Are you Inky or Blotchy?

April 15th, 2016 at 10:35 am

By now you’ve hopefully heard the amazing story of Inky, the escape-artist octopus from New Zealand. From this AMs WaPo:

By the time the staff at New Zealand’s National Aquarium noticed that he was missing, telltale suction cup prints were the main clue to an easily solved mystery.

Inky had said see ya to his tank-mate, slipped through a gap left by maintenance workers at the top of his enclosure and, as evidenced by the tracks, made his way across the floor to a six-inch-wide drain. He squeezed his football-sized body in — octopuses are very malleable…–and made a break for the Pacific.

Great for Inky, and a testament to how little we understand about the capability of certain animals, not to mention a wonderful liberation from captivity story.

But I’d like to focus for a second on Inky’s tank-make, Blotchy, who doesn’t even get a mention in the WaPo story, presumably because he or she just stayed behind and is thus uninteresting to the media.

But let’s face it: some of us are Inky and some of us are Blotchy.

I imagine the conversation in the octopus tank went something like this:

Inky: Blotchy, check it out! They left the top of our tank ajar. We can make a break for it!

Blotchy: Wait, what? You’re saying we—and by “we” I mean creatures who live and breathe in the water—climb out of our tank, somehow schlep across the floor to that tiny drain way over there, which we then squeeze through, and hope to Neptune that it somehow leads us back to the ocean? That’s the plan, Ink? That’s all you got?! Not to mention, we give up our three squares a day and no predators. I don’t think so.

Inky: We can do this, Blotch!

Blotchy: I barely have enough arms to count the number of whack-job schemes you’ve come up with, but this is downright suicidal.

Inky: Blotchy—is this how you want to live? Stuck inside this tiny tank when we could be roaming the sea? Ogled at all day by practically armless creatures, endlessly singing “Under the Sea” in a Kiwi accent. I know it’s a big risk. But think about the reward.

And so on…

What would you have done? I’m sorry to say, I’m probably a Blotchy. Perhaps that comes from learning risk analysis and being too driven by conditional probabilities such that I would have roughly calculated the odds of success by imagining all the parts of the plan that could go wrong, and stayed put.

What about you? Are you an Inky or a Blotchy? And is it too much of a reach to apply these personality types more broadly. Is Bernie an Inky, arguing that we’ve got to get out of the box/tank, while Hillary’s a Blotchy, saying we need to stay put and make things better from the inside? (Trump, OTOH, is building a seawall so Inky can’t emigrate here.)

End of the day, it takes both Inkys and Blocthys to make the world turn. I suspect old Blotch is sitting in the tank thinking: “well, how about that—that crazy plan worked! You go, Inky. As for me…let’s just see what happens the next time they forget to close up the tank.”

Two tax points: Why is the biz code still a mess and why are we still arguing about trickle-down?

April 13th, 2016 at 12:55 pm

1) Our duct-taped tax code

This WaPo editorial provides a clear and efficient explanation of the inversion problem, where a US company basically moves its tax mailbox, as opposed to its operations, to a low-tax country. The ed board argues that the villain here is neither the Obama administration’s Treasury Dept nor the companies. The former are doing due diligence protecting gov’t coffers and the latter are following unfortunate incentives in our mess of a corporate tax code. The bad guy is…wait for it…everybody’s favorite villain…Congress! Quelle surprise!

Enough members won’t make the necessary changes in the code to block inversions, presumably because they’re paid not to do so by donors who benefit handsomely from the status quo (that last bit is me, not the ed board—but I’ll betcha I’m right!).

Is this view too soft on the companies? Are corporate desertions inversions not unpatriotic? That’s certainly a critique I’ve heard, but patriotism, globalization, and shareholder value collide in ways that…um…complicate simple judgments. What these companies are is freeloaders. They’re taking advantage of our infrastructure, rules of law (e.g., patents), educated workforce and so on without paying their fair share.

