The Safeway Amendment Scam

L.V. Anderson has a must read on corporate wellness programs:

In 2009, Safeway CEO Steven A. Burd launched a public relations and political campaign claiming that his company had seen a stunning drop in health care costs after implementing a wellness program. In an opinion piece for the Wall Street Journal, Burd said that Safeway had begun testing employees’ tobacco usage, weight, blood pressure, and cholesterol levels in 2005 and tying financial incentives to their results. Burd called this program “completely voluntary” in the same paragraph that he explained individuals who didn’t pass these tests had to pay $780 more in annual premiums, or $1,560 more for family plans. This kind of doublespeak is par for the course in the world of corporate wellness, where avoiding a financial penalty is often framed as getting a discount. Simply by instituting wellness programs, Burd wrote, “we have kept our per capita health-care costs flat (that includes both the employee and the employer portion), while most American companies’ costs have increased 38% over the same four years.” As it turns out, almost none of Burd’s story was true. As the Washington Post’s David Hilzenrath discovered, Safeway implemented its wellness program in 2009, not 2005, and only about 14 percent of its workforce was even eligible to participate in it. Safeway did manage to keep its health care costs down—by raising deductibles in 2006, shifting more of the cost of health care onto employees.

She noted the history of how the Federal government addressed this issue over time:

Throughout the 1990s, federal regulations kept workplace wellness programs in check. Companies were allowed to offer modest financial incentives, but the rewards could be tied only to participation, not to outcomes. In other words, companies could offer workers cash or a discount on their insurance premiums for completing an HRA or a biometric screening, but they had to give all participants the same reward regardless of their health status. That changed during the George W. Bush administration. In December 2006, Bush’s regulators in the departments of Labor, Treasury, and Health and Human Services—the three agencies that regulate group health plans and enforce HIPAA—finalized a new ruleestablishing that companies could tie financial rewards to health outcomes. Not only that, they could increase the size of the financial rewards up to 20 percent of the total cost of the health plan. Put another way, this meant that companies could shift up to 20 percent of the total cost of premiums onto unhealthy employees. Business leaders had told administrators that they’d have “a greater opportunity to encourage healthy behaviors through programs of health promotion and disease prevention if they are allowed flexibility in designing such programs,” as Bush’s staff wrote in the rule.

She continues by noting how this Safeway scam conned the Obama Administration into putting the “Safeway Amendment” into ACA. But why bring this up now as aren’t we doing “Repeal and Replacement” whatever that means? Eric Levitz explains:

Now that it’s public knowledge that the story behind the Safeway Amendment was a lie — and that there is little science to support that lie’s broader premise — you might think that Congress would scrap the provision. If so, you don’t know Congress. Rather than roll back the Safeway Amendment, the House GOP is working to expand its reach ... It’s almost as though entities that define their own wellness by the size of their profit margins can’t be trusted to promote the “wellness” of the human beings that they view as labor costs.

Using disinformation to promote an agenda of shifting more costs onto workers to enhance profit margins. Isn’t this what Paul Ryan means by “A Better Way”?

Mussolini's Method Of Oratory

Does this sound familiar?

"He [Mussolini] paid little attention to the logic and truth of what he said as long as it was energetic and stirring. His gestures had rhythm and vigour.  He used short, staccato sentences, with no clear connection between them, often with long and dramatic pauses, sometimes changing voice and expression in a crescendo of violence and ending in a tornado of vituperations.  When his audience was carried away by his oratory he would sometimes stop and put to them a rhetorical question. They roared their answer.  This established a sort of heated dialogue, through which the spectators became involved in decisions they had no time to meditate on. Through incendiary eloquence, he rose..."

Luigi Barzini, The Italians, 1964, pp.135-136

Barkley Rosser

Searching For The Origins Of Fascism

Not too long ago I argued that Bonapartism in the nineteenth century was the predecessor of Mussolini fascism in the twentieth, the emphasis on a militaristic dictator emphasizing strong nationalism that smothers all groups into following the national leader.  However, it turns out that Napoleon Bonaparte had his own model.  When he invaded Russia he carried a book with him written in 1733 called Conjurat de Nicholas, dit de Rienzi, about Cola di Rienzo.

Cola di Rienzo seized power in Rome in 1347, declaring a revived Roman republic and attempted to conquer Italy and declared that he wished to conquer the whole world.  His rule did not last long and he fell from power after trying, but he took power under the first use of a red flag in political history, and he had a grandiose notion of himself, to put it mildly, giving himself the title "Nicholas, Severe and Merciful, Deliverer of Rome, Defender of Italy, Friend of Mankind, and of Liberty, Peace, and Justice, Tribune August.."  He was also the first person in history to write with a silver pen, with which signed official decrees.

The astute Luigi Barzini in The Italians (p. 117) claims that he was the pure Italian hero and describes him as having the following characteristics (one sentence):

"These are: literary, artistic, vague and contradictory ideas, practically unrelated to the contemporary world, the vast ambition to dominate all Italy, to re-establish the Empire, and, in the end the rest of Europ; the dream of building a 'new State,' inspired  by ancient history, in which peace, law and virtue would prevail; a genuine love for his people,his country, and their glorious past, a love so  intense it could be confused with self-love, as if he identified himself with Italy and the Italians; and the desire to  avenge his peoples' ruin and humiliation, which he attributed solely to the wickedness of others."

