Ignore Income Inequality

Income inequality seems to have great resonance.  An example is where Scott S. Powell argues in the WSJ that we should do away with or change Sarbanes-Oxley (SOX) because it increases income inequality:

With corporate tax reform in the rearview mirror, Congress and the Trump administration should pare back a misguided regulatory regime [SOX] that imposes unnecessary costs on public companies, discourages initial public offerings, and skews the distribution of wealth toward the very rich.

We would support adjustments to SOX but not because it changes income inequality. In addition, it is not clear what impact SOX has on income inequality.  More public companies might mean more rich folks.  On the other hand, Michael Tanner has a great article at NRO where he takes issue with what he properly describes as our dangerous obsession with income inequality.  Read it all but here is how he starts:

Yippee! Last week’s sell off on Wall Street wiped out more than $3 trillion in wealth. Overnight, economic equality increased. True, you and I aren’t any better off — in fact, some of those losses came out of our 401(k)s and pension plans — but the important thing is that the biggest losers were evil rich people. Warren Buffet lost more than $5 billion, Jeff Bezos more than $3 billion. All together, the world’s 500 wealthiest people lost more than $180 billion. Aren’t you happy?

He answers his rhetorical questions with of course not.

Sidebar: One of the problems with our dangerous obsession over income inequality is the challenges of measuring it.  The losses Michael describes are not part of a US tax return so it would be difficult to measure the impact.  Two major problems with any argument about income inequality is how to measure it and what is the goal using that measurement system.  End Sidebar.

Michael points out that capitalism has provided great benefits in the US.  Others (here is a video) have pointed out how it has helped the the world.  We need to promote economic freedom, defeat crony capitalism, and protect the needy.  Any argument that cites changing income inequality as a benefit should be ignored so that we can focus on serious stuff.

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Too Kind

David R. Henderson is exactly right in his title but way too kind in his WSJ Op-Ed entitled A War On The Rich Won’t Help The Poor that analyzes the Oxfam report Reward Work Not Wealth.  David starts out with a dichotomy that he shows a counter example of later:

There are two ways to close the gap. The first is to concentrate on making the poor better off. Mostly that has happened, thanks to liberalized international trade and reduced costs for shipping goods. Just as Walmart and Amazon have cut costs for Americans, the introduction of container shipping crushed transportation costs for the world. The second way to reduce inequality is to make the rich worse off. Any guess which method Oxfam’s report emphasizes? “Governments should use regulation and taxation to radically reduce levels of extreme wealth,” the authors conclude.

The problem is that he has accepted the Oxfam starting point that inequality is the problem.  Inequality is not the problem and Oxfam is (or perhaps no longer is) an antipoverty organization as David describes it.  The Oxfam report uses the catch phrase, “Even It Up.”  The first might not close the gap as David demonstrates:

Say that wages in a developing country rose by 10%, and in the U.S. by only 1%. For a family in the poor country earning $2,000, that would mean an extra $200. But for a family in the U.S. making $50,000, it would equate to $500. In other words, income inequality would increase, even though wages grew 10 times as fast for the poor family.

The second way has no assurance that it will close the gap either.  Eating the rich, or some variant of it, will likely have a negative impact on the poor.  Will the gap, however measured, be reduced or increased?  It should not matter because making the poor worse off is a bad idea.  Go check out Venezuela.  We are sure there are studies of various plans to punish the rich but we doubt they are definitive.  The solution is to work on poverty by encouraging markets, rule of law, free trade, allowing GMOs, and so on.  Income inequality is uninteresting and unimportant.  Don’t get sucked into it.

Hands Off Venezuela

The Weekly Standard recently had and editorial and support piece by Barton Swaim on getting Maduro and his cronies out of Venezuela.  We don’t think such an aggressive stance is warranted.  The support piece quotes the editorial:

The reality is that the Chavistas must be deprived of their oil. Otherwise Maduro stays, and Venezuela’s nightmare continues. If the Trump administration wants to rid the Americas of their most odious regime, it will have to embargo Venezuelan oil. Announce the decision six months in advance: Maduro and his cronies step down peacefully or the U.S. deprives them of their only real source of money. In the meantime, strengthen the opposition with clandestine funding and overt encouragement.

