Disney’s Transfer Pricing and the Destination Based Cash Flow Tax

Neil Irwin adequately addressed the trade policy debate over the Destination Based Cash Flow Tax (DBCFT) but his discussion of the transfer pricing angle leaves me cold:

Two prime examples are transferring intellectual property to overseas holding companies and engaging in corporate inversions that move a company’s legal headquarters to a country with lower taxes.

Corporation inversions do not impact transfer pricing as all they do is to allow a multinational to have a territorial system which many already effectively do. But I need to update my discussion to focus on intellectual property (IP) as this goes to the heart of my beef with what Auerbach has proposed. In my Trump Toaster Ovens example (Canadian production with U.S. distribution), I noted:

Total profits are $25 per oven with 80% going to the Canadian affiliate if the intercompany price is $100. US tax rates are now 35% and Canadian tax rates are close to 25% so with no repatriation tax involved (Canada is a territorial system), the effective tax rate is 27%. While currently Tiffany might want to raise the intercompany price – she knows the IRS could object. Of course Auerbach’s DBCFT would change her incentives as she might want to lower this price to only $80 to eliminate the Canadian income tax – assuming the Canadian Revenue Agency does not object. What’s going on here?

What’s going on per multinationals is that the U.S. becomes the tax haven per income taxation but also imposes sales taxes on imported goods. I know many U.S. centric transfer pricing types think all IP is created here but companies like the Japanese automobile manufacturers, Novartis, Adidas, Jimmy Choo, and Zara created IP abroad. DBCFT would be bad news for them as their IP faces sales taxes here as we consume their products but also face income taxes abroad. Let’s toss in Ikea even if Tim Worstall struggles to understand what an arm’s length royalty rate is. Of course we generate more IP income that most nations and DBCFT makes any IP income involved when foreigners consume our products tax free. Ricardo Hausmann and Federico Sturzenegger illustrated their “Dark Matter” idea with this:

Imagine the construction of EuroDisney at the cost of 100 million (the numbers are imaginary). Imagine also, for the sake of the argument that these resources were borrowed abroad at, say, a 5% rate of return. Once EuroDisney is in operation it yields 20 cents on the dollar. The investment generates a net income flow of 15 cents on the dollar but the BEA would say that the net foreign assets position would be equal to zero. We would say that EuroDisney in reality is not worth 100 million (what BEA would value it) but four times that (the capitalized value at our 5% rate of the 20 million per year that it earns). BEA is missing this and therefore grossly understates net assets. Why can EuroDisney earn such a return? Because the investment comes with a substantial amount of know-how, brand recognition, expertise, research and development and also with our good friends Mickey and Donald. This know-how is a source of dark matter.

In its latest fiscal year, Disney sourced over 94% of its worldwide income in the U.S. as its foreign affiliate pay the U.S. parent for the value of Mickey and Donald. While Starbucks has received some weird attention with respect to its transfer pricing, the 6% royalty rates paid by its foreign affiliate to the U.S. parent are consistent with what third parties pay and hence are arm’s length. In its latest fiscal year, over 84% of its worldwide income was sourced to the U.S. as a result. Both of these U.S. based multinationals are currently sourcing their IP income in the U.S. A switch to DBCFT would change that significantly reducing U.S. tax collections. Now you might ask what about those accused of Base Erosion and Profit Shifting such as Caterpillar? In her defense of their transfer pricing, Julie Lagacy noted that their Swiss affiliate paid the U.S. parent a 6% royalty rate for the use of Caterpillar’s technology but then other witnesses noted:

“I think the I.R.S. should have attacked this transaction on economic substance grounds,” said the other tax professor, Reuven S. Avi-Yonah, of the University of Michigan. To make the transaction bona fide, he said, the I.R.S. should have applied a 1986 law requiring the subsidiary to pay a “super-royalty” to its parent. That would have brought the profits back to the United States where Caterpillar’s higher rate, around 29 percent, would apply. Its negotiated rate in Switzerland was less than 6 percent. “There are all these opportunities that the I.R.S. had to go after this transaction, and unfortunately it didn’t,” he said.

The 29% percent effective tax rate was due to the fact that around 45% of Caterpillar’s income was U.S. sourced whereas only 30% of its sales were in the U.S. Again DBCFT would have meant even less U.S. taxes given the fact that a lot of the foreign generated IP income already was coming back to the U.S. This “super-royalty” would have the royalty rate raised from 6% to 9% as if the U.S. owned all worldwide intangibles, which strikes me as a very aggressive IRS view on this issue. In other words, one can make the case that the 6% royalty rate was arm’s length. If the IRS wants to disagree and pursue a transfer pricing challenge, then let it. But if we passed the DBCFT, then we would simply give up on taxing U.S. generated IP income when it is consumed abroad. This strikes me a very bad retreat from trying to enforce the transfer pricing rules.

Heterodox Session at ASSA: Marx, Rawls,Sraffa, and... Acemoglu

Yesterday morning I attended an URPE session at ASSA in Chicago titled,, "Marx, Rawls, and Sraffa, and the Limits of Mainstream Economics."  The Rawls person did not appear, but there was a paper on recent J.B. Clark award winners as reps of mainstream econ.  Lots of attention on Daron Acemoglu, with people arguing about whether what he is doing is good or not.  Wisecrack I heard was that "MIT economists are rediscovering insights of Marx, Kalecki, and Steindl, but not citing them."  This paper was presented by Robert Chenomas of U. of Manitoba.

