Should Economists Be Honest or Civil?

The question of course is directed towards Laurence Kotlikoff. I guess this was an attempt to be honest:

The fiscal gap — the difference between our government’s projected financial obligations and the present value of all projected future tax and other receipts — is, effectively, our nation’s credit card bill. Eliminating it, would require an immediate, permanent 59 percent increase in federal tax revenue. An immediate, permanent 38 percent cut in federal spending would also suffice. The longer we wait, the worse the pain. If, for example, we do nothing for 20 years, the requisite federal tax increase would be 70 percent, or the requisite spending cut, 43 percent. Even if we do nothing — which, given Washington, is the likeliest outcome these days — we should at least be transparent about our insolvency. A bill introduced last year by the Democratic senators Tim Kaine of Virginia and Chris Coons of Delaware and the Republican senators Rob Portman of Ohio and John Thune of South Dakota would require the Congressional Budget Office, the Government Accountability Office and the Office of Management and Budget to conduct such “generational accounting.”

I have no problem with a well informed version of generational accounting but I do share the concern expressed by Dean Baker that Kotlikoff’s habit of ginning up very big numbers tends to scare more than it informs. Paul Krugman echoes Dean’s wisdom here. The day after this exchange over long-term budget forecasting, Kotlikoff offers Krugman this advice:

I think public intellectuals, like Paul Krugman, have a responsibility to act like grownups in speaking with the public. If they start calling people with different views “stupid,” they demean themselves and convey the message that name calling rather than respectful debate is appropriate conduct. It certainly is not … But what I’m writing about is not Paul Ryan. I’m writing about the level of national discourse. No one, and I mean no one, deserves to be called stupid.

Brad DeLong has already pointed out that Krugman did not call Congressman Ryan stupid. What Paul was really saying is that the Republican fiscal policy wonk was a con artist:

all the alleged fiscal responsibility lay not in the much-hyped changes to Medicare, but in magic asterisks claiming huge but unspecified savings from discretionary spending and huge but unspecified revenue gains from closing loopholes he refused to name.

Ryan has often called for large reductions in taxes on the well to do. Kotlikoff on the other hand frets that we are not raising enough in taxes to pay for all the things that the government has promised. And yet Kotlikoff wants us to be nice to politicians like Paul Ryan who are not being honest with us. I’m speechless.

Economist's Squares

Mark Thoma's daily links has jumped the shark, recycling mostly the same old same old 'celebrity' economic bloggers gossiping about each other. Case in point: "Simon Wren-Lewis and Nick Rowe Annoy Each Other... - Brad DeLong"

Plot summary: Simon and Nick disagree about something Paul said, so Brad steps in to settle the dispute (probably a rerun or at least a rehash of a sequel to a remake). Most Lucky-like ("...the skull the skull the skull the skull in Connemara in spite of the tennis...") sentence -- what Brad wrote:

Conventional monetary policy that swaps liquid cash for short-term safe nominal assets cannot help unless and until it summons the Inflation Expectations Imp and so makes interest rates at the zero interest rate lower bound consistent with the configuration of real interest rates across the risk spectrum that corresponds to the current Wicksellian natural rate.

What the reader sees:

Blah, blah, blah, blah, Nick Rowe, blah, blah, blah, Simon Wren-Lewis, blah, blah, Brad DeLong, blah, blah, blah, blah, Paul Krugman, blah, blah, blah, blah, blah.

Storyline for Economist's Squares (adapted from the storyline for Hollywood Squares):

Nine celebrity economist bloggers, seated in a three-by-three tier as in a tic-tac-toe board, joined two contestants, one of them a champion, in a game known best for the celebrities' wonkish answers to questions. The object was to win an otherwise standard game of tic-tac-toe by determining whether a celebrity economist was giving a correct answer to a general knowledge question or bluffing ("agree" or "disagree"). Contestants selected a celebrity, for which host Mark Thoma reads a question; a correct decision to agree or disagree by the player allowed him/her to place their mark in that box, while the opponent's mark was placed there if said decision was incorrect (unless it led to tic-tac-toe, in which case the contestant had to earn the box). During the first complete game of a show, a "Secret Square" game offered the contestants a bonus prize package for a correct answer. The contestant winning the best-of-three match was champion and returned to face a new challenger.

Jobless Future or Futureless Jobs?

In a Washington Post Innovations blog op-ed published July 21, Vivek Wadhwa wrote:

In an op-ed in The Wall Street Journal, former Treasury Secretary Lawrence Summers revived a debate I’d had with futurist Ray Kurzweil in 2012 about the jobless future. 

He echoed the words of Peter Diamandis, who says that we are moving from a history of scarcity to an era of abundance. Then he noted that the technologies that make such abundance possible are allowing production of far more output using far fewer people.

Asking the wrong question again. There will not be a "jobless future." There may not even be a future. And that's the good news!

The bad news is that if machines replace enough people (and everything else remains the same) then wages will fall to a low enough level that it will be cheaper to use people to do the work that machines could otherwise do. Of course, everything else won't remain the same.

