Authority Figures Criticizing the Junk Science from Gerald Friedman

Christina and David Romer have written a devastating critic of that silly multiplier analysis from Gerald Friedman but some do not even want to read this as they are insulted by the alleged appeal to “authority”. I could understand this had the Romer’s included a long winded discussion of who they are but they did not jumping what Friedman wrote and their concerns. I’m thinking about this in terms of two business litigations where I did not testify because my side had attorneys who did not like what I had to say. Let’s play this out in terms of tale where a business used the technology from Bernie Co. to manufacturer and sell cutting edge sanders. Alas, they refused to pay royalties to Bernie Co. and so were sued for patent infringement. Let the attorneys for this slimy business be Team Republican who decide that the patent was not infringed just like real Republicans will scream Socialism. Of course this will not prevail as even Romer and Romer note:

Although we share many of Senator Sanders’s values and enthusiastically support some of his goals, such as greater public investment in infrastructure and education, we also believe it is vitally important to be realistic about the impact of policies on the performance of the overall economy

The plaintiff hires as its expert some little known valuation expert – Dr. Friedman – who posits a model of patent value (expected future sales, reasonable royalty rate, and a discount rate) that say the value is $29 billion (no Dr. Evil today). The defense attorneys are hoping that the estimated value can be placed at something south of $20 billion. What Romer and Romer showed that Friedman’s estimate was not credible as if it were “junk science” and would likely face a Daubert motion:

A Daubert motion is a specific type of motion in limine. It is raised before or during trial, to exclude the presentation of unqualified evidence to the jury. Daubert motion is used to exclude the testimony of an expert witness does not possess the requisite level of expertise or used questionable methods to obtain data

But what about an affirmative analysis? More on that latter after I noted the two real world litigations. The expert witness RIAA v. Napster was David Teece. His testimony started with his biography which I guess some might call appealing to Authority. Of course anyone who ever met David knows his expertise speaks for itself. The same goes with the Romers. But it was the high quality of his testimony that impressed the Court. The same holds for the Romer and Romer rebuttal. A lot of us back then were pulling for Napster but we also knew that the case for RIAA was impressive. But let’s turn to this diaper patent infringement case:

The Procter & Gamble Company ("P & G") has filed suit against Paragon Trade Brands, Inc. ("Paragon"), alleging that Paragon infringes P & G's patent rights to the barrier leg cuff feature on disposable diapers. Paragon has counterclaimed for the alleged infringement of a patent relating to diaper absorbent cores1 and for a violation of the antitrust laws.

While Paragon Trade Brands said they wanted to simply compete. Procter & Gamble was going to win it effect to drive out competition as their Ultra diapers did violate P&G diapers. And Bernie is a social democrat, I was not impressed with the expert witness and his overall valuation or his claim that a reasonable royalty rate should be 2.5%. I told the defense attorneys that the evidence supported a 2% royalty rate for reasons the Court later smartly noted. But that meant they did not want to hire me. They hired Robert Reilly instead as he argued for a very low royalty rate:

The highly experienced authors of the Guide to Intangible Asset Valuation define and explain the disciplined process of identifying assets that have clear economic benefit, and provide an invaluable framework within which to value these assets. With clarity and precision the authors lay out the critical process that leads you through the description, identification and valuation of intangible assets.

Yep – an appeal to Authority. Never mind that the Court rejected his testimony out of hand which often happens to his testimony in other cases as Courts seem him as advocate not an expert witness. While Friedman argues real GDP can be $29 trillion as of 2026, the CBO is saying that this will only be $20.6 trillion under current policies. Of course Sanders is proposing an interesting change in policies so one might argue we should model out how this might work. I’m sure Team Republicans might turn to section III.B of Romer and Romer:

Against these potential positives, there are features of Senator Sanders’s proposals that could work to slow the growth of productive capacity. The higher interest rates resulting from demand expansion that led to inflation would lower investment, and so slow growth of capacity. More generous Social Security, while surely desirable for poorer Americans, would cause some people to retire earlier. Strengthening disability insurance, another laudable goal, would likely lead to more people being on the program. Making public colleges free would cause some people to spend longer in school and less time working. And extensive research, to which we have contributed, shows that although the disincentive effects of higher tax rates are small, they are not zero.23 Potentially more worrisome are the extensive interventions in the labor market.

I’m sure weeds in the garden John Cochrane would be willing to use these effects to argue for a level of real GDP in 2026 less than $20 billion.

When Democrats have proposed incentive-killing growth-killing marginal tax rate increases with lots of exemptions for their donors...

Of course this ignores Romer and Romer’s section III.A.

Senator Sanders’s proposals would likely act to raise productive capacity in several ways. Most directly, infrastructure and education make the economy more productive. If Senator Sanders’s policies led to an additional $1.5 trillion of investment in these areas over the next decade and those investments have a rate of return of 10% (which appears to be a reasonable estimate for well-targeted public investments), this would raise output in 2026 by $150 billion, or somewhat less than 1%.19 Since this is an effect over ten years, the implied increase in average annual growth of capacity (or potential output) is less than a tenth of a percentage point. Thus, although there is a strong case for greater public investment based on its rate of return and on its potential impact on quality of life and equality of opportunity, it would not yield a fundamental change in the economy’s growth trajectory. Likewise, there is evidence that family-friendly policies, like parental leave, help keep workers in the labor force.20 And regulatory and tax changes that benefited low-income workers would make work more attractive. Again, such policies have much to recommend them.

They also say the net effects will be small as if their model might suggest real GDP closer to $21 trillion by 2026. I would argue, however, that a different model from what the CBO has might be used. Would that alternative model suggests $22 billion or $25 billion? Who knows as no one has done this. This is a shame as these issues mattered. I’m getting too old to do a quality job and I don’t have that magic Authority. But Team Democrat – whether Bernie or Hillary – should assemble a team of progressive economists to do the hard work

Romer^2 on Friedman on Sanders

Oh dear.  Today's Romer and Romer response to Gerald Friedman’s paper on the economic consequences of Sanders seems to have identified the core problem in GF’s analysis, confusing one-time and ongoing stimulus effects.  According to the R team, F attributed increases in economic growth in perpetuity to single bursts of stimulus, and not just once but repeatedly—in his treatments of demand stimulus, income redistribution and health care.  That plus his belief that the output gap is large enough to accommodate extremely rapid growth over a full decade, explains his headline numbers.  If this is true it’s an embarrassment.