The main debates came from presntations by Robin Hahnel and Michael Perelman.  The big whoop is that the archives of Piero Sraffa are now being made available.  This is engendering a massive search into his long secret writings with various proposed reinterpretations going on. A big issue is his relationship with Marx, with Hahnel claiming an FST vs an FMT, a Fundamental Sraffa Theorem vs a Fundamental Marx Theorem. The argument is that in a proper input-output Sraffa type system any commodity can be the "source of value," with the Marx argument being that it must be labor.  Well, all hell broke loose, and I shall not leak who was carrying on more than whom.

What is clear is that we are going to be hearing more  about this now that those long held archives have been opened.

Barkley Rosser

Ikea Transfer Pricing: The EU Green Party v. Tim Worstall

I may be late to the party but I started researching Ikea’s European transfer pricing after Ikea lost a Norwegian Supreme Court decision regarding intercompany interest deduction case. Tim Worstall attacked the EU Green Party for the Green Party’s claims that Ikea has been doing some old fashion income shifting. The title is a bit rough:

The Green Party Doesn't Grasp EU Tax Laws Concerning IKEA

Look – I’ll admit that the Green Party often says any transfer pricing that moves income from a high tax jurisdiction to a low tax jurisdiction is per se transfer pricing manipulation even before they have thought about what the appropriate transfer pricing should be. But as I recount Worstall’s account, it should be clear that he certainly is not proving that Ikea’s transfer pricing policies are consistent with the arm’s length standard:

Here's how bad their assumptions are. They're complaining about the non-taxation of royalties and interest flowing from one EU based company to another. And yet EU Single Market law specifically states that it is illegal for anyone to try to tax royalties and interest flowing from one EU company to another.

Worstall starts off by assuming that these intercompany payments are per se arm’s length, which is a bit premature. To be fair, Worstall does continue with this:

Here's the gist of the complaint. At the top of Ikea there're two tax free foundations. Tax free foundations do not, as the name implies, pay tax. One owns the operation of the stores and network, the other owns the trademark. The one that owns the trademark charges 3% to the other for the use. Those royalties flow around Europe and then into that tax free foundation. Much the same happens with interest payments on the fee that was paid to buy that trademark. And that's pretty much it, there's no more real complexity than this….Which is that we do have transfer pricing laws, laws to make sure that people don't just strip every amount of profit out of a country and stick it where there's no tax to pay. And those transfer pricing rules insist that inter-company transactions must be made at arms length prices. That is, related companies must charge each other an amount of money at least comparable to what they would charge an entirely independent company.

But there are two serious problems with this 3% trademark royalty. One is simply that the tax foundation was not likely the entity that created the trademark value in the first place. Did the tax foundation pay fair market value for any transferred intangibles? Worstall does not even address this. And how would one justify a 3% royalty rate as opposed to only 1%. Worstall’s defense is:

And 3% is actually fairly low by the standards of these things. Starbucks, an unrelated EU investigation found, charges itself 4% and this is considered just fine.

Actually Starbucks charges 3rd parties 6% royalty rates for its entire suit of intangible assets. To presume that this 3rd party royalty rate is a comparable for the Ikea name is beyond absurd. Here is a hint for multinationals that must defend their intercompany pricing – do not hire Worstall as this defense is beyond clueless. While Worstall does not address the intercompany interest rate issue, my understanding is that no one is questioning whether the interest rates are arm’s length but they are questioning whether another affiliate is actually receiving intercompany interest income. It is precisely this kind of debt versus equity hybrid mismatches that the OECD’s Action Plan 2 on Base Erosion and Profit Shifting addresses. May I suggest Mr. Worstall read this document before writing such an utterly embarrassing blog post. Update: While Worstall’s link to the EU report - this should work. Page 23 describes “the notional interest deduction in Belgium”:

Belgium belongs to the list of European countries having a strong tradition of treasury locations (together with Luxembourg, Ireland and Switzerland). The Notional Interest Deduction regime has been conceived as a replacement for the coordination centre measure, deemed illegal according to European competition law by the European Commission in 2003. This new measure, entered into force in 2007, allows Belgian subsidiaries of multinational companies to offset income derived from providing loans or services to affiliated companies around the world, while those affiliates can deduct the expense of these loans or services from their taxable income in their respective countries. This is a classic way for big companies to shift profits to low or no tax jurisdictions at minimal cost. And in cases where the source country imposes withholding tax on interest payments to Belgium, the Belgian entity can generally offset that expense with a foreign tax credit.

Page 21 notes how this works in Luxembourg:

PwC proposed, and Luxembourg accepted, an arrangement which guaranteed that an Inter IKEA Group subsidiary (now called Inter Finance SA) domiciled in Luxembourg would pay almost no tax on an estimated €6 billion in loans funded by subsidiaries in Curacao and Cyprus and funnelled to affiliates through a newly established Swiss branch of Inter Finance SA. In 2014, Inter Finance SA posted a profit of €13.6 million, and paid tax at an effective rate of just 2.4%, as compared with the Luxembourg statutory rate of 29.2%.

