Salam on Quarterly Capitalism

We know, you don’t come here and then go to NRO, but if you missed Salam’s piece on quarterly capitalism because there is so much to read there go back and read it.  It is not red meat but it covers important issues for anyone thinking about how to address this potential issue.  Three points to remember.  One, the measures that we have, accounting and otherwise, are unsatisfying.  As he says

If we’re focused solely on capital accumulation, investment narrowly understood is the most important thing. But if we care about innovation in some broader sense, nailing down the accounting can be difficult.

Two, as we have said, there is little reason to think that transfers to stockholders reduces investment and every reason to think (he wouldn’t go that far) it increases innovation.  Three, doing no harm is a challenge here.  Read it all.

Social Security Alert Two

Whoops!  We were unable to deal with a casual keystroke.  We return to our post on Social Security (SS).

As we were saying, there is a dominate solution.  Productive people make a poor return on SS.  The rational choice is means testing rather than higher taxes.

The question is how and when to start means testing.  The answer to when should be to start ASAP with a phased in process.  Bill Gates gets no payment in 2016.  MWG, a current SS recipient, gets X percent of the full SS in 2016, the first year of the new program.  The payment to MWG would reduce to a smaller percentage by the time it is fully implemented in say 2020.

How is more of a challenge.  The means testing system must account for both assets and income.  In addition, it is not just taxable income as proceeds from Roth IRAs are not taxable.  A more complicated issue involves MWG.  The state of Wisconsin converts sick days into health care benefits.  We will cover about $10,000 in health care costs from that pot in 2015.  It will be a challenge to keep it simple and fair.  As often happens, simple and fair will be in conflict but the solution must be reasonably simple and not obviously unfair.  For example, at $1,000,000 in income (as noted previously, no exceptions) or $100,000,000 in assets you get no SS.  The end of the process might be incomes below $100,000 get full SS.  Of course, we need to adjust the limits so that being married is not a negative economic choice.  Lots of arithmetic needs to be done but with a little attention to detail we can create a means testing system for SS that is reasonably simple and fair.

Myna is right.  Every pol should be talking about this.  If they are not then every voter should be asking about it.

Social Security Alert

Myra Adams has a personal story of the Social Security (SS).  It leads her to say:

Now is the time for Baby Boomers to force their elected leaders to confront this issue and take action. The planned benefit reduction should be a major talking point for every 2016 presidential candidate, but somehow it is not.

She recognizes that we are the problem – baby boomers don’t want the formulas changed.  As if on cue, one of the commenters complains about means testing.  The commenter correctly notes that some will benefit slightly by not saving but SS is a supplement to a full retirement.  Myra lists her’s at $2,136 at age 70.  That would hardly provide an incentive to live the life of the grasshopper.

Another commenter suggests that the government will solve the problem through inflation.  Fortunately, social security payments are adjusted for inflation, check out the arguments over indices, so the government doesn’t have that option.  The choices are raise taxes or decrease benefits.  Both of the options are likely to have an impact on the same group, productive people.  The SS rate might go up but it is almost certain that the upper limit, $118,500 in 2015, will go up.  Means testing will have an impact on the same folks.  Unless you think there is another option, the solut

Good Intentions

Like Islam means peace there is a rush to absolve the minimum wage warriors for their attempts to throw poor people out of work.  Jonah Goldberg is an example:

I find the race to raise the minimum wage across the country so problematic. I understand the good intentions underlying it.

We don’t think there is any reason to assume there are good intentions underlying this attempt to disrupt the economy.  We should assume that they are rational and do it for the obvious reasons to support labor unions and support government employment (often unionized) necessary to deal with the problems a higher minimum wage creates.

Sidebar: Islam means peace and Islam is evil are not the only choices.  Disagreeing with Islam means peace does not imply the other choice.  End sidebar.

We don’t need to attack the motives of people that propose such silly policies as raising the minimum wage.  We need to recognize the implications of such policies and accept that they could be rational.

Hillary’s Proposal to Increase Taxes

Recently Hillary proposed to increase taxes on capital gains by increasing the period to qualify for long term capital gains.  Reactions were predictable.  Larry Kudlow called it, “Hillary’s Inconceivably Stupid Capital-Gains Tax Scheme.”  Matthew Yglesias at Vox writes:

As my colleague Jon Allen has written, Hillary Clinton is a fairly unimpressive public speaker on the stump, but she’s an extremely skilled consensus builder and savvy candidate. The quarterly capitalism thesis is an example of that.

He also says this reveals a deeply wonky side of Hillary.  Both Larry and Matt are off base.  It is not inconceivably stupid, rather it is just standard leftist dogma with the advantage, from their point of view, of making the tax code more complicated.

It is not wonky.  A wonky idea could be that we suffer from a shortage of children to support our economy.  To solve that shortage we change the tax code to encourage children.  Hillary has put “Quarterly Capitalism” in the same speech with her proposal to increase taxes on capital gains but there seems to be little reasons to believe that there is a connection.