Addendum:  Wagner's obscure early opera, "Rienzi," is about this figure.  Wagner was Hitler's favorite composer.

 Further Addendum:  Two further points.  One is this matter of classical fascism tending to draw on both Left and Right politically, at least to obtain power, although then generally going Right.  Rienzo (or Rienzi) also had this, often labeled a "populiat," he opposed the aristocracy and the Church, much like the French Revolution and then Napoleon,  who drew off the FR.  Of course, Napoleon later declared himself Emperor, made peace with the Church, and handed out his own aristocratic titles.  Rienzi wanted to be emperor, but did not get that far.

The other is the matter of appealing ot ancient (or past) glory of the nation.  Like Rienzi, for Mussolini this was Ancient Rome,  and indeed the word "fascism" comes from the Latin "fasces," for a bundle of sticks held together by a rope, symbolizing the unity of the nation's people.

So, Rienzo/Rienzi tried to make Rome (and Italy) great again, as did Mussolini, and so with Napoleon and France, and others since elsewhere...

Barkley Rosser

International Womens' Day And The Russian February Revolution Centennial

It is now March 8, 2017, here in Italy where I currently am, so Happy International Womens' Day everybody!  I note that today is the centennial  of the beginning of the Russian February Revolution, so called because Russia was still on the Julian calendar back then, and the date was February 23, 1917, even though it was March 8 in the rest of the world on the Gregorian calendar, which they switched to a few years later.  This is not entirely a coincidence, and is deeply connected with why while the first "National Woman's Day" ever happened in the New York on February 28, 1909, it is not only not a holiday in the US, but is widely unknown even to many American women, even while  it is a national holiday in 26 nations around the world and has been internationally recognized since the mid-1970s by the United Nations (either 1975 or 1977, sources seem to disagree).

There are many conflicting stories and myths surrounding the origin of International Womens' Day, but it does seem that the first celebration was organized by the American Socialist Party and held in New York on Feb. 28, 1909, emphasizing both working womens' rights and the suffragette movement's  demand for women gaining the right to vote.  The most famous line from that first celebration was probably due to author Charlotte Gilman Perkins, speaking in Brooklyn, who declared that "...a woman's duty is to her home and...home includes the whole country."  The following year the idea was picked up and endorsed by the Socialist International meeting in Copenhagen under the name "Working Woman's Day," and then spread gradually throughout most of the world, initially in Europe. No specific date was set for it, and it would not be until 1945 that it became the plural form of "Womens' Day." In Germany in 1912, the slogan "Bread and Roses" was adopted.  In Russia the date for celebrating it was selected in 1913 to be the last Sunday in February, Julian calendar.

So it came to pass that the last Sunday in February in 1917 was on February 23, or March 8 in the Gregorian calendar. At that time a new food rationing system had been announced by the tsarist government as Russia's participation in World War I was going very badly, and the economy was in ruins.  On that Working Woman's Day, women protestors took to the streets banging pots and pans in protest of this new system and calling for "Bread and Peace," demanding an end to the food rationing, distribution of land, and an end to tsarism.  They went to factories where many male workers joined  them in the streets.  The protests grew and increased, and four days later troops ordered to fire on them refused to do so, always the sign that a revolution is at hand. Three days after that Tsar Nicholas II abdicated, and the Provisional Government took over led by Prince Georgi Lvov, backed by the Constitutional Democrats (CaDets) party.  His government would be replaced not long afterwards by one led by Socialist Revolutionary (SR) Aleksandr Kerensky.  This government made the mistake of continuing to fight the war, despite its growing unpopularity. John Quiggen pointed out in a column in yesterday's New York Times that Kerensky may have missed a chance to make a peace offer in July to Germany, when he was at the height of his power, but he continued the war effort.  This paved the way for Lenin and the Bolsheviks to stage their coup on Julian October 25 (the Great October Socialist Revolution as it was called during the Soviet period), or November 7, Gregorian calendar, overthrowing the Kerensky government.  The Bolsheviks held a Duma election in December, but when the SRs won it, they threw the result out and simply assumed power, not giving it up until the Soviet Union ceased to exist on Christmas Day, 1991.

As Quiggen notes, this sets up a great counterfactual "what if"? What if Kerensky had successfully made that peace offer and remained in power?  Aside from possibly preventing the rise of Stalin and Hitler and the occurrence of World War II and all its horrors and much else awful that happened.  Russia might have turned into a Nordic style social democracy.  Then again, maybe this was impossible due to its tangled history of authoritarian rule.  In any case, it did not happen, Russia became the USSR, and we got the twentieth century that we got.

Even though the Bolsheviks overthrew the government arising out of that first February Revolution, they did not repudiate that revolution, indeed honored it as the first step to their revolution, and as part of that made Woman's Working Day one of celebration, with it becoming an official national holiday in 1965, and today it is a national holiday in 26 nations, 12 of them former Soviet republics.  As it is, it largely became depoliticized, with it in Russia now functioning as a sort of substitute for Valentine's Day in western nations, with Russian men traditionally giving women flowers, preferably mimosas, and taking them out to dinner and giving them chocolates, and so on.  In other nations such as Italy, where it is widely celebrated (women will get into museums free today) but is not a full national holiday, women go out together to have a good time while the men stay home and take care of the kids or whatever, but also giving women mimosas (I do have not managed to get a definite explanation where the mimosa thing came in).  Different nations do different things on this day.