But enough about the intercompany loans – what about those trademark royalties? Table 3 on page 16 shows selected income statement information for a few European affiliates such as France. After paying its 3% intercompany royalty, the French profits were only 1.65% of sales. In other words, the trademark royalty captured almost 65% of consolidated profits in France. I’m sorry but that sounds a bit excessive to me.

Trump And The Wrigley Building

So, I am in Chicago for the ASSA/AEA meetings, which I missed last year because a year ago today I was having (successful) open heart surgery.  Anyway, on my way to get program and registration at the Hyatt Regency earlier this evening, I saw the iconic Wrigley Building, and then next to it a Trump hotel or whatever, with his name in seriously Yuge letters on it next door to the Wrigley building, and I mean like a couple of stories of the building worth of TRUMP.  Really, worse than you can imagine.

So, there is an irony here given all the controversies over possible Russian hacking of the US election to help Trump win (which ultimately in my view had to do with her multiple weaknesses as a candidate plus the Comey intervervention in the last two weeks). It is that the most of the largest buildings in Moscow are 7 so-called "Stalin Gothic" style, which include the Foreign Ministry building, but others of a variety of functions, including hotels and apartment builidings.  They have long provided the high points of the visual landscape of Moscow.

So, the big joke is that they are all modeled on Chicago's Wrigley building. They are all a bit bigger than it, but there is no question: it is their model.  As it is, this looks like some sort of ironic Gen-X fantasy, that the incoming president of the US, an apparent total pawn/sycophant of the current Russian leader, has a big building with his name big time emblazoned on it, right next door to the model for the dominant buildings in the capital city of the country whom he is  now widely viewed as falling all over himself to please.

Barkley Rosser 

Trump and the Chevy Cruze

Trump attacks GM:

President-elect Donald Trump on Tuesday attacked General Motors in a tweet, claiming the auto giant is making a Chevy Cruze model in Mexico and then sending them to U.S. dealers tax free. "General Motors is sending Mexican made model of Chevy Cruze to U.S. car dealers-tax free across border. Make in U.S.A.or pay big border tax!" Trump said on Twitter.

GM and Ford sell around $150 billion worth of cars per year to consumers around the world. Their production is also global. My understanding is that this Cruze was more of a hit among Asian consumers but yes a few are sold in the US. GM’s response?

GM later responded to Trump's tweet, saying it makes most of its Chevy Cruze models in the United States and sells only a "small number" of one model made in Mexico in the U.S. "General Motors manufactures the Chevrolet Cruze sedan in Lordstown, Ohio. All Chevrolet Cruze sedans sold in the U.S. are built in GM's assembly plant in Lordstown, Ohio. GM builds the Chevrolet Cruze hatchback for global markets in Mexico, with a small number sold in the U.S," the company said in a statement. GM told CNBC that it sold about 190,000 Cruzes in the U.S. in 2016. About 4,500 of those, or 2.4 percent, were hatchbacks made in Mexico.

Bloomberg BNA adds more context to this dust up:

General Motors CoBy Ben Brody and David Welch President-elect Donald Trump criticized General Motors Co. for building a version of the Chevrolet Cruze compact in Mexico, saying the largest U.S. automaker should build the car at home or face a hefty tariff. “General Motors is sending Mexican made model of Chevy Cruze to U.S. car dealers-tax free across border,” Trump tweeted Tuesday. “Make in U.S.A. or pay big border tax!” Every Cruze sedan is built in Ohio and most of GM’s Mexican-made hatchbacks are exported to global markets,said Tony Cervone, a company spokesman. He declined to comment on whether the company planned to talk to Trump. Trump’s tweet is the latest example of interventionist behavior toward U.S. companies that have included Boeing Co., Lockheed Martin Corp. and United Technologies Corp. His threats against Mexican-built vehicles have the potential to impact the nine global carmakers, including Toyota Motor Corp. and Nissan Motor Co.,that have announced more than $24 billion in Mexico investments since 2010. Volkswagen AG’s Audi, BMW AG and Daimler AG each build or plan to assemble luxury vehicles, engines or heavy trucks in the country. GM said in November it planned to cut a shift at its Cruze plant in Ohio and furlough 1,200 workers there due to weak demand for small cars.

Got that – Mexico makes for foreign markets and the US purchased cars are made here. Trump is an idiot.

Confirm Merrick Garland

The details are complicated, but there has been a meme batting about off and on that this Tuesday,  January 3, when the new Congress starts, there will be an odd moment when the Senate will have a majority of Democrats due to people leaving and arriving.  At that moment, apparenty, Vice President Biden as President of the Senate could make certain motions turning the chair over to the Dem Leader, who could then introduce the nomination of Merrick Garland for the Supreme Court, and they could just pass it. It may be that there is some flaw in this plan and that has been realized.  But if there is not and the only thing holding Biden and Schumer and other Senate Dems back  from doing this is  some sort of sense of propriety and not doing things unusual, I would say to  heck with that.  The Republicans have broken nearly every rule in the book, including their refusal the whole last year to consider Garland's nomination, which was already unprecedented and effectively breaking the rules.

So, given that this  may be the only and last chance to hold off Trump from giving control of SCOTUS to conservatives, and it would be morally justified in that Obama had his right to appoint his pick, I think they should do it if they can.  But I have heard nearly no talk in the last few days about this, which makes me suspect that either there is some flaw in the plan or that they are just plain too chicken to do it.  If the latter is the case, then no wonder the GOP is just taking over everything.  But, who knows, maybe they are plotting it and keeping that quiet and will  do it.  At least I can hope so  for the next two days or so.

