As the really serious news followers might know, President Obama was re-elected on Tuesday. Shockingly, some people who voted against Obama weren't too happy. Facebook intellectuals yelled about socialism, America going down the toilet, etc. A few fratstars at the University of Mississippi sobered up long enough to realize that Obama was re-elected president of the South too. So they went to their student union and started dropping N-bombs (bad look, Mississippi fratstars). Ted Nugent wrote something on Twitter about the tears of blood he was crying, or something like that. Needless to say, the really intellectual media was more serious. They focused on the next day, when markets experienced their biggest one-day drop of the year. "See! Obama is bad for the economy!", they yelled. Or, at the least, they took for granted the idea that markets tanked in response to Obama's re-election. This wasn't just a right-wing or mainstream-media meme; the left's typical response to markets moving in a way they don't like is either that markets don't benefit the working class anyway (not really true) or that we shouldn't care what Wall Street thinks because finance and bankers are evil. The problem with this narrative is that it's as badly wrong as it is prevalent.
The first thing to note is that markets participants aren't stupid. Markets can be, and often are, systemically inefficient. An entire sector of the economy (real estate) was overpriced for years. Right after another (tech stocks) was also overpriced for years. The Ron Paul followers will yell that the market was efficient and it was all the Federal Reserve's fault because interest rates were too low. That's wrong. But the point is that markets aren't dumber than the rest of us-- they can look at movements in markets and economic indicators, calculate probabilities, and price the impact that events might have into what they'll pay for an asset, or the amount for which they'll sell an asset. Now, that doesn't mean markets are right-- if markets shoot up in response to a particular policy or crater in response to another policy (or a likelihood of someone being elected), it doesn't mean that they're right; it just reflects their expectations, which may well be wrong. But the question isn't whether markets are right to love or hate Obama-- it's whether markets reacted yesterday to Obama's election on Tuesday. And the answer to that is pretty clearly "no".
The second thing to note is that the election wasn't that close. Sure, Obama won a somewhat narrow popular vote victory, but the media's obsession with "momentum" and particular polls largely obscured what anyone who can read data (and that most certainly includes Wall Street traders and hedge fund managers) already knew-- that anything but an Obama victory on Tuesday would have been a major surprise. As hard as the National Review, Fox, George Will and Dick Morris tried to pretend it was otherwise, the odds of Obama winning the election haven't dipped below 60% in a long time. Going into election day, all of the relevant number crunchers (statisticians at universities, bloggers like Nate Silver, etc.) put the odds of an Obama electoral victory at well over 90%. The main stream media, not to mention the right-wing echo chamber, liked to pretend that, because most of these number crunchers are personally left-leaning, their poll numbers must be biased. Which (again) is wrong. The wishful-thinkers yelled that Romney was winning independents (ignoring that "independents" in this election were, in large part, Tea Party folks who called themselves independents, then voted straight Republican, while a lot of previous independents became Democrats) and that turnout would be lower than it was in 2008 (as if Silver's turnout model was wishful thinking). In reality, though, liberal members of the media aren't like the Fox News folks-- they think of tabulating numbers as an exercise in math, not partisanship. Because, really, what good does believing your guy will win do? It might make it easier to sleep at night, but then you still have to confront reality. And then, when that reality looks different from what you predicted, you end up looking like a fool. Like George Will, Dick Morris and Michael Barone, who all predicted a Romney victory with over 300 electoral votes and came out with egg on their faces. Most interestingly, if you look at that link, left-leaning predictions mostly skewed toward the low end-- the ones who got the electoral math precisely right weren't Democratic pundits-- they were number-crunchers like Silver, Davidson College's Josh Putnam, and Princeton's Sam Wang. (Incidentally, a lot of people on the left like to pretend that Silver is some kind of wizard; he's not-- he just has a rather good, but far from unique, model for crunching poll data compiled by others).