For economists and other academics the message is to always circulate drafts before going public.  For the rest of us, don’t forget that this tussle has nothing to do with the merits of Sanders’ policies.

UPDATE: In my original post I attributed the supercharged growth rates to multiplier issues, primarily in out years.  That appears to be partly correct, in that GF's multiplier depends on his estimate of the output gap, which he thinks would remain substantial through the entire forecast period.  But the larger problem seems to be the multiplicands.  This is the sort of thing that requires actual replication to uncover.  Incidentally, this is turning into a poster case for the value of writing down your model and not jumping immediately into the spreadsheets.

The Sanders Fiscal Stimulus and Verdoorn’s Law

Noah Smith on the Friedman flap:

“If Friedman and others are right, it would up end most of mainstream macro, and would force a dramatic reconsideration of economic policy. But Friedman’s paper seems far-fetched because the normal action of stimulus -- putting unemployed people back to work -- wouldn't be nearly enough to create the kind of growth Friedman projects. In addition, we would need a huge boost to the growth rate of productivity. Usually we think of productivity gains as coming mainly from technological advancements, something that is very hard for government policy to affect. The notion that fiscal stimulus, in addition to raising employment, also boosts productivity growth was first suggested in 1949 by a Dutch economist, Petrus Johannes Verdoorn. According to what's known as Verdoorn’s law, all you have to do is boost gross domestic product growth -- for example, by fiscal stimulus -- and productivity will soar as well.”

What is this Verdoorn’s Law?

The importance of increasing returns for economic growth was revitalized only in the early twentieth century by Allyn A. Young (1928), who emphasized not only the reduction in the average cost of production brought by output growth in manufacturing but also the product diversification that characterizes an increase in the division of labor. Verdoorn’s law, an attempt to quantify this relationship, is named after the Dutch economist P. J. Verdoorn, who published a paper in 1949 in which he measured the impact of economic growth on labor-productivity growth in manufacturing for a group of countries in the late nineteenth century and early twentieth century. In general terms, Verdoorn’s law implies the existence of a stable and positive causal relationship from the growth rate of output to the growth rate of productivity in manufacturing in the long run. … The theoretical foundation of Verdoorn’s law is the existence of economies of scale in manufacturing, that is, the fact that the average cost of production falls with an increase in the amount of goods produced. The sources of economies of scale within a firm or industry are usually divided into two categories: static or dynamic. Static economies of scale come from the fact that most processes of production incur a fixed cost, that is, a cost that has to be paid no matter whether anything is produced. As a result, the higher the level of production, the lower the average fixed cost per unit produced and consequently the higher the economy of scale. It should be noted that static economies of scale are reversible because, if production is reduced, the average fixed cost rises. Dynamic economies of scale come from the productivity gains associated with innovations brought about by the increase in production. The intuition here is that the dynamic economies arise from learning by doing and as such are irreversible. Even if the level of production falls, the new knowledge acquired from experience does not vanish.

There is more on the empirical inquiries that occurred after Kaldor drew attention to this idea in 1966. I have been saying Team Bernie needs to hire economists to model out the economic effects of his policy proposals. This Verdoorn effect might be something worth exploring.

Krugman v. Mankiw on Rubio’s Tax Cut – Show Me the Model

Greg Mankiw of Team Republican tries to counter an attack from Paul Krugman on Rubio’s tax cut for the rich, which may come as breathing spell from the flap over that “analysis” by Gerald Friedman (my two cents on that flap in a bit). Greg says Rubio is proposing the David Bradford plan:

Good tax policy should be pro-growth, simple, and fair. An income tax, unlike a consumption tax, penalizes saving, which undermines economic growth and introduces complexity. An income tax is often thought to be fairer than a consumption tax, however, because it taxes saving, which is disproportionately done by higher-income individuals….The reduction in capital accumulation reduces labor productivity and lowers real wages throughout the economy, depressing the standard of living of future generations. Some studies have found that a switch to consumption taxation would increase the size of the U.S. economy by as much as 9 percent in the long run, although other studies estimate smaller gains.

Bradford does cite these studies and we will note one later. Can we take this back to the debate over the 1981 tax cut and note why I am so big on Show Me the Model? Voodoo economics was coined by George H. W. Bush as he did not believe Art Laffer had a real model of how large tax cuts could lead to a miracle growth. After all, standard economics tells us that tax cuts lead to less national savings, higher real interest rates, and crowding-out of investment. All of which happened. Laffer’s excuse for a model was a cocktail napkin which does not cut it. For what is worth, the Congressional Budget Office does model out potential output, which had been growing at a 3.5% clip since the end of World War II until 1980 but slowed to a 3% clip for the Reagan-Bush era. As Peter Dorman noted, Gerald Friedman failed to model out potential output and its projected growth path under the proposals of Bernie Sanders:

He never presented his model. The appendix to his report jumps immediately to parameter estimates, but there is no list of all parameters nor a formal model displaying how they relate to one another. I take it that the implicit model calculates GDP growth from spending projections subject to a multiplier, and that this translates into labor demand with productivity as a residual. The microeconomic results are determined by macro outcomes plus additional sector-specific factors. There does not appear to be a simultaneous relationship between macro and micro (especially labor market) outcomes, which is a cause for concern.

His defenders seem to miss the point with respect to the microeconomic or potential output side. Yves Smith wrote:

Friedman did this using a completely standard model. So the real issue is about the assumptions

A standard multiplier model without any consideration of potential output might be fine for forecasting a depressed economy over the next few years but not for a decade. In some ways, this defense from Jamie Galbraith was worse:

There are not many ambitious experiments in economic policy with which to compare it, so let's go back to the Reagan years. What was the actual average real growth rate in 1983, 1984, and 1985, following the enactment of the Reagan tax cuts in 1981? Just under 5.4 percent. That's a point of history, like it or not.