Where the editorial goes off is in its stretch to create some kind of equivalence here, one which rings totally false (my bold):

The U.S. corporate tax code remains an uncompetitive mess. Republicans in Congress and President Obama have promised repeatedly to do their duty and reform it.

Wait, wut? Team Obama, since back when I was a member, has been trying to both take legislative action against inversions and to reform the business side of the tax code (in fact, they updated their proposal just last week). Importantly, the reforms they’ve proposed are not that different from those conservatives have touted: basically, lower the rate, broaden the base. But to say they’ve had no takers is an understatement.

I’m not proud to admit that I’ve fixed many a problem with duct tape. It works in a pinch, but no one would mistake it for a real fix. Without a partner for reform, the administration has had to duct tape the code together, which they would readily admit is not the right way to do tax policy. For one, the next president can come in and change the rules back to what they were, adding a damaging level of lurch to an already screwed up system.

It is, of course, much harder make such a lurch with legislative changes. But that’s not Obama’s fault.

2) A compelling, old chart on the folly of “supply-side” tax cuts

I’m revisiting some work examining the claim that supply-side tax cuts pay for themselves (or get anywhere close to doing so) through unleashing growth effects. If you’re thinking “why? Isn’t that idea deservedly dead?” I assure you you’re very wrong. Look at any Republican budget, whether it’s the House of Reps or the candidates running for president, and you’ll see a veritable storm of trickle-down fairy dust.

It’s a classic zombie idea, impenetrable to facts, as I was reminded when stumbling upon this figure from a 10-year old CBPP paper, comparing the growth of real, per capita GDP against that of federal revenues under three different tax regimes: the 1980s (lower rates), the 1990s (higher rates), and the 2000s (lower rates; yes, these tax regimes were more nuanced than that, but no so much so; also, the 2000 bars seriously need updating, as they were forecasts from 2006).

Source: CBPP

Source: CBPP

As you see, growth/capita was about the same under each regime. What differed—un autre quelle surprise!—was revenues. That’s right, folks. You cut taxes, you lose revenues. One can build dynamic scoring models to make that go away, but in real life, that’s what happens, both at the national level and in the states, (see Kansas).

And yes, I know—I said it above—that facts don’t kill zombies. But they’re all I’ve got.

More to come…

Former Federal Reserve economist Andy Levin proposes some smart Fed reforms

April 12th, 2016 at 10:27 am

At a time when many of our key institutions, especially government, are failing us, the Federal Reserve stands out as a highly functional establishment. Their insulation from overt political pressures helps a great deal, and while almost everyone, myself included, disagrees with some of their decisions, the central bank efficiently and effectively practices monetary policy in the interest of balancing their dual mandate of price stability and full employment.

But they’re far from perfect. Though the Yellen Fed has been tough on labor market slack, there’s a long-term bias towards worrying more about inflation than full employment, at great cost to less advantaged workers whose bargaining power is closely tied to the unemployment rate. The Fed particularly dropped the regulatory ball during the housing bubble (Alan Greenspan, Fed chair when the bubble inflated, believed markets would “self-correct”…whoops).

Moreover, there are governance, transparency, and representativeness issues that could be improved at the Fed, which is why I was happy to see the Fed Up coalition (more on them below) release a proposal by Dartmouth professor and former Fed economist Andy Levin to update some ways in which the Fed is run.

First, let me point out what’s not in Levin’s proposal: any outside intrusion into the Fed’s monetary policy decisions (i.e., into how they decide to set the interest rate they control and other methods they use to speed up or slow down economic activity).

You may well be thinking, “But that’s the most important thing the Fed does! If you’re not nudging them on that, then what’s the point?” But it is precisely there where Fed independence is so crucial.

I might like it if I was the one who got to push them towards up-weighting full employment at a time like the present, avoiding potentially damaging pre-emptive rate hikes. But believe me, there are a lot of powerful people who want to push them hard in the other direction. Just this morning, I read an interview with Republican Kevin Brady—chair of the powerful Ways and Means Committee in the House—wherein he argued that the Fed should drop their full employment mandate and just focus on holding down inflation.

