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Tax Cuts and Jobs Act

So the Senate passed its tax cut. It is amazing to see the way in which the media has embraced the idea that this is a reform of taxation. It isn’t. It does have a number of small reform-like pieces, but those are mostly only in the legislation in order to mitigate its cost. They would not be there were the Republicans going through what the Senate calls “regular process”. When we realize this many things become clear.

  • Such is the determination of the Republican party to get some sort of legislation passed that it resorted to a purely partisan vote. The law passed 51-49 with one GOP Senator [Senator Corker] voting against. This meant that the law had to fit within prescribed budgetary limits and could not add more than $1.5 trillion to the deficit over the next ten years. Hence the rag-bag mix of “reforms” added to cut the bill’s cost. The only reason many of the bill’s features exist is because of last minute efforts to fit it within the budgetary cap.
  • The bill will blow an enormous hole in the budget — it will cost us between $1.4 and $1.5 trillion in extra debt. [Let’s not get into a discussion about modern monetary theory at this point!].
  • Never again can the Republicans argue they care about the federal deficit. Patently they don’t. This is the third time in my memory that they have passed budget-busting tax cuts [Reagan, Bush, and now Trump]. Each has been given the fig-leaf cover of being growth generating and therefore self-funding. The previous two provide us with ample evidence that this idea of self-funding is absurd, but the GOP clings onto the fig-leaf gamely in order to hide its antisocial intent.
  • That antisocial intent is to create the conditions under which they can claim the government is impoverished and thus will have to cut back on social spending. If you don’t believe me then you aren’t paying attention: Senator Hatch was asked why he hasn’t supported the re-instatement of spending for the program known as CHIP [the Children’s Health Insurance Program that provides health fare to none million poor kids]. His answer they we don’t have the money. He then voted in favor of the tax cut. Hypocrisy is the order of the day in the current Republican party.
  • And if it isn’t hypocrisy it is simply old fashioned meanness. Senator Grassley made it clear that he supported changes to the estate tax because it rewarded hard work and that it was because workers wasted money on booze and women that they didn’t have estates. Quite what hard work is involved in inheriting a fortune I don’t know. And quite how a family earning the US average of $59,000 is supposed to save up the $22 million needed to reach the estate tax exemption threshold I also don’t know. I doubt that cutting out all that booze and so on will get them there.
  • Also: those reforms that did get added into the bill are designed to undermine the budgets of typically “blue” states like New York and California. Those states have higher local taxes to pay for an array of more generous social and education programs. By eliminating the deduction for those taxes at the Federal level the Republicans are introducing a massive redistribution of tax revenues from the “blue” states to their own “red” states. This is over and above the historic subsidy that has moved in that direction already.

Overall the tax cut is an economic absurdity. It pours cash into corporate coffers already brimming over with cash. That extra cash will be spent, not on investment, but on share buy-backs and executive bonus programs. No credible study argues that the bill will increase growth by more than a minimal amount over the long haul, although next year might see a boost sufficient to make the GOP feel good. The negative impact of the rising debt will eventually overwhelm that modest boost and, as I indicated above as the real intention of the law, will provide the Republican’s with the cover they need to slash social spending.

With the Democrats poorly led and marginalized by a decade of organizational disrepair the only way for us to fend off this attack on workers, the poor, the sick, and the elderly is to heighten our local resistance. Just as repeal of Obamacare became the totem for recent Republicans seeking election, undoing the impact of the Tax Cuts and Jobs Act ought become our progressive totem. Any credible Democrat has to express a commitment to re-establishing the estate tax in order to mute the impact of inherited wealth; raising enough revenue to fund social programs adequately; and to a genuine reform of the tax code both to simplify it and re-introduce equity into it.

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Doomed to Repeat?

One of the great pleasures of living here in southern Vermont is that we have a terrific local bookshop. I go there simply to absorb that book shop vibe unattainable in the bits and bytes of Amazon. And like all good bookshops this one throws up surprises. About three weeks ago I was browsing the small business and economics section and found a book by Heinz Kurz. It’s his “Economic Thought, A Brief History” I recommend it for all of you who want to understand the predicament of modern economics.

Now I admit I am a sucker for reading about the history of economics. It’s a great parallel story to the broader social history of the past few centuries. Economics as it weaves back and forth from one emphasis to another is a much more humble adventure than the arrogance of the overly formal neo-mathematics that is has become nowadays. There was a time when it attempted to explore reality, when it included lumpy and vague concepts, when it allowed for collective action, and when it related to experience: how different from today’s pseudoscientific axiomatically self-determining oddity.