But in the US, its original home, it never really caught on.  Not only that, but due to its connection with socialism and then Soviet communism, it was actively suppressed during the 1950s Cold War period, which is why many people, including many women, are simply unaware of it in the US, even as it is celebrated in various ways in well over 100 nations around the world.

However, this may be changing, and it may be at least partly due to a partial re-politicizing of the day, with the womens' March in Washington after the Trump inauguration triggering a call for a womens' general strike today in the US.  I do not know how many will respond to that, but there has been more publicity about the day than in the past, so things are changing.  There has also been some return to focusing on poltiical issues elsewhere as well, with some marches in Italy protesting violence against women around the world.  The day is going back to its roots, even as those roots are part of why it was suppressed in the US for so long.

In any case, it is worth remembering indeed that the day is associated with the beginning of one of the world's most dramatic historical events one hundred years ago, when those women in Petrograd went out to call for bread and peace while pounding on their pots and pans.  They shook the world, and women can still shake the world.

Barkley Rosser

PS: Among the myths that I have heard is the claim that the original Woman's Day event in New York was organized by Clara Zetkin.  This is false. She was a German socialist and later communist who never set foot in the US.  Her connection with the day is that at the 1910 Socialist International meeting that endorsed it, she seconded the motion to do so, and later argued for its celebration prominently, being a friend of Rosa Luxemburg, and eventually became a famous figure in the communist world, fleeing to Moscow after Hitler came to power, with many streets in the former East  Germany named after her.

Tax Reform Japanese Style

Alan Auerbach and Michael Devereux are pushing their Destination Based Cash Flow Tax (DBCFT):

This reform should appeal broadly, to Democrats and Republicans alike. The border adjustments would strongly discourage the shifting of profits and activities offshore and eliminate incentives for corporate inversions.

As I noted over at Mark Thoma’s blog earlier this morning:

(1) it would make the US a tax haven as it effectively eliminates the corporate profits tax replacing it with a sales tax - a long time Republican goal. Shifting of profits would still occur but the transfer pricing manipulation games would be at the expense of Canada, Mexico, China, Japan, and Europe. (2) corporate inversions is a gigantic canard. The easy way to do this is to eliminate the repatriation tax (another GOP goal) and to beef up transfer pricing enforcement.

The proponents conceded my first point earlier this year:

the distinction between universal and unilateral adoption is important. With adoption by only a subset of countries, those not adopting are likely to find their profit shifting problems to be intensified: companies operating in high tax countries, for instance, which may seek to artificially over-price their imports, will face no countervailing tax when sourcing them by exporting from related companies in DBCFT countries.

The problem with DBCFT is that it would make us the tax haven while most of our trading partners continue to tax both corporate profits and have a VAT. This source compares corporate profit taxes internationally while this source shows that VAT rate for our European partners. Many European nations have VAT rates near 20% even as their profit tax rates are 20% or more. Japan is an interesting case as they went to a territorial system (ending the repatriation tax) a few years ago but they also are very diligent in enforcing transfer pricing. They also lowered their profits tax from just over 40% to just over 30% as they have been raising their VAT rate, which is scheduled to be 10% in a couple of years. The Senate Republicans seem confused if not nervous about Paul Ryan’s DBCFT ideas. Their preference is to simply lower the 35% U.S. tax rate to something akin to what we see in Europe and switch to a territorial system. If we decided to also vigorously enforce transfer pricing and also passed say a 10% VAT, then maybe all this controversy go away. In other words – let’s be Japanese.

Kevin Hassett v. Nate Silver on What Cause the Great Recession

A few years ago Nate Silver took on some nonsense written by Kevin Hassett:

It is no wonder that markets are imploding around us. Obama is giving us the War on Business. Imagine that some hypothetical enemy state spent years preparing a “Manchurian Candidate” to destroy the U.S. economy once elected. What policies might that leader pursue? He might discourage private capital from entering the financial sector by instructing his Treasury secretary to repeatedly promise a brilliant rescue plan, but never actually have one. Private firms, spooked by the thought of what government might do, would shy away from transactions altogether. If the secretary were smooth and played rope-a-dope long enough, the whole financial sector would be gone before voters could demand action.

Of course the Great Recession was imploding around us well before Obama was elected as President. Nate provides an alternative explanation:

Wall Street needs to get its house in order. A big reason for the financial crisis is because of market failures -- the country had to endure the weight of two consecutive bubbles, first in tech stocks and then in housing. Another big reason is because the Fed kept interest rates much lower than they ought to have been. There were a number of reasons for that, but the fact that the NASDAQ would pitch a fit anytime that Greenspan or Bernanke wouldn't meet their expectations on perpetually low interest rates was probably one of them. There appears to be no acknowledgment of any of this, no attempt whatsoever to come to grips with reality. Instead, all we get is denial and anger. Nobody is going on CBNC and saying: "You know what, our bad. We had a lot of good and honest disagreements with the Bush administration's policy. We have a lot of good and honest disagreements with the Obama administration's policy. There are a lot of things we couldn't have anticipated. We were trying the best we could. But we also gave you a lot of bad advice. And that advice cost you a lot of money. And for that, we're sorry." Why can't anyone on Wall Street man up and do that?