Of course, they’ve been missing their inflation target on the downside for years, but there is and always has been a powerful and influential group of inflation hawks who are not exactly…um….data driven.

Which brings us to what Levin does propose. He argues that the Fed’s governance structure is outdated and “its transparency and accountability are severely deficient.” To address these problems, he proposes four changes, mostly focused on the 12 regional banks in the Federal Reserve system:

  1. The regional Federal Reserve Banks, which are now commercial institutions, should become public (as is the DC Fed).
  2. The public should help select regional Fed presidents through a transparent process.
  3. All Fed officials “should serve one non-renewable term of seven years.”
  4. “The Government Accountability Office should produce a regular annual review of all aspects of the Fed’s policies, procedures, management, and operations.”

Read the proposal, which clearly explains why these reforms are needed (though I’m less certain of #4), but the basic point, as Dean Baker gets into here, is that the above noted thumb-on-the-scale in favor of holding back inflation vs. squeezing out slack relates to the structure of the regional banks and how their presidents, who serve on the Fed board (and thus influence monetary policy), are elected. Greater public control of these banks, more democracy in how their presidents get elected, and term limits for Fed officials can boost accountability without compromising the Fed’s independence.

At one level, the problem Levin is trying to solve here is that while the Fed is somewhat insulated from outside pressures, they hear a lot more from banks than they do from low- and middle-wage workers. And yet, the economic fate of those workers is very much linked to the Fed’s actions.

I noted some hesitancy regarding Andy’s 4th point: annual reviews by the GAO. To me, this gets a little too close to Republican calls to audit the Fed. The DC Fed already has internal and external auditing processes in place and with one exception, they look to me to work well (though Levin, a Fed insider for years, knows a lot more about this than I do). The one exception is that, because the regional banks are privately owned, the Fed’s Inspector General’s ability to monitor their activities is limited. But Levin’s other reforms, which make the regional banks public entities, seem to me to address that shortcoming.

One final point. It is often viewed as verboten to say anything about the Fed in political contexts. To do so is considered by many as a slap at their independence.

To which I say, “that’s nuts.” They’re much too important to hive off from political discourse. For example, why is it OK for presidential candidates to give us a sense of what they’re looking for in a Supreme Court justice but not a Fed governor? The latter can affect the quality of your everyday life as much if not more than the former.

To his credit, Bernie Sanders has put forth a set of ideas for reforming Fed policy, some of which dovetail with Levin’s. Notably, the influential economist Larry Summers, who’s name often comes up when discussing Fed appointments, agreed with about 56 percent of Bernie’s reforms. It would be a very good thing to see what the other candidates have to say about all this.

I’m not the only one seeking a new path forward on trade.

April 11th, 2016 at 9:20 am

In his oped out today, Larry Summers lands where I do in various recent posts. What he calls the “revolt against global integration” can lead to regressive Trumpian protectionism or to a new, more inclusive approach to expanded trade.

Larry lays out the benefits of expanded trade both in terms of consumer benefits and “economic integration as a force for peace and prosperity.” But, after suggesting people don’t always adequately recognize these upsides, he notes

The core of the revolt against global integration…is not ignorance. It is a sense — unfortunately not wholly unwarranted — that it is a project being carried out by elites for elites, with little consideration for the interests of ordinary people. They see the globalization agenda as being set by large companies that successfully play one country against another. They read the revelations in the Panama Papers and conclude that globalization offers a fortunate few opportunities to avoid taxes and regulations that are not available to everyone else. And they see the kind of disintegration that accompanies global integration as local communities suffer when major employers lose out to foreign competitors.

OK, maybe that’s a bit begrudging, but it’s essentially the same thing I’ve been saying for awhile now: many people believe their own well-being, along with that of their families and communities, are neither represented nor enhanced by the process by which we are expanding trade. And the politicians are listening to them.