When writing about jobless futures, "futurists" seem to forget that using more and more machines requires burning more and more fuel. Burning fuel emits carbon dioxide and requires more and more work to find and get and refine the fuel. Reductio ad absurdum implies that all the fuel and all the work will be expended going after the fuel to enable the process of going after the fuel -- a sort of perpetual inertia machine.

We won't ever get there. But we might travel too far in that direction to allow us to turn back.

Wadhwa makes a suggestion the Sandwichman has long advocated: "The only solution that I see is a shrinking work week. We may perhaps be working for 10 to 20 hours a week instead of the 40 for which we do today." I don't suppose Wadhwa realizes how deeply embedded the antagonism towards this "only solution" is among the high priests of fookerism.

Addendum to SCIOD 3: Petty Foggery and Political Arithmetick

"The meaning of fooker might be 'capitalist.'" -- Anatoly Liberman

In Chariots of the Luddites, I cited Dorning Rasbotham's allegation, "There is, say they, a certain quantity of labour to be performed..." as a precursor of Say's law of markets and the locus classicus of what eventually came to be known as the lump-of-labor fallacy claim. But who are "they"?

"They" turn out to be either John Graunt, William Petty or both. The following passage appears in Graunt's Natural and Political Observations made upon the Bills of Mortality:

We have said, 'Twere better the Publick should keep the Beggars, though they earned nothing, &c. But most men will laugh to hear us suppose, That any able to work (as indeed most Beggars are, in one kind of measure, or another) should be kept without earning any thing. But we Answer, That if there be but a certain proportion of work to be done; and that the same be already done by the not-Beggars; then to employ the Beggars about it, will but transfer the want from one hand to another…

There was some dispute about the authorship of the work which appeared under Graunt's name with probably the most credible explanation being that Graunt was indeed the author of the pathbreaking statistical analysis (and thus the "Columbus" of vital statistics) but that his intimate friend Petty may have contributed literary embellishments. Since the cited passage is more in the nature of an embellishment, it is quite possible, then, that Petty wrote it.

Just What the World Needs: Two More Introductory Economics Textbooks

Well, just maybe.  My offerings, Microeconomics: A Fresh Start and Macroeconomics: A Fresh Start are now available in print and as e-books.  The elevator version goes like this: the books embody substantial changes designed to close the gap between the way economics has been taught to undergraduates and the way it is practiced by professionals.  Their approach is empirical and open-minded.  They aren't my own personal take on the subject, since I hope some instructors will adopt it who aren't me.

They are published by Springer, so they don’t have the snazzy production values of the Big Boys.  But on the other hand you can buy them new for about $75 apiece.  (Hardbound, 450 pp.)

If you want the backstory, which will no doubt persuade you that these texts are what's been missing from your life all these years, click here.  And here are the links for ordering exam copies of the micro text and its macro companion.

Nike’s Bermuda Affiliates Are Named After Its Shoes

Forbes is also a fan of the good work of the Citizens for Tax Justice (CTJ) and note something a little odd:

What does Nike have to do with taxes? It turns out that Nike is very aggressive when it comes to sheltering profits overseas … Twelve of those subsidiaries are in Bermuda alone! The CTJ says that Nike has about $7 billion of profits parked offshore that are not being taxed by the United States or any other country … What is fun about this is that Nike apparently named its tax shelters after its shoes. According to the CTJ, 10 of the Bermuda subsidiaries are actually named after Nike shoes: Air Max Limited, Nike Cortez, Nike Flight, Nike Force, Nike Huarache, Nike Jump Ltd., Nike Lavadome, Nike Pegasus, Nike Tailwind, and Nike Waffle.

I guess you can say that the Nike tax planners have some fun with their jobs. But I do have a couple of issues with how CTJ is spinning this. Counting the number of affiliates in tax havens is not a great way of measuring profit shifting. If they parked $7 billion in one Bermuda affiliate, it would have the same financial impact. Also – this $7 billion figure must be an accumulation over time. Nike generates around $3 billion in profits each year on $25 billion in sales. I checked their 10-K which shows a 25% effective tax rate in part because 52% of their income over the past three years stays in the U.S. And some of the rest goes to distribution affiliates in other high tax nations. Of Nike’s sales, 55% are to foreign customers. But given the profits attributable to Nike’s trademarks, I guess one could expect more of the income coming back to the U.S.

SCIOD 3: Chariots of the Luddites

Edmund Cartwright was checkmated in his endeavor to turn a commercial profit from his mechanical loom. In 1790, Cartwright licensed Robert Grimshaw of Manchester, a manufacturer of cotton check cloth, to install 500 of his power looms in a large weaving factory at Knott Mills. The proposed factory was to be on a larger scale than any mill in existence at that time. Only twenty-four of the looms were in operation by February of 1792 when the Grimshaws received an anonymous threatening letter, presumably from hand-loom weavers (or competitors?) who were alarmed by the scale of the undertaking and its potential impact on the market:

Sirs—We have sworn together to destroy your factory, if we die for it, and to have your life for ruining our trade; and if you go on, you know the certainty, which comes unknown to my companions.

