 billion in TARP funds, quickly announced that while it would continue to sponsor the Memorial tournament in June, it would not entertain clients there. Wells Fargo, a $25 billion TARP fundee which took over sponsorship of a PGA Tour event at the end of April when it acquired Wachovia, said it would seriously cut back spending at that event.

[...]

Golf, with its traditional fat-cat image, is an easy target for abuse ...

But the author defends such activities as job-creating.

Golf and Corporate Jets

In light of the furor regarding corporations on the dole spending money on gold tournaments, I thought that I would post a part of my discussion of golf from my book: The Consfication of American Prosperity.

David Yermack of New York University's Stern School of Business produced a paper with the delightful title "Flights of Fancy: Corporate Jets, CEO Perquisites, and Inferior Shareholder Returns," in which he investigated the relationship between this particular luxury and corporate efficiency. He found that the cost of corporate jets for CEOs who belong to golf clubs far from their company's headquarters is two‑thirds higher, on average, than for CEOs who have disclosed air travel but are not long‑distance golf club members (Yermack 2004).




Yermack's paper reported that "more than 30 percent of Fortune 500 CEOs in 2002 were permitted to use company planes for personal travel, up from a frequency below 10 percent a decade earlier." Since Yermack's study, the problem has continued to escalate. Between 2004 and 2005, the reported value of personal use of corporate aircraft increased 45 percent, according to government filings of the 100 largest public companies (Fabrikant 2006).

Not surprisingly, Raghuram Rajan, the chief economist of the International Monetary Fund, gallantly came to the defense of the corporations. He suggested, without the slightest hint of humor, that these expenditures may have actually been justified because they encouraged executives to be more efficient (Rajan and Wulf 2004). This justification does not seem particularly credible since Rajan's study did not bother to distinguish between planes used for business or personal purposes, including use by retired executives.

In fact, the personal use of corporate jets does not seem to be correlated with profitability at all. Of course, some of the firms that supply their executives with corporate jets for personal use are successful, despite such wasteful excesses, but the use of corporate jets is correlated with poor performance. According to Yermack: "Firms that permit personal aircraft use by the CEO under‑perform market benchmarks by about 4 percent or 400 basis points per year, after controlling for a standard range of risk, size and other factors" (Yermack 2004).

A Wall Street Journal article entitled "JetGreen" followed up Yermack's report. It described corporate jets "as airborne limousines to fly CEOs and other executives to golf dates or to vacation homes where they have golf‑club memberships" (Maremont 2005). Although executives must report such personal use of corporate jets as income, they rarely disclose anything near the full cost. Besides, hiding golfing expeditions as business activity is not particularly difficult.

Golf Digest provided further evidence of the negative consequences of corporate jets. Every two years, this publication informs the golfing public about who are the best golfers among executive leaders. A USA Today reporter investigated whether their companies performed as well in the business world as their leaders did on the golf links. The results were not surprising: of the companies run by the top 12 golfers two‑thirds fared worse than the Standard & Poor's 500 index in 2006 (Jones 2006).

Of course, high‑level corporate executives enjoy many other perks besides free travel, including the provision of luxury boxes at sports stadia, chefs, yard work, and a multitude of other benefits that ordinary people would have to pay for on their own, if only they could afford them. New York Times business columnist, Gretchen Morgenson, described the excesses of Donald J. Tyson, former chairman of Tyson Foods, which ranged from the personal use of corporate jets to housekeeping and lawn care. Echoing Leona Helmsley, she appropriately titled her article "Only the Little People Pay for Lawn Care" (Morgenson 2005).

On the mediocrity of Heterodox Economics

Ann Pettifore's recent article linked to Richard Portes' statement about heterodox economics.
http://www.guardian.co.uk/commentisfree/2009/feb/26/recession-economy-capitalism

Portes, Richard. 2008. "The Annual Report of the Secretary-General (of the Royal Economic Society).

http://www.res.org.uk/society/pdfs/newsletter/apr08.pdf

"Mediocrity is rationalised on the grounds that it is hard for the ‘heterodox’ to publish in top journals -- despite the examples of Joseph Stiglitz, Amartya Sen, Herbert Simon, Samuel Bowles, Herbert Gintis, and many others."

Consider his list of Heterodox economists. Herbert Simon? There is some overlap there, but he ceased to do economics and moved on to other fields. Joe Stiglitz did good stuff before he became active in public debates, but I think most economists would regard his more policy-oriented work as belonging in top journals. Amartya Sen also does interesting work, but has he ever been associated with the left.

Furloughing in the Wind

by the Sandwichman

Sandwichpal, John de Graaf is quoted in this New York Times feature about "A Slowdown That May Slow Us Down." "It ['furloughs'] may not ultimately be a sacrifice," John told the Times. "It may be exactly what they need to do to be happier and healthier."

The article also cites shorter work time mavens, Juliet Schor and Ben Hunnicutt and cite Dean Baker's tax credit for time off proposal.

