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Policy as [Bad] Drama

Is is just me or are we firmly stuck in one of those endless dramas designed to drive us all batty?

David Cameron just gave a speech in which he called for ‘urgent action’ to resolve the Euro Zone crisis. This must be the millionth time a serious person has called for urgency. Just for fun someone should give a speech calling for extended dithering and obfuscation. At least they could later claim to have influenced the outcome.

It takes no insight whatever to remark that if there is one defining characteristic of the Euro Zone crisis it is the remarkable lack of urgency shown by the key figures. That, plus the unrelentingly wrong headed policies they keep coming up with when they do, at last, get something done. Europe has become a classic staged production: the script is cleverly written to keep us all on edge; the actors give brilliant perfect soliloquies; the chorus keeps score; there is both farce and tragedy; hubris meets nemesis; each act sets up the next; and it rivals Wagner for grandeur and length. The only thing missing is a hero to offset the abundance of villains.

Oh. And the script tilts too much towards farce.

The entire Euro edifice is slowly swirling down the drain, along with the lives and aspirations of millions of European citizens, while various erstwhile leaders are creating legends of folly apparently oblivious to the damage they are inflicting. As gripping drama it is first rate. As economic policy it is an epic failure.

I have a great difficulty in trying to understand why all the serious folk at the Euro’s helm have decided – every one of them – that steering the ship onto the rocks is the best way to avoid hitting those self-same rocks. Austerity diminishes an economy. It is an act of shrinkage. It lessens demand. Revenues fall. Paying off debts from a smaller cash flow means there is less cash for other things. Growth shifts to decline. Up becomes down. Duh. What about this is hard?

I also realize that serious folk somehow believe in magic. As in market magic. And that all this shrinkage is supposed to clear away the dross, inspire confidence, and set in motion a phoenix-like resurrection as investors clamor to innovate, lead, and otherwise jump around in Schumpterian joy at the sight of destructive creativity. Or something. Or is it von Mises who advocated depression as a cure for excessive growth? As if dancing on the grave of the middle class was a good thing. Perhaps it was in Austria. Indeed I am not even sure there was a middle class in Austria when von Mises and his ilk were creating their anti-social vision.

Had the Austrians had control of writing a certain document the famous phrase “We, the people … ” would have turned out to be “I, the person … ”

Yes, people, austerity hurts. The puritans want us to think it is good for us. A bitter pill to be swallowed to cure our prior excesses. They look sage and sad administering the pill. They tell us it is good for us. They make us promise not to be bad again. Or else.

Meanwhile in the UK austerity is having its required effect. Business is booming. Things are looking up.

Not. The UK is now mired in so deep a trough that it is actually worse the the 1930’s. Think about that. The UK managed to avoid the worst of the Great Depression because it threw off some of the shackles imposed by serious people back then – notably, it left the gold standard well before the US or France. So here we are many decades later and all that unconventional thinking has been tossed aside. The UK’s contemporary serious people didn’t study the history of economics, they just read the most recent orthodox book. They are competing with Europe for stupid economic policy award status. They might even win.

Think about that for a minute.

Meanwhile here in the US policy is in abeyance. No one actually cares about the economy right now because they are too busy getting elected or re-elected. This means that the competition is not to create dumb policy – that is so 2011 – it is now to create extraordinarily dumb proposed policy. In order to get back into the stupid policy stakes and have a chance of outdoing the Euro or UK lunacy, US politicians are having to propose all sorts of really ridiculous ideas. They are all being very careful to avoid saying anything sensible. That would ruin their chances of winning. So they blather on as if the great recession had never happened. They repeat the same proposals that got us all into this mess.

The trick, this election cycle at least, is to avoid, at all costs, saying anything constructive. Novelty is a distinct no-no. Attacking our problems is so, well, controversial. Far better to attack imaginary problems. Take, for instance, the debt ceiling and the catastrophic impact on our future of borrowing money at 1%. It is far, far, better to allow our children to borrow at 5%. We must not, at all, contemplate borrowing when interest rates at at all time lows. Think of the burden on our kids. No. Let them borrow at much higher rates. It’s the responsible thing to do. We must eschew the chimera of a once in a lifetime deal. We must hold back. We must let the opportunity pass. We must resist temptation. With enough steely self-control and enough hair on our hair shirts we will come through, and the magic will part the clouds, the sun will shine, and we all be saved from the hell of intervention.