Many of you, of course, will be completely familiar with such a history. Most of you will have your own heroes and villains as the story unfolds. Reading the Kurz book reminds me of mine.

I love the early stories.

The physiocrats for instance. They reflect their time perfectly. Agriculture reigns supreme. Industry is dismissed as a sterile sidebar. Landowner interests dominate. That was the reality of the age. No one can criticize their effort, no one can undermine their achievement. French society was teetering on the brink and was about to fall behind its industrial rivals — except, of course, those rivals were only just beginning the industrial adventure and didn’t understand it themselves. In any case, Quesnay’s “Tableau Economique” is one for the ages. None of our contemporary economists could or would attempt such an effort.

Then there’s Smith. We’ve been chasing his tail, and his tale, ever since. He is a cornucopia of observations that echo on through to today. Everyone knows about the invisible hand. If ever there was a metaphor that needs explanation this is it. What did he mean by this? We really don’t know. He only mentioned it once in “The Wealth of Nations” and probably didn’t mean it the way we commonly think of it nowadays. Subsequent economists adopted the phrase as their own. That twist in meaning is a later part of our story. Quesnay was all about flows, Smith observed a different kind of order. But is it order? Or is it the illusion of order? Your answer will depend on your point of view.

Smith’s other ideas are more interesting. The division of labor sits at the heart of modern economic society. His understanding of this makes him the first to see underneath the surface of industrialization, although I am not convinced he realized just how the revolution he was within would shake our world. Then again he understood the prominence of knowledge in spurring growth. He called it the quantity of science. Even now economics doesn’t accommodate knowledge well. The weirdness of Total Factor Productivity is a testimony to just how difficult it is to squeeze a public phenomenon like science into modern models that are simply homages to individual effort and reasoning.

Let me fast forward.

Where do the wheels start to come off? The early writers, those we call the “classical theorists” talked about economics very differently from the way we do today. We lost a lot when the change occurred. Frankly I blame the “marginalists” but that’s just me.

Between Smith and the so-called marginal revolution sits Marx and his critique of capitalism. The problem with Marx is that he is spot on: circa 1848 his observations made a ton of sense, and post-1848 the staid and the wealthy were terrified he might be right. They needed a new narrative to counter him. They needed to change the conversation.

And the marginal revolution was the response from economics.

The classical theorists thought in social terms. They observed and thought about social, political, and economic interconnections. Their vision of economics was rooted in a larger social context. It was obvious for all to see that the early years of industrialization were not altogether happy ones for a large portion, if not the majority, of society. Sure incomes were rising, but health and living standards were deteriorating. Urban squalor replaced the older rural idyll that the romantics imagined as reality prior to the rise of factory life. Marx was the ultimate critic of this squalor and his stories of the horrors characterizing the industrial interlude between that past idyll and his imagined future utopia unnerved high society.

History is a devil sometimes. Right when those in power needed to fend off their own queasiness about the effects of industrialization, and needed to arm themselves against a rising tide of worker unrest, economists could reach into the physical sciences and pull out miraculous concepts to defeat all that Marxist nonsense.

Back to the fore came the invisible hand, but now it was altered and updated with lots of mathematics and the notion of marginal productivity. There was, the economists of the time taught, no point in pushing back against the tide. Workers earned exactly — precisely and unequivocally — what they, well, earned. Productivity entered the lexicon. Efficiency was borrowed from physics. Inputs and outputs were tied inexorably together. And the economy was conceived, in distant echoes of Quesnay and Smith, as a great big equilibrating machine. There was no room in this scientific interpretation of the economy for romanticism or recourse to narratives. Society was only ever better off if we leave the machine to run by itself. Don’t meddle or interfere became the mantra of the age. Which, for some, it still is.

That cautionary note against interference was bulked up because of arguments going on outside economics.

The journey from ancient tyranny to modern democracy had, inevitably, to pass through its own middle ages. That was when the modern notions of liberty emerged. A problem that still haunts us today is that no single definition of liberty was passed forward to us.