Of course the CBO model would note we had a GDP gap back then near 8% with potential growing at 3% per year. CBO now says the gap is around 2.8% and it is growing at only 2% per year. But is CBO the only model? Of course not. Menzie Chinn had an excellent discussion:

Note: I do not know what the output gap actually used in the Friedman study, as it is not reported…. One thing that should be remembered is that the trend line extrapolated from 1984-2007 implies that the output gap as of 2015Q4 is … -18%. A graphical comparison which highlights the implausibility of the -18% output gap is shown below… I want to stress that estimating potential GDP and the output gap is a difficult task

Indeed it is difficult but using trend lines is how Lawrence Kudlow does this for the National Review. Let’s not go there. Sandwichman wants to ditch NAIRU (I agree) and Mark Thoma has a must read discussion. All of this is fine but I still say Show Me the Model and as one does, please note the latest from Brad DeLong:

These are principal causes of "hysteresis". I do not believe that the output gap is the zero that the Federal Reserve currently thinks it is. But it is very unlikely to be anywhere near the 12% of GDP needed to support 4%/year real growth through demand along over the next two presidential terms. We could bend the potential growth curve upward slowly and gradually through policies that boosted investment and boosted the rate of innovation. But it would be very difficult indeed to make up all the potential output-growth ground that we have failed to gain during the past decade of the years that the locust hath eaten

Team Republican will likely have their models so permit to reach back to one of the models mentioned by Bradford in discussing something akin to the Rubio proposal which was an excellent paper entitled Simulating U.S. Tax Reform:

This paper uses a new large-scale dynamic simulation model to compare the equity, efficiency, and macroeconomic effects of five alternative to the current U.S. federal income tax. These reforms are a proportional income tax, a proportional consumption tax, a flat tax, a flat tax with transition relief, and a progressive variant of the flat tax called the 'X tax.' The model incorporates intragenerational heterogeneity and kinked budget constraints. It predicts major macroeconomic gains (including an 11 percent increase in long-run output) from replacing the federal tax system with a proportional consumption tax. Future middle- and upper-income classes gain from this policy, but initial older generations are hurt by the policy's implicit capital levy. Poor members of current and future generations also lose.

This estimated 11% gain happens only very slowly over time. Tax cuts do not pay for themselves and the proposition that everyone gains is not true. Maybe Greg Mankiw wants to pretend otherwise and maybe he has in mind a different model. But like Gerald Friedman – he has not laid out a real model.

Krugman, the Gang of Four and the NAIRU Straitjacket

G. Friedman v. M. Friedman

Krugman and the CEA Gang of Four former chairs don't come right out and say it but G. Friedman's projections are implausible because... "NAIRU!"

um... um... um...

Two points on that.

First is Dean Baker's post about the latest Economic Report of the President's "insight into the question of how fast the economy can grow, and more importantly how low the unemployment rate can go."

Economists have long held the view that lower rates of unemployment would be associated with rising rates of inflation and vice versa. When the Federal Reserve Board decides to raise interest rates to slow the economy it is based on the belief that unemployment is falling to a level that would be associated with a rising rate of inflation. 

Most economists now put the unemployment rate at which inflation starts to rise somewhere near the current 4.9 percent rate. (This is called the non-accelerating inflation rate of unemployment or NAIRU.) So does the ERP. But its analysis suggests a somewhat different story.

Second is Jamie Galbraith's 1997 -- that's almost 20 years ago -- Journal of Economic Perspectives article, "Time to ditch the NAIRU"

First, the theoretical case for the natural rate is not compelling. Second, the empirical evidence for a vertical Phillips curve and the associated hypothesis that lowering unemployment past the NAIRU leads to unacceptable acceleration of inflation is weak, and has become much weaker in the past decade. Third, viewed collectively, attempts to estimate the location of the NAIRU have become a professional embarrassment; disagreements remain on too many basic issues. Fourth, adherence to the concept as a guide to policy has major costs and negligible benefits. Conversely, the risks of dropping the natural rate hypothesis are minor, while the benefits from a sustained pursuit of full employment could be substantial.

G. Friedman's projections may well be wrong. But the argument that they are "implausible" is based on uncompelling theory, weak empirical evidence, embarrassing estimates and "a guide to policy [that] has major costs and negligible benefits."

But, hey, you can't criticize the top wonks if the they don't come right out and say it.

UPDATE: John T. Harvey writes, at Forbes:

In the words of Christina Romer, former chair of the Council of Economic Advisors under Barack Obama: 

"Just as there is no regularity in the timing of business cycles, there is no reason why cycles have to occur at all. The prevailing view among economists is that there is a level of economic activity, often referred to as full employment*, at which the economy could stay forever."

*Often referred to as full employment? War is Peace. Freedom is Slavery. Ignorance is Strength. NAIRU is full employment.

First they ignore you. Then they ridicule you...

And then they attack you and want to burn you. 

And last they forget you and attribute what you said to Gandhi, Stalin, Hitler, Abe Lincoln or Mark Twain.

Here, in full, is the address of Nicholas Klein to the third biennial convention of the Amalgamated Clothing Workers of America, May 15, 1918 (if you're in a hurry you can skip to the penultimate paragraph for the punch line):

Mr. President and Friends: I did not expect to be called upon at this very moment, at least, because of the presence of my good friend and colleague, who has just come to you from the City of Washington, with a message of encouragement,  I have no doubt. But I was asked when I approached the platform to say some few words of encouragement to the Schloss Brothers strikers of Baltimore. I can only say this, that much more than I could say this morning has already been demonstrated here on this platform and in this hall. The marching around of the men and the women this morning, and the standing up of the groups of delegates from the various cities, was indeed an inspiring spectacle to my mind. 

I believe that they have been on strike for five consecutive weeks. The strikers now realize what war means. And they also realize no doubt what Sherman said about war, because, my friends, a strike is a war, the two contending forces fighting like separate armies, each for its share of the spoils in this world today. 

The speaker this morning, the Chairman or the co-worker of Baltimore, said that a settlement was about to be had, and he expected to announce before the adjournment of your convention a settlement of this strike. My friends, I hope that is true. I hope that the Schloss Brothers strikers are going to win a splendid victory! (Applause.) 

