Internal/External, Validity/Consistency

As every consultant knows, all the mysteries of the universe can be revealed in a two by two matrix.  We divide the cases up one way and then some other way.  That gives us four cells and vast, remunerable wisdom.

Here is my version for economics.  One way of dichotomizing how much faith we should put into hypotheses is between reasoning and evidence.  Reasoning is about consistency.  An inconsistent argument is at war with itself in some way and should be regarded with suspicion.  The other criterion is evidence.  Evidence either adds to or detracts from the validity of an argument.  Ideally a hypothesis should be strong on both fronts, although we know our powers of formulating and testing hypotheses are incomplete, especially in social sciences like economics.  We don’t necessarily rip up and burn theories that have consistency or validity problems, but we take those problems seriously.  Or should.

The other dimension is internal/external.  Internal means “with respect to this particular empirical study or body of theory” and external “with respect to all the rest of the empirical cases and theory out there”.  Each piece of work needs to be judged on its own terms, but research and analysis do not occur in a vacuum.  We also have to be mindful of the empirical world outside our particular sample, and we should respect the models developed by other researchers, especially when they have done well on consistency and validity tests.

The distinction between internal and external validity is familiar from statistics.  Internal validity is about the reliability of our claims based on the quality of our data and power of our analytical tools.  External validity is about how well a given study generalizes to the larger universe of cases we care about.  There has been a move toward experimental and quasi-experimental methods in economics, because studies designed around experiments have more internal validity for questions about causation.  This is controversial, however, because the constraints entailed in setting up or finding experiments often detract from external validity.

But the same tension exists on the theoretical side, consistency.  An extremely important example can be found in the debate surrounding so-called microfoundations in macroeconomics.  (I say so-called because, strictly speaking, representative agent models are not microfounded.)  Models incorporating intertemporal utility maximization are typically preferred by economists because they  possess more internal consistency, where “internal” means “within economics”.  Given that the models do not distinguish themselves empirically, their main defense, in fact, is exactly this type of consistency.  But wherever there’s an internal, there’s an external.  External consistency in this context refers to consistency with the models promulgated outside economics, for instance in psychology, social psychology, neuropsychology and sociology.  Given that academia is siloed, most economists give little thought to this, but they should.  The assumption that there is such a thing as utility, that individuals maximize it, and that they do so over their life cycle is radically inconsistent with the understanding of human behavior one finds in these other social sciences.  That’s a problem.

External inconsistency is not necessarily fatal.  One can always try to make the case that I’m right and you’re wrong.  That sometimes happens when the findings in one scientific field contradict and undermine what practitioners in another field believe.  It could happen here too.  But (1) economists seem unaware of the inconsistency, and (2) a cursory look at the state of knowledge suggests that the basis for the economics way of modeling behavior is its convenience, while other social and natural scientists have actually gone out and tested different behavioral hypotheses.

The irony is that we have now had more than two decades of prominent work in behavioral economics that has established the second point conclusively but hasn’t made a dent in what passes for a “consistent” model.  Yet.

Apple Operations International and the European Commission

Math quiz. If you paid a 36% tax on one-third of your income and a 6% tax on the rest – what is your overall tax rate? If you are Stephen Moore, you might sum 36% and 6% but the rest of us would take a weighted average and get 16%. Which brings me to the latest from Jared Bernstein:

I’m talking about Apple, Ireland, and the European Union, of course. The EU’s tax authorities are accusing Ireland of providing special tax breaks to subsidiaries of the US multinational tech company. Such alleged state subsidies are considered anti-competitive by the EU, which is thus demanding that Ireland claw back $14.5 billion in ten years’ worth of upaid taxes.,, Perhaps surprisingly, given the extent to which the Obama administration has righteously denounced such extensive corporate tax avoidance (e.g., they’ve gone after corporate inversions as best they can without Congress), they’re not at all pleased by the EU’s move on Apple. As tax expert Steve Rosenthal interprets their thinking. “Apple may be a tax cheat, but Apple is our tax cheat.” Perhaps they’re worried that if Ireland succeeds in squeezing some juice out of the Apple, there won’t be any left for our Treasury

The White House thinking seems to be related to something called the foreign tax credit which would be relevant if Apple was repatriating all that foreign sourced income but guess what – it is repatriating none of it at least for now. Yet Apple is telling its shareholders that its effective tax rate is over 26%. Maybe this is not as bad as Stephen Moore arithmetic but does this make any sense? Last year, Apple told its shareholders it made $72.5 billion before taxes with $47.6 billion sourced abroad and a provision for foreign taxes around $2.9 billion. So OK, U.S. sourced income is actually 35% and the foreign tax provision is such over 6%. But how on earth does E&Y say their tax provision is over $19 billion? Are they providing for the repatriation tax even if they are not repatriating? How is this consistent with APB 23? Of course they did tell shareholders:

On June 11, 2014, the European Commission issued an opening decision initiating a formal investigation against Ireland for alleged state aid to the Company. The opening decision concerns the allocation of profits for taxation purposes of the Irish branches of two subsidiaries of the Company. The Company believes the European Commission’s assertions are without merit. If the European Commission were to conclude against Ireland, the European Commission could require Ireland to recover from the Company past taxes covering a period of up to 10 years reflective of the disallowed state aid. While such amount could be material, as of September 26, 2015 the Company is unable to estimate the impact.