Barton goes on to suggest that an alternative is to have a Venezuela airlift like the one in Berlin.  Except it wouldn’t be anything like it.  The most important difference would be that the allies controlled West Berlin according to treaty.  Then Barton goes on to conclude:

It [the airlift] might be a wild idea. Perhaps the saner move would be the more immediately consequential one of embargoing the country’s oil. But either is better than watching another generation of Venezuelans starve.

There are two problems with US intervention leading to regime change in Venezuela:  First, the set of variables are large and the possibility of disastrous outcomes is too large.  The Knowledge Problem will make us ineffective.

The results would not be limited to Venezuela.  US actions in Central and South America reverberates through all of Latin America.  As NRODT tells us, Argentina has made remarkable progress in the last few years.  Still, including the Caribbean, according  Heritage, it is home to six of the 23 repressed economies in the world.  Why do we take aggressive steps to fix the other five?

The empathy of Barton and the others at the Weekly Standard speaks well for them.  Unfortunately, it is not something that we can fix.  To create a working economy the Venezuelans (Zimbabwean etc.) need to fix it for themselves.  We hope that they renounce socialism immediately but it is up to them.

Nope On Trade

We tend to agree with Larry Kudlow.  We believe that there are government policies that will awaken the growth fairy.  Per capita economic growth is critical to funding the government and providing for the people.  We generally agree with Larry’s article on The Donald and Davos.  America is open for business.  There was one part with which we strongly disagree:

In an illuminating interview with my friend and CNBC colleague Joe Kernan, Trump said he’s willing to deal on trade — including NAFTA, and perhaps the Trans-Pacific Partnership (TPP). But he correctly insisted on reciprocity. Barriers should be torn down by both sides. Arbitrations must protect America, not penalize it.

Arbitrations must protect America from what?  The answer would seem to be cheaper washing machines for consumers.  America first would mean the opposite.  We should tear down our barriers and not care about the barriers elsewhere.

Yes, it is more complicated than that.  America also benefits from free trade policies by other counties and we should encourage capitalism. Still, Larry should know that free trade is a good thing and surely he believes that raising taxes such as tariffs is a bad thing.

Three Trade Ideas

The Donald, Kevin Williamson, and Jonah Goldberg have put forth take ideas and actions recently.  It shows the difficulties of politics.  In politics we need to make priorities and often end up supporting the least worst solution, like The Donald.  Kevin and MWG are for unilateral tariff elimination.  We agree with Kevin that:

Which is why my preferred Plan B — unilateral free trade — is, politically speaking, a DOA proposition. I simply reject the notion that free people should have to ask the permission of, well, anybody before they can buy ordinary goods from whomever they like, including producers in China, India, Poland — or on Mars.

Well, we think of it more as tax policy than human rights but we are still on the same page.  Jonah is close to that and The Donald is very far away from us.  Let’s start with The Donald.  He recently gave a speech in Davos where the WSJ reported:

[The Donald] also echoed previous calls for “fair trade,” saying the U.S. would “no longer turn a blind eye to unfair economic practices.”

“We cannot have free and open trade if some countries exploit the system at the expense of others,” [The Donald] warned.
[snip]

The [Donald’s] administration drew criticism from abroad this week for its announcement Monday that it would impose steep tariffs aimed at protecting U.S. makers of solar panels and washing machines.

All three paragraphs represent foolishness of the first order.  Theresa May, in the same article, speaks for us when she says:

Free trade and the global rules-based system had together “delivered the greatest advances in prosperity we have ever known.”

The Donald had an excellent year in 2017.  This is a rocky start for 2018.

Sidebar One:A president does not and should not have control of the country such that, good or bad, it is all on him.  Events were such that The Donald had a banner year in 2017.  It was not all him.  End Sidebar One.

Jonah takes, and has always taken, our side in the trade issues:

[The Donald’s] administration is now moving to put some teeth on its promise to punish “unfair” trade from China and other countries. This week it imposed punitive tariffs on Chinese and South Korean manufacturers of washing machines and solar panels. The move is ill advised on its own, but you can be sure this is just the beginning of renewed debate over the benefits of free trade, with any number of once-passionate opponents of the government’s “picking winners and losers” rushing to defend the sagacity of “America first” economics.