Sidebar: As we started writing, searching for a transcript of Hillary’s speech was fruitless.  Therefore, this works entirely from secondary sources.  Why is the speech not up somewhere?  End sidebar.

Matt must be an amazingly successful investor because he is able to evaluate information much more effectively than the market.  First, Amazon:

For example, on the afternoon of July 23 Amazon released an earnings report that performed well above the consensus expectations of Wall Street analysts. That caused its shares to skyrocket in value — up 18 percent — within a matter of hours. And yet while the report was certainly good news for Amazon, it — like most quarterly earnings reports — didn’t really tell us much of anything about the most profound issues facing Amazon (or any other company) in the long run.

The foolish market that research has shown to be an unbiased evaluator of information must have overreacted while Matt held his composure and saw that profound issues were not addressed.  Then he is on to Verizon and Google:

[Google] plows the profits from its web search into a shockingly wide range of ventures…. By contrast, Verizon does not really do exciting things. It does invest money in its infrastructure. But it does so relatively cautiously, rolling out new fiber-optic lines at a measured pace. It could build fiber faster, but doing so would be expensive. Instead Verizon prefers to spend about $8 billion a year on paying dividends to its shareholders, with billions on top of that spent on buying Verizon stock.

He argues that Google, which isn’t private, is like a private company because of its ownership and therefore tends to invest more like private companies do.  He concludes we need more investment so [it appears a causation miracle happens here] we need to tax investors more heavily unless they hold on to the stock for six years.  The two are not well linked.

There are two main problems with Matt’s assertions.  First, there is no evidence that transfers to stockholders reduce investments.  They change who invests but no how much is invested because the rich stockholders (the only ones targeted by Hillary) won’t consume much.  The transfers allow investors to consider new opportunities.  The money will still get invested.  It is possible that the investors might choose more wisely than either Google or Verizon.  Not all investment is equal.

Second, Hillary is the candidate of the status quo and her proposal reflects this.  As an example, it will become a more economically challenging decision to get out of Verizon and into Uber because the tax rate is higher unless you hold the investment for six years.  Again, the proposal will often work against investment where we need it.

It seems as if Hillary has a theme to help lend some limited credence to what she wants to do.  What might she do if she really wanted to accomplish the goals of increasing investment and curbing Quarterly Capitalism?  Investment is easy.  She could eliminate the corporate tax or just make capital expenditures fully deductible.  Curbing QC is harder.  She could remove the restrictions on cash payments to corporate officers (a relic from Bill’s time in office) to reduce the use of stock options.  Limiting the stock options is a challenge since leadership is in short supply.  If the government puts substantial restrictions on corporations’ ability to offer stock options then we can create larger problems than we are trying to solve.  She has hinted that she will attack the ability of corporations to deduct stock options as compensation expense.

Vampire Bank

It appears that the Ex-Im Bank might rise from the dead.  It is a classic example as to why the Republicans are known as the Stupid Party.  The Republicans lose their brand for a few dollars.  Of course, the Democrats will support it in great percentages than their rivals but they won’t get tarred with the same brush because the Republicans are in charge and the Democrats own the press.

If any of the Republicans in the Senate are to have a chance to be nominated for president now is their time.  If individually or collectively they are unable to provide the leadership to kill Ex-Im then there is no reason to consider a Senator to lead to the party.  This situation is only slightly less dire for the party.  Why would a conservative donate, work, or vote for such a party?  Obviously, there are reasons to choose to support the Republicans but this choice by the party leadership will reduce the enthusiasm for the party.

This provides an excellent opportunity for the Democrats to escape being the party of big business.  Fortunately for Republicans, only The Bernie seems to recognize it.  Still it seems likely that this could be the week that the Republicans lost the 2016 presidential election.

Reed + Kevin = 1948

No it is not one of those research puzzles where you must assign a number to each letter.  It is about Kevin Williamson, Reed Galen, Michael Barone and the connection of Hillary to 1947 or 1948.  Kevin Williamson’s lament at NRO is wonderful:

There was a window of opportunity during which our country, had it had more intelligent leadership in politics and business both, might have adopted policies that would have made us — and the world — almost inconceivably better off. The tragedy of the postwar boom is not that it ended but that we did so little with it.

Now that there are fewer degrees of freedom, the lost opportunities from 1945 to say 1955 are not recognized enough.  The unique circumstances of the USA being the only major economy left standing after WWII made economic policy in the USA foolproof.  Anything would have worked.  Reed Galen ties Hillary to that era in another way and concludes:

Hillary Clinton should have run for President in 1948. Back then she could say one thing to people in New York and another to people in South Carolina and the chances of those streams crossing would be accidental at best. With nothing more than the radio and newspapers to inform the general populace, she would have been masterful at slicing and dicing voters whom had little conception of one another.

Michael Barone concurs with us that Hillary is in the wrong era:

We are a more fragmented and personally, economically, and culturally diverse country than the culturally conformist America of 1947 in which most adult men had just been mobilized in the military. Policies and approaches that worked then are not likely to work so well now.