Christina Romer: Following in the Tobin Tradition

Like the late James Tobin, Christina Romer argues for the efficacy of fiscal policy to pull us out of a recession. But that is not the motivation for my title – rather it is something Paul Krugman noted about Dr. Tobin:

He was a great economist and a remarkably good man; his passing seems to me to symbolize the passing of an era, one in which economic debate was both nicer and a lot more honest than it is today.

Let’s focus on the following from Dr. Romer’s paper:

The first issue is what it would mean for the policy to work. The President gave a very concrete metric: he wanted a program that would raise employment relative to what it would be in the absence of stimulus by 3 to 4 million by the end of 2010. Some on the blogosphere (such as the best man at my wedding, Greg Mankiw) call this metric meaningless: they complain that because we never observe the outcome under the no stimulus baseline, it isn’t verifiable. But it is, in fact, the intellectually sound and appropriate metric to use. Exactly what any macroeconomist would ask of a policy is what are its effects, holding constant all the other forces affecting the economy. I feel the strongest evidence that the President’s metric is a good one is that it has focused the debate on the right issue. Numerous forecasters, from Mark Zandi to Macroeconomic Advisers to CBO to the Federal Reserve, have looked at what they expect the Act to do. Rather than fighting over the differences in the no-stimulus baselines, which are substantial and largely outside the control of policymakers, the debate has centered on what the policy would accomplish. Of course, one can also debate the baseline and the question of whether creating or saving 3 to 4 million jobs will be enough to fully heal the economy. But, it is important to acknowledge that creating or saving that many jobs would be a tremendous accomplishment.

She was referring to this:

The expression "create or save," which has been used regularly by the President and his economic team, is an act of political genius. You can measure how many jobs are created between two points in time. But there is no way to measure how many jobs are saved. Even if things get much, much worse, the President can say that there would have been 4 million fewer jobs without the stimulus.

Romer could taken the approach that Brad DeLong took to this line:

Greg, Greg, Greg, Greg, Greg, Greg. Setting fire to your own credibility to please your political masters is a very myopic intellectual strategy. It is doubleplusungood to say: "It's bad when a Democratic president and his economic advisors do it, but it was just wonderful peachy when a Republican president and I did it."

To be fair, Greg Mankiw did update his post with the following:

A regular reader of this blog (who deserves anonymity) misinterpreted my meaning, so let me clarify: The 4 million job number is a counterfactual policy simulation of what the stimulus will do based on a particular model of the economy. As such, I have no objection to someone citing it in a policy discussion. In fact, macroeconomists use models to generate figures like this all the time. I have even done it myself.

And most economists draw up counterfactual policy simulation as Dr. Romer so politely points out. As Brad earlier noted, Greg Mankiw has unfairly gone after Christina Romer before:

Is there any way to interpret Greg Mankiw's Sunday New Yotk Times other than as an elbow to Chtistie's ribs while he thinks the ref's eye is elsewhere? Christie certainly does not believe that tax multipliers are twice the size of spending multipliers.

Had she gave an elbow to Mankiw’s rib in reply, she would have been well justified. But hers was a very polite and professional reply. Let’s return to what Paul Krugman said back in 2002:

Why do I feel that Mr. Tobin's passing marks the end of an era? Consider that Kennedy Council of Economic Advisers, the most remarkable collection of economic talent to serve the U.S. government since Alexander Hamilton pondered alone. Mr. Tobin, incredibly, was only one of three future Nobelists then working at the council. Would such a group be possible today? I doubt it. When Mr. Tobin went to Washington, top economists weren't subject to strict political litmus tests -- and it would never have occurred to them that the job description included saying things that were manifestly untrue. Need I say more? Yesterday I spoke with William Brainard, another Yale professor who worked with Mr. Tobin, who remarked on his colleague's ''faith in the power of ideas.'' That's a faith that grows ever harder to maintain, as bad ideas with powerful political backing dominate our discourse. So I miss James Tobin, and I mourn not just his passing, but the passing of an era when economists of such fundamental decency could flourish, and even influence policy.

Bad ideas with powerful political backing may still be leading to some rather sharp elbows being thrown – but it would seem Christina Romer represents a return to fundamental decency.

Crowding-out for Spending Increases but Not Tax Cuts?

Lori Montgomery plays Steno Sue for the GOP:

Republicans quickly attacked the document as a recipe for economic disaster, saying it would raise taxes on businesses and consumers in the middle of a recession in order to bankroll a massive government expansion. "The era of big government is back, and Democrats are asking you to pay for it," said House Minority Leader John A. Boehner (R-Ohio). "The administration's plan, I think, is a job killer, plain and simple." White House budget director Peter Orszag rejected that analysis, saying none of the tax increases would take effect until 2011. But some economists worry that even in 2011 the economy may be too fragile to absorb a tax increase. Meanwhile, some Democrats joined Republicans in complaining that the budget plan does not go far enough to narrow the yawning budget gap.

