ataxingmatter

11/24/12 Links worth noting: Germany rejects Swiss banking secrecy deal; Labor Devaluation

 David Jolly, German Lawmakers Reject Swiss Tax Deal, New York Times (Nov. 23, 2012).

 The US and other countries like Germany have been pressing the Swiss on their bank secrecy, which allows U.S. and other foreign citizens to establish bank accounts without the knowledge of the home country and thus hide assets and income from home-country taxation.  The US passed laws (called by the acronym "FATCA") that require foreign banks to actively report information on US accountholders.   The hope is that every country will recognize the harm done to tax systems by banking secrecy and join in imposing similar information-reporting requirements. 

The Swiss, meanwhile, have been trying to circumvent universal adoption of such laws.  See, e.g., Nicholas Shaxson, A scheme designed to net trillions from tax haves is being scuppered, Guardian.com (Nov. 22, 2012).   Britain, Luxemburg and Austria are cited as being in the forefront of the scuttling movement:  Britain, for example, has entered into a "Rubrik Agreement" with the Swiss.

The Swiss thought they had a deal with Germany.  This would be a bilateral deal in which the Swiss agree to an upfront payment in lieu of any back taxes on the accounts and then agree to act as tax collector for the foreign government on the accounts, thus maintaining secret the identity of the foreign taxpayers. 

Such an agreement is problematic for two reasons:  (i) it requires the foreign government to trust the Swiss banks to pay the right amount over in taxes and (ii) it undermines the drive to eliminate offshore banking secrecy as a cover for tax evasion. 

Transparency in international banking and taxation matters would require that banks provide information on accounts held by foreigners to the foreigners' home jurisdictions, without any account-specific or accountholder-specific request required.  The reason for a more transparent rule is that otherwise the home jurisdiction has to have information it does not have (who has an account at a Swiss bank) before it can ask for the information it needs to ferret out who has such an account and may be engaging in tax evasion.  The biggest cracks in banking secrecy have thus come from  whistleblowers and opportunists who sell account-holder information to purchasing jurisdictions. 

Friday, the Germans rejected--for now at least--a German-Swiss deal supported by Chancellor Merkel that had been two years in the making.  France is apparently also considering rethinking a similar deal.

The Swiss leverage was clearly stated by Swiss banking official Mario Tuor, who "noted that without a deal, the status quo would remain: German officials can seek specific information from the Swiss government on people suspected of tax evasion, or go back to buying data stolen from Swiss banks. 'With an agreement, every German taxpayer in Switzerland would be taxed,' Mr. Tuor said." German Lawmakers Reject Swiss Tax Deal 

 The Steady Devaluation of Labor, TwoHalfHitches (Feb. 2012).

This is an oldie but goodie, one worth reminding you of (or calling to your attention for the first time).

[The] minimum wage, in constant dollars, has had its ups and downs since 1970 but the overall trend indicated by the straight black line is down. The numbers show that the American economy puts less value on the entry level worker than it did in 1970. Why is that? Are minimum wage workers less intelligent now than they were forty years ago? Are they lazier?

The reason probably has a lot to do with the rise of the global economy and cheaper Chinese labor. It may also have to do with basic attitudes toward labor. Some see labor as a commodity, while others believe it is not.  

***

Representative Steve King (R-IA) on the floor of the House of Representatives last year:

"Labor is a commodity just like corn or beans or oil or gold, and the value of it needs to be determined by the competition, supply and demand in the workplace."

 

***  

Samuel Gompers, cigar maker-turned-labor organizer and founder of the American Federation of Labor in the early 20th Century, had a different business ethic related to labor and said this: “You cannot weigh the human soul in the same scales with a piece of pork.”

Labor advocates actually managed to insert a statement affirming the status of human labor in the 1914 Clayton Antitrust Act:  “The labor of a human being is not a commodity or article of commerce.”

 

 

Related articles

Indonesia Mulls Minimum Wage Boost Amid Protests

German-Swiss tax deal fails

German Lawmakers Reject Pact on Undeclared Swiss Accounts

German-Swiss tax deal fails in parliament

Bern and bankers digest German tax deal veto

UBS chief says banking secrecy 'over'

A scheme designed to net trillions from global tax havens is being scuppered | Nicholas Shaxson

Links Worth Noting

Simon Tilford, Workers Must Get a Bigger Slice of the Pie, New York Times Op-Ed (Nov. 22, 2012).

