About Peter Radford

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That’s a Tax Plan?

Well, no, it isn’t. It’s a draft of a sketch of an outline of a synopsis of what a tax plan might look like were it designed exclusively to serve the interests of the drafter/sketcher/outliner.

With great fanfare and pomp the White House rolled out its “huge”tax plan. As predicted it is not a plan, it is a tax cut for the wealthy.  And, also as predicted, it is more ghost than real. The entire thing fits onto one side of a piece of paper. It is a typically bureaucratic bullet-point presentation of suggestions that Congress might, or might not, want to take into consideration as it works on its own tax plan.

The entire thing is a farce. It is yet further confirmation that Trump has no clue about governance, or about legislation, or about anything much to do with being president. Oh well, he’s what we’re stuck with.

But, what the piece of paper tells us is interesting. It gives us insight into the minds of the plutocrats that now control the country. Let’s be honest: neither Gary Cohn nor Steve Mnuchin, the two ex-Goldman Sachs financiers who make up Trump’s economic team, are so stupid as to believe that massive tax cuts will lead to extraordinary economic growth. They know better. It’s just that after four decades of selling tax cuts to voters the Republicans have discovered that most people are sufficiently blinded by the prospect of a sliver of gain for themselves that they will happily ignore the torrent of gold that floods into the coffers of the wealthy.

The moral bankruptcy of the sales pitch is breathtaking. It ignores the recent example of the state of Kansas under the leadership of Governor Brownback. Kansas became a test bed for the more virulent form of conservative tax theory that Trump’s erstwhile plan embodies. And the Kansas experiment has been an unmitigated disaster.

Not only did Kansas not benefit from a surge in employment when it slashed taxes — it has seen weaker employment growth than most other states — but its budget was thrown into chaos. The state’s credit rating has been cut. It has had to undergo crisis financial management that includes cuts to popular services like education. And it still is in fiscal turmoil. None of the promised benefits from the tax cuts turned up. On the contrary: Kansas has become a fiscal basket case and a premier example of why far right tax plans are to be avoided at all costs.

Yet here we are with Trump trying to turn the entire US into Kansas.

Why?

It isn’t because he is clueless. Nor is it because he is ill-informed. Cohn and Mnuchin are too smart for that. It is because he is a plutocrat. It’s as simple as that. Trump himself will get a tax cut of around $30 million a year from his own plan. On any other planet that would smell of corruption, but in planet-USA it is positioned as a pro-growth strategy to generate jobs for the plebes.

Now, I could support a thorough revision of the US tax code. It is so ridiculous and riddled through with special interest driven exceptions that it needs tossing out and totally re-inventing. At one point in his presentation Cohn mentioned that the intention was to produce a radically reduced and simplified tax code. Great, but the one page we were given didn’t get us there. Instead it featured a breathtaking giveaway to the wealthy and to business.

Republicans are always telling us that the US tax rate for corporations is the highest in the western world. That’s true, it is. But corporations don’t pay the nominal rate, they pay a much lower rate after taking all sorts of deductions that lobbyists have managed to insert into the tax code. That’s why the code is so complicated. Most large companies pay a very low actual rate of tax. Many pay nothing at all, even after making enormous profits. The same is true of wealthy taxpayers who can exploit all sorts of loopholes to minimize their tax rates.

Most people know this. Yet the Republicans keep up with the special pleading anyway.

Trump’s suggestions do include a few things for the average voter: the old seven tax brackets are condensed into three, although we have no idea at what income levels these brackets kick in; and the standard deduction would be doubled, meaning there would be virtually no tax below an income of $24,000. The plan is decidedly partisan in one way at the individual level: it would do away with a whole host of popular deductions that have particular impact in typically Democratic states like California and New York. Those states tend to have higher local taxes to pay for their higher quality education systems and public services. Eliminating the ability to use those local taxes as a Federal deduction would put huge pressure in those states to cut services like education. The Republicans apparently want to turn the entire country into Alabama or Mississippi. The want to initiate a race to the bottom in public service. Right now low quality service tastes benefit from an inflow of residents who have been educated in higher quality service states. Their workforces do not reflect their own service levels but those elsewhere. Once we have squeezed quality down everywhere, those inflows will cease.

Worse: since the higher quality service states are typically those where the economy is strongest, they have sent to Washington tax revenues far in excess of any subsidies they receive back. In effect the blue states pay into and the red states draw out from the Federal Budget. Trump’s tax plan will exaggerate the subsidy the blue states pump into the red states. At some point this will have to become an explosive political issue. Right now most taxpayers are blissfully unaware of it.

