A Humorous Lesson in Financial Etymology

Public disgust with bankers is nothing new.  In the fifteenth and sixteenth century the most powerful banking family, which took over much of power and influence of the Medicis.  Their name, Fugger, became a slang word associated with rapacious behavior.

Government Purchases Versus Government Spending

It is interesting that PGL has posted a figure showing government purchases and how they have been gradually declining recently.  The recent report of GDP surprisingly declining in fourth quarter 2012 and the role of government spending in that brings this up.  What may be a problem here is that the public reports did not make this distinction, reporting on declines in "government spending," when in fact what is involved here has been a decline in government purchases.  The crucial issue here is that changes in transfer payments do not directly affect GDP, but changes in government purchases do, and it was purchases, mostly through defense spending, that declined.

Some readers may say, "What is the problem here?"  The problem is that a new right wing meme has erupted over whether or not "government spending" has declined.  Indeed, it did not do so during the 4th quarter 2012, at least not federal government spending.  Much as I dislike this source, one can see the numbers taken from US Treasury stats at http://www.breitbart.com/Big-Government/2013/01/30/Fact-Check-Federal-Spending-Increased-in-4th-Quarter .

Furthermore, Barron's has gotten all huffy about how the Bureau of Economic Analysis reported the decline in defense spending, which indeed was mostly a decline in purchases leading to a decline in GDP.  They complain that the 22% reported number for the quarterly decline was an annualized number, and that the actual decline was only 5.32%.  This is accurate, but indeed, that decline in purchases by the DOD happened and was unexpected (although following a sharp increase in the 3rd quarter, thought by many to be a forwarding of spending in anticipation of the fiscal cliff/sequester/etc.) and played a major role in the reported GDP quarterly decline.

In any case, the increase in federal spending noted by Breitbart was due to an increase in transfer payments that did not lead to an increase in GDP.  As it is, people should be warned that this meme is now out there.  I became aware of it when I saw the editorial page lead editorial in my very conservative hometown Harrisonburg (VA) Daily News-Record, which was going on about the government lying and Obama lying and so on and so forth, all on the basis of this report that in fact government spending had gone up rather than gone down as the media so widely reported.  It would have been helpful if the original reports on this had been a bit clearer, although I suspect that much of the public is simply unaware of the distinction here or its importance.

Meanwhile, everyone should keep in mind that the much bigger story here has been the ongoing decline in state and local government spending and purchases, with a far larger proportion of their spending being in fact purchases.  Their employment is also much higher than that of the federal government, just over 19 million in comparison with about 4.4 million for the federal government, the latter peaking in recent decades at about 5.3 million in 1987 and reaching a recent minimum in 2000 of about 4.1 million.  Since peaking in August 2008, government employment has fallen more than 700,000, with the overwhelming majority of that being in the state and local sector, with that decline still occurring in the last job report, where the gain of 157,000 jobs was after a 9000 jobs loss in the government sector, again, mostly state and local.  Federal employment has not changed much in this whole period, increasing some in 2009 and slightly decreasing since, although that could change if there continue to be substantial declines of federal government purchases.  

Barkley Rosser

Does Paul Ryan Know What Austerity Means?

It took NBC a week to do so but they finally put up the interview with Paul Ryan, which Paul Krugman criticized:

I didn’t see Meet the Press, and there doesn’t seem to be a transcript available yes, but I hear that Paul Ryan declared it a proven fact that Keynesian economics has failed — and was, of course, not challenged on that assertion.

Since Krugman has already challenged any assertion that Keynesian economics failed, let me pick up the pieces and show the key part of the MTP exchange:

GREGORY: Yeah, I know. A lot of centrist economists who may disagree with you in some areas but agree about the imposing or the impending debt crisis. Some on the left like Paul Krugman disagree. He calls you a deficit scold and he calls you worse than that. But his point is that-- that you’re being alarmist about the deficit and its relationship to how the economy performs and how the economy grows. So here’s what he wrote in his column on Friday and let me get you to respond to it. “It was, in fact, a good thing that the deficit was allowed to rise as the economy slumped. With private spending plunging as the housing bubble popped and cash-strapped families cut back, the willingness of the government to keep spending was one of the main reasons we didn’t experience a full replay of the Great Depression.” And this balance now between austerity, which he believes you call for, and appropriate investment on the part of the government is still where the great tension is. REP. RYAN: Well, we can debate the efficacy of changing economics or not and I don’t obviously believe-- I think that that is pretty clear, it doesn’t work. We’re not preaching austerity. We’re preaching growth and opportunity. What we are saying is if you get our fiscal shift fixed, you preempt austerity. That’s the-- here’s what a debt crisis is. A debt crisis is what they have in Europe, which is austerity. You cut the safety net immediately. You cut retirement benefits for people who’ve already retired. You raised tax and slow down the economy, young people don’t have jobs. That’s the austerity that comes when you have a debt crisis. And when you keep stacking up trillion dollar deficits like this government is doing, it’s bringing us to that moment. Our job, our goal is to prevent and preempt austerity so we can get back to growth.