But if this is without merit – why provide a tax provision for it? So much confusion, so little time. Speaking of confusion, let’s highlight some of the testimony from Tim Cook when he appeared before the Senate hearings back in 2013:

In accordance with US law, Apple pays US corporate income taxes on the profits earned from its sales in the US and on the investment income of its Controlled Foreign Corporations (“CFCs”), including the investment earnings of its Irish subsidiary, Apple Operations International (“AOI”). Apple does not use tax gimmicks. Apple does not move its intellectual property into offshore tax havens and use it to sell products back into the US in order to avoid US tax; it does not use revolving loans from foreign subsidiaries to fund its domestic operations; it does not hold money on a Caribbean island; and it does not have a bank account in the Cayman Islands… Under US tax law, these foreign intercompany payments are not taxable.

Sufficiently confused? Most of Apple’s income ends up in this Apple Operations International (AOI). Cook seems to be saying its income is not subject to US taxation which would be consistent with no repatriation tax. That income turns out not be to be taxed anyway so when he claims there are not using tax havens – that is not true. OK, AOI is not located in the Caymans but that is not the only tax haven. Apple’s 10-K filing notes only three material affiliates – all in Ireland. Apple Sales International and Apple Operations Europe are taxed at the Irish rate of 12.5%. The European Commission’s position is that these entities get very little income with most of it sourced in AOI where it is not taxed. How does that work? Phillip Elmer DeWitt explains:

it’s in the southern Irish city of Cork that Apple pioneered its famous “double irish with a Dutch sandwich” — a tax avoidance technique designed to take advantage of a quirk in Ireland’s tax laws that allows foreign corporations to move money around the world tax free…AOI is incorporated in Ireland; thus, under US law, it is not tax resident in the US. AOI is also not tax resident in Ireland because it does not meet the fact-specific residency requirements of Irish law.

This last sentence is actually from Cook’s testimony. What it basically says is that AOI is located nowhere. It might as well be on Gilligan’s Island or even Mars. But how is this Double Irish Dutch Sandwich (doesn’t that make you hungry) not a tax gimmick? Wasn’t Tim Cook under oath when he testified? And how is lying to the Senate “perfectly legal”?

Nominal Unit Labor Cost Growth in the 1970’s Versus Recently

Jeffrey Frankel reads some nonsense from Wilbur Ross so we don’t have to. Let me pick on one of Jeff’s points:

Okay, what he means is the rate of productivity growth, which has indeed fallen since the turn of the century, and is indeed a problem. But what numbers does he choose to cite to measure the productivity slowdown? “During the 1970s growth in US unit labour costs was 6.8 per cent a year but it dropped…to 1.2 per cent so far this century.” What a bizarre thing to say! Growth in unit labor costs (ULC) equals the rate of wage increase minus the rate of productivity growth. Other things equal, the productivity slowdown would show up as a higher rate of increase in ULC, not lower.

FRED provides nominal unit labor costs from 1947QI to 2015QIV. Over the thirteen year period from 1970 to 1982 this series did rise by 129.71% whereas it rose by only 18.09% over the thirteen year period from 2003 to 2015. This comparison is meaningless as the 1970’s was a high inflation period whereas inflation has been very modest during recent years. I trust Wilbur Ross knows this. So why not examine the changes in unit labor costs relative to the GDP deflator? Of course if he did that, he might have noticed that this real series fell by 3.4% during the 1970 to 1982 period whereas it fell by 8.47% during the more recent period. To continue with what Jeff noted – the change in the real value of unit labor cost equals the change in real wages minus the change in productivity. Yes productivity increases have been very modest of late and real wage growth has been worse, which contributes to the income inequality problem. But a chief advisor to Donald Trump seems to be clueless on what he is even measuring. Happy Labor Day!

The Outlaws of Political Economy!

Coming Labor Day to This Blog!

Did Jonathan Portes Cause Brexit?

I should like to show that Jonathan Portes most probably did not cause Brexit. To do so, however, I first must examine the plausibility of the case that his actions and words did indeed provoke a decisive margin for the Leave vote in the EU referendum last June.

Portes is Principal Research Fellow, formerly Director, at the National Institute for Social and Economic Research in London. From 2002 to 2008, he was chief economist at the U.K. Department of Works and Pensions and, following that, chief economist at the Cabinet Office. David Goodhart has described Portes as "one of the architects of Labour's immigration policy" during that period. He is a regular contributor to the Guardian, frequently on migration issues.

