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.


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.

Reviving Basket Cases

Mugabe is out in Zimbabwe.  It is not the worst economic and political basket case in the world but there is a great opportunity for its citizens and the world to improve.  Zimbabwe actually moved up in the last year or two as Heritage moved them up to a score of 44 (of 100) that lifts them into the repressive category.  Freedom House kindly puts them into the Partially Free category with a score of 32 of 100.  We have seen this description of the problems of newly found freedom for Zimbabwe in several places.  Here it comes from Neo-neocon:

“In the past we could never criticize the president,” said Felex Share, a political reporter, in the hours before Mugabe’s resignation. “Right now, we can touch anything.”

How will Zimbabwe deal with its opportunity?  What will the world do?  A better question is: What can the world do?  Answer: It can’t do much compared to Zimbabwe because only they can change the culture of corruption and so on that is causing the problem.

It is hard to change as the quote says and Douglas North described more generally.  Cambodia is in the news and we use it as an example.  It was hell on earth during the Khmer Rouge regime in the late 70s.  It is better now but it still only scores 59.5 from Heritage which is still just in the mostly unfree category while Freedom House scores them at 31 and categorizes them as unfree.  Much of Eastern Europe did much better after the fall of Communism but they were not in the Cambodia/Zimbabwe category before freedom returned and they had a capitalistic past to return to.  They also had freedom next door (or reunification for East and West Germany) and that helped too.

We hope that Zimbabwe propers.  We know that some critical elements like rule of law and the basic elements of capitalism are necessary for improvement but the citizens of Zimbabwe need to choose the path themselves because that is the only way to get them to follow it.  We hope you choose capitalism and hope the world makes it easy to do so.

We hope there will be opportunities to remediate additional basket cases like (but not limited to) Venezuela, Cuba, and North Korea in the near future.  Perhaps we can learn something in Zimbabwe that will help us and them.

Reviving An Old Slur

The “news” industry has rediscovered an old slur: Trickle-Down Economics (TDE).  Catherine Rampell is on the editorial page

Sidebar: We know we made fun of Kevin Williamson for stooping to take on Catherine but she is just part of this post.

She is saying things like this:

Of course, Republican lawmakers and administration officials promise that these corporate giveaways will really, truly, honest-to-goodness primarily benefit us regular humans, especially humans in the middle class.

That’s because, they claim, corporate tax cuts will unleash a wave of business investment and therefore economic growth, most of which will trickle down to the little people-people.

Well, heroes one thing Kevin Hassett, The Donald’s chair of the Council of Economic Advisors, said (from Larry Kudlow):

“Economists who have studied the effects of taxes over time have discovered a consensus,” he said. “Lower marginal tax rates and a broader base increase the rate of economic growth and well-being.”

Here is Kevin on CNBC:

The new report from Hassett, out Monday morning, projects that reducing the corporate tax rate to 20 percent will result in a windfall for U.S. workers. He predicted average U.S. household income would increase at least $4,000 a year but could rise as much as $9,000 annually.

It is an interesting question of the incidence of corporate taxes.  What percentage falls on owners and workers?  Catherine is suggesting that 100 percent falls on owners.  That seems unlikely.  It seems even more unlikely that the owners will decide to put all that money in their mattresses.

Taking up almost all of the above the fold back page of the 11/18 La Crosse Tribune  is an associated press (AP) story (yes it is an editorial pretending it is a news story) that we can’t find on the Internet.  The headline is: Giving Trickle-Down Another Try.  Here the AP is going for a triple slur.  They get Reagan, Trump, economics all in one headline.  It gives the Tax Policy Center the highly coveted “nonpartisan” designation.  [Perhaps they are just wrong and not partisan.] It blames the W’s 2001-3 tax cuts for the Great Recession and notes that W’s expansion was one of the weakest.  Hmmm, which President, we wonder, had the weakest?

If you would like a more detailed discussion of the slur check out Thomas Sowell from 2012.