I guess it took MTP a week to post this transcript given how incredibly embarrassing it really is. Let’s start with the fact that we have been cutting government purchases (austerity) for the past couple of years, which is a major reason why the recovery has basically stalled. But Ryan is calling for more government spending cuts so we can avoid austerity? Does this alleged GOP economic guru even know what the word austerity means?

The S-Word

A question thrown my way yesterday got me thinking about what my views are on socialism today.  (They keep changing.)  Here is a quick summary, more for getting my thoughts in order than to satisfy whatever interest there may be out there in blogland.

1. Objectives.  There are four areas in which capitalism often falls short and which might be served better by fundamental economic change.

a. A poor balance of intrinsic and extrinsic motivation.  For me, extrinsic motivation is a precise way to characterize psychological alienation.  A world in which people are motivated to live their lives as intrinsically as possible is, all else equal, offers a better, more meaningful way of life.  Of course, lots of important activities can’t be reliably left to intrinsic motivation, so this is not an all-or-nothing issue.  It seems clear to me, however, that we could have a much better balance than we now see.  Of course, intrinsic motivation is also linked to other issues, like the perceived fairness of the organizations we take part in and the reasonableness of what these organizations do.

b. Equality.  For an egalitarian like me, more economic and social equality is better, again all else equal.  Equal doesn’t mean “same”, of course.  We will continue to live, as we should, in a highly differentiated world, but it doesn’t have to be so hierarchical.  As with motivation, there are practical tradeoffs to take into consideration with equality; whether or not we face a tradeoff today between greater collective prosperity and greater equality (probably not), as equality is increased such a tradeoff must inevitably appear.  But to say that absolutely perfect equality is unattainable is not to say that we couldn’t thrive in a much more equal world.

c. Social control over economic life.  It is essential that our economic activities, which, as technology develops, become ever more far-reaching in their effects, be subjected to broad social control.  As a starting point, however, it is important to recognize that the market can quite often serve as a perfectly adequate mechanism of such control.  To take an example, think about the problem of producing shoes for a population with a wide variety of foot shapes and sizes.  I believe the market does a creditable job of generating and distributing an assortment of shoes that meet this collective need for diversity, both statically (existing technology) and dynamically (encouraging an appropriate level of effort in the development of new technologies for making footwear production more flexible).  This is a matter of some interest to me, because I have oddly-shaped feet.  (Note that I’m restricting the issue to the problem of foot diversity, not to the different question of whether everyone who needs some sort of footwear can get it.)  On the other end of the spectrum, the market is doing a terrible job of propelling us into a desperately-needed transition to carbon-free energy, with all it entails for infrastructure, residential and commercial location, patterns of consumption, and other related matters.  Arguably, there are many other, if perhaps less pressing, aspects of economic life that call out for greater social direction.

In connection with this point, it should be mentioned that there are two interrelated dimensions to social control.  First, this entails the formation of the “social” itself, the achievement of we-ness, jointness of purpose, in a society of (ideally) free individuals.  I certainly don’t expect that we would or even should arrive at a monolithic unity at the level of society as a whole; a desirable social-ness would be a mosaic of cross-cutting social groups, with individuals experiencing multiple affiliations.  You might consider this an extension of Tocqueville’s observations on association or Dewey’s reflections on democracy as a way of life.  It sounds rather airy and abstract but takes very practical, material form in the social institutions we create or could create in the ordinary course of life.  The second element is “control”, which, the closer you look at it, the more slippery it becomes.  As I’ve written elsewhere, ownership does not determine control in the modern world; control is multifaceted and inheres at all levels of economic life, from the most granular (a work team) to the most systemic (like a market).  Social control suggests something like a stakeholder economy, but with a much more developed, encompassing and democratically constituted set of stakeholders and a variety of mechanisms that incorporate them at all levels of the system, as is practical and meaningful.  But not too many meetings, please: the resources for democracy are limited and should be allocated to their most important uses.

d. Class politics.  When I’m feeling optimistic, I can imagine all the problems of capitalism being fixed by incremental tweaking, except one, the overweening power of the capitalist class.  A system of private ownership undertaken for profit cannot avoid creating a small group, a 1% of the 1%, who command an outsized portion of society’s wealth and can use it in a variety of ways to influence the political process.  One reason it is difficult to make progress on the preceding issues is the grossly disproportionate power of this minuscule group.  Nearly every proposal for circumscribing this power has been adopted somewhere on the planet, but no country has managed to actually tame it.  This may be the single negative feature of capitalism least amenable to reform.