In a 2012 blog post, Portes fondly reminisced that explaining the lump-of-labour fallacy "to six successive Secretaries of State for Work and Pensions, usually in the context of immigration… was probably the most useful thing I did, from a public policy perspective, in my six years as Chief Economist at Department for Work and Pensions."  The lump-of-labour fallacy is the spurious claim that supporters of some policy or other are motivated by a false belief that there is only ever a "certain amount" of work to be done.

The alleged belief is indeed false, as is the claim that support for the policy in question is motivated by it. The bogus fallacy claim was a staple of 19th century anti-trades union propaganda. Portes thus prided himself on his acumen in persuading Labour cabinet secretaries "to go out and defend policies that were consistent with" an archaic, reactionary view of the labour market.

That is not to say that the policies defended by cabinet secretaries coached by Portes were reactionary. The phrase "were consistent with" is notoriously ambiguous. Wearing an amulet is "consistent with" being a Satanist. It is also consistent with not being a Satanist. One must always be wary of "affirming the consequent."

Not wearing an amulet is consistent
with Portes not being a Satanist.

The Friendly Irish Skies for Transfer Pricing Games

My discussion of the Apple Structure promised to elaborate on a gem from Aidan Regan:

Wow! Exports are up 34%; Investment is up 27%; imports are up 22%. Wham, bam, the economy grew by 26%. Sensational. Per capita income per person in employment has increased from a whopping 88k in 2010 to 130k in 2015. I’m sure you can feel the booming economy in your pocket? Of course you can’t, the national accounts are a sham. So what’s really going on? The increase in investment, although you can’t see it in the national accounts, is being driven by airline leasing. My hunch is that this has increased by about 110%. Airline companies of the world are effectively transferring their financial activities (as new aircraft machinery) into Ireland for tax purposes….imagine all those massive Boeing planes flying around the world, then imagine them in Ireland, and hundreds of people working on them. Where are they? In truth. We couldn’t even fit these planes in Ireland. It’s just around 20 people managing a financial fund for tax avoidance purposes. Then using the generated money for profit redistribution. That’s what’s really go on.

Let me preface our discussion by noting this game is played by hotels in the U.S. who establish Real Estate Investment Trusts as well as oil drilling rig multinationals. After all those rigs in the North Sea off the coast of Norway and Scotland are formally owned by tax haven affiliates in Switzerland and the Cayman Islands. So how much income is being diverted to these tax havens? Let’s start with a discussion from Tom Bergin of Reuters:

The change, announced by Finance Minister George Osborne in March, caps the amount a UK company can deduct from profit for leasing drilling rigs from an overseas unit in the same group. The rig-leasing units are typically based in countries where their income is taxed lightly or not at all…Companies that have benefited from the current rules include Ensco Plc, Rowan Companies Plc and Transocean Ltd, which collectively accounted for over 60 percent of the UK market in 2012…"Currently, some companies making significant operating profits in the UK are able to move up to 90 percent of these profits overseas and out of the UK tax net," a spokeswoman for the UK Treasury said."In 2012, more than 1.75 billion pounds ($2.95 billion) was paid by oil and gas operators in the UK to contractors who lease drilling rigs and accommodation vessels. Almost no corporation tax was received on this," the finance ministry added. GENEROUS DEDUCTIONS Osborne's change, which will limit the amount companies can deduct from profit for such lease payments to 7.5 percent of the historical cost of the rig, will replace generous deductions calculated on the market value of rigs, which has been soaring.

While Osborne was right that a lease to value ratio near 15% is overly generous, his 7.5% might be a tad skinny. Let’s imagine an Irish affiliate that “owned” $30 billion in planes (see the financials for AerCap) that incurred operating and depreciation costs equal to 5% of assets ($150 million). I would argue for a 10% lease to value ration so the intercompany payment is $3 billion and profits of $150 million. This 15% lease to value ratio doubles those profits and leave the operating entities (the ones in high tax jurisdictions) with very little profit. So which approach is right? The OECD’s Action Plan 9 notes in its paragraph 63:

Risks should be analyzed with specificity, and it is not the case that risks and opportunities associated with the exploitation of an asset, for example, derive from asset ownership alone. Ownership brings specific investment risk that the value of the asset can increase or may be impaired, and there exists risk that the asset could be damaged, destroyed or lost (and such consequences can be insured against). However, the risk associated with the commercial opportunities potentially generated through the asset is not exploited by mere ownership.

The 15% lease to value ratio inappropriately assigns the expected return for bearing commercial risk to the Irish owner of the assets whereas the approach suggested here is to grant it only the return for bearing ownership risk or obsolescence risk as Miller and Upton noted. Their model would suggest that the appropriate profits for the Irish affiliate represent only a 5% return to assets with the remaining system profits accruing the operating entity. What the OECD has noted here is simply good finance and yet we often see the representatives of multinationals arguing for the overly generous 15% lease to value ratio. This is how transfer pricing abuse is done – these representatives basically lie to tax authorities under the assumption that the tax authorities are too stupid to realize they are being lied to.