Over the last 30 years, wage growth has lagged behind productivity across the industrialized world, leading to a steep fall in wages, salaries and other employee benefits as a proportion of G.D.P.

Simultaneously, there has been a big rise in inequality as the benefits of economic growth have accrued to those at the top of the income scale, as well as a steady increase in corporate income and profits. These trends have gone hand-in-hand with a steady decline in business investment.

***

There is no doubting the need for reforms aimed at increasing competition and opening the way for the adoption of new technologies. But governments need to combine market-led reforms with measures aimed at preventing a further decline in labor’s share of the pie.

With households now highly indebted across the industrialized world, a sustained recovery in private consumption will require a rise in the share of national incomes accounted for by wages and salaries.

The op-ed goes on to suggest a number of actions that governments should take:  redoubling efforts to ensure that students complete school, providing that executive compensation relates to performance rather than stock prices, making tax systems more redistributive (including increasing the tax burden on capital and reducing it on labor), ending their "obsession with 'competitiveness'" and instead "boosting domestic demand", and  being more "skeptical" of business lobbying.

Sound advice, I'd say.

Peter Diamond, Down with Supercommittees, New York Times op-ed (Nov. 19, 2012).

Diamond suggests that our government's fascination with commissions charged with coming to grand bargains on federal fiscal policy and congressional super-committees similarly charged cannot succeed.

Discussion of the debt trajectory is focused on some sort of grand bargain. Even if one is achieved, there’s reason for pessimism: any bargain is likely to sidestep, or even enshrine, many of the root causes driving inefficiencies in our nation’s spending and taxes.

***

Instead of wide-ranging, politically motivated panels, we need narrowly targeted commissions, without sitting members of Congress, modeled on the successful Base Closure and Realignment Commissions of recent decades.

***

 What we need ... is a set of narrowly targeted commissions, each with a clearly articulated task and the ability to require a no-amendments, up-or-down vote — and all without sitting members of Congress.

 

Related articles

Peter Diamond Advocates for Getting Rid of Democracy

a message from Bernie Sanders

Op-Ed Columnist: The Twinkie Manifesto

More on the Threat to Social Security and Medicare from the so-called "Fiscal Cliff"

private equity doesn't do us much good; avoiding taxes does us considerable harm

[edited 11/8 8:45 pm to correct typo in Weidner article title to $70 billion instead of $70 million--oops!]

I.  Private Equity, leveraged buyouts, and carried interest

On MarketWatch, David Weidner's "writing on the wall" column for Nov. 2, 2010 comments on "Paying for Wall Street's Prosperity: Loophole could cost taxpayers $70 billion".  What loophole?  That "carried interest" provision that lets hedge fund and private equity managers get their compensation income with the tax benefits of capital gains rather than ordinary rates.  This isn't chicken feed.  There are lots of private equity deals, and private equity deals have a huge impact on ordinary Americans--for one thing, they frequently purchase by leveraging the company they buy, so that it has considerable debt the interest on which is deductible, lowering the company's tax bills, at the same time that they frequently "restructure" so that the successor company is likely to fire lots of employees, sell some assets, and then do an IPO a few years down the road to bring in cash to pay off the debt.  And many of them will fail--including bankruptcies and going out of business. The benefit (deferral and capital gains preference) goes to the private equity firms that make fortunes out of the deal.  The burden is--surprise, surprise--borne by the ordinary Joe who gets fired or sees his company driven to insolvency or at the least faces job insecurity during the time that the private equity firm is whipping his company into shape for selling at a profit.  The burden is also borne by taxpayers generally and the kinds of public goods we would like to fund with tax money (from parks to disease research, from environmental enforcement to insider trading enforcement, from new roads to better cargo searches, etc.)--as Weidner notes, all those equity deals result in firms that pay less income tax per dollar of pretax income--about 14.2% less, in fact-- than their counterparts that haven't been taken over by private equity firms, because of the way the private equity firms profit by leveraging their purchase with the company's own cash flows.