About a month later, the mill was burnt to the ground. The fast combustion of the building indicated arson. Although the factory had been well insured, Grimshaw declined to rebuild and forfeited his license from Cartwright, perhaps because he took seriously the threat of further violence.

The destruction of the factory at Knott Mills foreshadowed the Luddite uprising that was to come two decades later and also followed in a tradition that had led to several incidents at cotton spinning factories in Lancashire a decade earlier, just five years before Cartwright had his auspicious conversation about spinning, weaving and chess-playing automatons:

A mob rose and scoured the country for many miles round Blackburn, destroying all the jennies, carding engines, and every machine driven by water or horses…. Even the upper and middle classes in those days entertained a great dread of machinery, and they connived at, and even actually joined in, the opposition of the working classes to its extension.

In response to those outbursts, Dorning Rasbotham, a magistrate near Bolton, wrote a pamphlet, "Thoughts on the Use of Machines in the Cotton Manufacture," that was to make an enduring impression on political economists. Although there has been some question raised regarding Rasbotham's authorship of the pamphlet, a memorial plaque in the church where his remains were buried described him as having "the characters of the poor man's friend." The pamphlet was signed "a Friend to the Poor." Squire Rasbotham strove to leave no doubt about where his sympathies laid:

I am, from the bottom of my heart, a Friend to the Poor. I wish to plead their cause, and to speak in their favour. I feel tenderly for the poor man and his family. And, if my heart does not deceive me, I would do, I would suffer any thing for their welfare. Led by no other principle, but regard to the Poor, I now wish to enter into free and friendly conversation with you, my poor but esteemed friends, on the subject of our machines.

Rasbotham's repertoire consisted of a series of assertions, several of which express notions that are repeated perennially as commonplaces in economic thought:

1. The interests of the poor should have the highest priority (after all, what would become of the rich if there were no poor people to till their grounds, and pay their rent?);
2. There is not so great a difference between the real interests of the rich and of the poor;
3. Trade is a large and difficult subject that requires deep thought, long study, extensive reading and large experience to form a true judgment;
4. Machines distinguish men in society from men in a savage state. There are many examples showing how machines invariably benefit people;
5. All improvements at first produce some difficulty but many receive the benefit while only a few suffer (probably not much and hopefully not for too long), Those who are inconvenienced should be grateful for the opportunity to make a sacrifice for their fellow man;
6. Trade will find its own level. Those thrown out of their old employments will find or learn new ones. Those who get a disproportionate gain will soon find many rivals and lose their temporary advantage;
7. There is a disposition among people to be unduly alarmed by new discoveries;
8. Even if machines are evils they are necessary evils. We might as well make the best of them;
9. This would be a prosperous time for the poor, if only they would show some initiative and weren't so inclined to carry their money to the alehouse;
10. Anyone who disagrees with the above truths is an irreligious, conscienceless scoundrel and nincompoop; and, last but not least,
11. The belief that "there is only a certain quantity of labour to be performed" is a false principle.

John Ramsey McCulloch, one of the more prominent political economists of the second-rank in the early 19th century was effusive in his praise for the sensibility and soundness of Mr. Rasbotham's opinion, emphasizing the observation that "There is, in fact, no idea so groundless and absurd, as that which supposes that an increased facility of production can under any circumstances be injurious to the labourers." Rasbotham's final point merits quotation in full if only because future economists echoed it incessantly for two centuries hence, presumably without the faintest clue as to its origin:

There is, say they, a certain quantity of labour to be performed. This used to be performed by hands, without machines, or with very little help from them. But if now machines perform a larger share than before, suppose one fourth part, so many hands as are necessary to work that fourth part, will be thrown out of work, or suffer in their wages. The principle itself is false. There is not a precise limited quantity of labour, beyond which there is no demand. Trade is not hemmed in by great walls, beyond which it cannot go. By bringing our goods cheaper and better to market, we open new markets, we get new customers, we encrease the quantity of labour necessary to supply these, and thus we are encouraged to push on, in hope of still new advantages. A cheap market will always be full of customers. [emphasis in original]

Banal as Mr. Rasbotham's paragraph may seem, it anticipates by around 20 years a principle expressed by Jean-Baptiste Say that eventually would come to be baptized "Say's Law" and preside over centuries of dogmatism, controversy and confusion. Here is how Joseph Schumpeter described in 1954 the variegated reception of Say's Law down through the years:

He hardly understood his discovery himself and not only expressed it faultily but also misused it for the things that really mattered to him. …Ricardo understood it because it tallied with considerations that had occurred to him in his analysis of international trade, but he also put it to illegitimate use. Most people misunderstood it, some of them liking, others disliking what it was they made of it. And a discussion that reflects little credit on all parties concerned dragged on to this day when people, armed with superior technique still keep chewing the same old cud, each of them opposing his own misunderstanding of the 'law' to the misunderstanding of the other fellow, all of them contributing to make a bogey of it. (624-5).