Barkley Rosser

Trumpshit: Correcting The Definition

www.urbandictionary.com/define.php?term=trumpshitWell, folks, it turns out that I did not coin the term, "Trumpshit."  It has been in the Urban Dictionary since at least August 5, 2016 (h.t Lones Smith), and it even has a twitter account.. I guess I have been trumpshitted.

In fact, there are four definitions at Urban Dictionary, two nouns, one interjection, and one verb.  The first is simply a synonym of "bullshit."  The second is a systemic belief in something for which there is overwhelming evidence that it is not true (e.g. "fake news").  The interjection is simply obvious.  And it can be a verb. One can trumpshit or engage in "trumpshitting," such as "You've got to be Trumpshitting."  Which suggests a noun that is probably closest to my not very good attempted definition that made it into  a person, a Trumpshitter, one who hands out Trumpshit.

Barkley Rosser

T. Rex: Engineering Fantasy

Global warming? "It's an engineering problem, and it has engineering solutions."

According to Rex Tillerson, Donald Trump's choice for Secretary of State, adapting to climate change is an engineering problem that has an engineering solution. A soundbite from a Council on Foreign Relations presentation by Tillerson has been widely reported. But it is worthwhile to consider his full answer and its context.

Trumpshit: A Definition

Trumpshit: A Definition

A person is a piece of Trumpshit if they are a Trump supporter who aggressively spreads fake news in various media and especially on the internet in the course of attacking and criticizing other people.  Of course, there are some individuals who have been Trumpshit for quite a long time, well before Trump appeared to run for president, with Rush Limbaugh and Sean Hannity obvious examples.

I note that this very derogatory term may apply to people who are in many ways in their private lives estimable and admirable. They may love their families and be nice personally to those around them, as well as contributing positively to their communities through various civic activities, including official, religious, or informal.  Some of them may be simply ignorant suckers who have been led astray by the broader purveyors of fake news, but like those who are overly religiously enthusiastic think that they must "spread the good news" of the fake news they have come to believe to others, even people they do not know. 

The recent phenomenon of people who are friends of friends of friends on Facebook commenting on sites they are at best peripherally connected to has led to more of this as somebody nobody knows on a particular FB site will suddenly turn up denouncing people there in unpleasant terms while spewing all kinds of pro-Trump fake news.  This has gotten worse recently, and seems to be gaining as the Trumpshit are unhappy that he lost the popular vote and are trying to get those who did not vote for their hero to "get over it" and behave differently from how Republicans behaved after Obama won in 2008, although he won the popular vote solidly.  Even Putin has gotten into this game, another prime example of Trumpshit on a global level.

Oh, and as for those pieces of Trumpshit who are highly religious and doing this stuff, especially if you actually do know that you are spreading lies, you have a worse problem than others.  You are putting your immortal soul in danger.  So, being called "Trumpshit" is the least of your problems.  Really.

In the meantime, happy new year, everybody, and I shall be in Chicago for the ASSA/AEA meetings, so hope to see some of you there where we can commiserate and all that.

Barkley Rosser

Paul Krugman on Protectionism and Trade Balances: Wonkish and Wrong

Fighting off a Trump-induced melancholy, Krugman has posted a brief analysis of the expected effect of a potential across-the-board tariff.  After a few sensible observations about why a VAT is not protectionist, he continues with:

The starting point for a simple analysis of trade balances is the accounting identity, 

Current account + Capital account = 0 

where the current account is the trade balance broadly defined to include services and income from investments. The standard story then runs as follows: the capital account is determined by international differences in savings and investment opportunities, with capital inflows to countries that offer good returns. The real exchange rate then adjusts to ensure that the trade balance offsets these desired capital flows.

The rest of his argument can be distilled into these further claims:

1. The first-level effect is that, if the trade balance is fixed, a tariff will have to be offset by appreciation, restoring the pre-existing balance at a lower level of both imports and exports.

2. But reduced openness will make US financial assets less attractive, reducing net capital inflows.

3. This will put downward pressure on exchange rates, reducing the trade deficit and eventually moving the account into surplus.

4. But this would happen anyway without protectionism, since the attractiveness of a country’s capital assets depends on its expected future exports.  A trade deficit (insufficient export) requires an ever-weaker currency to attract investment (cheapening domestic assets), which sooner or later turns it into a surplus.

Says Paul, summing up: “.... trade deficits are always a temporary phenomenon, to be followed eventually by surpluses, and vice versa.”

5. The net effect of achieving the inevitable trade turnaround by protectionism rather than letting nature take its course is that it will require a greater depreciation to produce a given shift in flows under reduced openness.

Before jumping on this extraordinarily mistaken analysis, I should say in all fairness that PK himself is not to blame for it.  He is presenting in his usual limpid way the mainstream view of international macro, one you would find in almost any textbook.  He is transmitting error, not creating it.  Still, the error is there.