So there's a pretty good argument that private equity firms are harmful to the economy, not helpful.  They for sure don't create jobs (and often cause job loss).  And there's prety good evidence that we create a tax break (by allowing the interest deduction for leverage used to allow private equity firms to buyout the company ) that isn't justified.  And then there's that tax break for carried interest.  Why are we giving so much to companies that give us back so little?  Weidner's answer--they've got lobbyists. $51.5 million over the last four years  spent on lobbying, compared to a mere 7.7 million from 2003 to 2006.  Blackstone and KKR spent $3.78 million this year alone. Id.  (And they've got the ability to contribute money even more targeted to electing the Congress they want, after Citizens United.  $10.6 million for the midterms, through Oct. 25, Weidner reports, based on OpenSecrets.org. data.)

II.  the "Increase Our Taxes" Blog

There's a blog I just discovered, titled "increaseourtaxes.com".  Uneven items, but some worth looking at.  For example, see the post on "Tax Cuts and the Well Off", which shows graphically (from the Tax Foundation) the impact of Obama's proposed changes--mainly in higher amounts of tax from those earning a million or more, or "California and the Politics of Taxes " (nov. 1, 2010), which notes the problems that occur when "voters want services but do not want to pay for them".   IN conclusion, he shows how all efforts to avoid taxes devastastes society.

"This is what happens when you try to avoid paying taxes.  Politicians, hemmed in by public opinion, look even slimier as they cut deals to balance a budget.  Voters kick those politicians out but don’t change the rules of the game, so the new politicians look just like the old ones, just like in Animal Farm. Revenue is raised indirectly and inefficiently, distorting the economy, reducing overall income and tax revenue, and eventually requiring the government to furlough teachers and fire fighters and cut popular services.  Refusing to pay more in taxes hastens the end of exactly what we want to pay taxes for."

Links Worth Noting: Thoma, Maule, Smith

Mark Thoma, Economist's View, EPI: STate and Local Public Employees Undercompensated, Sept. 15, 2010

Part of the rhetoric that has been circulating these days about the need to "starve the beast", even at local and state government levels, is a view that we are wasting money on overpaid public employees, especially their pension plans and health benefits.  Spewed hatefully on the Washington Post's comment site I've seen statements that every problem can be solved by cutting taxes to 15% for everybody (or taxing only "uses") and then cutting public employees' benefit to nothing since they are overpaid.    The anti-government venom is clearly irrational and not based on any understanding of how government works, what life would be like without those state employees, or how hard most public employees work for their lower pay.    [Disclosure--I am a state employee with a decent pension plan and decent health benefits.]

Of course, it is true that many states have underfunded their pension plans for their public employees.  But this does not mean that the employees are overpaid or the goals for the pension plan funding were too high.  It merely means that states have done what many imprudent individuals do--spent the money on something else rather than set it aside to meet the obligations that the state committed to with respect to its employees. 

The Economic Policy INstitute finds that public employees at the state and local level are undercompensated compared to their peers in private employment, including the promised benefits (which, of course, some may not receive because of the push by the right to cut public pensions).

To quote the post: "The report, Debunking the Myth of the Overcompensated Public Employee: The Evidence by Labor and Employment Relations Professor Jeffrey Keefe of Rutgers University, finds that, on average, state and local government workers are compensated 3.75% less than workers in the private sector. "

James Maule, The Consequences of Tax Education Deficiency, Mauled Again, Sept. 15, 2010.

My fellow tax professor Jim Maule hits on a topic that is dear to my heart--the staggering amount of misinformation about tax that is circulated in the blogosphere, newspapers, radio shows, and television "news" commentary.  He suggests much of it is intentional misinformation that is disseminated in an atempt to fool people in supporting positions that they would not support if they were fully--and accurately--informed.  Here's his final paragraphs:--I think the answer to the question of "who benefits" must be the people whose policies are furthered by the misinformation, and no one else.