Because we all know how evil government intervention can be. Reagan said so.

Whatever next?

Jump starting the economy so our kids actually can get good jobs?

Heavens forfend!

Don’t you believe in magic?

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Confusions Abound

Confusions abound. This is the middle of an intense, partisan, and important election cycle and confusion, deliberate or otherwise, is abundant. This is a moment when we need clarity, and voters are being asked to decide on issues that derive from arcane and often very obscure roots. Politicians have a bad habit of trying to slap simple names or labels onto what are very often nuanced ideas. They then sell these ideas as if they are simple solutions to complex problems. So the confusion grows.

Take, for instance Mitt Romney’s source of wealth.

Set aside his start in life as the scion of a wealthy family – not easy to do, but try. We are being asked to evaluate him as someone who has ‘got stuff done’. He has, it is claimed ‘created jobs’. The very purpose of his business was ‘to create wealth’. For a nation dithering along in semi-permanent stagnation this is a magic brew. Surely we should buy whatever Romney is selling.

Not really. It’s an illusion.

Private equity firms make more money from redistributing existing value, than they do from creating new value. They re-allocate wealth. They don’t necessarily create new wealth. By this I mean that one of the primary weapons deployed by private equity firms is their ability to break down old contracts and free cash for the benefit of someone else. This usually involves eliminating pension plans, getting rid of union negotiated wages scales, and other sources of ‘inefficiency’. This boosts profits that are then paid out to shareholders. But all this is doing is taking existing wealth – pension assets – and translating them into cash to support dividends. The unfettered cash flow increases profits and boasts share prices creating the illusion that new wealth has been created. It hasn’t. It has been transferred from the balance sheets of the workers to the balance sheet if the company, and thence to shareholders. There is nothing new. The fact that our accounting systems don’t have an entry for each of the worker balance sheets – the liability exists at the corporate level, but the corresponding asset disappears into the mist of our imprecise national accounting method – is the sole reason it looks as if wealth is being created. The entire process is actually one of capturing those assets in a more visible way, so that they can then be directed in concentrated form from the many to the few.

I am not arguing that private equity firms engage in only this activity; but there is enough of this going on that the notion of private equity firms being wealth creates is factually tenuous. They are wealth concentrators. They are one of the reasons we have such an unequal society, and that so many workers have defunded or eliminated pension programs.

Private equity firms are terrific if you are an investor. Not so much for the nation as a whole.

Which reminds me: Romney made his fortune by playing with other people’s money. He isn’t a tried and true capitalist. He’s a bureaucrat. He;s a lawyer slash business graduate who is excellent at acquiring cash from wealthy people and then using it. He isn’t Henry Ford. He isn’t JP Morgan, He is no Frick. Nor is he a Carnegie. His wealth was made on the back of other people’s capital, to his own. He is not hero of rugged job creation. He is a devotee of Powerpoint, negotiation, and the finer aspects of accounting. He is at home in the security of a spreadsheet and not on the frontiers of risk taking. He is not Steve Jobs, Larry Eliason, Bill Gates, or Paul Allen. He is not an entrepreneur. He is a stylish and successful money manager.

We should not confuse the two

Then there’s banking.

Poor bankers. I feel their pain. What most people fail to comprehend is just how Keynesian banking is. Not in that childish proprietary trading. Not in that undermining of democracy. Not in that anti-social behavior. No. But in the good old fashioned sense of banking.

Banks hold capital to protect themselves against uncertainty. They believe inherently in the existence of the unknowable unknowns that we all laughed about when Rumsfeld made his famous remarks along those lines. He was a Keynesian too, apparently. He didn’t know it of course. Uncertainty sits at the heart of Keynesian analysis. It is what creates a great divide in economics. Orthodox or classical economists presume that uncertainty can, by various tricks, dodges, and wheezes be translated – magically – into what Keynes describes as “the same calculable status as certainty itself”. It cannot. It lies beyond our comprehension. It is incalculable by definition.