The starting point, as you would expect if you’ve read my previous posts (or my textbook, for that matter) is that the equation Krugman begins with is not an equation at all, but an identity.  It is not that some causal process (like exchange rate adjustment) makes the current account equal (with opposite signs) to the capital account; they are two ways of measuring the same thing.  Let’s put it in the terms Krugman does:

A trade deficit, assuming it is reflected as a current account deficit, is an inflow of savings.  If I buy a bottle of wine produced in the US, I spend a sum of money for it, and that same sum is received by other people in the US as income.  (I’m putting aside the possibility that some payments may leave the country, for instance if the winery is foreign-owned.)  Individually, I’m doing the spending and someone else is getting the revenue, but when you add it up at the national level, the expenditure from my purchase is exactly the same as the income from it.  Again, this is an identity, not an equality.  There is no process that causes one to equal the other; they are two different measures of the same transaction.

Now, suppose I go for a foreign wine instead.  Let’s say I buy it on a trip abroad, so I bypass domestic retailers.  Now an expenditure is recorded for “people in the US” but no corresponding income, just as income is recorded in the selling country but no corresponding expenditure.  There’s still an identity at the world level, but not nationally.  The immediate effect of my purchase in the US is that there has been an increase in spending without an increase in income: that is a reduction in savings, identically.  Abroad there is the opposite, an increase in savings, identically.  This is what the balance of payments identity, current account ≡ - capital account, is telling us.

What’s the point of harping on the identity?  First, an identity is instantaneous, true at each moment in time.  If A≡B it doesn’t mean that first A is what it is and then, some time later, B changes to match it.  Second, there is no process that causes B to equal A.  Processes could fail, after all, but identities can’t.  All the reasoning Krugman provides for how the current account should adjust to a balance on the capital account is not simply superfluous but wrong.  No process occurring over time can relate the two.

So to be specific:

Krugman’s premise is wrong.  The current account balance is not passively determined by the capital account balance, any more than vice versa.  They are two measures of the same thing.  The balance of payments position of a country is the outcome of all the forces acting on the choices people make that cause this balance to be what it is.  That includes micro-level decisions about what products, domestic or foreign, to purchase, portfolio decisions about which assets to hold, speculative pressures in foreign exchange markets—everything.  If I develop a taste for foreign wine, that has a tiny but nonzero effect on the US balance of payments, including the capital account position, just as if I become convinced that another country’s assets are a better investment than domestic ones.  Once you understand what an identity means you can’t claim one kind of factor is determinate at the BOP level, while the other is the outcome of some causal process resulting from the first.

Therefore claim (1) is false.  The trade balance is not fixed.  If protectionist policies (including likely responses by other countries) induce expenditure-shifting, that should influence the payments position.  Of course, insofar as protectionist measures may also alter desired international capital flows, the outcome may be difficult to predict in advance.

Claim (2), although Krugman doesn’t state it, is the result of a limit assumption.  Foreign capital inflows are attracted by the promise of repatriated earnings and capital gains.  A country with a current account deficit/capital account surplus cannot continue to sustain this position indefinitely; at some point depreciation must occur to reverse it, but expected future depreciation makes foreign earnings less attractive.  If you also assume rational expectations or its near-equivalent, the anticipation of BOP reversal moves its date forward to the near-present.  (The role of the limit assumption makes BOP reversal structurally the same as Ricardian Equivalence.)  Whether the global economy obeys limit-cycle dynamics in this fashion is really an empirical question, however.

Is it actually true that countries cycle back and forth between external surpluses and deficits?  The view of international political economy, which I share, is no.  There is tremendous serial correlation.  (Check it out.)  For extended periods of time, countries sort themselves into chronic surplus or deficit entities, characterized by various policies and institutions that are conducive to one or the other.  (In my macro book I loosely characterize three types of surplus countries—resource exporters, followers of the east Asian development model, and social democratic collective competitors—and four types of deficit countries—less dynamic developing countries, former members of the Soviet Bloc, English-speaking developed countries, and peripheral Europe.)  Incidentally, the factors that tend to consign countries to one side of the ledger or the other are both micro (“competitiveness”) and macro (mobilization of savings).

What enables countries to run external surpluses and deficits for extended periods of time?  We don’t have a clear answer, in my opinion.  First of all, we don’t have long enough time series to draw conclusions, given that the world economy is punctuated by cataclysms (wars) that cause immense discontinuities in capital stocks, financial obligations and trade flows.  There are also periodic crises at the national level that cause an economic reset.  Perhaps the eruption of crisis is the form that sustainability limits take in a world of limited foresight.

In any case, the textbook (wrong textbook) analysis Krugman applies to a possible Trump tariff tells us almost nothing about the effects such a policy would have on the economy.

Peak Robot: the Fragment on Machines

Martin Sklar's disaccumultion thesis is a restatement and reinterpretation of passages in Marx's Grundrisse that have come to be known as the "fragment on machines." Compare, for example, the following two key excerpts.

Marx:

...to the degree that large industry develops, the creation of real wealth comes to depend less on labour time and on the amount of labour employed than on the power of the agencies set in motion during labour time, whose ‘powerful effectiveness’ is itself in turn out of all proportion to the direct labour time spent on their production, but depends rather on the general state of science and on the progress of technology, or the application of this science to production. ... Labour no longer appears so much to be included within the production process; rather, the human being comes to relate more as watchman and regulator to the production process itself. (What holds for machinery holds likewise for the combination of human activities and the development of human intercourse.)