So anyone looking at the numbers realized that anything but an Obama victory on Tuesday was unlikely (though, obviously, not impossible). And Wall Street types who have money on the line in the market don't much care who they hope wins the election when it comes to putting money in the market-- they care about who WILL win the election. And they knew as well as Nate Silver that it was almost definitely going to be Obama. Another useful way to think of it is as a probability. Say you can bet on a roll of a 10-sided die; any number 1-9 pays you $1000, and a 10 means you get nothing. Mathematically, you should pay $900 for a roll. Now imagine the game changes and a 9 becomes a losing roll. Now, you should pay $800. In electoral terms, Obama winning the election meant a move from a 90% probability of getting paid to a 100% probability. But the price of the roll only changed by 10%. In that scenario, a 2.5% swing in the stock market by reason of an event with 95% probability occurring is completely irrational. Yet that's what happened when Obama went from 95% certain to win the election to 100% certain-- Wall Street knew perfectly well that he was almost certainly going to win the election on Monday, so any change after the election would reflect only the cementing of a highly likely outcome.
Which begs the question: what DID move the market on Wednesday? It's probably not noise trading; one-day swings can and do happen, but the likelihood of that big a swing coming on the day after the election, especially when no particularly ground-breaking news came out of Europe means that markets were likely reacting to something that happened on election day. And my best guess is that they were reacting to the impact of the balance of power on negotiations over January's fiscal cliff. And I think that has something to do with the outcome of the House vote. Now, it's important to note that it's a lot easier to call a presidential race than an aggregated balance of power in a whole bunch of House races; if the margin of error in one or two states swings from one candidate to another, it will rarely decide the entire election. Put another way, Nate Silver was about 95% sure Obama would win the election, but he was only about 52% sure that Obama would win Florida. In the grand picture, though, that would be irrelevant. Obama will almost certainly win Florida... but even if he loses Florida, he will still be president. Meanwhile, in a particular House race, a 52% chance of a particular candidate winning actually means that a different person will represent the district. Combine that with the fact that people generally spend less time thinking about who they'll vote for in the House compared to the presidency or even the Senate, and you've got polling data that's substantially less reliable and less certain. So pollsters and markets knew with a high degree of confidence that Obama would almost certainly be President, and that the Senate would stay narrowly democratic (while the balance is probably slightly more favorable to Democrats than might have been expected, there's not a substantive difference in policy between a 54-46 Democratic majority and a 52-48 Democratic majority.
Which leaves the House. It was always highly likely that Republicans would keep control of the House. The question was what kind of majority they would enjoy. A bigger majority would be interpreted as a mandate to resist hiking top marginal rates at all costs and keep playing the obstructionist game. A narrower majority would have handed power to those who are interested in compromising on tax rates, while a majority that looked like the previous one would be interpreted by the Tea Party fringe as a sign that no tax hikes are ever acceptable (and yes, that's a fringe position that makes no sense). What further complicates it is that the President is actually in a rather strong bargaining position. If the country DOES go over the fiscal cliff, the uncertainty that creates will jar markets (and, later, if the tax hikes and spending cuts actually take place, contract the economy), but it will also put the Tea Party in an odd negotiating position. If the country does go over the fiscal cliff, and the President proposes a tax cut for all incomes under $250,000, the Tea Party will find itself either having to go along or holding up a tax cut for everyone just because they won't also get tax cuts for the wealthy. Politically, that's an ugly position to take. And it puts the President in a powerful bargaining position.
So I think it's the (still rather extreme) makeup of the House, and the Tea Party's ability (and possible willingness) to hold a deal hostage in order to get the tax cuts they want that drove markets down. That's more amateur political science than anything else, so it may just be a stab in the dark. But what is certain is that, if someone declares that markets tanked yesterday because Obama was re-elected, they're wrong.