This error in orthodoxy leads to all sorts of confusion. Fixing it destroys the heart of mainstream economic theory – utterly destroys it – and so undermines the efficacy of markets so beholden to right wing politicians. Markets are riven through with uncertainty which means we have no idea if they work well or not. Or if they produce socially beneficial results all the time. The point being that we cannot know.

And bankers, bless them, understand this. Hence the need for capital.

And before you all pile in and argue about risk: bankers know the difference, they try to think about that too. They routinely set aside a portion of their profits to cover potential losses. They call they account the ‘loan loss reserve’. They may misjudge the amount they need. The economy could throw a curve. So they protect themselves further by having a layer of capital to augment the loan loss reserve.

So they have two layers of protection: one for risk. One for uncertainty.

Keynesian to the core.

Of course they can be completely stupid by under-providing both for risk and for uncertainty, which is what happened in the recent crisis. And that’s where Minsky and his Keynesian thinking comes in.

You see bankers are so Keynesian in their approach to uncertainty that even when they go off in one of their periodic – and far too regular – bouts of lunacy their behavior is captured perfectly by Minsky’s Financial Instability Hypothesis, which is simply a more fully thought through Keynesian system. Keynesian when they’re good. Keynesian when they’re bad. Well done bankers.

When we think about it a little more, all business people are dyed in the wool Keynesians. The very existence of modern business is predicated on the complexities of lengthy production processes that require a structure to mitigate against the vagaries of uncertainty. Time can play havoc with the neatness of orthodox assumptions. Stuff happens. So businesses are constructed to enclose a subset of economic transactions, thus protecting them from the moment to moment volatility of an open market and allowing assets to be dedicated to a process through time. It is the incalculable nature of what might happen if those assets were exposed to market forces that gives virtue to their enclosure in a firm. Markets just don’t deal with uncertainty very well. Firms are designed to fill that gap. And it’s a big gap. A lot of things just could not happen were we to use markets alone to produce goods. Uncertainty get in the way.

Not that you would realize this by listening to bankers or business people. They prattle on about free markets as if uncertainty didn’t exist. Yet they laud entrepreneurship which is simply the adroit exploitation of the unknown.

Talk about confusion.

So here we are in the middle of an election where voters are being told that one candidate – the free market guy – is a wealth creator and that we should believe more fully in the virtues of markets. Which he’s not, and there aren’t. Government is essential to the proper functioning of a modern economy. So too is the modern business firm. Both intrude into the space that the free market occupies in the minds of right wing leaning economists. For good reason.

Uncertainty.

No wonder there’s confusion.

In the clash in ideologies presented to the voters this year, one view is based on an attempt to understand reality and has come up with a messy but workable solution. The other is based upon what some theorists would like there to be, which isn’t, but which at least is pure. So it’s a clash between the pragmatic and the idealistic. Between the real and the dream. And the realists are on the left while the dreamers are on the right. Which is almost exactly opposite to the way the media usually describes things. And which just adds to the confusion.

In fact it’s almost Confucian.

But that’s too confusing even for me.

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Bleak Housing; Brighter Debt

Today’s slightly upbeat report does nothing to mask real estate’s rotten 2010. For the record: sales of existing homes rose 5% in December hitting an annual rate of 4.61 million homes. Part of the increase is accounted for by the revision down of November’s numbers and the rest by the extraordinarily low mortgage rates and continued depressed prices that haunt the market.

The numbers speak for themselves. At the height of the lunacy, in 2005, 7.08 million existing homes changed hands. Obviously we are a very long way from that peak and are highly unlikely to get back there any time soon.

Meanwhile the median sales price edged down agin – to $164,500 in December – bringing prices all the way back to where they were in 2002. An entire decade of stupidity and irrational pricing has come and gone, yet we are not done. Prices look set to decline some more: the average for 2010 was $166,100, so December’s lower figure suggests we are still on the downward slope.

The mix of sales was also revealing. Distressed sales still account for about one third of all sales, while first time buyers accounted for about 30%, well below the usual 40%. Evidently the market is still disgorging the errors made during the bubble and looks set to continue that way through 2012 and into next year. The backlog of foreclosures is still sufficiently large that it will cast a long shadow across the market for a couple more years.