Sklar:

In consequence [of the passage from the accumulation phase of capitalism to the "disaccumlation" phase], and increasingly, human labor (i.e. the exercise of living labor-power) recedes from the condition of serving as a ‘factor’ of goods production, and by the same token, the mode of goods-production progressively undergoes reversion to a condition comparable to a gratuitous ‘force of nature’: energy, harnessed and directed through technically sophisticated machinery, produces goods, as trees produce fruit, without the involvement of, or need for, human labor-time in the immediate production process itself. Living labor-power in goods-production devolves upon the quantitatively declining role of watching, regulating, and superintending.

The main difference between the two arguments is that for Marx, the growing contradiction between the forces of production and the social relations produce "the material conditions to blow this foundation sky-high." For Sklar, with the benefit of another century of observation, disaccumulation appears as simply another phase in the evolution of capitalism -- albeit with revolutionary potential. But also with reactionary potential in that the reduced dependence on labor power also suggests a reduced vulnerability to the withholding of labor power.

The Accidental Conspiracy Theorist Redux

Kellyanne Conway, "The Microeconomic Effects of the Terrorist Attacks on September 11: Americans Helping Americans," 16 Notre Dame J.L. Ethics & Pub. Pol'y 101 (2002).

It took the slaughter of innocent people, the evisceration of the national economy, and the realization that all is not secure on the home front to reconnect with basics like faith and freedom, and to unify and marshal the public.  

A united and inspired America is no small feat. More than one year ago, the nation was deadlocked about a presidential contest "too close to call" that was not resolved some thirty-six days after Election Day.' For the third consecutive time, Americans elected a President with less than 50% of the popular vote.

Paging Paul Krugman...

Banana Republic and Auerbach’s Destination-Based Cash Flow Tax

I’m hoping Santa brings me a new winter coat but if he is comparison shopping between Old Navy and Banana Republic, note they are both owned by the GAP. Bruce Blonigen is right when he challenges this old canard:

Do large mergers benefit or harm consumers? Over the years, corporations and economists have argued that mergers benefit consumers by increasing efficiency, reducing production costs, and, in turn, lowering prices.

But the real reason I thought about shopping for apparel comes from CNBC:

It's a border-adjustment tax for goods that are imported. About 95 percent of clothing and shoes sold in the U.S. are manufactured overseas, which means imports make up a vast majority of many U.S. retailers' merchandise ... A retailer like the Gap buys a sweater from its overseas manufacturer for $80. Gap has an additional $15 in other expenses associated with that sweater (like transporting it). Gap sells the sweater to a shopper for $100. So tax is calculated by taking that $100 in revenue, subtracting the $80 cost of the good, subtracting the $15 other costs, leaving $5 in profit. If Gap pays a typical 35 percent tax rate on the $5 profit, its tax bill for that sweater is $1.75.

Hey, a $100 coat would be nice but I’ll question this example in a bit. The topic is the tax proposal from Alan Auerbach that I’ve been critiquing:

I think the real issue here is that this proposal smooshes together two very different ideas sort of like how shimmer was a floor wax and a dessert topping. Auerbach has been pushing a tax on economic profits instead of accounting profits for a long time. But typically profits taxes are sourced based not residence based. Now it is true that developing nations don’t like the idea of paying royalties to developed nations so they have favored residence based approaches but the OECD has favored sourced based approach to taxing income. Then again, a company like Apple neither declares its foreign based income in the US or in China but in places like Bermuda…we would repeal the corporate profits tax for multinationals but then give them a payroll subsidy. Whether this violates current WTO rules, it certainly is a distortion facing sourcing production in Detroit over Windsor. Maybe Trump might like this idea but this is precisely because he wants to use tax policy to shift production away from foreign sources and back to places like Michigan.

CNBC focus on the trade distortion. While Auerbach fires back with the notion that a dollar appreciation exactly offsets any trade distortion, CNBC’s discussion assumes a fixed exchange rate. The economists at Goldman Sachs take an intermediate view:

The “idealized version” is that standard proposition of the Mundell-Fleming model that trade protection under floating exchange rates would have no net effect on net exports. Of course the transfer pricing implications are a bonus for highly profitable US based multinationals who want to do massive income shifting and declare it all “perfectly legal”. This is a horrific idea which should not become law.

Let’s return to this transfer pricing in a bit but permit me to critique the CNBC example by noting what one would learn by looking at the financials for the GAP. Their operating profits are actually 15% of sales – not 5% - and their recorded operating expenses are 25% of sales not 15%. Cost of goods sold are only 60% of sales and that includes occupancy expenses, which are defined as:

Occupancy costs refer to expenditure required to occupy and maintain the physical space a business inhabits

Let’s assume that these represent 10% of sales. The cost to the GAP of that $100 coat I hope Santa gets me is only $50 – not $80. As Brad Setser thinks about the transfer pricing aspects of what may become Trump’s new tax and trade policy, he seems to be hoping Santa brings him a new iPhone:

The iPhone, famously, is designed in California and is assembled in China out of parts manufactured (mostly) in Asia .. No one questions that the iPhone is designed in the United States. And a lot of the software that makes an iPhone an iPhone is also created in the United States. And the export of intellectual property rights—the U.S. design and engineering embedded in a “designed in California” iPhone sold in Asia or Europe—should in theory enter into the balance of payments as a services export. I would think it should show up in the line item for the export of “charges for the use of intellectual property, computer software” though in practice it may enter as a payment for research and development services

Brad notes, however, that much of Apple’s profits end up offshore:

Apple here is really a metaphor. It is the most high profile case, but it is—judging from the size of reinvested earnings in the balance of payments and the cash balances various firms have built up abroad—far from unique. Certainly the profits that U.S. firms report in low-tax jurisdictions—Ireland, the Netherlands, Luxembourg, the Caribbean, Singapore—are now large relative to U.S. exports of software and research and development services.