A half century later, Robert Clower subtitled his article on Say and his law, "the story of a mare's nest." So just what does this so-called law say? In the 1821 English edition, C. R. Prinsep renders the following translation of the key paragraph:

It is worthwhile to remark that a product is no sooner created than it, from that instant, affords a market for other products to the full extent of its own value. When the producer has put the finishing hand to his product, he is most anxious to sell it immediately, lest its value should diminish in his hands. Nor is he less anxious to dispose of the money he may get for it; for the value of money is also perishable. But the only way of getting rid of money is in the purchase of some product or other. Thus the mere circumstance of creation of one product immediately opens a vent for other products.

"The creation of one product… opens a vent for other products." Although not identical, this version is reminiscent of Rasbotham's "By bringing our goods cheaper and better to market, we open new markets." Book I, Chapter VII of J. B. Say's Treatise on Political Economy, "Of the Labour of Mankind, of Nature, and of Machinery Respectively," reiterates many of the same points that Rasbotham made, down to using the same examples to illustrate the arguments. I don't know if Say read Rasbotham's pamphlet but it was well known, Edward Baines and John Ramsey McCulloch praised it highly, and Say attended school in England in the mid-1780s.

Although criticized by defenders of the sanctity of Say's Law, Keynes's version, "demand creates its own supply," captures the essence of the argument, albeit ambiguously and incompletely. There may well be, though, as Poe's Dupin remarked, "such a thing as being too profound." From the start, Say's Law incorporated a vast amount of ambiguity and evasion. Clower suggested it could have been better labeled Say's Platitude. Keynes's reductive summary of the claim legitimately represented the reductivism that prevailed in typical textbook dogma. Keynes didn't exactly capture all the nuance of Say's Law. Neither did the textbooks that revered it. Nor did Say.

Figuring out the Inflation Vigilantes

Brad DeLong provides the raw material, and Paul Krugman adds some speculation to an account of unrelenting and unapologetic error on the part of those who would scare us about inflation, always just around the corner.  Here are two further thoughts to chew on.

1. The paranoia about inflation is a widespread, longstanding phenomenon, with immense influence over public discourse and economic policy, and out of all proportion to the actual—and very history-specific—threat.  It deserves to be studied by the normal tools of social science, the ones we devote to other significant political, religious and social ideologies.  Obviously, political economy has a key role to play, insofar as net creditors, as a rule of thumb, benefit from less-than-expected inflation.  (I give this a short treatment in my introductory macro text, due to be released in about a week.*)  But I’d like to see the full range of analysis: social psychology, networks of influence, case studies, and any other tools that can replace speculation with solid understanding.  The disinflation lobby is an important part of the political landscape and deserves careful study.

2. One aspect of the IV impact on our discourse that has particularly rankled me as an economics instructor is the deliberate propagation of what I call Type II money illusion.  (Does anyone else use this terminology?)  Type I is carefully explained in every introductory textbook: if you look only at your money income and ignore changes in the price level for the goods you buy, you will overestimate your true spending power.  Governments are said to rely on this confusion when they engage in expansionary monetary policy, and one of the functions of Econ 101 is to innoculate the masses against it.

But there is also the reverse error, to observe changes in the price level of consumption goods but not the (roughly) corresponding increase in money income.  This is circular flow stuff, as fundamental as it gets.  It is an error for the public to think that a rise in inflation makes them, considered together, poorer—as if, with lower inflation, everyone would continue to get the same wage hikes and enjoy the extra consumption.  Seeing the spending side of inflation and not the income side is Type II money illusion.

The interesting thing is not simply that lots of people (in my experience even a large majority) harbor this, but that it is actively purveyed by the media and even, on occasion, prominent members of the economics profession in their popular writings.  “Good news for consumers!  The latest report shows that inflation has come in below market forecasts.”  “Inflation is the cruelest tax of all.”  You know the drill.  And that is exactly the way it works: it is drilled in, over and over, until money illusion becomes the shared reality and the few of us who recognize it as an error find ourselves reduced to shouting at passers-by (or at least our students), like incomprehensible fanatics.

I mention this partly to vent, but also because I think this massive, systematic disinformation really deserves to be studied.  Why does it persist?  Why do the economics textbooks not bear down on it like they do against Type I, even though far more people today are in the grip of this second kind of illusion?  Political economy surely plays a role, but only indirectly, since most of the confusion is purveyed by people, like journalists and your Republican cousin at this summer’s family reunion, who have no direct interest one way or the other.

Note: I’m sure some people will read the above and immediately try to argue that inflation really does eat into spending power through a wealth effect.  That’s a separate discussion (it could be true, but it doesn’t get rid of Type II money illusion, which is quite specific and impossible to defend), but note that wealth channels get complicated: you have to consider net and gross debtor and creditor positions, financial versus real assets, nominal versus real exchange rate movements for internationally diversified portfolios (and the degree to which these are baked into asset prices), and so on and on.  Trust me: that’s not what most people are thinking about when they burble that of course inflation is bad because it reduces your real income.

*Don’t worry about the announced release date; I’m told it is imminent.  And, no, it's not 109 pp.  Closer to 4x.