It is easy to figure out why the purveyors of tax nonsense do so. Political gain means more than does truth, honesty, or integrity. It’s not stupidity or laziness on their part. They know the facts, and they consciously twist the information because the twisted material has positive value for their agenda whereas accurate information will wipe out any realistic chance for political success. It also is easy, for me, to determine why the dissemination of tax nonsense works. As I pointed out in Tax Education Is Not Just for Tax Professionals:

It’s obvious that too few Americans understand enough about tax law or finances. It’s also obvious that one of the reasons is that insufficient funds are provided to educate the nation’s children about these things as they move through its school systems. . . . . If the nation continues to resist paying for quality education of its children, it will soon become a nation of the ignorant.

Who benefits when the country is a nation of the ignorant? The answer to that question explains much more than what fits in a four-paragraph blog post.

Yves Smith, Why do we keep indulging the fiction that banks are private enterprises, Naked Capitalism, Sept. 15, 2010.

Yves notes the problem that the Dodd-Frank bill doesn't do enough to head off another financial crisis (as I've said here before, banks remain too big to fail, banks are still permitted to own hedge funds and private equity funds, with some restrictions that don't amount to enough, and banks continue proprietary trading under the guise of customer preparation and derivatives transactions--well, naked credit default swaps are still possible).  So we are hoping for an assist from Basel III, the revision of the internationally agreed regime for regulating banks.

But Basel III doesn't go far enough either.  It's a weakling when a giant was needed, though the banks as usual will pile on with whining about how these new rules will cripple their profitability and hence restrict lending and hence doom the global economy.  As Wolf (the criticizer of the Basel rules linked by Yves) notes, tripling the size of required capital reserves "sounds tough, but only if one fails to realise that tripling almost nothing does not give one very much."  Besides the delays in our own bank reforms (years for the banks to speculate themselves into another crisis, the Basel III reforms won't be fully implemented for another decade, plenty of time for "another crisis or two."

Here's a great paragraph from Wulf (with highlighting by Yves).

We cannot assess the costs of regulation without recognising a few facts: first, both the economy and the financial system have just survived a near death experience; second, the costs of the crisis include millions of unemployed and tens of trillions of dollars in lost output, as the Bank of England’s Andy Haldane has argued; third, governments rescued the financial system by socialising its risks; finally, the financial industry is the only one with limitless access to the public purse and is, as a result, by far the most subsidised in the world.

You should read the full post to see what Yves does with the highlighted phrase, but here's a sample.

The usual narrative, “privatized gains and socialized losses” is insufficient to describe the dynamic at work. The banking industry falsely depicts markets, and by extension, its incumbents as a bastion of capitalism. The blatant manipulations of the equity markets shows that financial activity, which used to be recognized as valuable because it supported commercial activity, is whenever possible being subverted to industry rent-seeking. And worse, these activities are state supported.

***

So, the reality is that banks can no longer meaningfully be called private enterprises, yet no one in the media will challenge this fiction. And pointing out in a more direct manner that banks should not be considered capitalist ventures would also penetrate the dubious defenses of their need for lavish pay. Why should government-backed businesses run hedge funds or engage in high risk trading, or for that matter, be permitted to offer lucrative products that are valuable because they allow customers to engage in questionable activities, like regulatory arbitrage? The sort of markets that serve a public purpose should be reasonably efficient and transparent, which implies low margins for intermediaries.

Campaign finance and tax law

Ezra Klein, Congress's Bipartisan Regard for Wall Street Money, Apr. 21, 2010, provides an eloquent statement about the problems of our current campaign finance laws:  the rich are especially privileged, in that they can 1) donate to a candidate whose views they share in a way that can make a difference  in that candidate's chances for election but also 2) donate to all candidates indiscriminately in a way that hedges their rights to access no matter which candidate wins.  Poor constituents lose out doubly--they can afford only a pittance to help the candidates whose positions they believe most closely reflect their own, and they cannot begin to play on the "money for access" field.

So what if the access the rich are interested in is to talk about the tax laws?  For an amount of up-front money, access may provide a long-term monetary benefit in the nature of a tax expenditure that is tailored to provide significant benefits to upper-bracket taxpayers.  It may even be sold as a tax expenditure in the public interest--like the mortgage interest deduction, which is touted as a way to help ordinary Americans buy their own homes but which is especially beneficial for those with million-dollar home mortgages and high income tax brackets. 