Thursday, November 8, 2012
Sunday, November 4, 2012
The case against Mitt Romney
With an election in two days away, just about everyone has made up their mind about who they'll vote for. While the case for re-electing the President would take up a whole different post, I think one thing that's important to look at is the alternative. The question isn't whether Barack Obama has been a great president, or whether he's lived up to the hopes a lot of people had for him in 2008 (which were unrealistic to start with), but whether we'll be better off with him in office than the alternative. And I strongly believe that we will be.
There are a lot of different lines of attack that the Obama campaign has used against the Romney camp. Some I've found persuasive. Others, less so. In all honesty, as far as the Republican primary candidates go, Romney was about as well as the Republican electorate could have done. Unlike his rivals for the nomination, he's not some combination of stupid, crazy, and inept (or, really, all three; Newt Gingrich has a wildly undeserved reputation for being an "idea man"-- he counts if you include the caveat that all of his ideas are really really bad). He's been a hugely effective manager in the past. And he's surrounded himself with people who have, at some point, been very competent thinkers (though Glenn Hubbard, John Taylor and, to a lesser extent, Greg Mankiw have, at points, done their best to play dumb to advance "the cause").
As the Washington Post's very good blogger Ezra Klein notes, Romney is data-driven and analytical-- he's not a fire-breathing true believer like Gingrich or Paul Ryan, and he tends to change his mind about just about everything (which is how his Massachusetts health care reform went from being a model for the nation in 2007 to a government takeover of the economy in 2012). Some people call that flip-flopping, and that's certainly a valid case when it comes to questions of values, but I'd argue that someone who doesn't change their mind if their views turn out to be wrong is dogmatic, not principled. And I'd even believe that his choice of an ideologue for a running mate was a reflection not of Romney suddenly going nuts, but of him looking at the polls and figuring out that he needed to appeal to the hard right to have a chance in the election.
So I've argued that I think Romney is smart and competent and an effective problem-solver. But I still think he's the wrong person to lead the country. Here's why. Being an effective problem solver is great. But the presidency is less of a problem solving exercise than people like to think. A whole lot of what the president does is set an agenda. And setting that agenda requires someone who can figure out what the nation's problems are. While Romney may be an especially competent manager, I also think he's almost uniquely out of touch from people's concerns. And that's reflected pretty clearly when he speaks off the cuff. From talking about 47% of the nation being "dependent on handouts" to talking offhand about how anyone can start a business by "getting a loan from their parents", Romney has a deeply warped view of the reality that most people face.
This view comes, in large part, from Romney's extraordinarily privileged background. This recent piece in the New Republic from Noam Scheiber does a very good job getting to the heart of the Romneys' family mythology. Mitt genuinely seems to believe that he earned everything he has from scratch. And while he certainly deserves credit for building a hugely successful private equity firm, Romney is the quintessential example of someone who was born on third base but believes that he hit a homerun. He was born to a chief executive who ran for president. He attended an elite private high school in Michigan, had not just his college education, but also his joint JD/MBA from Harvard and all of his expenses paid for. He certainly deserves credit for apparently giving away the rest of his inheritance and building his own fortune. But he wants to ignore the advantages he was born with. As children of the 1% go, Romney certainly did more on his own than most. But that doesn't take away from the simple fact that, as a child of the 1%, he had opportunities most Americans can only dream of.
Scheiber's piece about Romney's son reflects a similar perspective. Tagg Romney is convinced that he built a private equity firm from scratch. The reality is that what Tagg Romney runs is a fund of funds-- while the elder Romney's Bain Capital is a traditional private equity firm that invests in and sometimes acquires companies, Tagg Romney's Solamere invests in other private equity firms. While firms like Blackstone, KKR and Bain Capital sell expertise, Solamere sells access. The average person, for instance, can't plant their money with these elite firms, no matter how much they might want to (and they would absolutely want to-- during Romney's tenure at Bain, the firm returned almost 90% annually to investors); the overhead required for these firms to take in investors who have $10,000 or $100,000 or even $1 million isn't worth the money. So Solamere pools these smaller investors' money and places it with these bigger firms; the result is that investors who otherwise wouldn't be able to invest in KKR or Bain otherwise have a way to do so. But this strategy rests on... Tagg Romney's connections. Which come from his father.