This sounds about right except for the complaint that the Federal Reserve kept interest rates “too low for too long” as former economist John B. Taylor keeps babbling about. But I have another problem with what Nate wrote as he stopped too soon with the nonsense in Hassett’s rant:

Another diabolical idea would be to significantly increase taxes on whatever firms are still standing. That would require subterfuge, since increasing tax rates would be too obvious. Our Manchurian Candidate would have plenty of sophisticated ideas on changing the rules to get more revenue without increasing rates, such as auctioning off “permits.”… First, one way the economy might finally take off is for some entrepreneur to invent an amazing new product that launches something on the scale of the dot-com boom. If you want to destroy an economy, you have to persuade those innovators not even to try. Second, you need to initiate entitlement programs that are difficult to change once enacted. These programs should transfer assets away from productive areas of the economy as efficiently as possible. Ideally, the government will have no choice but to increase taxes sharply in the future to pay for new entitlements. A leader who pulled off all that might be able to finish off the country…On the tax hike, Obama’s proposed 2010 budget quite ominously signaled that he intends to end or significantly amend the U.S. practice of allowing U.S. multinationals to defer U.S. taxes on income that they earn abroad. Currently, the U.S. has the second-highest corporate tax on Earth. U.S. firms can compete in Europe by opening a subsidiary in a low-tax country and locating the profits there. Since the high U.S. tax applies only when the money is mailed home, and firms can let the money sit abroad for as long as they want, the big disadvantage of the high rate is muted significantly. End that deferral opportunity and U.S. firms will no longer be able to compete, given their huge tax disadvantage. With foreign tax rates so low now, it is even possible that the end of deferral could lead to the extinction of the U.S. corporation. If any firms are to remain, they will be festooned with massive carbon-permit expenses because of Obama’s new cap-and- trade program.

Cap and trade is a bad idea? Even Greg Mankiw disagrees. Hassett also attacks Obamacare, which I guess is the reason Trump made his CEA chair. Of course the notion that Obama was proposing to massively increase taxes is what we know call “alternative facts”. It seems that Hassett’s real complaint was that we still have a repatriation tax and that we do not make it easier for multinationals to shift profits to tax havens.

Destination Based Cash Flow Tax and Supply-Side Silliness

Phillip Swagel comes out for this proposed change in the tax code:

The current corporate tax system, in contrast, typically means a lower tax rate for firms that produce overseas and import into the United States. U.S. firms that move production overseas do better than American companies that produce here because they get to put off paying taxes on the profits they make by producing in other countries.

But of course as we rely more on income taxes whereas European governments use a combination of VAT taxes and income taxes. But I interrupted Swagel as he got into “incentives”:

It is disappointing that companies move jobs and production lines overseas, but the backward incentives in the U.S. tax system make this no surprise. The Brady-Ryan tax plan will flip the situation. The proposal includes lower tax rates, strengthening U.S. job creation and economic growth, while giving both businesses and American families a simpler tax system.

Does Swagel seriously think that decisions where to produce goods depends solely on taxation? Try differences in unit labor costs. As I said – supply-side silliness. Up next is silliness about transfer pricing issues:

The border adjustment in the proposal addresses the vexing aspects of the U.S. tax code that today lead firms to shift their profits or invert their corporate structure to move their headquarters outside the United States.

Oh good grief! Where the corporate structure puts "headquarters" (basically the CFO and his tax minions) has nothing to do with the allocation of a multinationals profits. Yes – it ends the repatriation tax which could be more simply done without the Brady-Ryan proposal. But yea if you make the U.S. a tax haven, multinationals will have incentives to shift profits into our tax haven and not out of it. This will create a massive new wave of transfer pricing manipulation and international tax controversy. But Swagel continues with his silliness:

The border adjustment means that all products sold in the United States will face the same tax, regardless of where the item is made, and U.S. firms selling overseas will not face higher taxes than their foreign competitors. The incentives that lead firms to shift production to low-wage countries or to use accounting wizardry to shift profits to low-tax countries like Ireland will disappear. Decisions about where to invest and hire will be made on business considerations rather than driven by the tax code.

This is so manifestly not right that even Alan Auerbach has conceded the point. I guess this is why Swagel’s silly defense had to appear on CNBC.

Kevin 36000 Hassett to Head the CEA

Greg Mankiw congratulates Kevin Hassett for being named the head of the Council of Economic Advisers. He reminds of his review of DOW 36000:

But should one be as confident as Glassman and Hassett that the process will continue until the risk premium shrinks to zero and the Dow reaches 36,000? I don't think so. It is easy to imagine that some short-term event might shake investor confidence in the long-term stability of the market and push the equity risk premium back up. In fact, a stock market crash might be precisely such a self-fulfilling event. My own guess is that while investors are now satisfied with a smaller equity risk premium than they have had in the past, the risk premium will never fall all the way to zero.

