Odds and Ends

The economy has hit one of those dull patches where all we can say is that it appears to be growing, that growth is steady rather than spectacular, and that we all should go about our business and check back later to see if it has been blown off course.

In view of this I think we ought to reflect on some other things.

Like Martin Feldstein’s evident confusion.

He, in true economic guru style, muddles ideology with economic analysis. In today’s Financial Times he sets out to disparage Obama’s impending tax increase. This, it turns out, is the Bush tax increase that has been kicked down the road a couple of years because we all know that such a thing would be hugely counter-productive in the midst of a recession. Only now we are supposed to be recovering so further delay is beginning to look less problematic. Right wingers like Feldstein love to pin the problem on Obama and neatly forget that the issue of whether to implement the planned reversion to Clinton era tax rates was embedded in the 2011 and 2003 tax cuts. Back then the trickery was that in order to avoid the tax cuts looking like they blew up the Federal budget – which they did and were intended to – they had top appear “temporary”. Permanent cuts would have triggered a debate about how to re-balance the budget by slashing spending, and since the Republicans, then in power, wanted to avoid such a conversation, they hid behind the fiction that the cuts were not permanent. The other neat trick was to ensure that any debate took place after George Bush left office. presumably he didn’t want to have to deal with the mess he was making.

So here we are, predictably, with a right winger pinning the blame for an imminent tax increase on Obama, when the entire problem stems from a flawed piece of Republican legislation.

Anyway. According to Feldstein implementing the Bush law would destroy our recovery and thus we ought to avoid, at all costs, re-electing Obama. This is the intent of his article. There is no analysis. There is no justification of keeping taxes at these low levels on the basis of some new economic insight. It is simply Feldstein shilling for Romney. Perhaps he is tired of teaching at Harvard and wants another go at being a policy maker in Washington.

In any case his article is not economics. It is politics.

I find it interesting that the few statistics he gives us in his ideological argument are those of the total revenues of the Federal government. He tells us that, were taxes raise according to the Bush plan, government revenues would rise from 15.8% of GDP all the way to 18.7% in 2013, to 19.8% in 1014, and then stay around 20% for a decade or so. What he avoids telling us that this is comparable to the levels during the Reagan administration when Feldstein was a key policy advisor. Apparently government revenues of around 18% – 19% are deeply threatening to the American way of life in 2013, whereas back in 1987, when they were 18.4% they were no such threat.

Oh. And nor does he mention that revenues hovered at those levels all through the Clinton era – peaking at just over 20% – even while the economy boomed.

Some facts are just too inconvenient to mention.

The problem with an economist being a political shill is that they tend to use facts very selectively and to deploy only those aspects of theory useful to their argument. Other bits, and lost of history, are left out.

Feldsetin is adding nothing to our debate over fiscal policy other than to give color to Republican extremism and its attempt to defund entitlement programs – he comments very briefly that we need a serious debate about how to rein in entitlement spending but glosses over what that might mean. No. His thrust is simply to fire off a salvo about the putative Bush Obama tax increase, and how awful it would be.

If only we were all sensible and elected Republicans, just like Professor Feldstein, academic and impartial as ever, suggests is best given the science of economics upon which he bases his utterly neutral comments.

Sure.

Then there’s the Economist.

I feel sorry for the people there. They want to stay close to economic orthodoxy and preach the gospel of free markets, but every so often it gets in the way of making a sensible comment.

This week they are focused on the returns on equity. In particular they point out the the so-called traditional premium due to equity investment, over safer investments like government bonds, is an illusion. Stocks have underperformed bonds for a decade. This has all sorts of nasty ramifications.

For one ting it helps explain why businesses are slow to invest the mountains of cash they have. The return is there. They’d be giving up on a nice steady income from their investments in bonds. Shareholders who base their long term plans around receiving an equity premium are deluding themselves. This probably is not a great issue to any of us, were it not for the fact that most pension funds base their contributions and pay-outs exactly on earning such a premium. If the equity premium isn’t there, pension funds are left scrambling to earn a return from other sources in order to meet their pension obligations.

So it does matter.

And the Economist chose this week to talk about it.

The real nugget though is hidden from view. What they don’t want to mention too clearly is that this lack of equity premium is a major reason why privatizing Social Security was such a rotten and toxic idea.

Recall that a major plank upon which privatization is based is that the current return on the Social Security fund is tethered to US bonds. It thus doesn’t get that elusive equity premium. So advocates of privatization wave the supposed higher return someone could get from equities and argue that they are forgoing riches untold. Were someone, the story goes, able to untether themselves and play the market, they could dive into that stream that the equity premium provides and retire a whole lot better off than the way the stuffy Social Security system allows. The equity premium is a vein of gold denied to retirees by the government. So: we ought to privatize.

The argument sounds good.

It ignores all the risks associated with equity investment. And it ignores all the fees associated with running a private portfolio. I fact it pretty much ignores all financial theory. But it sounds good.

Until we realize that there is no equity premium. And that we are deluded when we refer to it because it may have been an aberration rather than the norm.

Worse: another thing the Economist touches upon lightly so as not to embarrass the privatization folks is the old supply and emend problem. Were we to privatize and pour more money into the stock market in search of the equity premium chimera, we would assure it’s nonexistence. All that money would drive returns down.

Lastly, we are told that because the premium doesn’t really exist we all should plan to save more in order to beef up our retirement. This would drain spending out of the economy in the short term, drive down returns to business, and make them yearn for the safety of their bond portfolios even more.

And, as Professor Feldstein argues, uncertainty over those returns stops our loyal businesses from investing even though they are flush with cash. So he would probably want a tax cut for business to give them an incentive. But that would imply we need steep cuts in entitlements. Menaing we all would have to save more. Which means that returns would fall more. Which means …

That it must be the government’s fault. Just like erstwhile scientists like Feldstein wanted it to be all along.

Phew.

Ain’t economics grand?