Finally, credit conditions continue to hamper recovery. Nearly one third of all homes bought in December were cash transactions as buyers picked up distressed homes for a song. The banks, the epicenter of the crisis, are still nursing their self inflicted wounds and thus being overly parsimonious with new credit extensions. So having caused the slide they now are working furiously to prevent a full recovery. Minsky must be smiling somewhere at this total vindication of his theories.

Amid this gloom there is good news: US debt ratios and levels are improving. One consequence of the foreclosure mess and the retreat of households from high levels of consumption, is that the process of de-leveraging has begun to have noticeable effect. The US private sector is now far less indebted than it was at the outbreak of crisis. While this improvement has been masked by the rapid run up in public sector debt, the improvement in private sector balance sheets is getting close to the point that we can expect a shift back towards spending.

As you know, I have argued all along that the most important factor triggering a stronger recovery – as opposed to the stagnation we are now lumbering through – is the indebtedness of business and, more importantly, households. The enormous shock to private sector balance sheets caused by the sudden exposure of the asset price illusion built up during the early 2000’s, the consequent collapse in confidence and expectations regarding wage security, and then the realization of the extent of over indebtedness within the private sector, all combined to create a sudden and sharp retrenchment. This sent us into recession and prevented us bouncing back. The retrenchment lingers on because wages are depressed, unemployment still is high, and asset prices have not recovered – notably home prices as I mentioned above. To the extent that this process is now winding its way towards a conclusion, and indebtedness arrives back at more comfortable and sustainable levels, we can expect consumption to accelerate.

It is this acceleration that will, finally, push us back to more rapid growth and allow unemployment to fall.

When will this be?

Sometime in 2014. That’s when, at current rates, debt levels look as if they will finally return to earth from the orbit they have been in for far too long. Until then the economy is at risk from further shocks, and cannot be expected to grow more than fitfully.

One last thing: people often speak as if the run up in public sector debt will hamper this outlook. Not at all. For two reasons.

First: the ability of the US government to issue debt throughout the crisis buffered the economy from the full impact of the private sector retrenchment. The key during a crisis such as ours is to allow those who need to cut debt do so without crippling the entire economy. This implies that someone else, whether in the private or public sectors, needs to keep borrowing. Indeed they need to increase borrowing to mitigate the sudden reversal elsewhere. The alternative is the old fashioned depression advocated by libertarians and classical economists. They have no fear of the social disaster that rapid retrenchment brings, seeing it, instead, as a necessary purging of bad decisions. They are correct to think we need to eliminate the consequences of this bad decisions, through bankruptcy etc, but they fail to account for the downward draft an unbuffered retrenchment can create. It is quite possible, in real world economies rather than in idealized ones, that the private sector will overcompensate for its prior mistakes. If that happens unnecessary harm is done with often irreversible consequences. So using the government’s balance sheet to limit the speed and depth of the adjustment helps prevent this overcompensation and allows for society to heal itself sooner rather than later.

Second: and consequent to the first, the more rapid healing in the private sector then allows growth to resume more speedily also and at at more rapid rates. This sharpening of the recovery then allows government income statements to return to normal – tax revenues recover and expenditures decline – thus limiting and then reversing the run up in public debt.

And don’t forget: most of the debt the government issues, especially here in the US, goes into the hands of local citizens. So the interest paid, often called a burden on the taxpayer, is also an income to those self same taxpayers. In aggregate in nets out – except for the small amount that leaks into foreign hands – and is thus not a burden at all. US taxpayers are lending to themselves, paying themselves interest, and then paying themselves back. At no point is this a burden. Indeed if the proceeds of the loan are used wisely and invested in socially beneficial projects, not only do taxpayers benefit from the umbrella of public sector debt preventing total economic collapse, but they benefit from long term infrastructure construction and other pay-offs from the utilization of the debt.

So even with US public sector debt ratios very high, the outlook for US balance sheets has improved markedly. There is no debt crisis. Not now anyway.

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Romney and His Taxes

This is a quiet day.