There is liberty as individual freedom that motivates capitalism — the freedom to own and dispose of private property is the result of the development of this notion. And there is liberty as citizenship and equality that motivated democracy — the idea of one-person-one-vote flows from here. What happens when the two liberties conflict? Well, the answers are manifold.  And our current political battlefield is littered with the debris of the consequence of our inability to balance the two very well all the time.

What we can say, is that when Hayek distorted history to tell his story about the “Road to Serfdom” he deliberately set economics along an anti-democratic path. He valued personal liberty above all else. Democracy is, he thought and his heirs still think, a perversion of the purity of the great economic machine. It allows politics to act as a distributional mechanism alongside economics. And surrendering to the democratic wishes of the majority will inevitably doom liberty.

The taint of Hayek’s anti-democratic convictions still sullies economics. Keynes tried to find a middle path, but the trajectory of modern economics and its obsession with the unobservable phenomenon of equilibrium, and its equally opaque partner of efficiency, has led it, inevitably, to become an ideological rather than a scientific enterprise.

There is, for instance, a straight line from Hayek to the notion of shareholder value, which is nothing more than weaponized neoclassical economics. And from shareholder value there is a straight line to the modern workplace replete with tales of woe, depressed wages, household insecurity, and tenuous employment all living in the shadow of record profits. To libertarians like Hayek undermining the futures of millions of workers is a mere nothing alongside the desire to preserve individual liberty. It makes me wonder whether such liberty is worth preserving.

Economics always has, its history teaches us, been a child of its context. What is, and is not, considered appropriate subject matter is a function of the moment. There are signs that the choice of subject matter is changing. Maybe the whole marginal era will be looked back upon as a curious misadventure. Perhaps equilibrium will be seen, at last, as an illusion. And maybe efficiency will be viewed as the chimera it is.

Hayek was right about one thing: information is paramount. Economics is the study of information: who has it? What do they do with it? How does it shape exchange? And so on. He was wrong to jump to the conclusion that he did. He argued that if the totality of information is inscrutable to any one person or group of persons, then we can conclude that it is pointless to interfere in the economy. The government, he said, ought stay well away. The price mechanism of the private market will, he went on, coordinate all that information and produce the “right” answer for us.

But how do we know?

If information is that inscrutable? How does anyone know? Prices might be wrong. How would we know otherwise?

We wouldn’t. We couldn’t.

There’s more to this history yet.

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Taxes: 1970’s Redux?

Taxes. What a problem.

I was going to start by saying something about our current national debate about taxes, but that would have been an untruth. We are not having a debate. Instead we are all sitting on the sidelines whilst the Republican Party desperately tries to cobble together a tax plan in order to fulfill one of the promises it made during last year’s election. That this would be the only major promise thus fulfilled we can ignore for now.

Instead, I think I will start with an observation I have made many times before: the American tax code is ridiculously complex and inefficient. It is also rigged, although the real extent of the rigging only comes into focus when we take a look at the budget that the tax code nestles within.

One of the sneaky ways that politicians of both parties communicate about government spending is to talk only in terms of programs funded out of revenues. That’s obviously a sensible thing to do. So we hear all about such-and-such a program costing $xx billion or trillion dollars which is invariably then presented as YY% of the total budget.

This is sneaky because it immediately creates a framework for conversation about programs and policies. In particular it opens up programs to easy public scrutiny and criticism of their expense. The most oft attacked programs — things like welfare and poverty amelioration activities — are easy targets when their cost is presented in clear dollar amounts or as shares of total revenues.

Indeed anything that is a line item in the budget becomes an easily understood and vulnerable target.

But here’s the really sneaky part:

There’s a distinct bias in the type of policies or programs that become separate line items in the budget. They tend to be things associates with low income voters, the young, the sick, and so on. Other policies get their funding in more roundabout ways so their cost is hidden from view and the public has a hard time focusing on them.

Here’s what I mean:

Tax expenditures are the big game in town.

The green bars on the left of the chart are revenues actually collected by the government. That’s the cash used to fund programs like defense spending which is shown as one of the blue bars on the right. It’s the central bar where the real action takes place.

Tax expenditures are the cost of loopholes in the tax code. They are a measure of the cash the government didn’t collect because of some program or policy that ended up being paid for by rigging taxes.

And they add up to an enormous amount of money each year. Just a quick look at the chart above shows that the loopholes in the tax code leak away enough cash to pay for both defense and Social Security with change left over.

Here’s a list of the biggest tax expenditures:

The biggest loopholes benefit the middle class and business. They are huge costs to the budget. And they are very difficult to locate in the budget because they don’t exist as cash expenditure.