The rich thus have money, in part, because they have had extraordinary access and through that access have succeeded in getting Congress (and regulators) to pass wealth-friendly laws.  Deregulation of swaps, for example, meant Paulson could short the toxic CDO specially created for it by Goldman and earn great wealth on a deal that might not have been allowed --or certainly would have been less likely with full transparency-- in a regulated market.  The preferential rate for dividends meant that a wealthy person could earn twice the income from his stock that his secretary earned in wages yet pay not a penny more of income tax. 

The power of money to buy access seems worrisome whenever it occurs, but perhaps particularly troubling if the access influences tax laws because of the underlying principle of sharing the burdens of the cost of government that is also corrupted.

So what can we do about this conundrum of the power of money to buy access?  I suppose we can vote those who readily provide access to money out of office.  But campaign financing pays for the information (and misinformation) that we receive, so it appears we voters will be likely to be misinformed more as the need to be informed rises.  On a local level, perhaps public financing of campaigns is the answer.  But on the federal level?  It appears that only volunteer activism and the work of organizations intended to counter directly the influence of purchased access could have an effect.

Do readers agree that corruption of the process is especially worrisome for tax laws?  Do you see any better ways to counter the corruption?

Today's Links Worth Noting (with commentary)

Less Interest in Interest Only, Tedeschi, NY Times, Mar. 17, 2010

Freddie Mac announces that  (as of September) it will no longer support mortgages that provide an interest-only period.  That's a good move.  As one of the small lenders quoted inthe article comments, these products make sense, if at all, only for wealthy borrowers who have ample ability to increase payments when the monthly amounts "jump" at the end of the interest-only period (sometimes as long as 10 years); but they were offered to many who don't fall into that category.  Note that the article indicates that the three-month delinquency rate on these types of mortgages that it holds is 18%--more than double the rate for principal & interest mortgages.  That is not surprising, since such mortgages EITHER are just a silly incentive for taking out a loan without starting to pay it back immediately--silly, because Americans don't need incentives for more leverage but rather incentives to start paying down their debt-- OR operate under demonstrably false hypotheses such as the assumption that home values will go up sufficiently to pay off the loan in a quick sale (where the borrower is just "flipping" the house) or that the borrower who can only afford the initial interest payment now will make more money later so that paying higher interest AND a portion of the principal will be feasible later.  Either way, they are one of among many "financial innovations" of the last few decades that primarily serve only to line the pockets of mortgage lenders while creating more instability in the financial system.  

Those Wall Street Gamblers Might Not Be Bad After All, Schwartz, NY Times, Mar. 19, 2010

Hmmm.  Given my various warnings about the harms of speculation, you can probably guess that I find the hypothesis here unable to stand up to much scrutiny.  The journalist obviously was looking for a catchy attention-getter--how to make a hero out of the current bad guy.  So while the article gives a little lip service to the real problems with naked market speculation, most of the time it is spent mouthing the encomiums that speculators have created about speculators to describe themselves as an important part of a functioning market.  Bunk, I fear. 

Here's why.  Schwartz notes that the role of speculators in the recent financial system crash is "hotly debated" on Wall Street and in academe.  He quotes a lone academic on the way speculators tend to increase market volatility by inflating bubbles on the way up and deflating them on the way down.  Then he spends the rest of the article quoting short sellers and other speculative traders on their views of why speculation is an overall good--in fact, even mentioning (with a caveat that it may go too far) Edward Chancellor's view that speculation is driven by utopian views of an equal society rather than by greed.  Ha, if only.

So he quotes a shortseller who says that because short sellers do market research to decide what to short, their trades aren't gambles.  That's a false distinction.  Research or no, trades are gambles.  Only the initial investment in equity or debt is productive, in that it goes into the busienss and provides capital to buy equipment or raw materials or hire productive employees--all of the trading after that is a gamble of one sort or another.  Naked trading in derivatives, of course, is even more clearly speculative gambling that just hopes to cash in on a perceived trend direction by voting with or against it. (Contrast with flash trading, using clients' expected buy-sell positions to make a profit, which isn't a gamble at all since it is an unfair way to make money off the market procedures themselves--neither productive in supplying capital to businesses nor helpful to investors in supplying information about investment possibilities but really a kind of insider trading taking advantage of known positions.)  Even researched positions are not sure things--and even positions that seem fundamentally sound because a fundamental flaw in a company has been found can go wrong because the company addresses the flaw in time to come out. 