Except for Mitt Romney and his charge to the Republican nomination. A furor has broken out over Romney’s tax rate. He, like many very wealthy Americans, lives in a different tax code from the rest of us. Up there in the higher reaches of the income atmosphere tax rates are lower than they are down here on planet earth. Clodden folk pay higher marginal rates than the high flyers. We have known this for a while. So the outbreak over Romney’s tax returns is a brouhaha long in the making.

The facts are simple.

The US taxes income generated by labor at a variety of tax rates rising to a top rate of 35%. This top rate kicks at about $380,000. Allowing for the variety of deductions, credits, and other dodges, the average middle income tax payer ends up paying around 20% on their total wage bill. Remember this is Federal tax only. States and cities levy taxes on top of this.

Obviously Romney earns way beyond that $380,000 level. Yet his average tax rate is close to 15%.

How come?

His income consists largely of dividends, capital gains, and other “unearned” income. The top rate, at the moment, on these sources of income is 15%.

Why?

Because the source of that income has already paid tax on it in the form of corporate taxes, and so it is ‘unfair’ – so some people argue – to impose income taxes on that stream of cash twice. This so-called double taxation problem is at the heart of Republican arguments to abolish taxes on such gains in their entirety.

But this is a recent argument. Capital gains were taxed at much higher rates in the past without, apparently, dampening the flow of capital so any argument suggesting that high taxes on these sources of income are a disincentive defies history. They weren’t.

More importantly, though, is the hidden story. As we all know: most corporations do not pay taxes. They are able to exploit the convolutions of the tax code to reduce their liability to zero. So the cash stream that ends up as dividends is largely untaxed. So non-wage income is vastly privileged, and flows with much less of a burden. It is just one aspect of the three decade long development of our rentier style economy within which wages are squeezed while profits soar and feed into the cash flow that ends up in the hands of people like Romney. The gradual disappearance of corporate taxes as actual rather than theoretical payments invalidates the double taxation argument.

But it’s worse.

One of the most egregious tax dodges still on the books is the notion of ‘carried interest’. This is the outrage that allows hedge fund managers earning hundreds of millions a year to pay at the lower capital gains tax rate rather than at the higher income tax rates. Carried interest is a performance fee levied by money manages on the funds they manage. It is calculated as a percentage of profit after having paid back the original capital that investors invested, and any agreed target rate of return. The residual net cash flow is then either distributed back to investors or paid out to the fund managers as carried interest. So the cash flowing into the carried interest bucket is simply a fee carved out from the revenues of the business. There are plenty of businesses that pay their managers incomes from the residual cash flows. Usually they are accounted for as partnership income, salaries, or bonuses. But not in the shady world of high finance. Somewhere along the line the finance industry managed to re-name these payments as carried interest and get them taxed as capital gains.

Technically the source of the income is the gain on the capital invested. But – and this is the crucial point to keep in mind – it isn’t the capital of the fund managers. It is the capital of other people, the investors in the fund.

In other words, private equity and hedge fund managers are being paid fees – taxable as income under normal circumstances – and, by sleight of hand, counting it as capital gains – taxable at the lower rate. It isn’t their capital. It is one thing to support capital gains tax as appropriate on gains from capital; it is another to tax ordinary fee income as if it were a gain on capital. It is no such thing. It is an outright cheat.

Back to Romney: in his days at Bain he earned huge fees as a private equity fund manager, re-named those fees carried interest and thus reduced his tax bracket substantially below that of any regular person. Like the ones he was firing in order to create those capital gains for himself. He was not alone of course. The entire hedge and private equity fund industry pulled the same scam.

So.

Not only is Romney paying a lower rate on his current income – because it comes, predominantly, from dividend and capital gains, but he was part of the big carried interest swindle perpetrated on the regular taxpayers by the finance industry. Romney lives in that rarified 1% world were the rules are specially designed to keep the wealthy secure from the problems of the rest of us face routinely. It is no surprise to find that, over the past three decades, the high end business managers and financiers responsible for managing our economy have down so to their own advantage. The epic shift in wealth to the top tier is well documented. That they distorted the tax code along the way to keep more of the loot is less well known. It ought to be. Especially in these more straitened times when the management of that top tier has been exposed as a dismal failure. They steered the ship onto the rocks and made off with the money. They are bankrupt of ideas, but well-heeled in wealth. They in ovulated themselves ahead of their failure so as not to be harmed by it.