In principle, I identify socialism with progress on these four fronts and not with any particular institutional forms.

2. Reform versus system change.  This topic may be mislabeled: I’m not convinced that it is justified to think of potential economies as discrete systems, boxes that are separated from one another by hard walls.  Nevertheless, there is a crucial strategic decision to make: do we prefer to make small, incremental changes in economic institutions or large, multiple changes all at once?  (This is about preference, but sometimes our preferences don’t matter: there may be no alternative to piecemeal or systemwide change under the historical conditions we find ourselves in.)

Here are the arguments for incremental reform:

a. Economic, political and social life are unimaginably complex, and our knowledge of how they work is spotty and often in error.  In order to avoid unintended outcomes, we should take small steps, learning as much as possible along the way from our successes and failures.  This is the logic of adaptive management.

b. Small steps usually entail less conflict and especially less violent conflict.  Violent conflict is bad for three reasons: it is harmful in itself, it results in chaotic situations whose outcomes are difficult to predict and control, and it typically institutes a dynamic of repression and exclusion that poisons the forms of democratic participation that a desirable socialism requires.

There are also two general arguments for radical, systemwide change.

a. Because of the interconnectedness between elements of the economic system, it may be the case that multiple, simultaneous changes are feasible while piecemeal changes are not.  This is an application to social change of the logic of interactive nonconvexity.

b. One possible lesson of history is that opportunities for significant change come infrequently and should be used to their fullest.  Reformism might be the right strategy in a world of open, democratically responsive politics, but that is not the world we live in.  Change should push up against its political limits and not be self-limiting.

As you can see, these are not finished propositions but ways of framing questions.  In fact, I would distrust any set of answers that are held to apply in every situation we might find ourselves in.

GDP Gap Stuck at 6%

Dean Baker gets it right with respect to the latest news on GDP:

A sharp drop in government spending, heavily concentrated in defense, coupled with a decline in inventories caused GDP to shrink at a 0.1 percent rate in the 4th quarter. Government spending fell at a 6.6 percent annual rate, driven by a 22.2 percent decline in defense spending, subtracting 1.33 percentage points from the growth rate in the quarter. A 40.3 drop in the rate of inventory accumulation reduced growth by another 1.27 percentage points. Without these factors, GDP would have grown at a 2.5 percent annual rate in the quarter. Pulling out these extraordinary factors, the GDP data were largely in line with prior quarters.

Inventory changes often turn out to be transitory events while I have faith that those military Keynesians in the Republican Party will push for more defense spending pork. But let’s be clear about what is going on with the GDP gap. While it did fall from 7.5% in mid 2009 to around 6% at the end of 2010, it has been basically stuck at 6% ever since. So recent GDP growth has been insufficient. Dean also rightfully turns on our fiscal policy prospects:

There is little evidence in this report to believe that the economy will diverge sharply from a 2.5- 3.0 percent growth path, except for the impact of the deficit reductions that Congress is considering or already put in place. Higher tax collections from the ending of the payroll tax holiday are likely to knock around 0.5 percentage points from growth. The sequester, or whatever cuts are put in place in lieu of the sequester, are likely to have an even larger impact on growth beginning in the second quarter.

Fiscal austerity has been a large part of the reason why we have been stuck at a 6% GDP gap. Many economists have been strongly recommending fiscal stimulus but I guess our political leaders choose not to listen.

Joe Scarborough on the Deficit

After his interview with Paul Krugman this morning Joe Scarborough wrote:

Mr. Krugman's view is that Americans would be better off if its government ran deeper deficits and ignored its longterm debt.

To suggest that Keynesians like Paul Krugman ignore the long-term government budget constraint is either dishonest or shows that Mr. Scarborough does not understand what we are saying. Which is why Mr. Scarborough should check out this list of commentary on the current economics and fiscal situation compiled by Joe Weisenthal.

Did economic growth in the 1960s make us happy?

Maybe I'm wrong but I think it is now common knowledge that mainstream economic theory doesn't take account of the role of energy and other natural resources in making economic growth possible, or at least promoting it. In any case, I'm not sure that anybody really understands how the Gross Domestic Product of their nation was continuing to grow for decade after decade whilst  the quality of our lives was diminishing year by year.  Is economic growth merely a statistical measure?  If it is, why is it so important?  After all, government can fiddle the stats anytime.