So the best reason to vote against Mitt Romney that I can think of, more than him being the nominee of a reactionary, extremist party, is that he's running for president of an America that doesn't exist-- an America where struggling college grads who want to start a business can borrow from their parents. Where "struggling" means selling off your inheritance after finishing a grad degree. Where fantastic success is hard... but living comfortably is a default. Governing the country Romney imagines, where people's biggest problem is a president who might hike their taxes or not appreciate them enough for their wealth, would be easy. Governing the one we have is hard. Because I think Barack Obama understands the country we have, I'll be casting my ballot for him on Tuesday.
There are a lot of different lines of attack that the Obama campaign has used against the Romney camp. Some I've found persuasive. Others, less so. In all honesty, as far as the Republican primary candidates go, Romney was about as well as the Republican electorate could have done. Unlike his rivals for the nomination, he's not some combination of stupid, crazy, and inept (or, really, all three; Newt Gingrich has a wildly undeserved reputation for being an "idea man"-- he counts if you include the caveat that all of his ideas are really really bad). He's been a hugely effective manager in the past. And he's surrounded himself with people who have, at some point, been very competent thinkers (though Glenn Hubbard, John Taylor and, to a lesser extent, Greg Mankiw have, at points, done their best to play dumb to advance "the cause").
As the Washington Post's very good blogger Ezra Klein notes, Romney is data-driven and analytical-- he's not a fire-breathing true believer like Gingrich or Paul Ryan, and he tends to change his mind about just about everything (which is how his Massachusetts health care reform went from being a model for the nation in 2007 to a government takeover of the economy in 2012). Some people call that flip-flopping, and that's certainly a valid case when it comes to questions of values, but I'd argue that someone who doesn't change their mind if their views turn out to be wrong is dogmatic, not principled. And I'd even believe that his choice of an ideologue for a running mate was a reflection not of Romney suddenly going nuts, but of him looking at the polls and figuring out that he needed to appeal to the hard right to have a chance in the election.
So I've argued that I think Romney is smart and competent and an effective problem-solver. But I still think he's the wrong person to lead the country. Here's why. Being an effective problem solver is great. But the presidency is less of a problem solving exercise than people like to think. A whole lot of what the president does is set an agenda. And setting that agenda requires someone who can figure out what the nation's problems are. While Romney may be an especially competent manager, I also think he's almost uniquely out of touch from people's concerns. And that's reflected pretty clearly when he speaks off the cuff. From talking about 47% of the nation being "dependent on handouts" to talking offhand about how anyone can start a business by "getting a loan from their parents", Romney has a deeply warped view of the reality that most people face.
This view comes, in large part, from Romney's extraordinarily privileged background. This recent piece in the New Republic from Noam Scheiber does a very good job getting to the heart of the Romneys' family mythology. Mitt genuinely seems to believe that he earned everything he has from scratch. And while he certainly deserves credit for building a hugely successful private equity firm, Romney is the quintessential example of someone who was born on third base but believes that he hit a homerun. He was born to a chief executive who ran for president. He attended an elite private high school in Michigan, had not just his college education, but also his joint JD/MBA from Harvard and all of his expenses paid for. He certainly deserves credit for apparently giving away the rest of his inheritance and building his own fortune. But he wants to ignore the advantages he was born with. As children of the 1% go, Romney certainly did more on his own than most. But that doesn't take away from the simple fact that, as a child of the 1%, he had opportunities most Americans can only dream of.