SCIOD 2: A Left-Handed Mechanical Loom

In the summer of 1784, Edmund Cartwright, a clergyman, was on holiday in Matlock, Derbyshire, not far from Cromford, where Richard Arkwright had a cotton-spinning mill. Cartwright fell into conversation with some gentlemen from Manchester about what would happen when Arkwright's patent expired. "One of the company observed," Cartwright later wrote, "that... so many mills would be erected, and so much cotton spun, that hands never could be found to weave it."

Cartwright suggested that Arkwright ought to get busy inventing a mechanical loom. His companions scoffed at the impracticality of the idea. Knowing nothing about either weaving or machines, Cartwright called attention to the chess-playing automaton built by Baron Ludwig von Kempelen, which had recently been exhibited in London:

Now you will not assert, gentlemen, said I, that it is more difficult to construct a machine that shall weave, than one which shall make all the variety of moves which are required in that complicated game. 

Later on, recalling this conversation, Cartwright gave the matter more thought and came to the conclusion that such a machine was indeed possible. He hired a carpenter and proceeded to build a prototype, having "never before turned my thoughts to any thing mechanical, either in theory or practice, nor had ever seen a loom at work, or knew any thing of its construction." Needless to say, the first loom was rather crude but Cartwright persevered and in August of 1787 patented a loom, "nearly as they are now made," he wrote in a letter to Dugald Bannatyne, author of the Encyclopaedia Britannica article on "Cotton Manufacture," published in 1818.

In his communication to Bannatyne, Cartwright didn't say if he ever found out that the chess-playing automaton that inspired his invention was an elaborate hoax – a puppet operated by a man concealed in the device's cabinet. In an essay about the chess-player, published in 1836, Edgar Allan Poe observed, "we find every where men of mechanical genius, of great general acuteness, and discriminative understanding, who make no scruple in pronouncing the Automaton a pure machine." If these assumption had been correct, the chess-player would undoubtedly be "beyond all comparison, the most astonishing of the inventions of mankind." According to Poe, though:

The first attempt at a written explanation of the secret, at least the first attempt of which we ourselves have any knowledge, was made in a large pamphlet printed at Paris in 1785. The author’s hypothesis amounted to this — that a dwarf actuated the machine.… This whole hypothesis was too obviously absurd to require comment, or refutation, and accordingly we find that it attracted very little attention.

In 1789 a book was published at Dresden by M. I. F. Freyhere in which another endeavor was made to unravel the mystery…. His supposition was that “a well-taught boy very thin and tall of his age (sufficiently so that he could be concealed in a drawer almost immediately under the chess-board”) played the game of chess and effected all the evolutions of the Automaton. This idea, although even more silly than that of the Parisian author, met with a better reception, and was in some measure believed to be the true solution of the wonder, until the inventor put an end to the discussion by suffering a close examination of the top of the box. 

These bizarre attempts at explanation were followed by others equally bizarre. Of late years however, an anonymous writer, by a course of reasoning exceedingly unphilosophical, has contrived to blunder upon a plausible solution — although we cannot consider it altogether the true one.

After reviewing these previous attempts at explaining the secret of the Automaton, Poe endeavored "to show how its operations are effected, and afterwards describe, as briefly as possible, the nature of the observations from which we have deduced our result." After enumerating 17 observations, Poe concluded that the decisive clue is that the Automaton plays with his left arm – "for the Chess-Player plays precisely as a man would not":

Let us, for example, imagine the Automaton to play with his right arm. To reach the machinery which moves the arm, and which we have before explained to lie just beneath the shoulder, it would be necessary for the man within either to use his right arm in an exceedingly painful and awkward position, (viz. brought up close to his body and tightly compressed between his body and the side of the Automaton,) or else to use his left arm brought across his breast. In neither case could he act with the requisite ease or precision.

Although a plausible conjecture, Poe's conclusion seems at first hardly conclusive. A right-handed Automaton could be operated easily enough by a left-handed person. As it turns out, lefties tend to be more heavily represented among chess players than in the general population. But they are still outnumbered by roughly five to one. As Poe's character, Dupin, was later to remark in "The Murder in the Rue Morgue," "there is such a thing as being too profound. Truth is not always in a well." Superficial as it may seem, odds of 5 to 1 in hiring an operator for the puppet are probably sufficient cause for constructing a left-handed automaton.

Transocean Transfer Pricing and Corporate Inversions

Martin Sullivan had the perfect line four years ago for this corporate inversion debate:

By inverting, a multinational is no longer subject to U.S. tax from its foreign operations. In addition, the transactions often are accompanied by planning techniques that strip income out of the United States.

His paper documented the drop in the effective tax rate for certain oil drilling rigs that did corporate inversions between 1999 and 2002. Ensco complained about this back then but they have joined the club since. About the same time, Senator Baucus used the Senate Finance Committee to blast Transocean:

Transocean, still largely physically located in the U.S., moved its headquarters to the Cayman Islands in 1999, thus avoiding U.S. taxes, and has since relocated the headquarters to Switzerland. Baucus led the fight in the Senate to shut down this practice, known as corporate inversion, and successfully passed the American Jobs Creation Act of 2004, which closed loopholes in the tax code that made corporate inversion possible. Baucus sent a letter today calling on Transocean to provide detailed documents and explanations relating to the company’s tax practices. This information will help the Finance Committee discern the tax benefits Transocean received by exploiting the loopholes closed by the American Jobs Creation Act of 2004 and determine whether further legislative action is necessary to prevent erosion of the U.S. tax base through corporate inversions.