Romney is one of them.

As his tax returns, when and if we see them, will attest.

Whether people care is another question.

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Captain America?

The Economist’s astonishingly tone deaf editorial on Mitt Romney – “America’s next CEO?” – is partisan, wong-headed, and naive. The very title gives away the fundamental error: America does not need a CEO. The popular notion that business experience somehow makes for a more productive president is horribly misguided and displays a misunderstanding of politics that, frankly, the Economist ought to know how to avoid.

That many voters are tired of the gridlock in Washington is understandable. We are stuck in a deeply partisan era, forced on us, by and large, by a recalcitrant extreme wing within the Republican party. So far has that wing been able to shift the center of gravity of the Republicans that none of Eisenhower, Nixon, or even Reagan, would qualify any more as a suitable standard bearer of the GOP cause. The gridlock has not come, as the Economist and many others imply, from an intransigent left wing president. Obama is not a hard leftist. Indeed a major criticism often leveled at him is that he has trimmed too far to the center in order to attempt to reach reconciliation with the hard right. No, Obama is centrist, so the Economist’s comment that Romney’s erstwhile centrism would somehow haul Obama back towards the “ignored middle” is laughable. The middle has been long ignored by the hard right, so much so that the entire thrust of policy over the last thirty years has been designed to support business and upper income interests. Or, at least, that’s the way it has turned out.

Policy after policy, for three or four full decade,s has been designed to open up the economy and deregulate business. Taxes have been asymmetrically cut in favor of the very wealthy. Spending on programs that benefit the middle class most have ben either attacked or left to fade away. We have overspent on wasteful wars. We have underspent on domestic programs. We have to fight tooth and nail to keep cash flowing to the unemployed. We have bailed out banks with abandon. The list is endless. This is hardly testimony to a left of center leaning. It is exclusively a hard right agenda.

So why the need to call Romney’s putative centrism a mitigating influence on Obama?

None. It is simple partisan pleading.

As for the notion that Romney’s business experience will make him more effective – nothing could be less true.

In order for any president, on either side of the political divide, to be effective, the US governance system dictates that there is broad consensus in Congress. This is the very thing we are lacking at present. So no one, absolutely no one, can get much done. I very much fear that this election will change nothing.

The gridlock that ails us is a function of the deep flaws within the US political system itself. The vaunted and much admired – here at any rate – system of checks and balances is designed to prevent the emergence of a strong government. The Senate is deeply undemocratic in structure because it gives far too much power to states with small populations. So it is easy to cobble together opposition to practically any program, whether right or left. It encourages barter and back room dealing. It encourages pork barrel spending in order to buy the votes in order to create coalitions. And Senate rules – not the constitution – allow tiny minorities of Senators to obstruct any policy they object to.

None of this will go away were Romney elected. The Senate will still be an obstacle no matter what.

This is the way the Founders set the game up: they were so terrified of mid eighteenth century monarchical authoritarianism that they wanted to prevent the US from having a powerful central authority. Ever. So they condemned us to weak government. They wanted legislation to be labored and consequent to endless compromise. This was the central virtue they thought they bequeathed us: no one can get anything done unless we all can get along.

Which, when there is a vocal and extreme minority, we can’t. Right now the continued existence of the Tea Party is the single most important blockage to policy making. It is not the competency, or otherwise, of the president. As an example look at the disaster we went through in order to raise the debt ceiling. Romney would have faced the same set of circumstances.

In my opinion a Romney victory in November will not reduce, but enhance, the likelihood of policy gridlock. The extreme right will feel vindicated and will start, in the House of Representatives, to introduce extreme legislation. The Senate will grind to a halt as it debates that legislation. If the GOP controls the Senate it will attempt to pass along that extreme legislation only to face a filibuster by the minority Democrats. If the Democrats control the Senate, they will attempt to modify the extreme legislation, only to run int to a Republican filibuster.