That was his only problem with the argument? The model they used posited value as the ratio of dividends relative to the difference between the cost of capital and the long-term growth rate but Glassman-Hassett pretended profits equal dividends ignoring the fact that growth requires investment in new capital. Brad DeLong is happy to mock the past mistakes of our new CEA chair:

Glassman and Hassett get the math of the Gordon equation for valuing the stock market simply wrong. It's not the earnings yield that shows up in the numerator, it's the dividend yield. The book should have been called Dow 22000. Glassman and Hassett get the math of the equity premium wrong. The weighted average of the returns on bonds and stocks is the return on capital. The equity premium is a wedge between the rate of return on stocks and the rate of return on bonds. If the equity premium falls, the rate of return on stocks falls and the rate of return on bonds rises. Hassett calculated the effect of a fall in the equity premium by fixing the rate of return on bonds. The book should have been called Dow 15000. Glassman and Hassett could make the argument that the equity premium ought to go away, and someday might go away, but that is not the argument they make. The argument they make--back in the late 1990s--is that the equity premium will go away in the next three to five years

Yes – Glassman-Hassett got the math of the Gordon equation terribly wrong. Let’s pose a really simple model based on an all equity financed company so the return on assets equals the return on assets. Of course the expected return on assets is generally lower than the return on equity. As a lot of folks were saying the expected return to equity exceeded the risk-free by near 6% back then, let’s delever that risk premium to say 4% currently. Let’s also assume a risk-free rate equal to 3% and a growth rate equal to 2%. Now a pure IP company or a pure franchiser might not require tangible assets so profits equal cash flows, most companies do require tangible assets. Imagine for simplicity a company with $100 million in tangible assets that generates $10 million in expected profits – that is a return to tangible assets equal to 10 percent. What would its price/earnings (P/E) ratio be? If the risk premium is 4% so the cost of capital is 7%, P/E would be 16. Now if Glassman-Hassett were right that the risk premium suddenly fell to zero, P/E would be 80 not 100 as they argued. Even under Mankiw’s suggestion that the risk premium might fall to say 2%, our model suggests P/E would be less than 27. Daniel Gros has more on Hassett:

Hassett’s celebrity rests on being the less flamboyant half of the duo that penned Dow 36,000 one of the most wrong books ever published on investing and the markets.

It was wrong not just because it assumed a zero risk premium. It was wrong as it fundamentally did not under the basic finance of the Gordon equation it purported to use.

Why Facts Don't Change Our Minds

Read this.

As everyone who’s followed the research—or even occasionally picked up a copy of Psychology Today—knows, any graduate student with a clipboard can demonstrate that reasonable-seeming people are often totally irrational. Rarely has this insight seemed more relevant than it does right now. Still, an essential puzzle remains: How did we come to be this way?

Dean Baker is Clueless On Productivity Growth

Dean Baker's screed, Bill Gates Is Clueless On The Economy, keeps getting recycled, from Beat the Press to Truthout to Real-World Economics Review to The Huffington Post. Dean waves aside the real problem with Gates's suggestion, which is the difficulty of defining what a robot is, and focuses instead on what seems to him to be the knock-down argument:

Gates is worried that productivity growth is moving along too rapidly and that it will lead to large scale unemployment. 

There are two problems with this story: First productivity growth has actually been very slow in recent years. The second problem is that if it were faster, there is no reason it should lead to mass unemployment.

There are two HUGE problem with Dean's story. First, aggregate productivity growth is a "statistical flimflam," according to Harry Magdoff, who pioneered productivity measurement in the 1930s. In the 1980s, Magdoff co-authored a Monthly Review article with Paul Sweezy, "The Uses and Abuses of Measuring Productivity," detailing the methodological problems of aggregate productivity measurement. After discussing "phantom statistics" in the reporting of construction industry productivity, and the technical problems of aggregating productivity statistics, Magdoff and Sweezy explained why "there is no such thing... as a 'true' measure of productivity":

One reason for including this somewhat technical discussion is to drive home the point that there is no such thing as straightforward or "true" measure of productivity. And if this is so even in the realm of commodities where a reasonable, limited, meaning can be given to the concept, what can said about the productivity of service workers? There are of course service jobs that consist of routine, repetitive operations -- e.g., in typing pools -- where productivity measures may have some meaning. But how would one go about measuring the productivity of a fireman, an undertaker, a teacher, a nurse, a cashier in a supermarket, a short-order cook, a waiter, a receptionist in a lawyer's office? It is in the very nature of the case that in most services qualitative changes are intertwined with quantitative changes; hence there is no continuity in the "output" from one period to another with which changes in employment can be compared. Moreover, it is typical of many of the service areas that the "output" cannot be separated from the labor engaged in the performance of the service; for that reason too there is no sensible way of comparing changes in output and labor. In other words, the notion of a productivity measure for most service occupations is nonsensical and self-contradictory.  

Unfortunately, such considerations of elementary logic have not prevented statisticians and economists from producing a whole array of productivity measures, applicable not only to the private economy (combining commodity-production and services) but in some cases to government as well, useful for ideological and policy-making purposes. And by dint of endless repetition and selective emphasis, these statistical phantoms (to use Business Week's apt expression) have attained the status of indisputable facts and have entered into the realm of scientific discourse. What is in reality nothing but a crude fetish has thus become one of the most potent weapons in capital's struggle against labor and in support of an increasingly irrational and destructive social system. 

Fred Block and Gene Burns took up the critique of productivity statistics six years later in "Productivity as a Social Problem: The Uses and Misuses of Social Indicators." Their analysis specifically addressed the second problem with Dean's story, his contention that productivity growth is totally benign:

In short, there is no reason that productivity growth should ever be viewed as the enemy of workers. We just need the right set of policies to ensure that they share in the gains.