I read the questions for the CEO of Transocean and I hate to say but the Senator completely missed the boat – as in Bareboat Charter arrangements, which I’ll explain in a moment. His notion that Transocean is largely physically located in the U.S. is simply not true. Yes about 25 percent of their activity is here but they have oil drilling rigs all over the world. Oil drilling rig multinationals are an incredibly simply issue as all they do is to combine very expensive equipment with workers so the only issue is who gets the profits from their equipment, which is predominantly these rigs which often cost $500 million a piece. The trick is that formal ownership of the rigs is transferred to tax havens, which lease the use of the rigs to the operating affiliates in places like the US and the UK. Now if this planning technique does not offend you – the intercompany lease rates should. The UK government certainly is according to Reuters:

"Currently, some companies making significant operating profits in the UK are able to move up to 90 percent of these profits overseas and out of the UK tax net," a spokeswoman for the UK Treasury said … Osborne's change, which will limit the amount companies can deduct from profit for such lease payments to 7.5 percent of the historical cost of the rig, will replace generous deductions calculated on the market value of rigs, which has been soaring. Andrew Cox, Tax partner at Deloitte, said HMRC had most recently agreed in 2008 that drillers could take tax deductions of up to 15 percent of the market value of a rig each year.

Finance Minister George Osborne is very frustrated with his national income tax authority for not challenging clearly excessive intercompany lease deductions. I would submit to Senator Baucus that we should be equally upset with the IRS for their failure to challenge overly aggressive transfer pricing. Rather than get lost in endless and ineffective tax rules, why not simply look at the real economics of these multinationals transfer pricing?

Fred Hiatt VSPs On Foreign Policy Again

Oh, I just cannot resist.  So in yesterday's Washington Post, editorial page editor, Fred Hiatt does his foreign policy Very Serious Person (VSP) act again (his domestic version has him calling for cutting social security benefits every several months or so) in a column, "An experiment gone wrong: Obama's policies expose the dangers of U.S. disengagement."  On the foreign policy side Hiatt ventilates neocon fantasyland mirages.  If only Obama had done this or that, all would just be so much better.  I agree that Obama has made mistakes, only my list of his mistakes tends not to be Hiatt's.  Most of this Hiatt has bloviated about previously, but some is new.  I shall note four quotes from his column (which is signed) and then comment.

1) "All U.S. troops were withdrawn from Iraq.  Whether this was at the insistence of Prime Minister Nouri al-Maliki, as Obama's defenders argue, or because Obama offered so few troops, and so half-heartedly, that Maliki was bound to reject the offer matters less than this: Obama was content with the zero option and as he made clear at the time, sanguine about Iraq's prospects without a U.S. presence"

Well, Iraq is certainly in bad shape now but there are two point on this.  The first is that it is utter nonsense to claim that if somebody says they want you out of their country then what is really going on is that they want you to demand that you keep an even larger amount of your troops in their country than you were otherwise asking to.  This is like saying that if a woman tells a man to stop raping her, what she really means is that he should rape her twice as much.  Hiatt and other VSP neocons constantly repeat this argument, but it is some of the worst nonsense I have ever seen, and Bush was being told to get out completely and unequivocally by Maliki when he was president.

The other point on this is that if the US had not invaded Iraq there would not have been any al Qaeda there or any spinoffs that would eventually become what is now this awful  Islamic State, led by a guy who spent four years in a US prison camp there, the erstwhile new caliph, al-Baghdadi.

2) "After bombing Libyan forces to depose Libyan dictator Moammar Gaddafi, Obama declined to send trainers or other support to the new government."

Now I happen to agree that it would have been better if the US, or better yet NATO, trainers had been sent to Libya after the fall of Qaddafi.  However the main problem is that the weak new Libyan government did not want or ask for any such trainers.  Only in the last year have they changed their mind and made a request for such from NATO, not from the US.  Those have not yet arrived, due to disagreements over who is to send those trainers, and it may be too late to prevent disintegration of the never unified post-Qaddafi government.  But "trainers" cannot be sent in if they are not requested, and they were not until recently.

There is also the minor problem that since Benghazi happened, nearly all discussion of Libya policy in the US has been dominated by congressional hearings on that event, with the entire foundation of such investigations having been based on a lie, as I have repeatedly pointed out, namely that what happened there had nothing to do with the infamous anti-Muslim video.  The recently captured organizer of the attack, Khattadi, has in fact repeated that the video did inspire the attack.

3)  "Obama declared that Assad, in gassing 1,400 civilians to death, had violated civilized norms and crossed his, Obama's, red line.  He asked for congressional approval for a military response; then he shelved that request in favor of a deal, brokered by Russian President Vladimir Putin, for Assad to hand over his chemical weapons."