Jonah is getting to be like Conrad Black.  Conrad can’t write an article without puffing up at least one of Nixon or FDR.  Jonah just has to fly his Never Trump flag but he does get to a good point in his conclusion:

Every form of statism — from absolute monarchy to socialism to fascism — involves the state forming an alliance with some faction or another and giving it preferential treatment. Protectionism is simply statism applied to trade.

Sidebar Two: Unlike Jonah, we are not convinced that folks have a hard time distinguishing between pro-business and pro-market.  He says: “But it is a rare corporate titan who favors a free market if doing so is bad for his or her bottom line.”  It is much more general than that as his quotes from Adam Smith indicate.  Neither businessmen nor workers want a free market.  Only consumers do.  End Sidebar Two

Jonah’s conclusion of protectionism as statism leads to Kevin’s idea that the left, where the statists dwell, might be the opportunity for free trade.

Capitalism isn’t what it used to be [the kinds of businesses].  And neither is free trade. Once largely an Anglo-American project, free trade today is a European project, a Canadian project, an Asian project, and a pan-Pacific and trans-Atlantic project, too. It is, properly understood, a global humanitarian project. For the moment, the leaders of that project are people such as Trudeau, Merkel, and Shinzo Abe. And Michelle Bachelet, too: The remarkable fact is that Chile’s socialist president is more pro-trade than is the nominally Republican president of the United States of America.

There is a big problem with Kevin’s analysis.  There is also a minor point in ignoring the UK and Theresa’s quote above.  His major example is the Trans-Pacific Partnership (TPP). Here is an an example of the big problem:

So far, the Democratic party has largely resisted efforts to purge members who supported TPP, fast-track negotiating authority for the president, and other pro-trade measures.

The problem is that Kevin opposed TPP as a free trader.  None of us, Jonah, Kevin, or MWG, were enamored with TPP and the thousands of pages it entails.

The problem is that our first preference is unilateral free trade.  Our second preference is one sentence free trade on a bilateral basis.  We are not interested in imposing thousands of pages interpreted by hoards of bureaucrats on ourselves or other countries.  The statists who Kevin hopes to work with are interested in such agreements.  We tend to favor negotiation but perhaps we need to move to free trade absolutism.  It is always the problem in politics.  Sometimes negotiation takes you so far from your goals that you lose more that you gain.

 

Quasi-Experimental Results

Some results are in on the quasi-experiment designed by the GOP.  The recently passed tax reform bill coincides with an Apple announcement in the WSJ that it:

would make a one-time tax payment of $38 billion on profits accumulated overseas and ramp up its spending in the U.S., as it seeks to emphasize its contributions to the American economy after years of taking criticism for outsourcing manufacturing to China.

An interesting part of the coverage is the difference between the WSJ reporting and the WSJ editorial page.  Here is more of the WSJ reporting cited above:

Apple said its one-time tax payment was the result of recent changes to U.S. tax law, under which companies must pay a one-time tax of 15.5% on overseas profits held in cash and other liquid assets. Profits held in other forms will be taxed at 8%. The company said in November that it had earmarked $36 billion to cover deferred taxes on its $252.3 billion in overseas cash holdings, assuming that it would eventually pay U.S. taxes on a portion of it by bringing it home.  [Emphasis added]

The news gives the new tax rate rather than the reduction, which would seem to be the interesting part, and suggests that the profits would have come home eventually anyway.  The details are not complete here but it looks like the news folks are confusing financial accounting and tax accounting.  The WSJ editorial page has a different take:

Apple said Wednesday that it will pay $38 billion in taxes on the $250 billion or so in cash the company holds overseas; that’s a lot of money for Social Security checks and food stamps. Apple also said it would invest or spend on purchases some $350 billion in the U.S. over five years and add 20,000 jobs.

Apple’s windfall for the U.S. Treasury is the result of the reform bill’s 15.5% “deemed” tax rate on profits previously earned overseas whether or not they are returned to the U.S. The old system featured a one-two punch of taxation abroad and than again at home at a punishing 35% rate if the money was repatriated.