Sure it's good for Government to have steadily-increasing revenues, but can't they simply put some extra digits on a balance sheet and bring into creation these revenues?  Such an action would drop the value of the domestic currency on the world's foreign exchange markets but that'll mean the nation's exports will be more competitive and that's good, isn't it?  Hmmmm, why didn't Greece, Ireland, Portugal and Spain think of that?  (What would happen if every nation devalued its currency this way?)

Private businesses, on the other hand, also want their profit base to be sustained and to grow.  However, haven't the world's big corporations long stopped producing anything of real value for people anyway?   Of course, any business that is Too Big to Fail can be bailed out with no questions asked, as was done in 2008 using trillions of dollars in the world's most prominent reserve currency under the US government's TARP program. These are certainly the days of financialisation.

Most monetary transactions today have very little to do with actually producing services and things of real value for people.  At the same time, the intensity of exploitation of humans and nature seems to be ramped up with every passing month.

In the 1960s, the vast excess of money had not yet thrown a monkey wrench into the machine of investment. [1]  It was a different world.  The level of production of real things sold per capita was much higher than it is now in the world's richest industrialised nations.

Therefore, I believe that it would be helpful for the baby boomers like myself to try and remember what the lives of our more privileged parents were like in their decades of so-called 'peak prosperity'. In their time, the purported social joy of the 'economic growth' experience was at its historical summit.  The 'happy days' of the 1960s was an era when a middle class family could be supported by one full time and secure job only.

The rest at:  Did economic growth in the 1960s make us happy?

Very Serious People Completely Missing The Boat On The Budget (Yet Again)

On Monday's Washington Post editorial page we have two of Washington's more self-important Very Serious People bloviating yet again on how the Most Important Thing that Obama must do if he is to be well regarded in history is to cut Social Security.  I am talking about WaPo ed page editor, Fred Hiatt (who gave this bum this job anyway?) and of course my favorite non-economist posing as one, Robert J. Samuelson.  Hiatt thinks the two big issues of the first term were the stimulus and health care, but is clearly upset that while Obama had apparently signaled early in his term that he was willing to cut SS benefits, he is not willing to do so now, which clearly Hiatt views as inimical to Obama's ultimate historical standing.  RJS discusses whether or not the 21st century will be another "American century," but finds the biggest threat to this to be that the US is in with Europe and Japan in that "Their welfare states are overwhelmed. Aging societies face a collision between promised benefits and acceptable taxes."  Acceptable taxes?  Gag me with a spoon.

As it is, both studiously ignore the much more reasonable column on the same page by E.J. Dionne who cites both Martin Wolf and Bruce Bartlett on how it is "madness" to be so worked up about the deficit.  The problem can be largely resolved if growth and jobs are able to be gotten back and a premature rush to sharply cut the deficit can lead to a failure to do that.  Indeed, the constant churning about deadlines for various fiscal cliffs is generating massive uncertainty that is damaging business activity and government agency planning, driving up costs needlessly.  Neither Hiatt nor Samuelson somehow notice this at all, nor do they notice that this churning is entirely due to inane tea party demands over the debt ceiling in Summer 2011, when the ridiculous sequester was cooked up, now being pushed by Paul Ryan and others as a tool to extract what H and S want, "entitlement" spending cuts.  That these threats are far more damaging than any social safety net expenditure to the economy somehow does not occur to these dim bulb VSPs.

Barkley Rosser

Benghazi Myths

Juan Cole has a post on "Top Ten Republican Myths on Benghazi that Justify Hillary Clinton's Anger," http://www.juancole.com/2013/01/republican-benghazi-clintons.html .  I am linking to this not for partisan reasons, as I am not all that big of a fan of substantial parts of Obama's foreign policy (and Hillary is reportedly more hawkish than he is), but because some of these myths are believed much more widely and are regularly repeated in the MSM as established fact.  So, while I urge readers to read all ten of them, I shall just list the top 4, which strike me as being the most important ones for policy purposes and also the ones that are mostly widely misunderstood by the broader public, including many Democrats and much of the media.