Two Thirds Of The Way Through The Teens Decade

Yes, give or take a day or two and accepting that 2010 really was part of the teens decade of the 21st century*, as of August 31, 2016, we are two thirds of the way through that decade.  With what is left only half as long as what has passed, the form and nature of that decade should be becoming established.  What is it?  Above all, it has been a decade of stagnation from a deep economic recession, a depressing event rivaling only that of the 1930s decade of the Great Depression, even if technically in the US the entire decade has been one of positive economic growth since the bottom was reached in 2009, the last year of the previous decade.  But that decade was more the decade of terrorism, thanks to 9/11/01, with only its end marked by the crash and recession the slow recovery from which has dominated this decade, even if we still have terrorism and a political atmosphere overhung by it as well.  The combination has soured the political atmosphere both here and in Europe.

From where I  sit as a front end baby boomer who is still teaching economics at the university level, I am looking at this in terms of who my students are and in terms of generations and generational shifts.  This decade has so far been heavily dominated by the so-called millennials, although they were emerging as important during the previous decade.  Indeed, many would say the event that defines their consciousness is 9/11, the defining event of last decade, just as the Challenger crackup defines the Gen-X generation, and the civil rights movement and the Vietnam War defined the boomer generation, although as one gets to the outer edges of these generations these things get fuzzy, and the boundaries between them are not entirely clear.

One thing that is clear is that the influence of a generation has much to do with its numbers, with these effectively alternating with successive generations.  The Greatest generation, who lived through the Great Depression, won World War II, and basically ran the show in the US for  most of the Cold War, were a populous and dominating generation.  Their successor, the Silent generation, with their low numbers reflecting the low birth rates in the Great Depression 30s and WW II, made much less of an impression.  Then we had the noisy and self-important boomers, the children of the Greatest, who would rebel against their supposedly virtuous parents (who, despite their achievements, were also marked by being heavily racist, sexist, anti-Semitic, and homophobic).  They were  followed by the ironic and low key and less numerous Gen-Xers, the children of the silent Silents, with the also self-important and numerous millennnials somewhat resembling their  boomer parents. These  periods of dominance are in some sense illustrated by how there were no US presidents from the Silent generation, with us going from G.W.H. Bush of the Greatest to Bill Clinton of  the boomers.  Between Trump and Hillary, we see a last gasp of boomers, although do not be surprised that the successor to either of them jumps over the self-effacing Gen-Xers to represent the noisy millennials.

Of course there are arguments about exactly where those generational boundaries are.  So it is conventional to give the boomers two  decades, being born from 1946 to the mid-60s somewhere, about 1965, give or take a year.  That means they are currently in the 50s and 60s, just starting to move into their 70s with none left in their 40s, and with 1957 the peak year of  births for them, their center of gravity, just about to hit 60.  While the beginning point of the Gen-Xers clearly start in the mid-60s, it is more debated where their endpoint is, with this ranging from around 1976 to possibly as late as 1980, making people in their late 30s sort of a boundary case, up in the air.  Many of these people think of themselves as millennials, but this may be a matter of  wanting to be in the supposedly cooler millennials rather than the sort of pathetic Gen-Xers.  I mean, lots of popular media may say they are, but are people 39 years old really millennials? Well, maybe, but of course this matter of giving the Gen-Xers a shorter time period while both the boomers and millennials get longer periods just emphasizes the dominated and outnumbered nature of the Gen-Xers, with the birth rate bottoming out in 1975 while it reached a new peak in 1990, clearly a core year for the millennials.

Which brings us to what I think may be an important emerging story for the rest of  this decade, the social appearance of the post-millennials or Gen-Z, with indeed them now dominating the current set of undergrad students, with I think many people  not realizing yet that another generation is in the works about to make their presence felt socially as they start graduating from college.  Obviously this depends on when that endpoint of the millennials is, but some put it as early as people being born around 1996, especially if  their beginning point was those born in 1977.  So they are people basically in their 20s and 30s, although, again, those in their upper 30s may be hanger on Gen-Xers.  Thus the endpoint of the millennials might be a year or two  later, maybe those born in 1998, but if 9/11 is the defining event of their generation, well, those in 1998 do not remember anything from 2001 at all.  They are getting to be something else.

Now it must be recognized that there are important sub-groups within some of these generations. Thus I know that there are substantial differences between my front-end baby boomer group and those born nearer the end after 1957 or so and especially in the early 1960s.  Likewise, among the millennials there is a sharp break between those who came out of college after 2007 when economic conditions became much worse than those who got out before.  There is an especially damaged group who will probably suffer their entire lives for their bad luck in timing, those who graduated in roughly 2009-2013, the worst years of the Great Recession job markets.  These are the people with high student debts and lousy starting jobs, if any starting jobs, with many spending time in their parents' basements playing video  games, who will probably never catch up economically, even if they have gotten out into  the job market finally.  Those graduating in the last year or two are experiencing a different situation, one more like those who graduated prior to 2009.  This past spring for the first time since 2008 I heard some graduating seniors rather self-satisfiededly talking about which of competing job offers they would take.  Wages may have remained stagnant with inequality and student debt loads worse than ever, but there are now many more jobs with the Great Recession really over, even if for many it does not really quite feel like it.  But it is, and the post-millennials will be the beneficiaries of that, even if the current stagnation really does turn into something more permanent or longer lasting than those more optimistic think.  Thinking that it will has certainly become quite an intellectual fad, with some serious arguments behind it, even if we do get a pickup in growth rates sometime in the next few years.