There never has been such a wonderful opportunity for labor as presents itself this very moment. But, my friends, I have in mind this, and I say this to the strikers and I say this to the delegates. Labor just now is in the flower of its manhood. Just like this beautiful spring day, when the buds are beginning to open, so labor is coming into its own. But, my friends, that is due in great measure not so much to your stand either as workingmen or working-women, but to the peculiar economic status which has been brought about by the war. And I say to you, my friends, that perhaps after this war— and that is not so far off—a chance will come to you strikers, and to you workers, to show not by applause, but by action, how much per cent. you feel for organized labor. Because, my friends, after this war there will be a great unemployment problem. The munition plants will be closed and useless, and millions of munition workers will be thrown out upon the market. And then the time will come to show whether you strikers and you workers believe one hundred per cent. for organized labor or only 35 per cent., because, my friends, my good friend is he who is with me when the storms are beating, when I am hungry, when I have no money, when everybody is spitting on me, when I am in jail; and then, when a man comes to me and says, "I am with you; have courage; I'm your friend!" that man is my brother—that man is two hundred per cent., because that man is not a sunshine friend. Sunshine friends organized labor can get now. Sunshine friends organized labor can get when it is victorious, when it is on top. But the true test will come to you, strikers, and to you workers, in just a short time. To you strikers, who have been holding out five weeks, I may say a word of courage, and that is this: When you go into the Amalgamated Clothing Workers of America, you are going into a real organized Union, not a bosses' union. You are going into a union made up of those who have ideals, of those who believe in you, of those who are working for you, of those who are using every energy and every effort, not for politics, but to make it better for you in the shop, not because of a label, but because you are workers and you produce all the wealth.  

And I say to you, stick to that Union. That Union means just what it says. It is a Union of organized forces in America in the needle trades. 

So, my friends, without taking up any more time, let me say to you, and without being pessimistic, that there will be evil days coming. And they are not so far off. I wonder how many of the membership of New York and Chicago and all over the country are so solidified and will stick to the Union, to the Amalgamated, when the time comes— when the call comes, and you are put to the test. Will you be a real soldier in a grand army of labor, or will you be one of those stragglers who only come in to get two dollars or more wages per week? That is going to be the great problem. 

And the education of your membership now, the solidifying of your forces now, the making of your lines strong now, my friends, is the big, big question. and it can be done—anything can be done if a Union of one hundred thousand members can be organized in three years like has been so wonderfully done here by your leaders and by your officers and your membership, my friends, anything is possible. Education is possible, and the winning of strikes is possible. 

Let me close just now by giving you a little story that I have given you once before. I close by telling you the story, because I think it explains better than anything else, at this time, the great possibilities which can come to labor. There is a story told about the making of the first railway. There was an old man, it is said, whose name was Stevenson [sic: should be Stephenson], who made the first locomotive. You know, just like in the labor movement they said locomotives were impossible. You had to have horses or cattle to pull a train; that nothing would go without something being attached to it. There would be no locomotion. 

And when old man Stevenson proposed a train—something to be run without the aid of horses or oxen, he was ridiculed. One day a test was made, and they laid two pieces of wood and upon these two pieces of wood they placed some thin sheets of metal, and upon that crude arrangement was placed the first locomotive. 

And it is said in this story that thousands of people were out to see the first test of that locomotive, and of course the people all shouted, and pointed to their heads, and said the man was crazy, and they said the locomotive was out of question; it was impossible, and the crowd yelled out: “You old foggy fool! You can‘t do it! You can‘t do it!” And the same everywhere. The old man was in the cab, and somebody fired a pistol and the signal was given. He pulled the throttle open and the engine shot out. and in their amazement the crowd, not knowing how to answer to that argument, yelled out: “ You old fool! You can’t stop it! You can't stop it! You can't stop it!" (Applause.) 

And my friends, in this story you have a history of this entire movement. First they ignore you. Then they ridicule you. And then they attack you and want to burn you. And then they build monuments to you. And that is what is going to happen to the Amalgamated Clothing Workers at America. . . . . . . 

And I say, courage to the strikers, and courage to the delegates, because great times are coming, stressful days are here, and I hope your hearts will be strong, and I hope you will be one hundred per cent. union when it comes! (Great applause.) 

Alan Krueger and the "Environmental Kuznets Curve."

In 1994 Krueger -- one of the former CEA chairs who signed the Sanders letter -- and Gene Grossman published a paper titled "Economic Growth and the Environment." They studied four kinds of environment pollution and the countries' per capita income. They found "no evidence that environmental quality deteriorates steadily with economic growth. Rather, for most indicators, economic growth brings an initial phase of deterioration followed by a subsequent phase of improvement."

This finding subsequently became known as the "Environmental Kuznets Curve" by analogy with the Simon Kuznets's finding, once upon a time, of income inequality first rising with economic growth and then subsequently decreasing as growth continues. Ask Thomas Piketty about the robustness of that empirical theory.

A couple of years later, David Stern and associates published a critique of the Environmental Kuznets Curve theory. They pointed out that the inverted U shape relationship between environmental degradation and economic growth depends on the unrealistic assumptions that there is "no feedback from the quality of the environment to production possibilities" and "trade has a neutral effect on environmental degradation." Furthermore, the inference from some studies "that further development will reduce environmental degradation is dependent on the assumption that world per capita income is normally distributed when in fact median income is far below mean income."

This is not to disparage Krueger and Grossman's research or their findings but to point out that the implications of those findings were subsequently blown out of proportion by people who ignored the study's limitations. That enthusiasm has fostered an industry of unwarranted EKC optimism. Again, ask Piketty how that Kuznets Curve thing is working out.

There does appear to be an inverted U curve for SOME pollutants. Other pollutants get exported by rich countries to poor countries -- see the infamous 1991 Summers/Lant Pritchett  memo on toxic waste for a sarcastic commentary on that potential. And, last but not least there is no Environmental Kuznets Curve for global greenhouse gas concentrations.

Nevertheless, wishful thinking based on the EKC concept perennially fuels optimism about the prospects for "decoupling" GHG emissions from economic growth. Some of the boosters of decoupling even talk about "stabilizing" GHG emissions at current levels while growth continues. The decoupling fantasy sidesteps the reality that massive reductions in emissions -- not just stabilization -- are required to stop the continued increase in atmospheric GHG concentrations.

Now Go Do That Voodoo That You Do So Well, Dr. Krugman

Varieties of Voodoo, by Paul Krugman, Commentary, NY Times:

America’s two big political parties are very different from each other... Republicans routinely engage in deep voodoo, making outlandish claims about the positive effects of tax cuts for the rich. Democrats tend to be cautious and careful about promising too much...

Sorry, but there’s just no way to justify this stuff.

It would do well to recall that it was Democrats who first parlayed vulgar Keynesianism into the voodoo of weaponized growthmanship. NSC-68 set out "economic growth" rationale for tripling arms spending, conceived by Truman's Council of Economic Advisers chair, Leon Keyserling:

...the necessary build-up could be accomplished without a decrease in the national standard of living because the required resources could be obtained by siphoning off a part of the annual increment in the gross national product.