Were legislation to find its way to Romney’s desk he will be faced with a dilemma: does he sign into law extreme right wing policies? Or does he veto his own party? Either he falls into the Obama trap and appears incapable of getting something done. Or he ends up as an enabler of the extremist wing of the GOP. By failing to recognize this trap, the Economist presents a naive and erroneous view of Romney’s prospects.

The conundrum is clear: either Romney falls down as someone who can execute. Or he falls down as being a centrist. In any case he is doomed to fail. The system dictates failure. It as designed that way. It is supposed to create gridlock in the brace of extremism.

Put it another way: Romney cannot be effective – getting stuff done – or centrist at the same time. Not in our current political climate. He has to pick which he wants to be. Just like Obama. There is no difference.

The Founders got it right. Much to our chagrin and frustration.

The solution is to get rid of extremism. Not to elect former executives.

Besides, as I have written about before, CEO’s are not at all adept in democratic circumstances. They are petty dictators. That’s how they get things done in corporations. They rule by fiat and centralized diktat. They have cadres of bureaucrats – aka management – at their bidding. They can make arbitrary decisions without having to face a vote. Popularity is not an issue. Employees cannot vote a CEO out of office because of opposition to an unpopular policy. Indeed many of our most famous CEO’s are proud of being unpopular. That’s how they earned their tough get things done image. At no point did they have to compromise. They trampled on employees to make a profit.

That is fundamental to business: every large corporation is run along the lines of a Politburo. Our CEO’s would be more at home in the old Soviet Union. The idea that a tough CEO can get stuff done in Washington is therefore mistaken. The US is not a corporate style dictatorship. It is run on compromise and public acceptance of policy. Popularity matters. So as soon as a CEO arrives in Washington they have to unlearn the very things that made them a successful CEO.

By the way: this is the same reasoning that exposes CEO hypocrisy about economics. None of them, not one, runs their company along free market rules. Every single one of them runs a Politburo management style. Yet they all endorse free markets outside the boundaries of their business. They seem quite happy with this dualist and internally inconsistent position. Efficiency at the business level requires dictatorship. It requires central planning and control. It is the antithesis of what orthodox economists advocate and model. Efficiency in a closed system is not attainable without ruthless centralization. Efficiency in an open system is simply unattainable due to the vagaries imposed by uncertainty.

I have said it before: in the face of uncertainty, things such as inefficiency, duplication, tolerance for redundancy and other horrors of potential ‘waste’ are essential to long term survival. Inefficiency, in an evolutionary sense, turns out to be a very good thing. It enables more effective adaptation to change. Ergo survival.

But I digress.

The point is that Romney’s business experience was gained in the wrong setting. It is worthless in national politics. Worthless. Romney’s ability to get stuff done as president – which seems to be the reason people are attracted to him – would not be a function of his experience at all. It would be a function of our ideological divide and the political system. Since that doesn’t appear to be going away or changing, he cannot be any different from Obama. Indeed, for the reasons I gave above, there is every likelihood he would be worse.

One last thing: people, seem also to assume that business leaders have an inside knowledge of economic policy. So, they are supporting Romney because he ‘understands’ how to create jobs.

Wrong. Many times wrong.

Macroeconomic policy is far more nuanced than running a business. For one thing there is no bottom line. The US is not a for profit enterprise, so it has no one, single, goal for economic policy. Creating jobs is a major goal, but low inflation is another. The two can conflict. Business does not suffer from this ambiguity, so solutions are easy, clean, and simple. So the Economist’s defense of Romney’s business history – Bain Capital’s success was largely driven by its ability to make arbitrary and narrowly focused decisions without reference to their repercussions on society at large – is both simple minded and misleading: it is a non-transferable skill set. It is enormously useful in the private sector. It is potentially massively damaging for the nation as a whole. You don’t have to quibble about Romney’s job generating history to make this point. It doesn’t matter how good he was at Bain. It is not relevant to being president.

So the Economist, and any other person or organization, arguing that Romney has superior skills to be president because he has been successful in business is simply wrong. They need to read up on American civics; and to get a better handle on the difference between business and economics.

Two things I would have thought the Economist was strong at.

Apparently not.

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