So the question that is on my mind is what is the nature of this newly emerging post-millennial (or maybe Gen-Z) group that is now clearly to me at least dominant among current undergrads?  I somehow feel that last year's seniors were the last of the clear millennials.  Current seniors and juniors may be a transition group, but by the time one gets to current sophomores (born in 1997) and freshman, one is getting to post-millennials, closer to my oldest grandson, who at age 11 just entered middle school yesterday, than they are to my youngest daughter, who just turned 27 yesterday, part of the core millennial group, even as her older sisters at 41 and nearly 45 are definitely Gen-Xers.  I  can see and feel the difference with the current undergrads, even if  I am not sure I can fully articulate it.

Besides not being so down about future job prospects, even as they continue to be plenty worried about high college costs and future indebtedness,with this latter problem only worsening as college tuitions continue to outpace inflation in their rise (with this perhaps having stopped after decades for medical care costs) for no good reason (they are not rising due to faculty salary or numbers increases).  Of course part of it is indeed that they do not remember 9/11 at all.  It is strictly history, so all this terrorism stuff is more strictly background noise, if annoying.  However, probably a stronger aspect is a qualitatively greater involvement in a natural and engrossed way in social media and that world of technology.  It is totally second nature in a way that it has not been even for  the deeply embodied millennials.  I am not sure I can pinpoint it or describe it, but I suspect that they have been an even stronger driving force in the new Pokemon Go fad than their millennial predecessors.  They live more  fully in this "augmented reality" that adds this odd social media-generated component to itself than their older peers in the earlier generations.  Is this good or bad?  I do not know, but I think it is a serious reality, this new augmented reality that will more truly be with the post-millennials than earlier generations, with middle schoolers reportedly playing by sitting in their homes on skype whle they play with games and other things, even when they live on the same street.

In any case, I think this generation will play an important role in defining the rest of this decade, even as it will probably be mostly one dominated by the millennials, as the boomers really move into retiring and the millennials finally begin to really move into decent paying jobs and forming families and all that.

*The technicality regarding 2010 is  that properly speaking it was the last year of the first decade of the 21st century, for which we still do not have a universally accepted name, the "noughties" being not all that widely used.  That is because, technically speaking 2000 was not  the first year of the 21st century and third millennium, but the last of the 20th century and second millennium.  Why?  Because there was no year Zero.  Of course at the time nobody was remotely aware of this question, it being some centuries later that the Roman Church established when Year One succeeded Year Minus One (or in those days, B.C., Before Christ) using the Julian calendar and Roman numerals, which had no zero or negative numbers.  The Church would come to view those numbers as demonic or satanic, not really real, with the double-entry accounting-inventing Tuscans of the late middle ages finally having to convince the Church, especially the wealthy and powerful Medici bankers of Florence who loaned the Church lots of money, that indeed that negative net wealth is a real thing, and that adopting those Indo-Arabic numerals with their zero really made it easier to do that accounting.  Or, as my late mathematician father, a gentleman of the old Deep South, once said in reply to a young woman during a public lecture who asked him if zero was a real number, "One of the finest, my dear, one of the finest."

Barkley Rosser (Jr.)

The Apple Structure to Parking Profits in Bermuda

British economist Andrew Watt tells us how he really feels about the European Commission’s slam of Apple’s transfer pricing:

Without delving too deeply into the specifics of the case, a number of crucial issues are raised by this controversy, not just in the narrow area of taxation but for the European integeration process more generally...The ability of internationally active and thus “mobile” companies to play off national tax jurisdictions against one another and to use transfer pricing and other tricks to concentrate book profits in low-tax jurisdictions is one of the most pernicious effects of globalisation as it has been implemented over the past three or four decades. Whole armies of corporate (tax) lawyers optimise financial flows so as to minimise tax liabilities. The largest companies reach tailor-made deals, primarily with smaller economies, The resultant “race to the bottom” is an important reason why capital (and higher-skilled , also mobile wage-earners) have reaped most if not all the gains, while most workers have been left out or seen declines in living standards. The tax burden is shifted onto “immobile” factors, especially labour and the ability of national governments to finance compensatory measures (welfare benefits, active labour market policies) to offset the losses caused to some by globalisation has been constrained. The fact (according to the FT) that Apple, one of the world’s wealthiest companies, pays a (sic) 2% rate of corporation tax thanks to its deal with Ireland is a particularly egregious