Of course that was two-thirds of a century ago. Nobody believes in such trickle-down arms build-up voodoo any more these days, do they? Except Paul Krugman:

Economics, as I say often, is not a morality play. As far as creating aggregate demand is concerned, spending is spending – public spending is as good as but also no better than private spending, spending on bombs is as good as spending on public parks.

The day after he wrote the above, Professor Krugman welcomed Republicans' fondness for weaponized Keynesianism on the grounds that it would expose the hypocrisy of Wall Street's complaints that government spending undermines business confidence:

Once you concede that the government can act directly to create jobs, however, that whining loses much of its persuasive power -- so Keynesian economics must be rejected, except in those cases where it’s being used to defend lucrative contracts. 

So I welcome the sudden upsurge in weaponized Keynesianism, which is revealing the reality behind our political debates.

The Sanders Economic Analysis Flap

Not often is a single economics paper propelled to the front of the news cycle, but this is what happened to Gerry Friedman’s analysis of Sandernomics.  The bottom line as I see it is that, while Friedman was doing his best (as he saw it) to promote his candidate, he ended up harming him.  The ultimate effect will not be too great, assuming most voters forget what happened more than a week ago, and the Sanders campaign pivots a bit to limit the damage.  Nevertheless, I think there are lessons to be learned, especially for economists and similar researchers.

I suspect that what we witnessed was a sort of Rosie Ruiz moment.  Rosie Ruiz, you’ll remember, was a woman who entered the New York and Boston Marathons in 1980, leaving the routes early to hop on a subway, and then rejoining each race just before the finish line.  No one might ever have noticed, except she placed first among women in Boston by a wide margin, and then the scrutiny began.  Eyewitness reports confirmed that she had not actually completed either race, and the result is that she was stripped of her records.

Now, I’m not saying Friedman was cheating or violating any other academic rules, but he clearly cut several corners, not anticipating how the spotlight would come down on him once his work was disseminated.  My guess is that he thought the most important thing was to get his results to the public before the next round of primaries, pulled lots of late-nighters and didn’t stop to think about what would happen when he would suddenly become a focus of national attention.

So what were some of those corners?

1. He never presented his model.  The appendix to his report jumps immediately to parameter estimates, but there is no list of all parameters nor a formal model displaying how they relate to one another.  I take it that the implicit model calculates GDP growth from spending projections subject to a multiplier, and that this translates into labor demand with productivity as a residual.  The microeconomic results are determined by macro outcomes plus additional sector-specific factors.  There does not appear to be a simultaneous relationship between macro and micro (especially labor market) outcomes, which is a cause for concern.  Moreover, there is no discussion of the history of his model: who else has used it and what its track record has been.  I can imagine that these are the sorts of things one would put aside if one were in a race to publish, but Friedman should have expected that academic economists would savage him for this.

2. His estimate of the national income multiplier is suspect.  He gives a verbal description of how he calculated the multiplier, but it’s not entirely clear: “I assume the multiplier is two in first-quarter of 2009 and then falls by 20 times the reduction in the output gap.”  Can you write that equation?  But what makes it really suspect is that the multiplier remains close to 1 (.87) even at the end of the analysis horizon in 2026 after a decade of unprecedented economic growth.  It leaves the impression that Sanders can simply expand national income almost indefinitely by perpetual increases in spending.  It is the multiplier assumption, in conjunction with the structure of his model (whatever it is), that gives Friedman shockingly large predictions for income, employment and productivity gains.

3. There is no sensitivity analysis.

4. He apparently ended his work as soon as he generated his results.  This is an instructive mistake, in my opinion.  When I teach statistics and research methods, I always emphasize that, while models produce results, results test models.  Look at your output.  If it appears to be unreasonable you better be able, based on your model structure, to tell a plausible story that justifies it.  Otherwise you have evidence of a flaw in the model itself.  The highly unlikely predictions for GDP, employment and productivity should have sent Friedman back to the drawing board to see if one or more of his assumptions might be questionable.  Of course, this describes an iterative process that would make it difficult to meet what he may have believed were his political deadlines.

5. He didn’t circulate his results to skeptics.  The people you feel closest to are the most likely candidates to be reviewers, but the feedback you actually need is from those whose bias is to reject you and your work.  Friedman knew he was going to release his report to be devoured by a pack of wolves, so having an honest wolf or two provide a pre-release assessment would have been a good idea.  His list of acknowledgments does not suggest he did this.  Granted, it is not always possible to find a critic willing to play this role, but I’m pretty sure that there are Clinton partisans among economists in Gerry’s wider circle that he could have drawn on.

I realize I’m being hard on Gerry in this post mortem.  I know him a tiny bit (just a few moments here and there), and he seems like a very nice guy.  But I think he lost track of the larger picture and probably now regrets some of his choices.  The rest of us can learn from his experience.

Incidentally, for the record, I don’t for a moment believe I could have done better myself.  First, I’m not a macro guy, so I wouldn’t take on the job in the first place.  Second, the careful, comprehensive, cross-checking approach I’ve described is beyond the capacity of any one person within a short timespan.  If the Sanders people needed an economic analysis asap, before South Carolina and Nevada, they should have assembled a team to carry it out.

And as for the Sanders campaign, they should thank Gerry for his efforts and then say that, given its results, his analysis represents the upper limit of what Sanders can accomplish, and they welcome more analyses providing a range of predictions.  As most commentators have pointed out, the attractiveness of the Sanders program is not based on its performance in economic models, which are unreliable predictors in any event.  It is enough to show that the program is internally consistent and not vulnerable to large downside risks.  More finely tuned analysis can wait for the aftermath of the election, when it will be time for drafting policies in detail.

UPDATE: I’ve been taken to task for assuming that Friedman is a Sanders supporter, which I inferred from his work with the Sanders campaign on health care reform finance, as well as the flashy headline numbers from his latest study.  If he is actually for Clinton I can’t understand why he seemed to be in such a hurry to get his work out.

I’ve also been directed to Josh Mason’s defense of full-bore stimulus to get the economy back to full employment and potential output.  Overall, I agree with Josh, but I still think the extremely rapid rates of growth, year after year, for a full decade are problematic.  Our current macro situation calls for expansionary policy, but there is no precedent in a developed economy for this sort of velocity over this duration.  After such a massive downturn followed by many years of no rebound, it’s not plausible that the US can return to the pre-2007 trend in less than a decade.