In my work, I’ve associated this with the inadequately representative and non-transparent “free-trade agreement” (FTA) process, which, as Summers suggests, is too dominated by elite stakeholders here and abroad.

The question then becomes how can we move forward in a positive direction? How can we best tap the benefits of globalization in a more inclusive manner?

I don’t think protectionism will prevail. Global supply chains are deep and consumers will not accept the impact of Trump-level tariffs on prices. Over 300 FTAs have been enacted such that the infrastructure of international trade is in place (though it needs work…read on). Do not conflate trade with FTAs.

Thus, I tend to think Hillary Clinton has it right: “Even if the United States never signs another trade deal, globalization isn’t going away.”

Here’s Larry’s view of the way forward:

The promotion of global integration can become a bottom-up rather than a top-down project. The emphasis can shift from promoting integration to managing its consequences. This would mean a shift from international trade agreements to international harmonization agreements, whereby issues such as labor rights and environmental protection would be central, while issues related to empowering foreign producers would be secondary. It would also mean devoting as much political capital to the trillions of dollars that escape taxation or evade regulation through cross-border capital flows as we now devote to trade agreements. And it would mean an emphasis on the challenges of middle-class parents everywhere who doubt, but still hope desperately, that their kids can have better lives than they did.

Good points, all. “Bottom-up” means what I’ve been calling a more representative, inclusive process. But what’s this about “international harmonization?”

It’s a way of saying that we need to reduce the “frictions” and thus costs between trading partners at the level of pragmatic infrastructure, not corporate power. One way to think of this is TFAs, not FTAs. TFAs are trade facilitation agreements, which are more about integrating ports, rail, and paperwork than patents that protect big Pharma.

It’s refreshing to see mainstreamers thinking creatively about the anger that’s surfaced around globalization. Waiting for the anger to dissipate and then reverting back to the old trade regimes may be the preferred path for elites, but that path may well be blocked. We’d best clear a new, wider path, one that better accommodates folks from all walks of life, both here and abroad.

Bernie v. Jeffrey

April 8th, 2016 at 1:03 pm

Bernie Sanders and Jeffrey Immelt had a bit of a dustup over the past couple of days. For the details, links, and some really trenchant analysis, see Jeff Spross here. Basically, Sanders went after GE as a bad corporate actor, a serial tax avoider, and an outsourcer. He said something about the firm eroding “the moral fabric of America.”

That last bit is pretty heated, and Immelt punched back, as you’d expect. He made reasonable points–I don’t blame GE for rips in the moral fabric–though as Spross notes, Immelt’s response lacks context and fails to deal with the dual problems of their outsourcing and tax avoidance.

Most of GE’s workforce–about 60 percent, I believe–is in other countries at this point. Spross notes that their net job creation in the US has been about zero since 2008. And, according to the tax analysts at CTJ, they paid about 1% in federal taxes in 2014 and -1.2% in state taxes.

Here’s the problem: there was a time when the goals of GE and those of the American middle class were mutually reinforcing. But globalization, financialization, and the ability of large, powerful firms to lobby for favorable tax treatment have altered that symbioses such that you can no longer assume that what’s good for GE is good for the middle class.

That doesn’t mean that what’s bad for GE is good for our workforce, either. As Immelt claims, they do some impressive things, and they do some of them here, including in Vermont. Moreover, it’s perfectly legal to avoid taxes (avoidance, yes; evasion, no) and offshore work.

What, then, is the responsibility of policymakers in the midst of this fundamental divergence of goals, where GE’s success fails to reach our workforce the way it once did? Clearly, it’s not to facilitate tax avoidance, ignore the loopholes that allow them to pay such low effective rates, grant them further tax breaks, or to turn a blind eye to unfair trade practices like currency manipulation by trading partners.

Nor is it to assail their morality.

It’s to implement policies that will shift more bargaining power and thus a more balanced share of the economy’s growth from multinational corporations to the majority on the wrong side of the inequality divide upon which GE’s riding so high. Which policies are those? Read the book!