The journalist "buys" that researched trades aren't gambles, and moves from that to state as fact that speculative trading "helps reduce risk by taking on the other side of popular trades, resisting the herd mentality that creates bubbles in the first place."  Well, the fact is that for every trade there is someone in the opposite position.  Speculators are as likely to be on the wrong side as the right side, where right is defined as the side that most accurately reflects economic fundamentals.  One of the problems with the 2008 crisis was that there were lots of trades all assuming that house values were going to keep going up and therefore mortgage securities were going to keep being paid off.  But they were made with insurance, which left the insurers holding the bag.  In the credit default swap casino, AIG was the big holder of the losing chips (and, without the bailout, many of AIG's counterparties would have held losing chips as well, with the loss being diffused among all of those who had not stopped to consider that the hedge was only as good as the party providing it).

As for that idea that speculators act out of a utopian view of societal equity rather than greed, I'm gonna have to pass on that.  Greed certainly seems to be the primary motivator in most, in the financial assets world where money and status and power are inextricably intertwined.  Sure, part of the lure of any "get rich quick" scheme is that it allows the lowliest participant to have some possibility of being as rich as the wealthiest royalty.  But the system really operates quite adversely to that view.  Most of the riches accrue to those who already have them, or the financial institutions that manage the trades and get rich off of both sides, going up and coming down. 

Dodd's Letter to Attorney General Holder

Dodd's letter to attorney general Holder is worth noting.  He asks Holder to investigate the use of repo transactions as an accounting gimmick to hide information.  As you will recall, the March 11 report from the bankrtupcty examiner in the Lehmann case (available on BNA for those with a subscription at a link from 47 DTR K-3 Mar 10, 2010) revealed the financial firm's teetering financial state had been hidden through a series of repo transactions designed to make its leger look less vulnerable by removing bad assets. 

Repo transactions are really financings, but they can sometimes be treated as "true sales" for accounting purposes.   This is one of the places where accounting should adopt tax standards rather than vice versa (in fact, there are lots of them).  Tax has long required an examination of economic substance, and repo transactions are treated as financings.  But accounting allows minor deviations from standard financing terms to treat repo transactions as "true sales" that thus disguise the amount of leverage on a firm's books or the fact that particular assets--in this case, bad mortgage loans--remain on the books.  It's time that accountants quit playing so many gimmicks and adopted an economic substance standard.

Links Worth Noting

Don't miss Martin Sullivan's spewing contempt for Congressional inaction on the "black liquor" tax break whereby paper companies reduce their taxes by doing what they've been doing all along, but adding enough oil (increasing pollution and energy consumption) to their mix to qualify for a type of alternative fuel credit.  [Hat Tip:  Roth]

Okay, a little older (Feb 9), but worth a close read--Dan Shaviro's assessment of the Republican spending/tax agenda put forward by Paul Ryan: Paul Ryan's Shadow Budget for the House Republicans (with links to the CBO letter scoring it). Shaviro notes that the budget will (my unavoidable response in some places in parentheses):

1. reduce benefits for those born in 1956 or later (why? simple steps can ensure sustainability)
2. privatize social security (always a bad idea, particularly bad after the market collapse)
3. provide a minimum social security benefit (hey, a good idea for once from the GOP)
4. replace medicare with vouchers (YIPES--bad idea)
5. replace insurance exclusion with refundable credit (mixed reaction--depends on what else is done--why not just move to single payer and be done with it)
6. freeze government spending (YA GOTTA BE KIDDING--after the Republicans have had essential control for 40 years in which they have increased militarization out the kazoo????  just what spending is to be frozen??? quite likely not the stuff the elites benefit from and not the military-industrial complex)
7. change the tax code (mostly for the worse--same old, now proven not to be economic stimulating tax cuts for corporations, etc.)