1. Various senators waxed indignant over how Susan Rice, Hillary, Obama and other administration figures did not just easily find out what was going on "in real time" and publicly tell everybody.  The main reason they did not do so, and that indeed full details of what went on remain unclear, is that the Benghazi consulate was essentially a CIA operation.  There were at least 40 people at the nearby CIA site, who were viewed as the security for the consulate.  They had clearly been running a long run covert quasi-war with the radical Islamist elements in Benghazi, and two of them died in the firefight after the attack on the consulate, when the attackers moved on to attack the CIA site.  It is also the case that there was no real time camera or whatever for anybody at the State Department to watch, although this false claim has been widely and frequently repeated, particularly by Sean Hannity of Fox News, which has been an especially virulent purveyor of outright falsehoods and myths about Benghazi.  Clearly much of this prior to Nov. 2 was with the hope of embarrassing Obama in his election campaign, but apparently the continued efforts on this front are an effort to damage a future campaign by Hillary, including such nonsense as Rand Paul's claim that what happened there was the worst thing since 9/11.  Back to the more serious issue, it remains completely unreported and unclear what Ambassador Stevens was doing there, although it looks almost certain that he was coordinating in some way with the large and ongoing and at that time still officially secret CIA operation there, although certainly the people who attacked the consulate were fully aware of it.

2.  Despite their claims of worrying about leaks and security, various GOP congreespeople, most spectacularly Rep. Darryl Issa (CA-R), leaked names of people cooperating with the US in Benghazi, thus endangering their lives.  This goes along with the hypocrisy of their cutting of diplomatic security budgets while blaming the State Department for all sorts of supposed security failures.

3.  Perhaps the area where public perception and repeated assertions in the MSM are most off has to do with the matter of whether or not there was a demonstration at the time in Benghazi and the relation between the attack and the anti-Prophet Muhammed film that had inspired massive demonstrations in many Muslim nations, including Egypt, with many US embassies under attack.  The widely repeated argument is that there was no demonstration and that the attack had nothing to do with the film.  It was just a pure terrorist attack that somehow or other the State Department was supposed to have foreseen and defended against, although the CIA indeed did intervene within 20 minutes of the start of the attack, too late to save Ambassador Stevens and one other in the consulate, but soon enough to get two of its own people killed later at its own building.  In any case, there was an anti-film demonstration going on at the time of the attack, although local authorities had managed to keep it some distance from the consulate.  Also, there have been clear reports, supported by Gen. Petraeus from the CIA, that indeed what triggered the attack specifically was leaders of it watching the anti-film demonstration in Cairo on TV.  This was a terror attack inspired by the film, even if it was somewhat separate from the street demonstration going on at the same time in Benghazi.  The repeated assertions that it had nothing to do with the film are simply false.

4.  Also widespread is the belief that the attack was run by al Qaeda and that Benghazi in general is dominated by Salafist Islamists.  Both of these are false.  There were apparently as many as four AQIM people involved in the attack, but it was led by people from Ansar-el-Islam (although its leaders now deny this), a strictly local group not affiliated wtih al Qaeda.  This and several other groups had been engaging in scattered low level attacks on various facilities, but they had (and have) little real power in Benghazi.  There had been an election, and secularist liberal parties grateful to the US for its support against the Qaddafi regime had solidly won and are at least officially in power, if not fully in control of all parts of the city. It should be remembered that Benghazi was the original center of the anti-Qaddafi revolt and the operational capital of the rebel regime until Tripoli fell.  The Salafists, and more particularly the AQIM group that is al Qaeda-related, have little power (and AQIM is a bunch of Algerians anyway, as the more recent events in Mali have reminded us).

Why Britain Needs the EU Less than the Rest of Europe

This is the subject of a stimulating piece in The Current Moment.  The short version, embellished with my cynical spin, goes like this: more or less all of Europe inherited a mixed economy social contract from the ruins of WWII.  This remains generally popular among the public.  Nevertheless, elites want to unwind it.  In France, Germany and elsewhere the way to do this is through EU directives; this way you can make a show of resistance as if it were not your idea all along.  But Britain has gone neoliberal on its own, domestically, without any push from Brussels.  They don’t need the fig leaf.

My Breakfast with Helena

We were talking about evolutionary psychology and the problem of tribalism—that the cooperative impulses attributable to our biological heritage are inseparable from the impulse to punish defectors and threatening aliens.  Bowles and Gintis came up.

Then the conversation drifted to “Zero Dark Thirty”, which neither of us had seen but were both willing to analyze and assess.  I said that the filmmakers likely misjudged their audience.  They thought that gruesome footage of torture sessions would counterbalance the impression that the trail to Bin Laden passed through waterboarding: viewers, like good liberals everywhere, would be anguished.  What they failed to anticipate is that moral judgment, for the vast majority of us, is mediated by tribalism.  Torture is not bad in a universal sense; it is bad when inflicted on one of us.  Do it to one of them, one of those who have harmed and dishonored our tribe, and you can be a hero.  Reports have it that audiences have cheered this film as the final credits role.  They are not conflicted.

But Helena saw it differently.  The director was a woman, she pointed out.  Women (in her echo of a different voice) are not inclined to take a warrior’s view of violence and honor in the pursuit of victory.  They would judge torture on its own terms, as cruelty.  Women have difficulty imagining how men see the same acts.  The reception of this movie is probably deeply gendered, almost two different cognitive experiences.