Scheiber's piece about Romney's son reflects a similar perspective. Tagg Romney is convinced that he built a private equity firm from scratch. The reality is that what Tagg Romney runs is a fund of funds-- while the elder Romney's Bain Capital is a traditional private equity firm that invests in and sometimes acquires companies, Tagg Romney's Solamere invests in other private equity firms. While firms like Blackstone, KKR and Bain Capital sell expertise, Solamere sells access. The average person, for instance, can't plant their money with these elite firms, no matter how much they might want to (and they would absolutely want to-- during Romney's tenure at Bain, the firm returned almost 90% annually to investors); the overhead required for these firms to take in investors who have $10,000 or $100,000 or even $1 million isn't worth the money. So Solamere pools these smaller investors' money and places it with these bigger firms; the result is that investors who otherwise wouldn't be able to invest in KKR or Bain otherwise have a way to do so. But this strategy rests on... Tagg Romney's connections. Which come from his father.
So the best reason to vote against Mitt Romney that I can think of, more than him being the nominee of a reactionary, extremist party, is that he's running for president of an America that doesn't exist-- an America where struggling college grads who want to start a business can borrow from their parents. Where "struggling" means selling off your inheritance after finishing a grad degree. Where fantastic success is hard... but living comfortably is a default. Governing the country Romney imagines, where people's biggest problem is a president who might hike their taxes or not appreciate them enough for their wealth, would be easy. Governing the one we have is hard. Because I think Barack Obama understands the country we have, I'll be casting my ballot for him on Tuesday.
Tuesday, August 28, 2012
Two kinds of stupid
It's almost fall, which means election season is fully in gear. Which is too bad-- I hate election season. Instead of Bud Light ads, the TV's looping ads with messages approved by Barack Obama and Mitt Romney. When they come on, I change the channel.
But the press has been filled with the typical cycle of politicians putting their feet in their collective mouths. The theme this time around is Tea Party representatives'... questionable grasp of female anatomy. You've got Todd Akin declaring that women who are "legitimately raped" don't get pregnant (apparently, he learned everything he knows about women from this documentary). Then there's Stephen King (the representative, not the Cujo author), who says women can't get pregnant from statutory rape or incest (Rep. King needs to catch up on his Game of Thrones; then he'd know that one's also not very true). And that's the core of the 55-year-old virgin wing of the Republican Party. They're kinda crazy. And kinda ignorant. But everyone knew that already.
The contrast to that end of the party is supposed to be what the media likes to dub the "serious" end. The supposed leaders of that faction are people like Chris Christie and Paul Ryan, who claim to be fiscally responsible, and who the media loves. The existence of the Akin-King axis lets the media play the balanced card-- some Republicans are nuts, they declare, but there are plenty who aren't. And Romney's choice of Paul Ryan is a sign, they say, that we're going to have a "serious" campaign between "competing ideas". Because, you know, Ryan has a serious vision that we should pay attention to. The problem with this narrative, of course, is that it's complete nonsense. In their own way, Romney and Christie are just as nuts and just as un-serious as Akin and King. Here's why.
To start with, the distinction the media likes to draw isn't as clean as they tend to like to pretend. For starters, Ryan is a card-carrying member of the "Sperm Are People Too" club. But that's not what makes his ideas nutty. It's the very ideas that the media likes to trumpet as "serious" that are a complete house of cards. The reason behind that, I think, has to do with the people who become journalists. By and large, journalists are reasonably smart people. But they're journalists because they like words. Throw numbers are them, and their eyes glaze over, they get chills, and their brain shuts down. Which is why they swoon any time a politician throws numbers at them, assuming that the politician must know what s/he's talking about because there are a lot of digits on that spreadsheet, and that must mean that they're smart.
This is what happened with Paul Ryan's "budget". It gets quotation marks because calling it a budget is a joke. Normally, when you put together a long-term budget, you specify changes to certain programs; you expand or contract different parts of the government, raise some taxes, cut others, and create an approximation of how you see the federal budget going forward. The further out you go, of course, the less accurate it is, but it provides something of a vision for a big picture. Ryan's "budget" makes a mockery of all that. It's got numbers, sure. But the way you normally get those numbers is to make specific policy recommendations and then apply those to the numbers.