Leaving aside the benefits and risks of technological advances themselves, Block and Burns chronicled how the concept of productivity growth -- and its faux measurement -- has been used as a political weapon against workers, unions and collective bargaining. The use of productivity data had initially gained prestige for its role in providing a "rational and objective" basis for wage negotiations, but in the late 1970s, business and political leaders,

...seized on declining rates of productivity growth as proof of the need for national policies to restrain wages and limit the growth of state spending. The decline of productivity growth was attributed to inadequate levels of investment and it was argued that only measures that increased the flow of resources to business and the rich could possibly facilitate adequate levels of new investment. It was simultaneously argued that excessive government regulation was also responsible for the slowing of productivity growth leading to stronger demands for deregulation of the business community. The culmination of these efforts was the Reagan Administration's dramatic reversals of long standing tax and regulatory policies which were justified as providing solutions to the productivity crisis. 

While the productivity concept had initially been elaborated by the WPA's National Research Project to provide justification for more generous wage settlements and government public works programs, by the late 1970s, it provided a critical justification for getting tough with labor and for dismantling key parts of the American welfare state. The process of institutionalization had resulted in a reversal of the political implications of this particular indicator.

In short, flimflam productivity measures were used by the enemies of workers to justify enacting a set of policies that ensured that workers wouldn't share in the gains of technological advance.

Gates & Reuther v. Baker & Bernstein on Robot Productivity

In a comment on Nineteen Ninety-Six: The Robot/Productivity Paradox, Jeff points out a much simpler rebuttal to Dean Baker's and Jared Bernstein's uncritical reliance on the decline of measured "productivity growth":

Let's use a pizza shop as an example. If the owner spends capital money and makes the line more efficient so that they can make twice as many pizzas per hour at peak, then physical productivity has improved. If the dining room sits empty because the tax burden was shifted from the wealthy to the poor, then the restaurant's BLS productivity has decreased. BLS productivity and physical productivity are simply unrelated in a right-wing country like the U.S.

Jeff's point brings to mind Walter Reuther's 1955 testimony before the Joint Congressional Subcommittee Hearings on Automation and Technological Change:

Every tool on every operation has a green light, a yellow light, and a red light; and when all the green lights are on, it means that all the tools at each work station are operating up to standard. When a yellow light comes on, on tool No. 38, it means that the tool is still performing, but the tool is becoming fatigued and that is a warning sign, so that the operator sitting there looking at these panels will know that he has to get a replacement tool for tool No. 38. He stands by at that position on the automated machine, and at the point the red light would kick on, on the board, he walks over — the machine automatically stops — he puts the new tool in the place of the tool that is worn out, and automatically the green light comes on and the machine goes on.  

When I went through this plant the first time I was told by a top official of the Ford Motor Co.: 'Mr. Reuther, you are going to have trouble collecting union dues from all of these machines.' 

And I said: 'You know that is not bothering me. What is bothering me is that you are going to have more trouble selling them automobiles.' That is the real significance. We have mastered the know-how of mass production, and what we need to do is to develop comparable distribution know-how so that we will have markets for the tremendous volume of production that automation now makes possible.

BMW Transfer Pricing and Trump Trade Accounting

The Tax Justice Blog features a critique of the Destination Based Cash Flow Tax (DBCFT) by the Institute on Taxation and Economic Policy (ITEP):

the border adjustment likely would make the corporate income tax substantially more regressive ... One of the major arguments that proponents of the border adjustment tax make is that it would stop corporate tax avoidance. It is certainly true that the border adjustment would remove companies’ incentive to use certain existing loopholes in our current system, but it would create numerous new opportunities for tax avoidance through the shifting around of sales. For example, Microsoft could avoid the tax by selling its software to consumers in the United States directly from servers in Ireland or another tax haven. At this point there is no reason to believe that following a tumultuous transition to a border adjusted tax that our tax system would end up less prone to tax avoidance than our current system.

The list of people realizing that will create new opportunities to game transfer pricing is growing. Permit me to address a somewhat related transfer pricing issue with respect to the proposed Trump Trade Accounting idea:

Let’s take an example based on Ford selling its cars to Canadian customers and having them manufactured in Mexico. Suppose Ford Canada sold a car for $20,000 that cost Ford Mexico $16,000 to produce and cost Ford Canada $2000 to distribute. Ford worldwide made $2000 in profits off of that car. The balance of trade statistics currently would take Ford’s transfer pricing as given so let’s speculate on how this might work. Suppose Ford US paid Ford Mexico cost plus 5% or $16,800 but then charged Ford Canada $17,600 on the premise that the Canadian distributor deserved a 12% gross margin as its operating expenses were 10% of sales. Ford US would retain $800 per car in profits for effectively doing nothing. Of course Ford might argue that this represents the value of Ford’s intangibles. I can see the tax authorities of Canada and Mexico disagreeing on this allocation of income. My simple point, however, is that current balance of trade accounting relies on the intercompany pricing of multinationals which at times can be suspect.

Dean Baker prefers to talk about BMWs:

The classic example would be if we offloaded 100 BMWs on a ship in New York and then 20 were immediately sent up to Canada to be sold there. The way we currently count exports and imports, we would count the 20 BMWs as exports to Canada and also as imports from Germany. These re-exports have zero impact on our aggregate trade balance, but they do exaggerate out exports to Canada and our imports from Germany.