How Valuable Are Amazon’s Intangible Assets?

The income tax portion of Amazon’s 10K filing for fiscal year ended December 31, 2011 reads:

The effective tax rate in 2011, 2010, and 2009 was lower than the 35% U.S. federal statutory rate primarily due to earnings of our subsidiaries outside of the U.S. in jurisdictions where our effective tax rate is lower than in the U.S. Such earnings primarily relate to our European operations, which are headquartered in Luxembourg ... We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These reserves are established when we believe that certain positions might be challenged despite our belief that our tax return positions are fully supportable. We adjust these reserves in light of changing facts and circumstances, such as the outcome of tax audits ... We are under examination, or may be subject to examination, by the Internal Revenue Service (“IRS”) for the calendar year 2005 or thereafter. These examinations may lead to ordinary course adjustments or proposed adjustments to our taxes or our net operating losses. In addition, while we have not yet received a Revenue Agent’s Report generally issued at the conclusion of an IRS examination, we have received Notices of Proposed Adjustment from the IRS for the 2005 and 2006 calendar years relating to transfer pricing with our foreign subsidiaries. The notices propose an increase to our U.S. taxable income that would result in additional federal tax expense over a seven year period beginning in 2005, totaling approximately $1.5 billion, subject to interest.

Amazon’s effective tax rate was 31.2% for 2011, 23.5% for 2010, and 21.9% for 2009. Reuters provides more on this IRS transfer pricing challenge:

Online retailer Amazon Inc is fighting the U.S. Internal Revenue Service over a $234 million international tax bill, a dispute similar to others in which the agency has struggled to collect corporate taxes. The case, filed on Dec. 28 in U.S. Tax Court in Washington, has implications for other technology companies with software assets that may prove difficult to value for tax purposes … Amazon argues that the IRS is overestimating the value of Amazon’s “intangible property,” which includes computer software, trademarks and marketing assets, according to the court filing … The IRS relied on an estimation method that was overturned in a 2009 court decision involving Veritas Software Corp, now part of Symantec Corp, Amazon said. The Veritas decision was a stinging loss for the IRS, prompting corporations to be more aggressive in fighting the IRS over transfer pricing.

Some excellent reporting from the Bureau of National Affairs provides even more details with respect to the transfer of intangible property from the US parent to its Luxembourg affiliate - Amazon Europe Holding Technologies SCS – back in 2005. While Amazon claimed the value of the European rights to their intangible assets was less than $217 million, the economists hired by the IRS are claiming the value was $3.6 billion. These economists are relying on an application of the discounted cash flow method based on assumptions that Amazon are now challenging. While the representatives of Amazon are claiming that this $3.6 billion valuation estimate based on this particular application of the discounted cash flow approach is above the fair market value – let me submit any reasonable application of the Market Capitalization approach would suggest that the IRS expert is being conservative. Some might be shocked that the IRS is asking for so little as at the current stock price just over $272 a share, the market value of equity exceeds $120 billion. OK, the Market Capitalization approach would have one deduct the relatively minor amount for book value of equity and add any the book value of intangible assets, which would make the value estimate just under $120 billion. With sales in 2011 at $48 billion, the value to sales estimate is well over two. But we also need to remember that the valuation date was closer to the end of 2005 when sales were running around $8.5 billion per year and the Market Capitalization approach was closer to $20 billion. Yes – Amazon has experienced considerable sales growth and a large increase in its market value over the past seven years. We also need to remember that the Luxembourg entity did not receive the U.S. rights to the intangible assets. With US sales running at 55 percent of worldwide sales takes a large chunk of this $20 billion. And I’m sure the lawyers for Amazon will argue that not all of the bundle of intangible assets in the foreign region was created by the US parent given this statement:

Amazon discovered that it could not “simply re-launch the Amazon.com website in foreign countries” but rather, had to launch sites that were “specifically tailored to the browsing practices, purchasing habits, and language and cultural preferences” of its European market. It also needed to develop new technology to support those sales.

Even so – the $3.6 billion estimate put forth by the IRS expert’s discounted cash flow model still appears to be conservative in comparison to any reasonable application of the Market Capitalization approach. Of course, taxpayers often argue that their market valuations reflect irrational exuberance. It is true that Amazon’s operating margin was a mere 5 percent so its market valuation reflected an incredibly high price-earnings ratio. But also remember that Amazon has experienced very high growth during the past 7 years. Which is interesting in light of the other complaint about the IRS expert’s discounted cash flow model:

This disparity in valuation, according to the petition, reflects in part the company's determination that the pre-existing intangibles had a limited useful life of seven years or less, whereas IRS presumed that the intangibles had a perpetual useful life ... The discounted cash flow was based on the projected profits of the European websites from 2005 to 2011 and a terminal growth rate of 3.8 percent.