Which he did.  Assad now has no chemical weapons that we know of.  Obviously it was the threat to bomb Syria that brought about this result.  We would have been better off if Obama had bombed Syria, killing who knows how many more civilians, but not have engaged in a negotiation to get rid of the chemical weapons?  Is Hiatt completely out of his mind? 

 4) "Obama offered Putin a 'reset' strategy of improved relations.  But when it became clear that Putin wasn't interested-that he wanted to re-create a Russian empire while blocking the achievement of a Europe whole and free-the West again had no strategic response.  Obama could have bolstered a unified Europe with military, diplomatic and trade measures. Instead, as Putin wrecked democracy in Russia, annexed Crimea and fomented war in Ukraine, Obama and his European counterparts were reactive and divided."

One upshot of the reset was that Obama obtained a renewed nuclear arms control treaty with Russia, which is still in place, despite some reports that now that relations with Russia have gone bad parts of it are having difficulty being implemented.  This would not have happened without any reset.

Given that Hiatt seems to want US troops on the ground in Iraq, Libya, maybe Syria, and also seems to support supporting US allies in Asia against China, if not necessarily a full "pivot to Asia," which he seems to mock, there are definite limits to how much military bolstering the US can do in Europe, and doing so in such a non-NATO (and non-EU) members as Ukraine was completely out of the question.  The US has been in negotiation with the EU over a trade agreement, but that has not gone anywhere fast because such things go very slowly anyway.  Europe is divided on many things, including degrees of economic relationship with Russia, whether nations are in NATO or not, the EU or not, and within the EU, in the eurozone or not.  The idea that there was something, anything, that Obama could have done to have fostered more unity in Europe is nonsense, and it is pretty obvious that there was very little that Obama or anybody in Europe could do to stop Putin from annexing Crimea or messing further in Ukraine once the Ukrainians themselves overthrew the Yanukovich government, which is what immediately triggered Putin's actions on both fronts (and I have been highly critical here repeatedly of Putin on those actions).

More generally, Hiatt's VSPing amounts to criticizing a supposedly "cautious, modulated retreat from US leadership."  However, the only actual "retreat" involved in any of this is the troop removal from Iraq, which Hiatt is simply fantasizing could have been avoided without simply imposing our will on the Iraqi government.  All the rest amounts to criticizing Obama for not expanding military operations in a whole series of countries.  This was never feasible or reasonable, but making unfeasible and unreasonable recommendations is par for the course when Hiatt gets on his foreign policy VSP high horse, as he did here.

Barkley Rosser

More on Moore’s Strategic Tax Cuts and Employment

Stephen Moore goofed again and Paul Krugman does something novel – actually looking at the data:

Actually, if you’re going to do something about state job growth, the very least you should do is bear in mind that the recession and recovery have had differential effects across states, so that you might want to look at job growth over the whole period of recession and recovery. If you do, the figure shows what you see for Moore’s four states … Texas is, not surprisingly, the best performer. New York comes in second, followed by California, with Florida in last place. Not much of a clear ideological message there. Nor should you expect there to be. Real empirical work on state growth shows multiple factors — mildness of climate, cheap housing, high wages, and yes, some impact from tax rates. The idea that you would find an overwhelming one-factor correlation with taxes alone is something only a, well, Heritage foundation analyst could believe.

If one compares employment in California as of June 2014 to where it was 7 years ago, it has risen by an incredibly modest 0.36%. What I found really amazing is that Moore did not present any information about Kansas. Employment in this state also suffered during the height of the Great Recession and over this same 7 year period has risen by a mere 0.04%. Of course, Moore’s oped is loaded up with excuses why supply-side tax cuts might not pan out in real world starting with the title:

Give Kansas tax breaks time to work

He also tosses in this goodie:

Well, it’s true, tax cuts don’t have magical powers, and it is an often-repeated caricature by the left that Laffer and I and others believe that to be true. There are dozens of reasons why some places grow and others lag behind — and taxes are only one of them. But what is irrefutable from the evidence in the states, not just Kansas, is that strategic tax-rate reductions can ignite growth and employment. Memo to Krugman: Read our new book: “An Inquiry into the Nature and Causes of the Wealth of States.”

You see – if a tax cut did not lead to an employment boom, Moore would argue it was not “strategic”. Dandy! Here in New York - where employment has risen by risen by 3.52% over the past 7 years – we have to endure statements from the governor of New Jersey about his supply-side policies. So how are they working out? Despite all of Christie’s shooting about record employment growth, the reality is employment is still 3.32% below where it was 7 years ago. I guess “voting with their feet” has a problem when Christie’s budgetary policies get in the way of fixing bridges and building tunnels. But hey – he kept gasoline taxes low. Or was it the reductions in public employment that caused this anemic performance? The balanced budget multiplier in action. But I have faith in the shifty charlatan known as Stephen Moore to praise this from New York:

Governor Andrew M. Cuomo today formally launched START-UP NY, the game-changing initiative that, starting today, will create tax-free zones to attract and grow new businesses across the state.

Oh boy – I bet this makes it in the 2nd edition of Laffer and Moore’s book. Pardon me if I don’t bother to read the 1st edition.