Fortunately, none of this matters much.

This meager beginning is just a start in what will be a long and drawn out battle. Most of what we saw yesterday will not make it into the final package that emerges from the arcane processes of Congress.

Oh, and we will now see just how committed the Republicans are to their fiscal conservatism. After years of bleating about the deficit during the Obama years will they simply “do a Cheney” and suddenly argue that deficits don’t matter? The Trump plan would blow hole of up to  $7 trillion in the budget over the next ten years. Either the Republicans have to let that happen or they need to find ways to cover the gap. Current Senate rules forces any tax legislation with a life beyond ten years to be “revenue neutral” — they must not add to the deficit —  this is why the Bush tax cuts were phased out after ten years, or they would have been had they not been re-upped. So do the Republicans go for another ten year deal? Or do they tackle the tax code once and for all?

The Trump plan gives us no insight. It isn’t worth the paper it is written on. So it’s a good job there wasn’t much paper involved.

One last thing, for all of you who thought a vote for Trump was a vote for fair trade: the Trump tax plan has abandoned his much ballyhooed tax on importers. He caved to pressure from the retailing industry.

What a negotiator!

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Complex Simplicity

Simplification, in the context of an economy, is the eradication of all things of interest. This does not mean that studying an economy is thus doomed to be a pointless recitation of history as it unfolds. It is, rather, the recognition that as an economy moves through time it is never, to paraphrase Heraclitus, possible to see the same thing twice. Each economy is different. Each instance of the same economy is different. Any attempt to generalize eradicates those differences and thus eliminates the very substance we wish to explain. It is the existence of differences that are of interest in economics. Indeed, it is the existence of difference that allows an economy to exist in the first place.

Difference as in the spatial scarcity of resources.

Difference as in the complexity of human agency, motivation, and desire.

Difference as in the application of and resistance to power.

Difference as in variations in access to opportunity.

Difference in the chance bestowed by birth.

Difference as in variable interpretations of information.

And so on …

It is impossible to collapse all these differences into a model and then hope that such a model can capture even a modicum of reality. It couldn’t hope to. No amount of mathematical elegance and rigor can contain all the information needed to describe let alone predict an economy. Such a task is a computational impossibility. Uncertainty condemns a model’s relevance to degrade rapidly through time, if not from the very beginning.

The only true explanation of an economy is its history. Beyond that everything is educated guess wrapped around opinion.

The simple so-called laws of economics may or may not hold, but they are inevitably swamped within a context so riddled through with idiosyncrasy that they become very weak and only partial explanations of events. To strengthen those laws in the face of this turmoil past economists have dedicated themselves to extracting bits and pieces from the economy for isolated analysis, as if by such reduction they could learn some truth that would still hold once the isolated part was re-introduced into the complex whole. This method has produced a brilliant array of components disassociated from their context none of which have much value when the components are all re-assembled. So modern economics is not a solid body of thought so much as an amalgam of “neat tricks” that are handy for illuminating this or that, but which are insufficient for explaining the whole. Even then they fall short.

Many of the great success stories in economic theory are actually failures. Many of them can be reduced to a “stuff happens” narrative and not much more. And much of the “stuff” that happens lies beyond the power of economics to explain: growth theory is a good example. Even after decades of tweaks we are left with an obscure object called “total factor productivity” that acts a clever sounding but vague veil for our ignorance. In contrast, the majestic work resulting in theories of general equilibrium are a direct contradiction of the very phenomenon it sets out to prove.

We must resist mocking the achievement hitherto: except, of course where we need to illustrate the arrogance of economics in its current form. The intellectual effort has been incredible. It has simply been misguided. Economists have produced an object of great beauty and of no relevance. It is a work of art not of science. Perhaps it could be hung on a wall somewhere as a caution against future efforts being similarly misguided.

You cannot reduce that which resists reduction.

Economies are such a thing.

 

 

 

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Tax Reform, Relief, Whatever

Moving on, White House style, we are now confronting the prospect of tax reform. I suppose that those of us who cringe whenever we hear a Republican use the phrase “tax reform” ought take some comfort from the obvious disarray in right wing policy circles. Tax reform is already looking like a re-run of health care reform. We all know that Republicans never actually mean “reform” they always mean “cut”, but there are hopeful signs this time through the process. Perhaps reform is a possibility.

Maybe not.