Dean Baker objects to this nonsense:

While no economists are identified with the view that President Obama's tax increases on the wealthy in 2011 will harm a fragile economy, the article does not discuss at all the economic impact of the cuts in spending that "some Democrats" and Republicans apparently favor. The multiplier for almost possible spending cuts would be considerably larger than the multiplier for the tax increases on the wealthy. Any economists who were concerned that tax increases in 2011 could harm a still weak economy would almost certainly be much more concerned about the prospect of spending cuts in that year.

OK – this is the standard Keynesian view but we are seeing a parade of folks on display at this blog who would tell you: (1) the multiplier for tax cuts is indeed high; and (2) increases in government spending completely crowd-out investment even during periods of unemployment. After all, the Treasury View is what must be taught to their graduate students. Of course, all real economists know the Treasury View does not hold when fiscal stimulus comes in the form of tax cuts for the rich – right?

Not Part of the Remit? Part II

by the Sandwichman

The Sandwichman submitted the following comments to the "Middle Class Task Force" (formerly the White House Task Force on Working Families):

The Middle Class Task Force staff report on Green Jobs, issued today, cites the UN Environmental Programme's report, "Green Jobs: Towards Decent Work in a Sustainable, Low-Carbon World." I would like to call your attention to two brief but absolutely crucial sections in the UNEP report: "Rethinking Consumption" and "A New Approach to Work Hours".

In the section on rethinking consumption, the authors state, "Sooner rather than later… we need to confront the specter of insatiable consumerism itself. There is a danger that the consumer juggernaut will overwhelm even the most sophisticated methods and technologies that can be devised to make consumption lean and super-efficient. Consuming better does not obviate the need to consider moderation in overall consumption levels."

What this means, to be perfectly clear, is that if we DON'T confront the economic growth imperative all the rest of the good work we do to create green jobs will be moot.

That's a rather strong statement, tucked in inconspicuously in a one-page section of a 376-page document and, significantly, excluded from the summary report "for decision makers."

We know why this matter wasn't discussed more fully because the report tells us. The question about what to do about excessive consumption was "not part of the remit of this report." Let me repeat, it was "not part of the remit of this report" to look into a matter that could overwhelm (that is to say: bury, crush, submerge completely) all of the sophisticated methodological and technological innovations discussed in the other 375 pages of the report.

May I point out that is like getting ready to do a twelve-hour brain surgery without making sure there are double and triple back-ups in case of a power outage? As John Kenneth Galbraith remarked fifty years ago, it is like having a discussion about how to prevent traffic accidents while agreeing not to talk about speed.

There's a name for this bizarre phenomenon of skirting around the forbidden question. It's called "the elephant in the room." The White House blog mentioned the good-natured jockeying among cities and states for who was "greenest." By coincidence, earlier this week the City of Vancouver launched a program with the goal of making Vancouver "the greenest city in the world." In response to that, I started a facebook group called "The Greenest Elephant in the Room" because so much of the talk about green jobs sidesteps the single most direct and immediate way to cut greenhouse gas emissions (among other things) – reduce consumption, reduce the hours of work, share the work and spare the planet!

That brings me to the other brief section in the UNEP report, "A New Approach to Work Hours":

Industrial economies are extraordinarily productive-meaning that the same quantity of output can be produced with less and less human work. In principle, this can translate into either of two objectives: raising wages (in line with productivity) while holding working hours constant, or providing greater leisure time while holding income from wages constant. In practice, it has mostly been the former. Most people have been locked into a "work-and-spend" pattern.

Since the rise of mass industrialization in the late 19th century, there has been an ongoing tug-of-war between employers and unions over working hours… Employees have struggled for less work time – in the form of shortened workdays or weeks, extended vacation time, earlier retirement, or paid leave. These efforts were primarily motivated by a desire to improve the quality of life and to create more jobs. While environmental issues have not played a central role, channelling productivity gains toward more leisure time instead of higher wages that can translate into ever rising consumption also increasingly makes sense from an ecological perspective.

It is crucial to retool not only the economy, but also economic thought. Right now, economic actors are primed to respond to quantitative growth signals… A sustainable economy needs a different way of measuring human activity and of providing signals to investors, producers, and consumers. It needs a different theory, abandoning the outdated assumption that quantitative growth is unconditionally desirable and embracing instead the notion of qualitative growth.

The UNEP report "is correct when it states that it is crucial to retool not only the economy, but also economic thought." But then, amazingly, the report doesn't follow through on what could be done to retool economic thought! It focuses exclusively on the technological fix.

It takes courage to talk about what has become taboo to mention – to name the elephant in the room. The brief sections in the UNEP report that discuss "rethinking consumption" and "a new approach to work hours" are pithy. Their brevity, though, and lack of follow-through speaks volumes.