Check out Brad’s comment section and they get into this Auerbach tax. I was wondering how much of GAP’s income is sourced offshore as apparel multinationals are notorious for such income shifting. It turns out, however, that GAP sources very little income offshore. So OK Santa – buy my coat there. Happy Holidays everyone!

PEAK ROBOT: Accumulation and its Dis-contents

Jared Bernstein is wrong. The "robots did it!" story DOES NOT require an acceleration in productivity growth, as conventionally measured. Dean Baker, who shares Jared's certainty about the relationship between robots and productivity measurement, is also wrong. Mike Beggs is wrong. James Livingston is wrong. And Larry Kudlow is wrong. Everyone is wrong!

Why are they all wrong? The answer is to be found in a portentous passage in an article by Martin J. Sklar, "On the Proletarian Revolution and the End of Political-Economic Society," published in 1969 in the SDS journal, Radical America:

In consequence [of the passage from the accumulation phase of capitalism to the "disaccumlation" phase], and increasingly, human labor (i.e. the exercise of living labor-power) recedes from the condition of serving as a ‘factor’ of goods production, and by the same token, the mode of goods-production progressively undergoes reversion to a condition comparable to a gratuitous ‘force of nature’: energy, harnessed and directed through technically sophisticated machinery, produces goods, as trees produce fruit, without the involvement of, or need for, human labor-time in the immediate production process itself. Living labor-power in goods-production devolves upon the quantitatively declining role of watching, regulating, and superintending.

Except, there is no "gratuitous" force of nature. Sklar's "gratuitous force of nature" did for his argument exactly what he criticized Herbert Marcuse of doing, naturalized the historical. Forces of nature were treated as gratuitous within a particular historical mode of production.

What does this have to do with Jared Bernstein -- or for that matter with Larry Kudlow? (Not to mention Mike Beggs, James Livingston and Dean Baker).

Let's start with Kudlow, an SDS activist at the University of Rochester in the late 1960s and favorite of Sklar, according to Livingston. For Kudlow, tax cuts function as a "gratuitous force of nature" -- or more precisely as the removal of fetters on a gratuitous entrepreneurial "energy" that will subsequently be "harnessed and directed through technically sophisticated machinery" etc. etc.

You can take the ex-SDS activist out of the Grundrisse but you can't take the Grundrisse out of the ex-activist. Or, to paraphrase Trotsky, Kudlow may have forgotten about disaccumulation but disaccumulation does not permit Kudlow to escape from its net.

So much for Kudlow, how does this criticism apply to Livingston, Beggs, Bernstein or Baker?

I'll take Livingston first, since his aversion to "full employment" is most compatible with my own view. Livingston advocates "detach[ing] the receipt of income from the production of goods." This is a sensible idea in that most income today is already detached from all but symbolic connection to the production of goods. Unlike Kudlow, Livingston explicitly ties this imperative to Sklar's disaccumulation thesis:

But the bottom line is this. Most jobs aren’t created by private, corporate investment, so raising taxes on corporate income won’t affect employment. You heard me right. Since the 1920s, economic growth has happened even though net private investment has atrophied.

Can you spot the gratuitous force of nature in Livingston's argument? "Since the 1920s, economic growth has happened even though..."

Mike Beggs takes issue with the sort of income detaching solution that Livingston advocates. Beggs challenges the underlying notion of technological unemployment with the age-old refrain that new jobs "always come along" to reabsorb the workers displaced by automation:

But the idea that machines are about to supplant workers is a trope as old as capitalism itself. It always looks plausible because so many particular tasks are always in the process of being automated, and new wonders are always just around the corner. And yet new jobs have always come along.

Beggs admits those new jobs are not always as remunerative as the old ones. "Almost all net job growth in the United States since 1990 has been in low-productivity growth sectors: construction, retail, hospitality, health care, education, government, and finance." For the last decade, you can leave out construction. Net job growth has been confined to "sectors with average hourly pay and weekly hours much lower than the economy-wide average."

"But," Beggs argues, "there is no technological reason that such jobs be low paid and insecure." To explain why not, Beggs digresses at length on the history of Milton Friedman's "natural rate of unemployment" and the "awful but more literal 'non-accelerating inflation rate of unemployment."

The upshot of all this is that liberal policies for full employment "are predicated on labor's weakness." The left "should be calling [the] liberals' bluff". Beggs doesn't specify exactly what full employment policies should be advocated by the left but he does cite Dean Baker's and Jared Bernstein's Getting Back to Full Employment.