The problem with being an utter incompetent when it comes to sophisticated governance is that complicated stuff is, well, complicated. You can’t just go and bully a few people and get what you want. Tax reform is a complicated problem, especially so in America’s antiquated legislative milieu. There are so many opportunities for well-healed interest groups to twist legislation into the kind of contorted, incomprehensible, and special interest pandering mess that is our current tax system. Untwisting the tax pretzel will require deft, well informed, and strategically driven legislative leadership. Which is not, I think, a key asset of Trump. He is more of an ill informed, inept, elephant of a negotiator whose primary skill is to threaten or cajole, and who then quits abruptly if he can’t get his own way quickly.

Such was his approach on health care. And so far such is his approach on tax reform.

What do we know about the great Trump tax cut?

Not much.

As usual is seems to be a made-for-headlines artifact rather than an actual policy. We don’t know who is working on it, although this weekend our Treasury Secretary appeared to know something about the plan because he told an IMF conference that the plan would involve some short term budget busting. That’s alright though because he assured everyone that in the long term the tax cuts would pay for themselves.

What’s the correct way to react to this absurdity?

OMG!?

Apparently there are no grown ups in the modern Republican party. They keep trotting out the drivel that tax cuts “pay for themselves”. Which they do only in right wing fantasy land. Here on earth: not so much. This is not even controversial. Look at the Reagan and Bush tax cuts and then take a look at the [modest] Clinton tax increase. Investment failed to budge after the tax decreases, economic growth didn’t get a jolt, and the tax cuts simply piled up Federal deficits. Conversely, or perversely depending on your point of view, everything perked up nicely after the tax increases. So we have actual, real-life evidence: tax cuts do not pay for themselves. The fact that we have to to say this is depressing. Facts matter.

But it does give us insight into Trump world.

He, and his key advisors, seem to live in a fact fchallenged time warp where current or contemporary is defined as anything in vogue in Reagan era Republican thinking. Subsequent history and evidence is simply either ignored or never taken on board to begin with.

Its all very old fashioned and increasingly irrelevant in our new economy.

Trump is fighting a modern policy war with the equivalent, not of the old Maginot line, but with something much earlier. He seems to live in a different era and is remarkably ill-informed about the modern economy. His tax plan, what we know of it, reflects his obsolescence.

Do we need to worry?

Of course. Trump is a Clouseau clown bumbling about but with a difference: he might actually break something important. Worse: he doesn’t know enough to know if he’s breaking something.

Then again, maybe we don’t need to worry: Trump hasn’t — still — filled any of the key tax policy positions in the Treasury Department. Presumably this is because he thinks it isn’t complicated and so he doesn’t need thoughtful advice or analysis.

Or maybe he simply doesn’t know those positions exist.

Or something.

You can get quite a headache trying to explain Trump. It’s probably safer not to try.

 

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Nailed to Its Perch

I always use some famous Chicago School economist as my representative fool when I am describing mainstream economics to my uninitiated friends. How does one, after all, defend such a ludicrous body of thought? By reference to Monty Python?

Here is Gary Becker explaining why mainstream theory is so ridiculous:

“The combined assumptions of maximizing behavior, market equilibrium, and stable preferences, used relentlessly and consistently, form the heart of the economic approach.”

And thus Becker’s economic approach remains firmly nailed to its perch looking for all the world like a dead bird. A very dead bird. It would be funny, indeed hilarious, were it not for the rather dismal fact that people like Becker win prizes and accolades for believing such tripe. There is, apparently, no satire sufficiently cutting, no mirth sufficiently loud, and no critique sufficiently detailed to stop the farce from continuing.

Economics, especially the Becker sort, is dead. It died at its inception. It is a joke that needs sensitive burial so we can move on and look for a real economics that engages real problems and real economies and not the fetid fantasies of the type inhabiting too many professor’s minds.

I often wonder whether economists realize how funny they sound. Or whether they even care about economies. The evidence isn’t reassuring. They press on teaching rubbish as if it were golden. They press on writing ever longer papers riddled with details and mathematics that describe absolutely nothing. They continue to paint pictures that amount to fog. They are, in short, wasting everyone’s time.

As you can tell, I am tired of it.

The pretense must end. Economics, in its majority form, is simply dumb and wrongheaded. It is a dangerous technology based on a severely anti-social premiss. It seeks to contort the world to match itself rather than to describe the world as it is.