Ryan budgeting works the other way around-- make up numbers, without specifying how you get there. Yes, it's as deeply stupid as it sounds. It's the equivalent of asking a basketball coach how he plans to win a game, and getting "We plan to score more points than the other team" in response. It's true, maybe, but it's not a response-- it's an insult to the reader's intelligence. Ryan got the CBO to "score" his budget, to give it an air of legitimacy. But this, too, was an exercise in deception. Normal CBO procedure is to give them policies, whose budget impact they project. Ryan gave them numbers and told them to calculate those. In essence, he told them, "If we raise X revenue and spend Y dollars, will we have a balanced budget?" And so long as X was equal to Y, the answer would be yes. Problem is, that's useless without a plan for getting to X or Y.
So what is in Ryan's budget(s)? Well, there's the specifics-- lots and lots of tax cuts, concentrated at the top. He would eliminate the estate tax and capital gains taxes and create two tax brackets-- 10% and 25%. If this sounds like a massive tax cut, that's because it is. But he says he'd offset those revenue losses by closing loopholes in the tax code. Which loopholes? He won't say. And, given that he's CUTTING capital gains taxes, it's safe to say that there won't be enough in loopholes to keep the tax code from either becoming WAY more regressive than it already is, or massively reducing the amount of revenue the government takes in. When the nonpartisan Tax Policy Centered analyzed all the loopholes in the tax code and constructed a maximally favorable scenario for the Ryan plan (closing the loopholes that were most regressive first). It determined that, even in that scenario, the budget amounted to a further tax cut for the mega-rich, and a tax hike for the poor and middle class.
Ryan, of course, complained about that analysis by... calling the TPC a patrisan organization run by a "former Obama Administration official" (it's actually directed by officials from both the Obama and Bush Administrations, and they weren't in political positions). So that's the plan on taxes. But it gets worse. Ryan makes a bunch of absurd assumptions about the federal government-- he claims he'll be able to cut the federal government to a third of its present size in... unspecified ways (this is, of course, ridiculous, and it doesn't address the problem; the federal government is small already-- social security, health care, defense, and interest on the debt make up over 3/4 of the federal budget; everything else the government does, from running the federal courts to managing national parks, conducting diplomacy, and regulating the financial system take up under a fifth of the budget; somehow, Ryan proposes to cut that by 2/3). It won't happen, and it shouldn't happen-- it's more hand-waving and magic asterisks.
But what's really terrifying is Ryan's vision for health care. The Romney campaign has been attacking the Obama people for "cutting Medicare to pay for Obamacare". Which is untrue, and especially egregious when compared to Ryan's plan. While cost control is a priority, there's a smart way to do it, and a dumb way to do it. Ryan, unsurprisingly, opts for the latter. Health care costs have been rising faster than GDP for awhile (though they've slowed down in the last few years), so controlling them is clearly a priority. The smarter way to do that is to find efficiencies on the demand side-- by determining what does and doesn't work, we can try to cut down on superfluous procedures and consume fewer health care services; in essence, we cut demand for superfluous and expensive procedures without (hopefully) compromising quality. We know that can work because just about the entire developed world spends less on health care than we do, yet has better health care outcomes. The Affordable Care Act takes steps to compile data on the effectiveness of various procedures to make positive steps toward that goal. Then there's the Ryan plan, which involves capping what seniors get for Medicare by placing a cap on the supply side. In essence, it tells them that they can spend a fixed amount on health insurance. And if that insurance doesn't cover all the health care they need, they can pay out of pocket. And if they can't afford it, well, tough luck, they get to die. In other words, according to the Ryan Plan, we can't make cuts to superfluous procedures because that's "rationing", but we can hand people a check, then go to the market and find out that it won't buy them health insurance that actually insures them. But I guess that's "fiscal discipline"-- financing massive tax cuts for the Romneys and the Buffetts, while throwing granny off a cliff. That's not a scare story-- scare stories aren't true.