Middle class critics can thus attack welfare spending because it’s explicit whilst remaining blissfully ignorant about how much they, themselves, also benefit from government largesse.

Which gets me to one more thing:

There’s a strangeness to the current tax conversation. It all seems so dated.

We are being told that we need a massive reduction in corporate tax burdens in order to boost profitability and encourage investment. But American businesses are already highly profitable: profits as a percentage of the total economy are high and have been rising. There is no evidence of a profitability problem. Plus, corporations are sitting on piles of cash. They are not so cash strapped that they are forgoing oodles of great investment opportunities. On the contrary, they seem to have no idea what to do with their cash. So they are reduced to shoveling it back to shareholders rather than investing in expansion.

The economy doesn’t look very supply side constrained when you take current profitability and cash hoarding into account. The problem seems much more acute on the demand side. Were there more demand all that cash could be invested in expansion.

And yet: employment is also doing well. Unemployment is fairly low, even given the very slow recovery from 2007/2008, and the tepid policy response since.

Inflation is also low. So too are interest rates.

So why the sudden urgent need to “reform” taxes to free up the economy and get it going again?

Ideology, naturally, plays a part. Republicans always want to reduce taxes for the rich. It’s what they do. And, yes, there is merit in true tax reform to simplify the tax code and get rid of those loopholes. A lower tax burden is always an attractive policy for anyone concerned with winning the popular vote. The problem is that the current Republican tax plan seems designed to solve problems that existed in the 1970’s, not those of today.

Ideology also plays its part in framing the discussion around corporate goals. The drumbeat for short term increases in profits is so loud that it drowns out any sensible discussion about wider issues of corporate governance and financing. The shareholder value mantra long ago destroyed any alternative conception of corporate purpose and has contributed mightily to a sense of malaise in the workplace that then engenders urgency to do something. Yet that something ought not to be to pour more cash down the maw of managerial capitalism. It is not money well spent, and it encourages corruption within business and, by extension, in politics as lobbyists crawl all over Washington and subvert our democracy.

So here’s the thing:

If we have decent levels of employment; high profits; low inflation; low interest rates; and tons of investable cash, why are we discussing a tax plan that will do nothing for employment; might increase inflation; might raise interest rates; and will add to the tons of investable cash?

Why are we partying like it’s the 1970’s.

Why aren’t we simplifying the tax code, getting rid of the loopholes, and moving the tax burden upwards so that the folks who have the income to be taxed pay the taxes?

Ideology.

It is the 1970’s after all. Isn’t it?

 

 

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Speculation

Robert Locke’s excellent discussion of the different perspective presented by a tacit-knowledge rather than explicit-driven driven enquiry into economic matters prompts me to reprise my understanding of the purpose of a business firm.

Put briefly: a business firm exists to translate what is often called tacit knowledge in to what is called explicit knowledge. An alternative wording would be that firms take the ad hoc and various and make them into the codified and uniform. In my own thought I use the words “secondary knowledge” to refer to the kind of knowledge that tackles ad hoc or unexpected circumstances. I use the words “primary knowledge” to refer to the codified knowledge that allows us to tackle the usual and/or repetitive circumstances. It is phraseology I borrowed from evolutionary psychology.

Why do firms do this?

Because that’s how they extract value.

Firms succeed when they control a process in order to produce something. Such processes are constructed from a variety of roles and routines whereby knowledge is combined with energy and physical resources, with the outcome being something for sale. Since establishing a process is a risky proposition — it takes up both space and time and so is susceptible to uncertainty on two fronts — control becomes the key component. And, in order to make the process most profitable, firms want to establish maximum control over the outcome: products must be both qualitatively and quantitatively predictable. How best to do that? By eliminating the ad hoc and various and limiting production to the codified and uniform.

However, as all students of evolutionary theory will recognize, being too specific, too codified, and too uniform renders something highly risky in the face of uncertainty. An unpredicted event may make the output of even the most efficient process useless or obsolete. In biology such uncertainty might arrive in the form of environmental turmoil. In business it might arrive in the form of a new technology. Either way excessive specialization and excessive efficiency makes a process vulnerable to change.

So firms need to absorb novelty. They need to be able to adapt. This implies that there is survival value in the ad hoc and the various, since they are the source of the novelty and adaptation. But to wring out the efficiencies upon which profitability best thrives the new ideas and discoveries within the ad hoc and various must be reduced to code: reliable replication is the key to effective production.