I’m not sure why this is the “classic” example but I suspect there is a very different supply chain envisioned in this BMW example versus my example. I will admit that automobile multinationals would prefer not to have taxable income in the U.S. but they are also aware that the IRS and other tax authorities in places like Canada, Germany, Japan, and Mexico have extensive knowledge of the transfer pricing aspects for their sector. While Ford might want Ford Canada to pay only $16,800 as income tax rates in Canada are lower than they are in the U.S. currently, Ford has to let this $800 remain in the U.S. if that represents the value of the Ford intangible assets owned in the U.S. So the Trump proposal would have something other than a “zero impact” in my example. So what is Dean’s example about? Let’s assume that these BMWs are sold in Canada and the U.S for $30,000 (all figures U.S. dollars), cost Germany $21,000 to design and manufacture, and incur $4500 in local selling and marketing costs. Consolidated profits are therefore $4500 per car. Through negotiations with the IRS, the Canadian tax authorities, and the German tax authorities, the U.S. and Canadian distribution affiliates will receive a 20 percent gross margin – that is Germany receives $24,000 per car which leaves them with $3000 in profits and $1500 in profits for the local distribution affiliate. Now if a ship landed in New York with 100 BMWs where 20 of them would be re-rerouted to Canada, then Dean is likely right – BMW Canada will pay $24,000 per car. But would this have to be first invoiced to BMW U.S. as he assumes? Not necessarily as doing so could cause all sorts of confusion for our customs agents. But let’s grant Dean this narrow example under the current tax law. But what would likely happen under DBCFT? Karl Keller, George Korenko, and Lori Hellkamp note:

rather than eliminating transfer pricing, the border adjustments will likely shift its focus, incentivizing multinationals to minimize the cost of imports by U.S. affiliates (because such costs would no longer be deductible expenses) and maximize U.S. affiliates’ revenue from exports (because such income would escape U.S. taxation and possibly even result in tax rebates)

They and ITEP talk about multinationals altering their supply sides. In our BMW example, imagine if BMW US took over the selling and marketing efforts in Canada eliminating BMW Canada as the U.S. has become an effective tax haven. In this case, they would import the 20 BMWs for $24,000 per car and export them for $30,000. Now you might say this is not the current U.S. tax system which is true. But consider nations like Hong Kong, Ireland, and Switzerland that are tax havens. This kind of transfer pricing activity is widespread and the implications for balance of trade accounting is considerable.

The "Cutz & Putz" Bezzle, Graphed by FRED

anne at Economist's View has retrieved a FRED graph that perfectly illustrates the divergence, since the mid-1990s of net worth from GDP:

The empty spaces between the red line and the blue line that open up after around 1995 is what John Kenneth Galbraith called "the bezzle" -- summarized by John Kay as "that increment to wealth that occurs during the magic interval when a confidence trickster knows he has the money he has appropriated but the victim does not yet understand that he has lost it."

In Chapter 8 of The Great Crash, 1929, Galbraith wrote:

"In many ways the effect of the crash on embezzlement was more significant than on suicide. To the economist embezzlement is the most interesting of crimes. Alone among the various forms of larceny it has a time parameter. Weeks, months or years may elapse between the commission of the crime and its discovery. (This is a period, incidentally, when the embezzler has his gain and the man who has been embezzled, oddly enough, feels no loss. There is a net increase in psychic wealth.) At any given time there exists an inventory of undiscovered embezzlement in – or more precisely not in – the country’s business and banks. This inventory – it should perhaps be called the bezzle – amounts at any moment to many millions of dollars. It also varies in size with the business cycle. In good times people are relaxed, trusting, and money is plentiful. But even though money is plentiful, there are always many people who need more. Under these circumstances the rate of embezzlement grows, the rate of discovery falls off, and the bezzle increases rapidly. In depression all this is reversed. Money is watched with a narrow, suspicious eye. The man who handles it is assumed to be dishonest until he proves himself otherwise. Audits are penetrating and meticulous. Commercial morality is enormously improved. The bezzle shrinks."

In the present case, the bezzle has resulted from an economic policy two step: tax cuts and Greenspan puts: cuts and puts.

Ponzilocks and the Twenty-Four Trillion Dollar Question

Twenty-three and a half trillion, actually. But what's a few hundred billion? Here today, gone tomorrow, as they say.

At the beginning of 2007, net worth of households and non-profit organizations exceeded its 1947-1996 historical average, relative to GDP, by some $16 trillion. It took 24 months to wipe out eighty percent, or $13 trillion, of that colossal but ephemeral slush fund. In mid-2016, net worth stood at a multiple of 4.83 times GDP, compared with the multiple of 4.72 on the eve of the Great Unworthing.

When I look at the ragged end of the chart I posted yesterday, it screams "Ponzi!" "Ponzi!" "Ponz..."

To make a long story short, let's think of wealth as capital. The value of capital is determined by the present value of an expected future income stream. The value of capital fluctuates with changing expectations but when the nominal value of capital diverges persistently and significantly from net revenues, something's got to give. Either economic growth is going to suddenly gush forth "like nobody has ever seen before" or net worth is going to have to come back down to earth.

Somewhere between 20 and 30 TRILLION dollars of net worth will evaporate within the span of perhaps two years.

When will that happen? Who knows? There is one notable regularity in the data, though -- the one that screams "Ponzi!"

When the net worth bubble stops going up...

...it goes down.