Baker and Bernstein's prescriptions include improving the trade balance, public investment, public jobs and work sharing, all of which sound like good ideas. But here our old repressed nemesis, disaccumulation, returns in the form of denial that "robots and other new technologies will diminish the need for human labor in the years ahead." "History is littered with such predictions," B&B, recite, in a trope as old as capitalism itself, "and there are many aspects to today’s version that don’t hold up to scrutiny." Why doesn't today's version hold up to scrutiny? Because, they explain, job displacement by robots would "imply an acceleration of productivity growth in recent years, but that has not occurred." Is that so?

Let's go over that again because it is subtle. Beggs agrees with Baker and Bernstein that history is littered with the old trope about automation displacing workers. But Beggs's claim that net job growth since 1990 in the U.S. has been in low-productivity sectors contradicts Baker's and Bernstein's assertion that the displacement of workers  by automation would imply faster productivity growth economy wide. Why not faster productivity growth in sectors that are declining in relative importance being more than offset by the expansion of low-productivity sectors?

I would side with Beggs on that later point but argue further that this discrepancy between Beggs and Baker and Bernstein arises from a fundamental flaw in the claim that "new jobs have always come along." Where have those new jobs come along from? From the same place that "economic growth has happened even though." A gratuitous force of nature has produced new jobs and economic growth "as trees produce fruit."

Isn't it time that we gave a name to this allegedly gratuitous force of nature? In the late 17th century, that name was "African slaves." In the 19th century, it was "wage labor and coal." In the disaccumulation phase of capitalism, it is "fossil fuel."

A century and a half ago William Stanley Jevons linked the consumption of coal and the creation of jobs in a way that has been overlooked by most commentators on the infamous Jevons Paradox. "It is wholly a confusion of ideas," wrote Jevons in The Coal Question, "to suppose that the economical use of fuel is equivalent to a diminished consumption. The very contrary is the truth." He went on to explain:

As a rule, new modes of economy will lead to an increase of consumption according to a principle recognised in many parallel instances. The economy of labour effected by the introduction of new machinery throws labourers out of employment for the moment. But such is the increased demand for the cheapened products, that eventually the sphere of employment is greatly widened. Often the very labourers whose labour is saved find their more efficient labour more demanded than before.

The new jobs have come along from the increased demand for the more efficient labor, which has been brought about by the introduction of new machinery, which has increased, rather than diminished the consumption of fuel.This is fundamentally different from what I will call the naïve Jevons Paradox,  the idea that fuel efficiency per se leads inevitably and directly to an increase in the consumption of fuel.

That is the good news.

The bad news is that the same reservation applies to the naïve, policy-induced resurrections of "Say's Law" in both its demand-side and supply-side variants. Those panaceas perform either a tacit or an overt denial of climate change and resource limits.

This is admittedly unfair to those proponents of a "green new deal" with its emphasis on eco-technological modernization. They are not so much tacitly denying climate change and resource limits as "watching for the card so high and wild that they'll never need to deal another." Just because such a breakthrough is conceivable, doesn't make it imminent, though -- or, for that matter immanent.

In practice, job creation requires increased fuel consumption. Robots require a fuel source. An unplugged robot neither liberates nor displaces workers.

Yes, Virginia, there is no gratuitous force of nature.

Trump Goes To Hell On Nuclear Weapons Policy

OK, so maybe this is another thing we should ignore, but Trump coming out with his call for the US to increase its stockpile of nuclear weapons, as well as upgrading them, is seriously off the wall.  One reason I had no doubt about voting for Clinton, despite disliking both aspects of her positions and her personality, was his occasional wild remarks about nuclear weapons (e.g. "Why can't we just use them when we feel like it?" or something like that).  One would have hoped he would get past that after getting elected, but I see nothing good coming out of this at all, with not a nation on the planet supporting this, not even UK or Israel, and plenty disliking it and quite possibly setting off a new nuclear arms race, just what many past presidents have been carefully trying to undo.

Of course the Chinese will hate this, but an irony is that this might upend one of the few possible bright spots in foreign policy Trump has offered.  I have not been a fan of his ass kissing of Putin, but in fact I had begun to hope that maybe Putin might just behave better in some parts of the world, Baltics and Ukraine in particular, to please his new pet president.  But I seriously doubt that Vladdie is going to like this at all.  This particular honeymoon may be over before it even begins.  Time to bottle back up all that now drunk champagne in Moscow.

The only real question is if this is just Trump himself shooting off his mouth thoughtlessly yet again or whether this reflects advice from any of his new national security team.  Some of these people seem not entirely unreasonable, including the wildly named "Mad Dog" Mattis, incoming SecDef.  If indeed this is being pushed by an adviser, I suspect the conspiracy-minded NSC guy, Flynn.  If it is just Trump, however, maybe they can walk him back off this.

As it is, it  may be just as well that the late Tom Schelling did not liive to see this awfulness.

Addendum at 11:10 PM:  I have now learned that Putin put out an unpleasantly aggressive statement about enhancing the Russian nuclear weapons stockpile so  that it can penetrate various defenses in Europe shortly before Trump issued his tweet.  I am not sure if Trump's tweet was specifically a reply to that or not, but this does put a different spin on this, with it looking like the honeymoon was ended by Putin rather than Trump before Trump could even get in office.  Wow, what a sucker Trump was with all  that falling all over Putin, not to mention the reportedly 37% of Republicans who supposedly now think that Putin is just great since Trump has been saying so  many nice things about him.  Just gag all the way around.

Barkley Rosser