I am not alone in this, of course, far from it. The embarrassment of the last crisis that left the mainstream sublimely naked and bereft of anything sensible to say stirred many more voices to rise in opposition. Yet the mainstream plods on. Oblivious, apparently, to its public image it hides away in university halls pretending that nothing happened, and that its core principles simply need another tweak to make them the explanatory equipment economists dream of.

But that won’t happen.

Economics went down the wrong road many decades ago. It is too deeply embedded in erroneous thinking and is beyond saving by anyone within those university halls.

If you want to read good ideas about the economy don’t ask an economist. Ask someone who has been in the economy. They might not have grand theories and lots of wizard math to blind you with, but at least they are engaged with reality and not fantasy.

Which, in rather long winded fashion, brings me to Richard Bookstaber’s excellent short book: “The End of Theory”. Let me give you a taste of it through this long quote:

“To understand crises, we must work with the limits that address these essential aspects of our human condition. And, more important, we must refute the use of mathematics because the essential problems are computationally irreducible; refute the notion that we all can be represented by a proxy, which already should be refuted based on the failures of general equilibrium theory; refute the notion of optimization and the maximization of utility, because of radical uncertainty and the need to use heuristics; refute the notion of stable preferences, because people live in a non-ergodic world where they change based on their experiences; refute models using predetermined probabilities, because past behavior cannot then prove a window into future behavior. Refute all these in periods of crisis.”

I object only to his limitation that the refutation refers to crisis. It refers to all times, those of calm as well as those of crisis.

Many of you will not appreciate Bookstaber because of his background in the deepest parts of Wall Street. But, like him or not, his thinking represents a clear and decisive denunciation of the farce that is mainstream economic thought.

Economics is riddled with longstanding idealistic and fantastic efforts to unpick the complexity of actual economies. Those efforts all end up over-simplifying to the extent that reality is tossed aside to make theorizing more tractable. And, perhaps more deadly to theory, those efforts are all entirely products of a particular time and place: they are entirely contingent on the circumstance in which they were dreamt up.

This is true of theories across the political spectrum: they ignore subsequent history and, instead, freeze within themselves the environment the theorist was observing. They become time capsules and ever more irrelevant as the real world continues to unfold. Mainstream thought, though, is a very special case: it was never relevant because it drove out reality from the very beginning. There was never an instance when mainstream thought described an actual economy or explained actual economic behavior. It was always imaginary.

And it would be demonstrably dead were in not nailed so firmly to its academic perch.

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Notes On The Firm

When, for reasons too byzantine to recount here, I decided to re-engage with economics a couple of decades ago I did so through the prism of business. After all I had just finished a stint in banking and was thinking about the way in which the rise of digital technology would change the way in which business is conducted.

The reason for this point of re-entry was that I believed then, and still do, that economies are movements of information as much as, if not more than, anything else. So if digital technologies make information more tractable, abundant, and accessible then they must affect business. My earliest basic assumption was that a business firm is simply a system of thought whose objective is to protect and exploit its information advantage. This brings it into conflict with both its suppliers and its customers who are seeking to overcome the asymmetries of information that occur “naturally” in the landscape. I described the space that firms occupy as “operating space” that is a wedge preventing direct contact between customers [end users] and suppliers [or resources].

That was back in the mid 1990’s and, by and large, since then the disintermediation of operating space that we observe as a consequence of the “digitalization” of the economy has gathered pace.

The most obvious manifestation of this is the steady redesign of business itself. More and more business firms are reducing their operating space by jettisoning  what they consider to be “non-core” activities. The idea being to reduce their logical space only to that in which their information advantage resides, and to allow those aspects of their older form that represent no advantage to go elsewhere to be repurchased at lower cost if, and when, needed.

This, fundamentally, is what outsourcing is about. It is a recognition that the information advantage within certain activities has been eliminated by digital technology. Those activities are now better accumulated and managed outside of the firm, perhaps by other specialty firms, or even by individual workers who can act as contractors with many customer firms rather than being an employee captive within a single firm.

The greater availability of information, and its greater ease of communication is, in my opinion, the key to understanding most trends in business. It certainly underlies the radical reconstruction of our retail industry where the older model incorporating a physical presence in stores scattered around the country is being made obsolete by a more modern and more efficient digital marketing method coupled with a digitally enabled logistical infrastructure.

Key to understanding all this is having an idea of what the objective a business firm is.

In my mind a firm exists to exploit its information advantage. It must, therefore, pay particular attention to its boundaries, not in a physical sense, but in a logical and information sense.