The profit cycle then begins again: knowledge gleaned from confrontation with uncertainty is carefully reduced to code. The specific discovery is made general production. And along the way value is added because quality controlled production becomes possible in quantity.

Being able to deploy both primary and secondary knowledge is the only long term source of survival. In my view the goal of a firm is to survive, it is not to maximize profit since uncertainty rules out the ability to maximize. But to thrive a firm needs to generate sufficient profit to locate and benefit from novelty so it can then reduce that novelty to codified and thus controlled production.

And so on …

The advantages of primary knowledge are that it allows consistent and reliable replication; it is objective inasmuch as it exists outside of any one person [it is coded]; and it is cheap to maintain [it has low/no error rate]. It is thus the most efficient basis for process construction. As noted: these advantages come at the cost of potential failure in the face of change.

In contrast, secondary knowledge is highly variable; subjective inasmuch as it is unique to an individual; and it is expensive because it is both relatively scarce and inscrutable. It is also highly likely to involve redundancy since its components might have no application to any particular problem, but are, rather, available to be called upon to deal with change.

So the getting balance between highly efficient but vulnerable to change, and less efficient yet adaptable, processes is the goal of good management. Survival depends upon the latter. The former is the source of profit. Translation from one to the other is the purpose of the firm.

 

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Spite as Policy

There’s not much to say, but let me say it anyway:

Last week Trump simply stopped pretending he wants to make policy based on thought. He revealed, instead, that his primal driving force is to humiliate and stomp on anyone who stops him being in total control. Since Congress failed to deliver a “repeal and replace” just as he had advocated during the election campaign, Trump decided to let his inner spite flow. He decided to smash away at the Obamacare edifice regardless of the consequences in a child-like rage. He hadn’t got what he wanted. So people have to suffer. And suffer greatly.

So spiteful is his rage at being denied his original goal that Trump cares not one whit about the damage to ordinary citizen’s lives he is wreaking. That’s not the point: being concerned is for weak people. Domination and control is for strong people. And, boy, does Trump want us to cower in the shadow of his presence.

Apparently Trump’s calculation is that if he smashes away at the Affordable Care Act, if he undermines it sufficiently, if vents his anger and spews out his hatred of Obama enough, and if enough people feel the pain, then others — notably Congress — will be forced to come to heel. If not, then so be it, let people die, let people suffer, let people go without. In Trump’s contorted and vile mind, all that devastation is justified, it is part of his act.

Trump likes to imaging himself a deal maker. His method is based on a zero-sum approach. A deal is only good for him if someone else manifestly loses. He has no ability to give and take. He has no measure that allows nuanced or complex deal making. No, not at all: a deal is either a win or a loss. And the best way to arrive at a win is to demonstrate your willingness to tear down all and sundry until the opposition caves in. If the opposition doesn’t cave in, then all the destruction is their fault because they could have surrendered.

So when Trump stops the cash subsidies that have propped up the insurance markets he knows well what he is doing. He is driving up insurance premiums for everyone; he is undermining the entire healthcare system; he is adding substantially to the Federal deficit; he is hurting  insurance company profitability; and he is tossing people out of the system altogether. There is nothing good about any of it. He doesn’t care.

He lashes out by fiat.

He is driven by spite.

All because Congress didn’t deliver on his impossible promises.

His body language when he spoke about his actions tells us all we need to know. His actual language simply reinforced it.

He told us that Obamacare “no longer exists”; he has, he said ,”got rid of it”. More to the point he announced that the desperate  attempts going on in Congress to salvage something from his outburst, are only taking place because of his swathe of destruction. This latter assertion is, naturally, a total lie. Bipartisan efforts have been underway for over a month to come up with a fix to Obamacare. That they haven’t progressed far is due to his indifference: they don’t render unto Trump what he wanted. He wants to expunge the entire Obama legacy. He is entirely uninterested in fixing or improving anything. He, because of his insatiable ego, needs to be boss. And especially he needs to boss his predecessor, a black man far more popular, far more sensitive, for more intelligent, and far more aware of the needs of the country.

His attack on Obamacare last week wasn’t an act of policy. It was an act of spite.

In Trump’s case it is no longer possible to tell what else he might do in a fit of rage.

His policy is spite. It’s all he has.

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