The Curious Case Of The Malofeev Mafia

Yesterday's Financial Times had an article, "Oligarch emerges as link between Russia and rebels," that revealed curious details about a most curious figure, 40-year-old Russian private equity billionaire, Konstantin Malofeev.  He is also a committed adherent of Russian orthodoxy, creationism, and a supporter of the restoration of the Russian empire and monarchy.  In January, he and the Russian Orthodox patriarch arrived in Sevastopol with some ancient relics, only to be met by 100,000 Crimeans who prayed, supposedly for union with Russia.  Malofeev got his wish later.  Ukraine complains that he is currently funding Russian separatists in eastern Ukraine, which claims is untrue.  But there is more to this tale, which is even more curious.

What is most curious is his relationship with the top two leaders of the Donetsk Peoples' Republic, Alexander Borodai and Igor Girkin, known as "Strelkov," the former its self-proclaimed prime minister and the latter its self-proclaimed minister of  defense, both of them Russian citizens from Moscow who somehow showed up heavily armed after Russia took Crimea (where Borodai advised the new pro-Russian leader of Crimea briefly) in eastern Ukraine, leading seizures of public buildings and proclaiming their republic.  Both are former employees of Malofeev.  Borodai was particularly close as a top PR consultant for Malofeev.  Girkin/Strelkov is closer in terms of ideology, also espousing Orthodox domination of an expanded and restored Russian empire ruled by a tsar.  This latter figure was the one who bragged about the separatists downing MH17 on his website, which he took down after it came out it was a commercial airliner, only to then promulgate the theory that the plane was full of already dead people, a claim reiterated seriously on Russian media, btw.

As for Malofeev himself, he is reported to be close to to people close to Putin (aside from the patriarch, who is so): Vladimir Yakunin, minister of railways, and Igor Shchelgov, minister of telecommunications (no wonder Russian media was reporting the Girkin/Strelkov claim that MH17 was a zombie plane).  He also apparently spends time hanging out with US evangelicals and attended a semi-secret meeting in Vienna of right wing political leaders, including Martine Le Pen, leader of France's National Front, and Heinz-Christian Strache.

Some western progressives like to repeat the Russian propaganda that Ukraine is run by "fascists" (yes, there are some in the new government) who were installed by machinating western powers, particularly the US, although the US has nearly zero direct economic interests in Ukraine at all.  But the idea that these Russian separatists in Donetsk and Luhansk are somehow progressives is just complete and utter nonsense.  They are about as reactionary as one can get, if not outright certifiably insane in the case of Strelkov, but they are the Malofeev mafia, and as such, they get a lot of support  from Russia's leaders.

Barkley Rosser

Addendum to SCIOD 1: Paper Mechanisms

Joseph Dorfman tells of the note John Maurice Clark sent to Wesley Mitchell on May 14, 1948, (the day after Sandwichman was born):

I have a theory of competition which argues that any fixed schematic laws must be misleading, because competition is an evolving thing. And I have a theory of human nature which can't be used as a basis for deductive theorizing, because it includes too many various elements and leaves too much room for personal and group differences in values and in behavior.

A week later, Clark added the sarcastic observation, "In dealing with the evolutionary character of the mechanisms, I sometimes think 'theory' of the abstract sort is a device for converting usefully enlightening ideas about behavior and motivation into paper mechanisms whereby armchair theorists can grind out misleading results."

A Neglected Point in Connection with Crises -- N. A. L. J. Johannsen

Joseph Dorfman, "Heterodox Economic Thinking and Public Policy," Journal of Economic Issues, March 1970, p. 20:

My last exhibit of an influential heterodox thinker is a man who had no college training whatever. The self-taught Nicholas August Ludwig Jacob Johannsen (1844-1928) dared long ago to espouse the greatest of heresies; namely that there could be a chronic condition of overproduction of goods, or in modem terminology, a "general deficiency of demand." Because of this, his audience among the orthodox economists was extremely limited. While he labored in relative obscurity any impression that this might give that his work was of little importance or influence would be misleading, for his limited audience included many of the best minds of the day both at home and abroad; to wit, J. B. Clark, J. M. Clark, Foster and Catchings, Friedrich von Hayek, John A. Hobson, Keynes, Mitchell and F. W. Taussig.  

His major work, A Neglected Point in the Theory of Crises, (1908) with its clear presentation of the multiplier and of the inability of unlimited saving to find investment has been hailed as one of the earliest successful formulations of what has become known as Keynesian economics.  

Johannsen followed up his intricate analysis with policy proposals that were likewise quite modern. For example, in one of his innumerable pamphlets appealing to the profession to attempt to understand his theory, he wrote that there were two alternative ways to "guard against depressions." One was to "create unlimited opportunities for building up new productive capital, so that the savings funds constantly accruing can always find investment in the beneficent way." The alternative was to "restrict or regulate the saving activity, . . . so as to keep it in healthy limits." Since "the greater the concentration of wealth in individual hands, the greater the saving power; such concentration . . . is not desirable, so far as the interests of society are concerned."