To repeat (just so it’s clear): on the policy point, Mason is entirely correct.  The right thing to do is to apply large amounts of fiscal and monetary stimulus as long as incomes and employment are depressed or until these measures show signs of being counterproductive for some other reason.

Post Post Work Post

"Automation may mean a post-work society but we shouldn't be afraid," writes Paul Mason at the Guardian. Mason writes, "to properly unleash the automation revolution we will probably need a combination of a universal basic income, paid out of taxation, and an aggressive reduction of the official working day."

Don't get me wrong. The Sandwichman is all for aggressive reduction of working time. But not because magical robots are going to usher in a Utopian (or dystopian) post-work society.

Let me tell you a secret: although machines are used to produce things, they are not about producing things. They are about power -- the power of one human being with a will over other human beings with wills. Exchange value is a manifestation of this power relationship.

Twenty years ago, George Caffentzis explained "Why Machines Cannot Create Value." His essay began, "Thirty years ago...

...my generation was told by economists, sociologists, and futurologists to expect a society in which machines had taken over most repetitive and stressful tasks and the working day would be so reduced by mechanization that our existential problem would not be how to suffer through the working day but rather how to fill our leisure time.

Twenty years plus thirty years makes fifty years. It might as well be a hundred years or a hundred and fifty. Perhaps fifty years from now some thinker will be predicting that some as yet unheard of technology is about to usher in a post-work society. Don't believe it.

And no, it's not because supply creates its own demand or because technology creates more jobs than it destroys.

Why did the most sophisticated analysts of the last generation go wrong and why is there a still continual stream of texts to this day like Rifkin’s The End of Work, which see in technological innovations the promise of a new era of workerless production?

Caffentzis asked in his essay.

And why twenty years later does Paul Mason regurgitate the Rifkinesque fantasy? Caffentzis answers his own question with an examination and defense of "Marx's original claim that machines cannot produce value" and an update of that claim from the perspective of the late twentieth century. The essay is reprinted in In Letters of Blood and Fire, a 2013 anthology of Caffentzis's essays.

Caffentzis's explanation is erudite and probably redundant. Those who have misinterpreted Marx's argument by viewing it through an economistic lens, will presumably do the same to Caffentzis's defence of Marx.

That is, when someone insists that wealth refers to a vault full of gold coins and/or a warehouse full of useful stuff, that person will no doubt presume that a labor theory of value refers to some sort of ratio between the coins and the stuff. Thus the critics attribute to Marx the position that Marx fundamentally critiqued. Kill the messenger.

Set aside the coins and the stuff, please. Wealth refers to, on the one hand, disposable time and on the other hand, command over the labor of other people. That is to say wealth expresses a power relationship between people -- always a precarious balance between autonomy and coercion. Precarious because "total power" over the other terminates the relationship by murdering the other.

Robots do what they do without autonomy or coercion. They do not desire time off from work "to seek recreation... to enjoy life... to improve the mind." That which they do not possess -- and do not want to possess -- cannot be taken from them. Robots are already dead. Thus they cannot create value in the sense of giving up a portion of their autonomy.

This perspective is difficult to grasp not because of any inherent complexity but because it lies outside the distorting frame in which wealth and value are conventionally viewed. But it bears repeating:

Machines cannot creates value because they are already dead.

New Monetarist Stephen Williamson Completely Loses It

New Monetarist Stephen Williamson has declared "The End of Central Banking." He focuses on the central banks recently announcing negative nominal target rates, such as in Sweden and Japan, all supposedly to try to reach now apparently far out of  reach 2% inflation targets. They, along with the Fed, simply are pathetic losers unable to get anywhere near those target rates.  Of course, the reason for this is the truth of neo-Fisherian new monetarist economics that  argues that to raise inflation one central banks should increase their target rates.  He goes on to argue that all schools of macroeconomic thought support such an argument, except for the loser ISLM/Phillips Curve school, supposedly in control at all these loser central banks, now coming to their end.

Well, it may well be true that large amounts of modern macro theory support this view, apparently with little empirical evidence to support this view that depends on agents adapting their expectations appropriately.  Sounds nice, but in fact we are still waiting for this to actually happen, although, of course, we all know that it takes time, lots of  time, for these expectations to adjust.

Well, as far as I am concerned, Williamson has just completely lost it. In his post (see link) he presents data showing sharply falling inflation expectations, in particular a FRED graph showing the "10 year inflation breakeven point" over time, this reflecting the difference between 10 year nominal US bond rates, and the US 10 TIPS rate.  The rate went sharply negative down to nearly -2% during the 2008 crash, but fairly quickly rebounded to a not unreasonable positive rate.  So, what has this measure Williamson focuses on so strongly been doing recently?

Well, he  makes a big deal  about how it is now lower than ever except for that brief super decline during 2008, reachin 1.18% "currently."  This reflects a sharp decline in the last few months from a rate around 1.5% quite recently.

So why does this suggest that he has completely lost it?  Because the Fed raised its target rate in December, and most of this decline has happened since then.  Now maybe we must wait some appropriate long period of time, just as all the hyperinflationistas (not in same camp as Williamson) have been insisting that eventually, sooner or later, the horrible overly stimulative Fed policy of  the last years will certainly certainly eventually lead to hyperinflation, or at least some noticeable increase in the inflation rate.

As it is, we have seen the Fed do what Williamson recommended in order to increase the inflation rate (and certainly the expectations of that).   But, instead we have seen his favorite measure of inflation expectations crashing hard, and the trend looks like it is straight down.  Williamson needs to phone home, or maybe phone Milton Friedman, or maybe even Irving Fisher himself, I do  not know.  In any case, the data he himself touts seems to be completely at odds with what he argues so  presumptuously. More monetary crackpottery, if more responsible  than a lot of it.

Addendum:  I have just gone to his original post where I added a comment making the main points here, if more  briefly and with less of the punch.  Williamson's reply is that market participants now expect that there will be no more  rate increases by the Fed, and that indeed, US rates will converge to  those of  Japan (he has a long convergence argument in his post).  This is in the face of Yellen still maintaining the official line before a congressional committee that more  rate increases, if more slowly than previously stated, are in store from the Fed.  I think Williamson is  right that indeed the rate increases are not likely to happen, and it is just a matter of time before the FOMC climbs off its official high horse on this matter.  But his argument that it is completely reasonable that this increase in target rates (by only 25 bp) should lead to a crashing breakeven inflation rate continues to make no sense whatsoever, even if the Fed is not going to increase target rates further.