Of course other hi-tech and life science multinationals are playing the same game which is often dubbed the “Apple Structure”. How this works is actually quite simple. Imagine Apple Ireland sells $100 billion in either smart phones or personal computers (a conservative estimate given the US share of sales is only 40%) with total operating costs being $70 billion - $30 billion in profits to be divided among the tax authorities. Ireland’s share of Californian based R&D costs represent $10 billion when one includes the cost of employee stock options. Given how the game is played, the US tax base would include no profit and might not even include those cost of employee stock options. Selling costs represent another $10 billion, which are incurred by the foreign distribution affiliates, which likely pick up only $1 billion in profits. The remaining $29 billion are either taxed in Ireland at 12.5% or sourced in Bermuda where they are not taxed at all. Back in 2007, Apple’s 10-K noted that their products were assembled in Cork, Ireland:

Most of the Company's components and products are manufactured in whole or in part by third-party manufacturers, most of which are located outside of the U.S...Final assembly of the Company's products is currently performed in the Company's manufacturing facility in Cork, Ireland, and by external vendors in California, Korea, China and the Czech Republic.

Let’s assume that total production costs are $50 billion with $45 billion being components supplied by third parties. Cork incurs $5 billion in labor costs and the tax deal gave Ireland a 20% markup or $1 billion in profits. So $28 billion ended up in Bermuda. Today, Apple’s products are assembled by Foxconn so Ireland gets even less in profits. Aggressive tax planning indeed but Tim Cook says it is “all perfectly legal”. Andrew also linked to Aidan Regan:

Wow! Exports are up 34%; Investment is up 27%; imports are up 22%. Wham, bam, the economy grew by 26%. Sensational. Per capita income per person in employment has increased from a whopping 88k in 2010 to 130k in 2015. I’m sure you can feel the booming economy in your pocket? Of course you can’t, the national accounts are a sham. So what’s really going on? The increase in investment, although you can’t see it in the national accounts, is being driven by airline leasing. My hunch is that this has increased by about 110%. Airline companies of the world are effectively transferring their financial activities (as new aircraft machinery) into Ireland for tax purposes...imagine all those massive Boeing planes flying around the world, then imagine them in Ireland, and hundreds of people working on them. Where are they? In truth. We couldn’t even fit these planes in Ireland. It’s just around 20 people managing a financial fund for tax avoidance purposes. Then using the generated money for profit redistribution. That’s what’s really go on.

Enough transfer pricing for one day so I will elaborate on this scam tomorrow.

Question for Labor Day, 2016

"...it is often said that to regulate the hours of labour, or to introduce differential import duties, is to break economic law." -- Palgrave's Dictionary of Political Economy, 1894

Do you agree that regulating the hours of labor is a violation of economic law?

Trigger Warnings and Academic Freedom

The top brass at the University of Chicago are so, so wrong about trigger warnings.  I don’t know how other instructors use them, but for me they provide the opportunity to bring disturbing material to my students.  I have used them for graphic films about child soldiers and prostitutes, for instance, hoping to provide a missing dimension to the social science readings I assign on these topics.  I would never be able to do this unless I allowed the most vulnerable students to excuse themselves.  In the absence of trigger warnings, and out of respect for the needs of these students, I would not be able to use this material at all.

The core intellectual error in the UC statement is that it implicitly assumes that the extent to which academic content is challenging is fixed.  It’s not.  It’s a product of the flexibility we have in the classroom to introduce it.

The Infrastructure Investment Debate

While Noah Smith makes the standard case for public infrastructure spending, he only lightly touches on the right wing critiques:

Some question the need for road and bridge repair. Others deny the need for federal infrastructure spending in the first place. Still others claim that while spending is good in theory, the U.S.’s high infrastructure costs mean we should hold off until those costs can be brought down.

This last line left me speechless as real borrowing costs are incredibly low right now and with a continuing weak economy, one would think this is a great time to hire construction workers. We will turn to material costs later. Noah links to Adam Millsap of George Mason:

In inflation adjusted dollars (the top panel) infrastructure spending has exhibited a positive trend and was higher on average post 1992 after the completion of the interstate highway system...The bottom panel shows that spending as a % of GDP has declined since the early 80s, but it has never been very high, topping out at approximately 6% in 1965. Since the top panel shows an increase in the level of spending, the decline relative to GDP is due to the government increasing spending in other areas over this time period, not cutting spending on infrastructure... Another interesting thing that jumps out is that state and local governments provide the bulk of infrastructure spending.

Adam’s source is the 2015 CBO analysis, which confirms this last claim:

Public spending—spending by federal, state, and local governments—on transportation and water infrastructure totaled $416 billion in 2014. Most of that spending came from state and local governments: They provided $320 billion, and the federal government accounted for $96 billion.