To extract value from its information advantage a firm has to create and manage processes that produce whatever it is that it sells into the outside marketplace. And to secure the most [not the maximum since that is an impossibility] it seeks to be as efficient as it can be. Efficiency in a business sense then becomes a consequence of creating product knowledge, and making its production processes reliable, replicable, and predictable. This is why firms prefer to deploy what I call “primary knowledge” rather than “secondary knowledge”.

Primary knowledge is that which can be encoded in some form of instruction to create routines to produce a product or artifact. That artifact doesn’t have to be a physical thing, it could be something intangible, but the goal is that production is consistent and predictable. Each car, for instance, coming off a production line must conform to a plan. The plans embody the primary knowledge required to produce a car. The more rule-based the plan the more likely it is that production can be scaled to higher volumes; the more likely it is that each car will be standard; the more likely its is that errors are eliminated; and so on.

The problem with primary knowledge is that its efficacy relies on a stable environment. It is, after all, the basis of routine. Wherever a task can be made routine primary knowledge, that is codification in some form, will create the greatest value. This is why robots are superior to humans on production lines: they are less susceptible to error since their underlying code is more predictably followed. Humans have a greater tendency to err. Primary knowledge, because it is encoded, sits at the heart of the transition from the industrialization to digitization.

Let me repeat: business firms exist to exploit information. They do this by encoding what it takes to produce something. They translate knowledge into code. The more of their activities they can encode the more value they can squeeze from their information advantage. So businesses are “in the business” of creating routines. The more routine the better. Business creativity is thus almost a contradiction: it is in the discovery and implementation of routine. More particularly it in the discovery and implementation of  routines that either supplant older routines by virtue of greater efficiency, or which are novel and thus allow the production of new products.

With business firms recognized as code-making and thus efficiency-seeking devices the issues we all have with economics comes into sharper relief: economic theory is pointless in the face of the real world of information processing.

It’s the environment. Real world environments are riddled with uncertainty, emergence [you cannot predict the whole from the sum of its parts], computational intractability, and the simple fact that history is no certain guide to the future [the world is non-ergodic]. In other words, there is an ever changing context that cannot be predicted, calculated, or even easily envisioned.

Business deals with this by creating “alternative futures” called plans. These plans are simply efforts to project a modest amount of certainty into the future, knowing that such a future is unlikely to transpire exactly, but that the match between the prediction and that which transpires is sufficiently close for current decisions to be made.

Businesses need stable futures so that their codes remain relevant. The moment a business context changes the code risks becoming irrelevant. It is a question of adaptation. Even the best code can become useless if the instructions it embodies are no longer efficacious because the environment into which the product emerges is too different.

Which is why secondary knowledge exists. Secondary knowledge is best thought of as the ability to learn or adapt. It is secondary because it is vastly less efficient in stable environments. It is less efficient because it involves the maintenance of knowledge that might not be currently useful but which may be useful in some unknown future. Such knowledge is embodied not so much in code as in the persistence of sets of rules to apply to solve new problems. These rules may, of course be encoded, but their inefficiency resides in their current applicability: there is a cost in carrying around code that has no immediate application. So the ability to learn is an expensive and often unnecessary quality. It becomes vital in periods of rapid change, but is a luxury in times of relative stasis.

Thus firms prefer primary knowledge: it is less costly to maintain, more predictable, replicable, and reliable.

This leads us to another insight: business firms are devices for the translation of secondary knowledge into primary knowledge. They are not designed to, nor do they necessarily want to, learn. Learning is expensive.

This is why it is devilishly difficult for existing firms to innovate well. Innovation is a form of learning. It is an activity that sits uneasily within the codifying apparatus of a well-established business. Naturally, all businesses retain a capacity to learn by virtue of their human basis, but as logical entities they resist too much learning. Their entire reason for being is to seek efficiency through codification. Learning disrupts that efficiency seeking goal.

But, enough, these are notes to myself after all.

Summary: only in the context of an economy as the movement of/exploitation of information can we build a good theory of the firm.

Mainstream economics cannot do this because it cannot deal with radical uncertainty, non-ergodicity, emergence, or computational irreducibility. Indeed it refuses to acknowledge these facets of reality. These facets all have information in various forms as a common theme. Business, in contrast, must deal with the asymmetry of information. Indeed such asymmetry is why firms exist. So by looking at the way in which real firms behave and deal with information we can begin to understand how economies as a whole work.

Without asymmetries of information business as we know it becomes impossible to sustain. The distinction between production and consumption would blur, and the institutions of our modern economy would need radical replacement.

But that’s for another day.

 

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