Apple had no plans to return the money to the U.S. under that regime, and ditto for many other companies that together have some $2.5 trillion abroad. Republicans broke this logjam by lowering the top rate and creating a permanent system that taxes income where it’s earned. Now Apple can put this cash to whatever the company deems the highest use, without arbitrage from tax policy.

We can’t live out the other option of high corporate taxes and there is only one Apple so we can’t randomly assign anything.  We can’t make any statistical statements and there is some possibility of arguing cause and effect because it is only a quasi-experiment.  The results, however, seem robust to us because of the previous statements of corporate officials and the proximity of the tax change and the results.

Pensions, Careers, And Retirement

Pensions and careers have changed.  Ramesh Ponnuru thinks the retirement changes are for the better and we heartily agree.  We will give an example and explain why it matters.  Ramesh thinks Americans should stop mourning the loss of traditional (defined benefit) pensions concludes:

These are changes that would build on, rather than attempt to reverse, the last few decades of developments in the American retirement system. Those developments, especially the rise of the 401(k), have largely been for the better.

Sidebar One: Pensions can be divided into defined benefit and defined contribution.  In a defined benefit plan you typically get a pension equal to then number of years worked * highest salary over three years * a percentage.  So if you work 30 years and your percentage is 1.8 then you get 54 percent of your highest salary.  A 401 (k) is an example of a defined contribution plan where a defined amount is invested and you get the result at retirement.  We often think that the worker takes the risk in a defined contribution plan and the company takes the risk in a defined benefit plan.  That is only true if the worker retires from that employer.  We will show details later.  End Sidebar One.

Sidebar Two: Risk is both upside and downside.  If a worker spends his entire career with one employer then a defined contribution plan is more risky because he might get much more or much less than a defined benefit plan.  End Sidebar Two.

The big reason for changing pensions is that the nature of careers have changed.  Years ago it was bad to have a resume that indicated you were a job hopper.  Now career advice is:

If you are changing jobs less than every three years, you are in the minority.
You may need to have a well-prepared explanation when you front up to your next job interview.

It also true that employers come and go.  Both of these are reasons why we should cheer at the increasing number of defined contribution plans.

MWG has a defined benefit pension plan.  It worked very well for us although it limited our opportunities, as it was intended to do, in the time close to retirement.  It worked very well for us because we spent nearly 40 years with one employer.  Thus, our paltry year salaries in the seventies and eighties were irrelevant and only the years mattered in the computation of benefits.  If we had of switched employers it would have been bad for us because our salary was so low. Another benefit was sick days.  In our case sick days accumulate and can be used to pay for medical insurance after retirement.  The sick day benefit is based on your highest salary but you must retire in order to get it.  Thus, because of both sick days and defined benefit, as retirement approached it was financial suicide for us to leave before retiring.  When we became eligible for retirement, the sick days became a powerful incentive towards retirement because workers had to pay for part of the cost of health insurance but retirees, like us, with lots of sick days did not.

For us and our employer, the defined benefit plan worked.  We got a nice retirement and they got us to work for less than market prices late in our career.  We are not sure if the intent of the pension was to get us to retire.  It was effective at that too.  We retired because the tax on working was over 100 percent.  That is, we had more disposable income in the first year of retirement then we would have had if we worked that year.

Defined contribution was a fair deal for us in another era.  Even then we were a minority in staying with one organization so long.  Now we would be a micro-minority.  Defined contribution is the way to go in the new environment.  We need to find incentives to increase them.  We have three suggestions:

First make health insurance benefits taxable to the recipient.
Second, increase social security benefits for the needy by means testing benefits for high income individuals.
Third, increase the tax benefits of Roth IRAs.  Make the contribution tax deductible and keep the returns not taxable.

The first would help by producing a bit of government revenue and focusing both employer and employee on the retirement issue.  The second would provide a safety net to the really needy.  The third would reduce complexity at retirement because everyone would go Roth and there wouldn’t be any taxes having an impact on decision making.

As Ramesh says, let us build on the success of 401 (k) plans.  Folks are looking for freedom.  The right incentives will help them make good choices.