Alas Adam choose to omit the rest of the summary which also notes:

In 2003, the average price of materials (asphalt, concrete, and cement, for example) and other inputs used to build, operate, and maintain transportation and water infrastructure began to rise rapidly. Nominal public spending on that infrastructure increased by 44 percent between 2003 and 2014, but because prices of materials and other inputs rose more quickly than nominal spending, real (inflation-adjusted) public purchases decreased, falling by 9 percent from their peak in 2003 to their level in 2014 (see the figure on page 2)...The decline in real public spending (adjusted using infrastructure-specific price indexes) on transportation and water infrastructure between 2003 and 2014 occurred almost exclusively within the category of capital purchases, which fell by 23 percent during those years. The construction and rehabilitation of highways, in particular, declined over the period. By contrast, real public spending for the operation and maintenance of infrastructure continued its historical tendency to grow, rising by about 6 percent over that period, primarily because of increases at the state and local level.

The debate is over the lack of capital spending – not the cost of ongoing operations. I have a hard time believing that Adam missed this point even as he choose not to note it to his readers. Incidentally, if material costs are way up do we have any reason to believe that they will dramatically fall? I’ll provide links to the FRED series on two price indices - asphalt and cement. Both nominal price indices rose from 2003 to 2009 as China was undergoing its own construction boom. While the Great Recession moderated these increases for now – I seriously doubt either commodity will ever see the relative prices observed before the commodity boom. Now is the right time for infrastructure investment.

James Galbraith Resigns As Chair Of Economists For Peace And Security

After serving for 20 years, James K. Galbraith is stepping down as Director of Economists for Peace and Security (EPS), an important group in my view that he has built up during his time as its leader.  I know that is a long time, so I understand that perhaps the time has come.  However, his shoes will  be hard to  fill.  He originally succeeded Kenneth Arrow (who just turned 95) and the late Lawrence Klein, who co-founded the organization and served as co-chairs.  Other Nobelists who are Fellows or Board members include Amartya Sen, Daniel McFadden, George Akerlof, Joseph Stiglitz, Eric Maskin, Roger Myerson, and Thomas Schelling.  I hope that a suitable successor for Galbraith will be found.

Barkley Rosser

Amnesia, Automation and Job Loss

I would say that when technology is contributing to greater inequality of incomes, as it  seems to be doing in recent decades, then address the inequality directly. -- Timothy Taylor

Having lived through "recent decades" (along with a couple of less recent decades) I can't imagine how Timothy Taylor can blame greater inequality of incomes on technology and then go on to talk about addressing inequality directly through public policy.

Whether or not it was the intention of public policies, greater income inequality has been a direct outcome of  those policies. As a matter of fact, increasing income inequality wasn't a stated objective of the policies. The stated objectives were promoting economic growth and controlling inflation. That was supposed to make everybody better off. Technology is just an alibi for what went wrong.

Is Timothy Taylor against economic growth? Does he favor accelerating inflation? If not, how does he propose to design public policies to somehow counteract the presumably unintended inequality effects of the policies that inadvertently brought about those outcomes, while simultaneously continuing those policies and pretending that some vague "technology" was the culprit for the undesired effects? I think he's got himself a bit of a dilemma there.

Might I suggest that his narrative doesn't jibe with itself? We already have "corporatist public policy" in a form that insulates elite decision making from democratic oversight or input. How we transition from that to something better is a mystery to me but I'm pretty sure that the solution is not to pretend that individuals' insatiable desires are what ultimately determine the mixture of leisure and income. Especially after three decades of stagnant incomes for wage earners. I remember the promises made in the 1950s, 60s and 70s. Those promises were broken. Nobody believes them any more.

What people do believe is not necessarily true, either. But it conforms to their experience. Given a choice between abstractions that have been discredited by experience and illusions that validate that experience, most people will choose the illusions. Hello, Rough Beast, slouching toward Bethlehem.

The "reduction of the average work week in manufacturing from 67 hours in 1870 to somewhat less than 42 hours" that Leontief cited, quoted by Taylor, was not just something that "happened" as a result of individuals choosing to take more of the fruits of their increased productivity in leisure. It was the outcome of political struggle that was viciously opposed at every step along the way. At. Every. Step. The compromising and subsequent defeat of the labor movement that fought for shorter hours is not unrelated to the subsequent increase of income inequality over recent decades.

In the view of some economists, such as Milton Friedman, labor unions were a parasitic impediment on the smooth functioning of free markets. Free to choose entailed a "right-to-work," in the Taft-Hartley sense. Hooray! The debilitating leisure is all gone; we can bask obesely in our insatiable glut of shoddy goods and huckster services. Climate change? What... [glug, glug, glug]

Economists are all too modest when they act surprised at the ill effects resulting from policies that they had insisted would make everyone better off. "If only they had listened to us," they moan.

Oh, but the leaders did listen. And they did what their economists told them to.

By the way, the analysis and arguments put forward by advocates during that long struggle for shorter working time are very relevant to some of the most seemingly intractable policy dilemmas that we face today. And no, they weren't based on a false belief in a fixed amount of work. Unfortunately, the actual views have been so slandered and sidetracked by the propaganda that economists would rather contemplate the lint in their own belly button than marginalize themselves by engaging with these "fringe" ideas in an ethical debate.