Given the high current price-earnings ratio, one could readily argue that the market is expecting a much high growth rate than 3.8 percent post 2011. Unless one wants to continue to argue that the current stock price of $272 a share is again reflecting irrational exuberance. Does Amazon management really want its tax attorneys to claim their shareholders are paying way too much for their shares in the company?

Do 2007 Fed Transcripts Make Yellen Frontrunner To Succeed Bernanke?

I think maybe so.  There is a large photo of her above today's story in the Economy & Business section of the Washington Post entitled "Caught between two outlooks: Fed slow to abandon optimism even as a few sounded alarm, 2007 transcripts show."  Next to the photo of her is a quote by her from the Dec. 2007 meeting in which it is clear that she was one of the far-sighted ones who "sounded alarm" but failed to convince the FOMC to loosen monetary policy more vigorously at the time, when she was still President of the San Francisco Fed.  Bernanke was apparently torn, although he had made warning noises in the summer about deterioration of the markets.  Those who also "sounded alarm" with Yellen are identified as being Tim Geithner, then New York Fed President, Eric Rosengren, then a Fed governor, and Frederic Mishkin, author of the most widely used Money and Banking textbook, then also a governor.   Given that Janet Yellen is currently Vice Chair and apparently in good graces with Bernanke, and Obama is being fingered as a possible sexist, and that aside from being identified by Richard Shelby as an "inflation dove" (and he voted against her appointment), and she has avoided saying anything embarrassing in public or making many enemies, it would appear that she may well now be the frontrunner to replace Ben Bernanke as Fed Board Chair next year.  I would certainly support it.

Ironically, her most serious rival might prove to be fellow Wise Person, Geithner, if he is interested, now stepping down as Treasury Secretary.  He has been viewed by many as kind of a front man of the big banks and also somewhat dissed for not having an academic and professional background in economics, like Bernanke or Yellen have (although neither Greenspan or Volcker did).  However, there is reason to believe that he might well have been ahead of the rest of those in the inner Fed decisionmaking circles in worrying that the decline of the housing bubble could lead to a major financial crisis and economic downturn.  This would have been due to his deeper association with the New York financial markets and is given in a speech he gave on Sept. 15, 2006 in Hong Kong in which he mostly said optimistic things, but devoted several paragraphs near the end to warning that if there were a crisis he would be unable to get everybody in a room and just cut a deal to solve it the way his predecessor, McDonough did during the 1998 LTCM crisis. He noted that the links in the financial system through complex derivatives had become too obscure and global.  This speech can be found at http://www.ny.frb.org/newsevents/speeches/2006/gei060914.html .

While he was not identified in this article, other sources have identified a main opponent of the Yellen-Geithner-Rosengrim-Mishkin position as being Jeffrey Lacker, then and now the President of the Richmond Federal Reserve Bank.  Apparently there were specifically sharp arguments between him and Geithner over bank regulation, with Geithner seeing himself as having a national responsibility, whereas Lacker was protective of his oversight of the Bank of America and Wachovia Bank, both of which had their HQs in Charlotte, NC in his district.  Of course, more recently he has been the hawkish dissenting vote on the FOMC, although he has now stepped off it as a voting member.  An irony of this is that he was a Ph.D. student of Donald Hester at the University of Wisconsin-Madison, who is an old Keynesian and student of James Tobin's at Yale, where he crossed paths with Janet Yellen.  Curiously, Hester defends Lacker and his policy arguments, despite Lacker's apparent capture by the long-time monetarist research staff at the Richmond Fed.

In any case, here is one voice in support of the candidacy of Janet Louise Yellen to be the next Chair of the Board of Governors of the Federal Reserve System of the United States of America!  

Mitigation Versus Adaptation in Climate Change

Today I will take a stab at dispelling what I think is widespread confusion over what constitutes mitigating climate change, as against adapting to it.  Both are necessary, of course, but effective policy depends on understanding which is which.

Begin with the following stylized fact: reducing the severity of future climate change is essentially about keeping fossil fuels in the ground.  It is true that there are some benefits from tweaking carbon exchange (the carbon cycle that operates across the atmosphere and terrestrial and marine ecosystems)—for instance, by planting a forest—but the impacts are relatively small (not big enough to do most of the job) and of uncertain duration.  And someday there might be a feasible method for pulling the carbon out of the fuels we burn and re-sequestering it for near-eternity.  But for now these options are of limited value.  As Carbon Tracker noted last year, about 80% of hydrocarbon reserves have to be foregone if we are to achieve a reasonable likelihood of limiting warming to 2º C.