We are great Harry Truman fans.  Hiroshima and Nagasaki were, perhaps, the two best decisions by an American President.  FDR left him with some international challenges and he played them well.  But, as the Williamson lament notes, he did little to improve the economic condition.  We understand that Presidents are busy and have limited capital.  Perhaps he made the best choices or wasn’t capable of considering other opportunities.  It was not unreasonable for him to conclude that the economic side of the post-war country was going better than most expected.  Why let perfect be the enemy of good?

The problem is that degrees of freedom have been lost.  After the Great Depression, post-war America was a relatively great place to be economically.  The war that wrecked our economic rivals gave us, as the Williamson lament recognized, a window of opportunity that we did not fully embrace.  To revive those policies seems odd.  Circumstances have changed and we are no longer an unrivaled economic power.  We need to move on.  Hillary can’t figure it out.  She is running as Harry Trumam.  Can anyone on the Republican side?

NY Times Illogic

James Taranto compares this to an earlier NYT  editorial:

“One of my favorite lines of attack was the one voiced by (among others) Rick Perry, the former governor of Texas and former spectacular failure in the Republican primary process. ‘President Obama’s decision to sign a nuclear deal with Iran is one of the most destructive foreign policy decisions in my lifetime,’ he said. Seriously? . . . Going back just a few years before Mr. Perry was born in 1950, there was the decision to carve up Europe with Stalin, creating the Soviet bloc, sparking a nuclear arms race and leaving entire nations in bondage to the Kremlin for a half century.”—Andrew Rosenthal, editorial page editor, New York Times website, July 14, 2015 (emphasis added)

But we would like to comment on the internal inconsistency highlighted in bold.  It is astounding that the editorial forgot about what was said three words and some punctuation before.  Of interest, Conrad Black is still disputing the NYT assertion above.  It may never happen again but we are with the NYT on the before 1950 comment.  We love Conrad’s writing but often are unmoved by the beauty of his prose.

Colleges and Employee Skill Gap

A nice job by Nathan Hansen reporting on colleges and job skills.  Jason Tyszko, a U.S. Chamber of Commerce Foundation’s senior policy director, spoke on the issue of what he saw as the growing employee skill gap.  He argues that employee turnover makes the “old” model of in-house skill development a bad investment because employees leave before businesses can recover their investments.  Therefore, colleges should treat businesses as their end customers rather than students.  If he thinks he can transfer 100% of the training costs to employees and college then he is wildly mistaken.  We think he is making the reasonable argument that it is about sharing the costs.

Sidebar: Tyszko properly recognizes that it is a educational system where high schools transfer to colleges.  He recognizes that students often leave high school unprepared for college.  End sidebar as we want to discuss college.

Hansen interviews John Nunley, a colleague, who adds to the story.  He recognizes that employers need to give economic incentives to encourage potential employees to develop skills.  In addition:

[Nunley] is also leery of the desire by employers to have educators do all the workforce training for them. Teachers can’t teach their classes to fill the need of every employer, he said, and the goal of education is to develop general critical-thinking and communication skills instead of highly specialized skills that might not be of value in the labor market after a short period of time.

It is critical that we recognize what colleges can do.  Consider an area like tax accounting where we have a very explicit program to develop a specific expertise.  After the tax courses students should know the tax system, lots of tax law, ethics, know how to research tex issues, and, perhaps, have some familiarity with tax accounting software.  The employer can train the employee in the specific software and the issues related to their clients.  Colleges, and especially business colleges, do need to respond to business.  They are one of our customers (students are the other).  On the other hand, we must be careful because Nunley is right that colleges can add the most value by developing general skills but the communication skills must be closer to writing tax memos than Victorian novels.

Like employers, colleges need to see how they measure up against their goals.  For both general skills and more specific we need to see that students are really accomplishing what we think they are.  The assessment boom is imperfect but it is the right idea.  We identify the outcomes and see if students are reaching them.  What is important is what students learn.  What we teach or think we teach does not matter.  We need to make sure we evaluate those big skills that are so important.

Good News?

Today the WSJ says:

U.S. stocks rallied Friday after fresh Greek economic proposals appeared to put Athens closer to striking a bailout deal with its creditors.

Sidebar: Now, retrospective protocols about what causes the market to move should be discounted.  That is, be skeptical when you read that the some stock market went up or down and the cause is X.  In this case, however, the US market has moved several times consistent with the argument that no bail out is bad news and bailout is good news.

We see the danger is in the bailout.  If Greece then why not Italy, Spain, or Portugal?  No bailout leads to winners in losers in Greece but it stops the problem and it seems likely that the overall impact would be positive.  We understand the probabilities are against us but we see much smaller losses in no bailout for Greece.  Would John Taylor agree?

We are not encouraging disagreements with markets.  Markets are the best mechanism we have for understanding complex phenomena.  It might be us be we don’t see the bailout as good news.