My New Running Shoes and the Auerbach Tax

I’m in the market for a new pair of running shoes and am considering the latest from both Adidas and Nike. I will use my next shopping trip to explain the transfer pricing aspects of a devastating critique of the Destination Based Cash Flow Tax (DBCFT) from Karl Keller, George Korenko, and Lori Hellkamp (KKH):

Like others who have addressed the DBCFT in general, and border adjustments in particular, we have to make certain assumptions about how the border adjustments would work because the details in the proposal are so scant. Indeed, the description of the DBCFT occupies less than two pages of the proposal, and only a few sentences describe the border adjustments ... Likewise, rather than eliminating transfer pricing, the border adjustments will likely shift its focus, incentivizing multinationals to minimize the cost of imports by U.S. affiliates (because such costs would no longer be deductible expenses) and maximize U.S. affiliates’ revenue from exports (because such income would escape U.S. taxation and possibly even result in tax rebates) ... Consider an example to illustrate this point: A U.S. distributor acquires a product from a foreign manufacturer (FM) for $100 and resells it to U.S. customers for $160. (For purposes of this and the next example, we disregard currency adjustments in the figures, as the principle remains the same and, as seen above, perfect and immediate currency adjustments offering universal relief are unlikely.) The U.S. distributor can’t deduct the $100 paid to FM, meaning the distributor has taxable income of $160, with tax of $32 (at the proposed 20 percent rate). Without the border adjustment (and assuming the same 20 percent rate), the distributor’s tax would be only $12. Inevitably the U.S. distributor will try to push at least some of the economic burden of this additional tax cost onto FM.

Both Adidas and Nike are selling my perfect pair of shoes for $160. Each pay $80 per pair (50% of sales) for the design as well as the cost of hiring a Chinese manufacturer. Each incurs $48 per pair (30% of sales) for local sales and marketing expenses. Profits are $32 per pair or 20% of sales, which is divided between the parent corporation and the local distributor depending on the transfer pricing policy. Adidas Germany has established a U.S. distributor – Adidas America – to incur the sales and marketing expenses and in the KKH example, receives a 37.5% gross margin which equates to a 7.5% operating margin or $12 in U.S. profits on my pair of shoes. At a 35% U.S. tax rate, U.S. profits taxes are $4.20. Since the German profits tax rate is only 30%, the CFO of Adidas once wondered why they don’t raise the intercompany price from $100 to $110 but his tax director told him that the IRS team is insisting on their 7.5% operating margin. If DBCFT is adopted, the incentives change as a lower transfer price would eliminate German profits but not change the U.S. tax bill. This was the point of my Trump Toaster Oven example. So yea – transfer pricing manipulation could still exist but now this becomes a German problem. I suspect the German authorities might object if the intercompany price was reduced to $80. But at least the U.S. gets its $22.40 in sales tax – right? That might be true under a retail sales tax arrangement but not necessarily under a VAT. KKH also note that Adidas might scheme DBCFT by asking me to buy my shoes via the internet:

If, instead, FM, which otherwise has no nexus with the U.S., sells directly to the U.S. consumer for $160, it bears no U.S. tax. Without the imposition of a standalone import tax, FM can increase its profit—and even undercut the retail price relative to what U.S. distributors must now charge, while still making a higher profit. In short order, virtually all sales of foreign goods into the U.S. would be made direct to the end consumer, cutting out the tax-costly U.S. middleman.

Nike might look at this scheme and lament that the otherwise conservative folks at Adidas had outdone them in terms of transfer pricing aggression. Nike is known for sourcing some of its foreign based profits in Bermuda but credit the IRS on currently insisting that Nike pay the U.S. some of the intangible profits. DBCFT, however, would give Nike a huge tax break on its foreign sourced income. But Nike also realizes that half of its approximately $30 billion in sales per year are to U.S. customers like me. KKH note that Nike could pull the same trick:

Taking this example one step further, a U.S. seller into the domestic market will also have a strong incentive to adopt this same strategy. Assume a U.S. manufacturer sells the same product as in the above example, with a cost of production of $80. It will sell to a U.S. customer at the market price of $160, and would be subject to tax of $16, resulting in an after-tax profit of $64 ($80 – $16). But if it established a foreign distributor (FD) and sold the product to FD for $150, followed by FD’s resale to the U.S. customer for $160, the U.S. seller would have $70 of profit, subject to no U.S. tax—plus the $10 of profit residing in FD, also subject to no U.S. tax (assuming FD otherwise has no U.S. taxing nexus; for that matter, FD need not be related—U.S. sellers would probably find little difficulty locating foreign companies willing to earn modest profits for acting as a go-between).

Daniel Hemel noted something similar with respect to Microsoft tax planning. KKH also state:

A more traditional VAT would also be expected to withstand a WTO challenge, be compatible with the U.S.’s existing network of income tax treaties, and enjoy the benefit of other countries’ experiences, which could provide guidance for a VAT’s adoption and implementation. This conclusion may seem obvious, but only if one ignores political realities—there is no appetite in Congress for enacting a ‘‘new tax,’’ particularly one that would ultimately fall on American consumers.

Indeed there are simpler ways of accomplishing what Alan Auerbach wants to do but Paul Ryan does not a clear and honest debate over tax policy. Paul Ryan is also making a lot of wonderful sounding claims about DBCFT but then when has Ryan ever been honest about tax policy? Oh well – time to go shopping.