Barkley Rosser   

Ted Cruz's Mendacity and Calumny are Breathtaking

Sunday, on Meet the Press, Senator Cruz had this to say:

By the way, the Senate's duty is to advise and consent. You know what? The Senate is advising right now. We're advising that a lame-duck president in an election year is not going to be able to tip the balance of the Supreme Court. 

That we're going to have an election, and if liberals are so confident that the American people want unlimited abortion on demand, want religious liberty torn down, want the Second Amendment taken away, want veterans' memorials torn down, want the crosses and stars of David sandblasted off of the tombstones of our fallen veterans, then go and make the case to the people. [emphasis added]

I don't think the American people want that. I'm very happy to take that case directly to Hillary Clinton, directly to Bernie Sanders. And I would note, look, how do we know Donald Trump's record on this is going to be bad? He has supported liberals for four decades: Jimmy Carter, John Kerry, Hillary Clinton, Chuck Schumer, Harry Reid. 

Anyone who cares about judges would not be supporting Harry Reid and Chuck Schumer and John Kerry and Hillary Clinton. And the consequence is, if either Hillary or Bernie or Donald Trump is the president, we will see the Second Amendment written out of the constitution. This is a basic question, who will defend our liberties?

That business about sandblasting crosses and stars of David off the tombstones of veterans may sound like just some crazy piece of paranoid fantasy rhetoric but it is worse than that. R. Ted Cruz was one of the petitioners in Salazar v. Buono, a case argued before the Supreme Court in October 2009. Elena Kagan, Solicitor General, was counsel on behalf of the petitioners.

Got that? The Obama administration was on R. Ted Cruz's side, seeking to NOT tear down a veteran's memorial in accordance with a lower court injunction that the Bush administration had not appealed.

The life cycle of the T. cruzi parasite 

What Will Humans Do?

The Guardian asks "Would you bet against sex robots? AI 'could leave half of world unemployed'":

Machines could put more than half the world’s population out of a job in the next 30 years, according to a computer scientist who said on Saturday that artificial intelligence’s threat to the economy should not be understated. 

Expert Moshe Vardi told the American Association for the Advancement of Science (AAAS): "We are approaching a time when machines will be able to outperform humans at almost any task. 

"I believe that society needs to confront this question before it is upon us: if machines are capable of doing almost any work humans can do, what will humans do?"

Given the article's salacious headline, one can well imagine what the humans would be doing. While half the humans are kept busy servicing the sex robots, economists will be fully employed reassuring the other half that supply creates its own demand, technology creates more jobs than it destroys and there is not a fixed amount of work to be done.

The amount of work to be done is admittedly not fixed but supply does not "create its own demand." Say's Law is neither Say's nor is it a law. Meanwhile, there is only so much cheap and cheerful energy to go around and a certain quantity of atmosphere to accumulate carbon dioxide in.

Fifteen years before Jean-Baptiste Say's birth, in Reflections on the Expediency of a Law for the Naturalization of Foreign Protestants, Josiah Tucker, Rector of St. Stephen's in Bristol and Chaplain to the Right Reverend the Lord Bishop of Bristol, asked:

Whether Sir Josiah Child did not call it a VULGAR ERROR to say, We have more Hands than we can employ? Whether he was a Judge of Trade? And Whether it is not an infallible Maxim, That one Man's Labour creates Employment for another?"

The relentless questioning of the "Important Queries occasioned by The Rejection of the late Naturalization Bill," in Tucker's Reflections, made the tract unusual but not unique in eighteenth century writings on political economy. In 1736, George Berkeley published the 895-question tract, The Querist. The significance of this interrogative genre was noted in an intriguing analysis by George Caffentzis, "Querying the Querist," in his Exciting the Industry of Mankind: George Berkeley’s Philosophy of Money.

Caffentzis points out that Berkeley was a master of elenchus, which he practiced daily. In a footnote, Caffentzis cites Peter Walmsley's discussion of elenchus in Berkeley's work. Walmsley offers the following explanation of the exercise:

For the ancients, elenchus was primarily an exercise for students in logic and definition. Its technique was developed in the teaching practices of Socrates and the sophists, and its rules were later laid down by Aristotle at the Academy. These are, briefly, as follows. One student, who accepts the role of answerer, states a thesis. Another then attempts to refute this thesis, not by direct argument or evidence, but by asking a series of simple questions. To each question the answerer may only reply 'yes' or 'no'. The questioner's aim is to force the answerer to contradict his initial statement. This idiosyncratic form of debate entails several constraints. The initial thesis must be of a form that permits analysis: a maxim or a definition rather than a plain statement of fact. … Similarly, the progress of elenctic dialogue depends on the answerer's ability to resist the temptation to qualify his answers. In the Protagoras, for example, Socrates strives in vain to convince the sophist that short answers are called for. Finally, it is essential to successful elenchus that the answerer speak his mind. Plato shows how the dispute can become mired when an evasive answerer, such as Euthydemus, pretends to hold ridiculous but consistent views, rather than admit self-contradiction. In the eyes of Plato and Aristotle such dishonest thinkers played not elenchus, but eristic, which term seemed to designate nothing but the disputants' failure to commit themselves to the pursuit of truth.

Is there a fixed Amount of Work to be done? Does Technology create more Jobs than it destroys? Does Supply create its own Demand? Is it not an infallible Maxim, That one Man's Labour creates Employment for another? The surprising answer to these questions -- or about them -- is that they are not stand-alone questions with stand-alone, indubitable answers. They function as elements in a sequence of questions, the purpose of which is to encourage the questioning of popular prejudices, not to impose the dogma of received wisdom.

The answers to the various questions are not uniformly positive or negative. Thus the phrasing, "is it not an infallible Maxim," can only be approached with suspicion.

The Political Economy of Oil (and Other Sectors of a Modern Economy, Considered Separately)

There has been a lot of talk recently about the impact of falling oil prices on global equity and bond markets.  One simple comparison can’t capture all that’s going on, but for starters here’s how the daily price of West Texas Intermediate stacks up with the S&P 500.  I’ve converted both to indexes of their initial values as of July 1, 2015.

Source: FRED

The first thing to notice is that oil prices are far more volatile than this specific equity index, but that’s not very enlightening, since oil is a single commodity while the S&P is a basket of 500 different items.  More interesting is whether they’re aligned in any way.  I don’t think formal tests will help much because equity prices are influenced by many factors that typically emerge and recede in importance over time.  A better way to consider it is to look at different historical episodes and ask whether they are consistent with a compact set of plausible stories.