Catherine and the AP seem desperate to make slurs and throw stuff against the wall and hope that something sticks.  To get the success of the Reagan tax cuts from The Donald’s tax cuts we need to couple it with deregulation and good central banking.  There seems to be good news on deregulation.  The Donald doesn’t fill us with confidence and we worry about trade but he is our best chance.


A Reminder On Socialism

Yesterday is was Communism (no, we still don’t reference our stuff0.  Today it is socialism, the slightly less virulent method of restricting economic and personal freedom.   The WSJ Editorial Board tells us:

Venezuela is broke, which takes some doing. For much of the second half of the 20th century, a gusher of oil exports made dollars abundant in Venezuela and the country imported the finest of everything. There were rough patches in the 1980s and 1990s, but by 2001 Venezuela was the richest country in South America.

And now socialist Venezuela is broke.  Yes the country with the largest proven reserves in the world according to Wikipedia is broke.  The socialists are almost as unlucky as the Communists.  There are just too many “unexpected” events every time one of these methods is put in place.

Civil War Choices

Dan McLaughlin at NRO has an excellent article on the Civil War related to comments by Tim Kaine and John Kelly.  We one complaint about it the commentary on compromise and the opportunity for a financial settlement.  A possible way to end slavery would be to set the slaves free by buying the slaves from the slaveholders.  Research has shown that the market in slaves was efficient.

The problem is to consider such a solution you must compare the expected cost of the two alternatives.  So when Dan says this:

Over 600,000 men died in the Civil War, and many more were wounded or crippled. It’s not such a bad thing for a president to be advised by veterans who look at that kind of carnage and linger over whether it was avoidable.

He is making the wrong comparison.  Both sides expected a short war with many fewer deaths.  Using the actual cost of the Civil War to compare to the expected cost of ending slavery overstates the lack of compromise from the South.  The actual opportunity was to free the slaves at birth and death.  That is, current slaves would stay slaves all their lives but their children would be bought out of slavery.

Sidebar: You have to trust us on the data on this.  We wrote this paper in grad school before word processing so there isn’t a record of it.  End Sidebar.

Thus, we are unable to agree with Dan in laying all the failure to compromise at the feet of the South.  We support the John Kelly view.  The available plan would split the abolitionists from the rest of the North because the former group wanted to end slavery now.

Capital Investment And Growth

Recently we were discussing Reihan’s assertion (look it up it is really recent) that we should go for immediate expensing for capital expenditures rather than lowering corporate rates because capital expenditures are the path to productivity.  We were unconvinced because we see the path to productivity including software and R&D which are already immediately expensed.

Today we found a WSJ article by James Mackintosh that suggests some support for our vision.

Sidebar: We at first used argument rather than vision.  We changed it to vision because, as we said at the time, we have no data to provide.  It just makes sense to us that buildings and equipment are just part of the productivity story.  End Sidebar.

James is discussing the potential pitfalls of Amazon’s new headquarters.  As part of the background he reports:

The lesson from the long term is that companies with high capital spending tend to underperform. Kenneth French, a professor at the Tuck School of Business at Dartmouth College, calculates that shares in the 30% of U.S. companies with the lowest investment returned six times as much as those with the highest investment since 1963.

Along the way he gives examples of overspending including the 1840 British railway boom, peak oil, dot-com, and shipping.  In addition, James notes:

Investing in growth is more plausible. Academics have shown that higher R&D spending on average is followed by better stock performance than for companies with lower R&D spending.

James is far from conclusive on the subject but we continue to think that rates are more important than immediate expensing.  One reason is the evidence he provides on capital spending not leading to stock market price increases but R&D does.  Obviously, stock market prices and productivity are only weakly connected through profits.  It is not QED but it suggests some of the problems with capital spending.  It buttresses the basic argument that rates provide the incentive for profits and solve the problem with firms moving out of the country.  We have moved a little more strongly in favor of rate reductions over immediate expensing.