It Is Monday And The Washington Post Wants To Cut Social Security Benefits (Again)

To  be more specific, Robert J. Samuelson on the editorial page, and I am posting this because for some reason Dean Baker did not post about this, perhaps bored with yet another round of WaPo and its columnists doing the same old same old over and over again, especially on Mondays.  This one draws on a new study of the impact of aging on economic growth, specifically per capita growth, using US states as the data sources by Nicole Maestas, Kathleen Mullen, and David Powell, the first in the Harvard Medical School and the latter two at the RAND Corporation.  A main finding is that a 10% increase in the percent of a state population that is over 60 implies a 5.5% decline in real per  capital income growth.  They find a third of this due to fewer workers, but the other  two thirds due to  unexplained productivity changes, with RJS recognizing that the paper does not provide completely convincing explanations for this, although there are some, such as that the retirement of older workers with their experience reduces  the productivity of those left behind still working.

Of course, when it comes to the end of the column Samuelson does that old Monday WaPo thing, dragging out Social Security as a big problem. Now indeed, it is certainly the case that anything that damages future economic growth damages the future status of Social Security, although apparently this paper has nothing to say about this, and Samuelson does not provide any specific estimates.  But this does not hold him back from the following: "As a society, we need a better  balanceof  obligation between the older and younger generations.  Until now, policy has favored the elderly.  The remedies to shift the balance are well-known: higher eligibility ages for government benefits; less generous benefits and tax breaks for wealthier retirees. None is politically easy." 

Yes,  that was it, the complete list of possible ways of  dealing with this problem. Should we increase aid to  students going to college or making moves to reduce college tuitions that might help the younger generation?  Nope, not a word.  How about increased aid for poor children?  Nope, not a word.  Medicare was not mentioned,which Dean Baker has regularly pointed out has much more rapidly rising costs than Social Security and helps the old, but as he has regularly also noted, most of that is due to  the continuance of medical care costs rising more rapidly than inflation, just as college tuitions have been.  No suggestion from Samuelson that any effort to try to  restrain these increases might help with this problem.  No, it was all about messing with Social  Security, although for once he did mention tax changes, not a general tax increase, but one maybe just directed at the wealthy, not recognizing that this could undermine future support for the program.

I have not read the paper, only its abstract, but at least one issue appears to me as possibly contributing to the large effects that the authors of this study find that RJS does not note  This is that it might be that they have not accounted for the fact that migration of the young is very responsive to job availability.   So, if a state has more rapid per capita growth than another one, and thus more rapid job growth, it will see younger people moving into it and out of the other one, at least relative to each other.  So, a more rapidly growing state will tend to end up with a lower percentage of elderly than a slower one, without any of this needing to be due to the rise in the percentage of elderly themselves.  This is certainly what is going on in say West Virginia, which has one of the highest percentages of elderly in the country.  Now it may be that they do not want to pay for schools, which may be damaging long run growth, but it is obvious that the main thing going on there is that with the collapse of the coal mining industry, younger people have moved out of the state leaving the old behind, not that some rise in the numbers of  old people drove the coal mining industry out of the state.  However, I must grant that it is possible that they have somehow accounted for this sort of endogeneity effect.

In any case, even if the study has completely covered for all of these sorts of issues, it is completely unsurprising that Samuelson on a Monday somehow sees the only thing that should be done in the face of this supposedly negative effect of the elderly on growth is to cut Social Security benefits.

Barkley Rosser

He Said, She Said on Charter Schools and the Black Community in the New York Times

Today we get another sad example of “objective” journalism, where advocates from opposing sides of an issue are given a platform to face off—without any independent investigation of the underlying merits.  In particular, the possibility that one point of view may just be the public face of a wad of cash is not considered.

So we have a “controversy” piece in the New York Times about black attitudes toward charter schools, the NAACP and the Movement for Black Lives (whose platform really deserves your attention) against and the Black Alliance for Educational Options for.  The Times hands the pro-charter mike over to Howard Fuller of BAEO, naming his organization and identifying him only as a professor at Marquette University.

Anyone who knows anything about the education “reform” “movement” anticipates there will be more to the story, and there is.  See this revealing piece on Fuller and BAEO by Julian Vasquez Heilig of CSU, Sacramento.  (Hat tip: Diane Ravitch.)  Sure enough, there’s seed money from right wing foundations (Bradley, Milton and Rose Friedman) and continuing sugar from Walton and Gates.  In fact, Fuller started out pushing vouchers and only gravitated to charters as the movement (and money) against public education shifted from far right to near right.  Heilig gives a nice example of a BAEO “survey” that is actually a thinly disguised propaganda effort.

Here’s the thing: I, who am just a casual follower of K-12 education politics, found all this in about five minutes.  Maybe a Times reporter could do the same.