More on freshwater economics--

I just discovered (via Mark Thoma's Economist's View) an economics blog by Maxine Udall (self-styled "girl economist"--which just goes to show how much our image of economists is one of hirsuted males forging through the marketplace...oops, I meander) that may be worth a read.  I'll add it to my "progressive sites of interest" blogroll, which, as readers are probably aware, is rather selective.  One advantage of not trying to make money on my blog and of having a free hand because it is mine (and not my employer's or mine together with a bunch of friends) is that I get to recognize whomever I want.  So I'll indulge.

Anyway, the posting that drew my attention today is "The Price of Casino-Like Finance is Higher Than We Think (jan. 2, 2010), in which Maxine "marvel[s] at the disconnect between what her economics textbooks assert and the realities."  Markets are supposed to provide us efficient information about prices and wages, so that resources are allocated to the best use, improving individual and societal well-being.  But instead we see cyclical downturns from "irrational exurberance", "casino-like behavior aimed at capturing high short-term gains" which substitutes for "sober, sound, long-term business investment supporting long-term corporate growth and survival."  Part of the reason markets don't work this way, she says, stems from the economics profession itself.  This part is worth quoting.

[A]n entire cottage industry called the economics profession sprang up, firmly anchored on the shores of Lake Michigan, aimed at creating cultural narratives and myths about how “markets” (meaning some abstract aggregation of semi-rational, often ill-informed, but definitely self-interested points of light) would magically “know” and act rationally and with perfect foresight. In many ways, the birth of the cottage industry known as freshwater economics is a testimony to the power of markets. There was and is a lot of money to be made in that cottage industry, especially if one was willing to drink the “business as usual,” “just ignore the man behind the curtain,” “the business of business is business” kool-aid that until recently has characterized Maxine’s profession.

One under-recognized effect of distorted price signals in a frothy economy is the distortion of intellectual curiosity and endeavor. While a course correction, championed by Keynes, Robinson, JK Galbraith and others in the past and now led by such notables as Paul Krugman, Brad Delong, Joe Stiglitz, Mark Thoma and many others is underway, Maxine believes that considerable damage has been done. Not least because most non-economist Americans are unwittingly under the sway of several "defunct economists." The defunct economists have provided a convenient narrative in which government of, by and for the people can never act as a countervailing force against large corporations, but instead is viewed as promoting individual freedom only when allied with and strenuously promoting the financial well-being and increased power of those very same large corporations.

Note that phrase "convenient narrative."  That is an apt description of the facility with which economic models have been used to influence thinking.  I probably mentioned this in an earlier post, but it reminds me of the first year that I taught tax law after leaving practice.  I had a class of about 50 students.  They were still searching to make sense of the legal world and their place in it.  One of my students--a third year who was at first provoked and then, apparently, convinced by my discussions of fairness and distributional concerns as the fundamental question underlying how to tax to raise a certain amount of revenue--told me about his course in the fall of his second year in "law and economics."  It was an eyeopener, he asserted.  He had been at sea, trying to figure out what grounds underlay the legal world.  He didn't have any philosophy to tie it to, and none of the classes had given him any sense of what justice was all about.  All of a sudden in "law and economics"  he had found a theory that claimed to explain everything based on what was asserted as intuitively appropriate self-interest rationales--not just why markets are important, but also how tort law should work, and contracts--efficient breaches are fine, even if you do break your solemn word--, and even constitutional law (Gary Becker's unconvincing work suggesting that discrimination will disappear if one only trusts in markets).  With that theory in hand, he had stopped asking questions and just started applying.  It made it all so easy.  Greed is go; fairness is in the eye of the beholder; efficiency is king.  Wealth shouldn't be condemned; instead, condemn the lack of responsibility in the freeloaders who beg for handouts.  Bigness isn't a problem--corporations wouldn't get so big if the market didn't make it possible, and since they are big, the markets have spoken.  When this student had my class in tax, he suddenly found that there were bucket-sized holes in the dyke set up by free marketarianism.  For every ready one-liner response he'd learned from efficient market theory, I had another question.  (This often was in discussions we had after regular class, so sometimes we talked for a half hour about these ideas.)  Finally, by the end of the course, he had concluded that the law and economics theory that he'd been sold was, in fact, pretty much a sham--at least in terms of holding ready answers, with precise mathematical models to show how scientific it was, to every legal question.  A good tool for thinking about things from a particular perspective, but not God's Truth.