Obviously there are periods when the two indices move together and periods when they come apart.  It is pertinent that two particular episodes of oil price distress, late August and late January, are associated with sharp equity downturns.  The period from November to January, however, saw oil prices slide while equities held their own.  Perhaps the rate of oil price decline is a factor: it has to be rapid enough to move equities.

Now the reason I mention all this is not because I want to improve anyone’s investment performance, but because it poses what I regard as one of the central questions in political economy, whether the “branches of capital” metaphor has lost most of its salience.  To put it in very simple terms, once upon a time it was common to think of capital as divided between various sectors: there was industrial or manufacturing capital (maybe divided between light and heavy industry or home market and exporters), financial sector capital, real estate capital and so on.  If you were interested in the relationship between capital and political processes, you thought in terms of the agency or structural influence of these various branches on political outcomes.  Whether a government took action that favored or undermined a particular sector depended on the power, potential and actualized, of that sector.  The data that political scientists use to assess the role of wealth (capital) in politics is largely organized on such a sectoral basis.

But what if the sector delineation is less important now than in the past?  For instance, what if the fortunes of non-oil sectors of capital (expected future profits) are tied more closely to the fortunes of the oil producers than in the past?  This would fundamentally alter how we think about the political economy of oil and have large implications for strategies to curtail the use of fossil fuels, for instance.

The short run relationship between oil prices and equities, even if we restrict it to episodes that support the “integration of the branches” hypothesis, is not very revealing.  It could be, for instance, that oil price movements are interpreted as coincident indicators of macroeconomic forces: falling oil prices mean falling incomes and demand in advance of the statistical reports that might validate these trends.  But it could also mean that, in a more financialized economy, there is more cross-dependence of the values of a range of financial instruments on one another: think of the large financial portfolios now held by nonfinancial corporations, greater diversification of portfolios in general, the integration associated with many types of derivatives, and the network effects of increased securitization (use of some financial instruments as collateral for others).

You could approach the same question from the starting point of politics.  When Clinton was elected in 1992 there was a big surge of public interest in and support for health insurance reform.  Remember Harris Wafford?  He was elected in a special senatorial election in Pennsylvania in 1991 in which his advocacy of public health insurance was the overriding issue.  The momentum seemed to be on the side of reform.

The political strategy of reformers was to isolate the health insurance companies.  Yes, they were rich and powerful, but surely their interests were in conflict with nearly every other branch of capital.  After all, most employers were suffering from the high cost of health care provided as a form of compensation to employees; surely they could be enlisted to neutralize or even overwhelm the bleatings of just one sector.  Based on this strategy there was a long period of negotiation over policy details to bring as many other branches of capital on board.  In the end, however, the strategy failed: no amount of policy tinkering could convince the rest of business to oppose the health insurers, and Harry and Louise were left without debating partners.

Nor was the situation very different in 2009 when Obama turned his attention to health care reform: the absence of a public option is directly due to the lack of any financial counterweight to the health insurance sector.  Safeguarding the profits of insurers was the price of getting a bill passed.

And now the issue of the day is climate change, and the sector under direct threat is fossil fuels.  Activists have largely converged on a strategy that is reminiscent of what was tried in health care in the early 90s: isolate the energy companies.  Only a small portion of capital is actually invested in oil, coal and natural gas; make this one sector the target and bring the rest of capital on board.  But this will work only if the branches-of-capital metaphor actually applies, and there is every reason to doubt that it does.  There was no great coalescence (pun intended) of non-carbon capital around climate legislation in 2009, nor should we count on it in the future.  My reading of the recent history of the European Trading System, moreover, is that energy-invested capital has not been isolated there either; this is ultimate reason why carbon prices collapsed into meaningless.

To sum up, the question of the extent to which the interests and power of capital are integrated and can’t be decomposed into particular branches is one of the central uncertainties in political economy, and the answer has great significance for political strategy on the ground.  I think some insight can be gained from more fine-grained analysis of co-movements across financial sectors, particularly in combination with event studies.  Carefully examined case studies might help as well.  At this point, what I most want to say is that there is lots of talk about political economy but hardly any research on the political economic problems that matter most for political action.

How Much Profit Should Vanguard Make on Managing Your Assets?

Justin Fox reports on a weird transfer pricing issue that I have been following:

Near the end of last month, mutual-fund giant Vanguard announced that it had lowered the expense ratios on 35 of its mutual funds. That’s after a December announcement that it had lowered expense ratios on 53 funds. All in all, Vanguard estimated, the changes resulted in an $87.4 million reduction in the fees paid by its customers. Isn’t that outrageous!?!?! I mean, seriously, how shameless can these guys get? That, in short, is the argument Vanguard tax lawyer turned whistle-blower David Danon and his hired expert, University of Michigan law professor Reuven S. Avi-Yonah, are making. Yes, there's a more complicated legal angle involving transfer pricing. More on that in a bit. But the underlying reasoning is simple: Vanguard is cheating state and federal tax authorities by charging its customers much less than other fund companies do.

We’ll return to the transfer pricing later as well. I’m not a tax lawyer so forgive me if I get this one wrong. Vanguard’s customers are also its shareholders. If they did raise the fee so as to make C corporate profits taxable at 35% - would not their rich customer/owners get a deduction off their taxable income which may now be at a rate of 39.6% (under Bernie make that 52%)? OK – let me turn to something I do get – transfer pricing:

Danon and Avi-Yonah argue that it is still required to charge “arm’s length” fees similar to what other management companies charge. At almost every mutual-fund group other than Vanguard, the management company is out to make a profit

I have a lot of respect for Avi-Yonah as a tax professor but when I read his report, I realized any competent economist for Vanguard could push back. And the reason is in that Morningstar report:

The asset-weighted expense ratio for passive funds was just 0.20% in 2014, compared with 0.79% for active funds.

Avi-Yonah’s analysis would take the overall average of 0.64% for the intercompany fee for Vanguard which is four times its costs. A profit to cost ratio of 300% sounds incredibly high. But Vanguard is a passive fund not an active fund. So wouldn’t the appropriate comparable fund analysis suggest a fee closer to 0.2% of assets under management so the profit to expense ratio would be around 25%? Justin Fox does a nice job of presenting whether or not the IRS could or even should pursue this. But if they did – one would hope their transfer pricing analysis would be a bit better developed.