This gives us a rough and ready definition of mitigation: reducing the extraction of fossil fuels.  Everything else is adaptation.

But wait.  What about renewable energy?  Efficiency improvements?  Aren’t these about reducing the buildup of greenhouse gases?

To answer this it helps to distinguish between two types of adaptation: adaptation to climate change and adaptation to climate change policy.  An example of the first is reinforcing seawalls and dikes to minimize storm surges despite rising sea levels.  An example of the second is a wind farm.

A wind farm does not reduce carbon emissions.  What it does is to preserve energy services despite a decline in the rate of fossil fuel extraction.  In other words, it reduces the cost society has to pay in order to take the action that actually mitigates climate change, leaving the hydrocarbons in the ground.

The distinction is important.  Imagine a fossil fuel reserve with two uses, generating electricity and powering an industrial process.  Suppose we invest in a wind farm to replace the use of the fuel in electrical generation.  Now demand for the fuel drops, which lowers its price.  This may well lead to an increase in its industrial use—not fully offsetting of course, but partially offsetting.  The impact of the wind farm on climate mitigation is entirely measured by how much total fuel extraction is reduced, not by how much energy the farm produces.  Its principal function is to enable us to continue benefiting from electricity in the absence of burning fuels.

If you look at it this way, the accounting for carbon capping systems becomes much simpler.  It’s all about how much fuel (measured in terms of carbon equivalents) you do or don’t burn.  Everything else is about how to live with the consequences, both from limiting the use of fuels and from having to deal with climate change.  This is why a policy regime that offsets reductions in fuel combustion by granting credits to all sorts of green production investments is essentially trafficking in loopholes.

A Comment on What’s Causing the Rise in Inequality

I was at the ASSA session where Larry Mishel faced off against David Autor, and I came away thinking, like Jared Bernstein, that the EPI view of the world holds more water than the it’s-all-technology argument that Autor was defending.  The timing issues, including the discontinuities in the wage structure traceable to the early 1980s, are important, for instance.

Nevertheless, I think the whole debate suffers from insularity.  The critical technological developments of recent decades, especially digitization, computing and networking, have swept over the entire world.  They have transformed work in every developed country and much of the developing world.  Meanwhile, the dramatic rise in inequality, and the portions of the earnings distribution most impacted, differ tremendously.  You simply don’t see the same change in profile in most of continental Europe or Japan that you find in the US data.

Understanding these differences is where explanation would begin, in my opinion.  And here’s a hypothesis: analysts of income inequality in the US suffer from a dynamic, self-reinforcing lamppost effect.  They begin with a model of the world in which only the individual characteristics that workers bring to the market should matter for wage determination.  Then, to measure what’s taking place, they set up or utilize systems, like the CPS, to collect these individual data: your age, marital status, education, occupation and earnings.  Armed with this information, they crunch and recrunch the numbers to see which aspects of worker characteristics play the most important role.  The struggle to produce a convincing labor supply-based story generates demand for even more detailed individual-level observation on workers.  No doubt big data will be brought to bear shortly on this topic.

But what if the critical drivers of the wage structure have to do with the way work is organized in production systems?  I’m thinking here of decisions regarding how much autonomy workers can have at different levels within an organization, what monitoring and incentive mechanisms are adopted, how extensive are internal job ladders, etc.  All of these are affected by technology, of course, but only as refracted through organizational strategy, governance systems, market structure and the like.  We know about these things mostly through case studies because systematic data are not collected on them.  Anyone who has compared work organization and management across the “varieties of capitalism” knows that these matters are crucial, but it is difficult to construct formal tests in the absence of large sample data.  At best, matching workers to industry-level variables like age-adjusted average tenure and capital-labor ratios can generate proxies for what we really ought to measure directly but don’t.  (I have a little experience with the use of these proxies and am tempted to do more work with them.)

As for the policy implications, I think the change-in-the-nature-and-structure-of-firms story has rather radical implications.  How can we change how work gets done in America?

Addendum: This past week Gerald Davis’ book Managed by the Markets, has been the main assigned reading in the class I’m teaching.  It is excellent in describing, lucidly and concretely, how financialization has changed the American corporation.  This is the sort of account that could be written only by someone who has devoted a career to corporate finance and governance research.  It is a bit less effective when it strays into political theory and cultural criticism and also too Anglo-Saxon-centric, but at least what it says still makes sense if you know a bit about how the rest of the world is evolving.