This is the problem we face today.  Free marketarianism has been accepted as God's Truth for decades.  And the financial crisis has shown it to be a bunch of hocus-pocus, with the rabbit up the magician's sleeve accounting for the magical interlude.  Complete focus on self-interest results in casino banking, corporate interests that ravage the environment for a penny more's profits, and managers/CEOs who are so out of touch with reality that they think, e.g., that it is absurd to suggest that a half a million for being an investment banker is sufficient pay.  So we've got a lot to do to counter this casino speculation.  Treasury and Congress putting my proposed New Year's resolutions into effect would help.  (See Jan 2 posting.)  Educators spurring students to think more deeply rather than accept trivialized views of human society would help.  And a stiff bill of financial regulation that takes the casino out and puts the safe back in would be a really important boost towards evening the balance between casino-thinking corporate powerhouses and ordinary people.

HEALTH REFORM: who is trying to make sure real reform doesn't happen?

[hat tip to Stephen V.]

One of the wonderful things about the internet is the speed with which information can be available.  Another wonderful thing is the ability of a few people to cut to the chase and help large numbers of people understand relationships that otherwise would be hidden and esoteric.

But that benefit of the internet is lost when there is lots of money pushing an ideological agenda without much (if any) regard for truth.  IN health care reform, there has been a lot of propaganda and not much real analysis.  Sarah Palin has continued her odyssey from small state governor to stirrer of the passions with half-truths and outright untruths (her "death panels" analysis of the House health care reform bill is an outright falsehood).  Sen. Grassley has claimed the role of arbiter of health care reform legislation, but represents a tiny minority of the country and plays the propaganda game down to mimicing the rabble-rousing misinformation from Sara Palin, talking about deciding whether grandma will live or die. 

In the meantime, big money is circulating to ensure that the outcome of the "debate" favors--guess who, Big Money.  So take a gander at the health care reform lobby-tracking post at Huffington Post back in July and a chart from "our future.org" showing the way right-wing money and operatives are shaping the health care reform debate.  Or just enjoy the chart, below--with the caveat that the chart does include some assumptions about whose paying for what, as described in the Huffington Post entry.

Links Worth Noting

My tax prof colleague Ted Seto has a sobering analysis of "The End of Supply Side Economics", over at his new blog, Understanding Tax.  Readers of ataxingmatter may well note a similarity to some of the issues frequently raised here--i.e., the long-term changes in our fiscal and economic policies under Reagan's marketarian "supply side" or "trickle down" theory and the fact that those changes have had some dire results.  Ted's post focuses on the way U.S. borrowing is financed, something that is becoming soberingly worrisome as we borrow trillions to beef up spindly banks or jump start the economy (not to mention--pay for our grossly overweight military and defense budget). 

Senator Charles Grassley has asked some important questions of Treasury Secretary Tim Geithner.  See his Feb. 12, 2009 letter on the federal mortgage modification plan that may use a considerable amount of the remaining TARP funds.

Coberly, on Angry Bear, posts some much needed reminders on the fake "crisis" in Social Security, No Crisis in Sight, Feb. 19, 2009.  And in related postings, rdan at Angry Bear probes the right's new push against "entitlements", Peterson is non-partisan?? and Fiscal Conservatives Begin Push Over Entitlements.

Mark Thoma's Economist's View has a lengthy analysis of the current housing discussion.  Obama's Housing Plan, Feb. 18, 2009.

Donald Boyd has produced an analysis of the state of states after the economic stimulus money runs out:  What Will Happen to State Budgets When the Money Runs Out?, The Rockefeller Institute of Government , Feb. 19, 2009.  Boyd notes that state revenues tend to take several years to recover after a recession.  While the states will undoubtedly benefit from the $150 billion stimulus through 2011, they will likely nonetheless face a significant fiscal gap--around 4% to 6% of general expenditures--in 2011-12 if they do not  take steps while the stimulus is available to "spread out baseline spending cuts and/or tax increases they will need to make".