So no, the Ryans in the Republican Party aren't serious, and they're no more principled than the anti-abortion crusaders-- they are, in their own way, just as nuts as the Akins, and are not to be taken any more seriously. If only the media would try looking at the numbers long enough to figure that out...
But the press has been filled with the typical cycle of politicians putting their feet in their collective mouths. The theme this time around is Tea Party representatives'... questionable grasp of female anatomy. You've got Todd Akin declaring that women who are "legitimately raped" don't get pregnant (apparently, he learned everything he knows about women from this documentary). Then there's Stephen King (the representative, not the Cujo author), who says women can't get pregnant from statutory rape or incest (Rep. King needs to catch up on his Game of Thrones; then he'd know that one's also not very true). And that's the core of the 55-year-old virgin wing of the Republican Party. They're kinda crazy. And kinda ignorant. But everyone knew that already.
The contrast to that end of the party is supposed to be what the media likes to dub the "serious" end. The supposed leaders of that faction are people like Chris Christie and Paul Ryan, who claim to be fiscally responsible, and who the media loves. The existence of the Akin-King axis lets the media play the balanced card-- some Republicans are nuts, they declare, but there are plenty who aren't. And Romney's choice of Paul Ryan is a sign, they say, that we're going to have a "serious" campaign between "competing ideas". Because, you know, Ryan has a serious vision that we should pay attention to. The problem with this narrative, of course, is that it's complete nonsense. In their own way, Romney and Christie are just as nuts and just as un-serious as Akin and King. Here's why.
To start with, the distinction the media likes to draw isn't as clean as they tend to like to pretend. For starters, Ryan is a card-carrying member of the "Sperm Are People Too" club. But that's not what makes his ideas nutty. It's the very ideas that the media likes to trumpet as "serious" that are a complete house of cards. The reason behind that, I think, has to do with the people who become journalists. By and large, journalists are reasonably smart people. But they're journalists because they like words. Throw numbers are them, and their eyes glaze over, they get chills, and their brain shuts down. Which is why they swoon any time a politician throws numbers at them, assuming that the politician must know what s/he's talking about because there are a lot of digits on that spreadsheet, and that must mean that they're smart.
This is what happened with Paul Ryan's "budget". It gets quotation marks because calling it a budget is a joke. Normally, when you put together a long-term budget, you specify changes to certain programs; you expand or contract different parts of the government, raise some taxes, cut others, and create an approximation of how you see the federal budget going forward. The further out you go, of course, the less accurate it is, but it provides something of a vision for a big picture. Ryan's "budget" makes a mockery of all that. It's got numbers, sure. But the way you normally get those numbers is to make specific policy recommendations and then apply those to the numbers.
Ryan budgeting works the other way around-- make up numbers, without specifying how you get there. Yes, it's as deeply stupid as it sounds. It's the equivalent of asking a basketball coach how he plans to win a game, and getting "We plan to score more points than the other team" in response. It's true, maybe, but it's not a response-- it's an insult to the reader's intelligence. Ryan got the CBO to "score" his budget, to give it an air of legitimacy. But this, too, was an exercise in deception. Normal CBO procedure is to give them policies, whose budget impact they project. Ryan gave them numbers and told them to calculate those. In essence, he told them, "If we raise X revenue and spend Y dollars, will we have a balanced budget?" And so long as X was equal to Y, the answer would be yes. Problem is, that's useless without a plan for getting to X or Y.
So what is in Ryan's budget(s)? Well, there's the specifics-- lots and lots of tax cuts, concentrated at the top. He would eliminate the estate tax and capital gains taxes and create two tax brackets-- 10% and 25%. If this sounds like a massive tax cut, that's because it is. But he says he'd offset those revenue losses by closing loopholes in the tax code. Which loopholes? He won't say. And, given that he's CUTTING capital gains taxes, it's safe to say that there won't be enough in loopholes to keep the tax code from either becoming WAY more regressive than it already is, or massively reducing the amount of revenue the government takes in. When the nonpartisan Tax Policy Centered analyzed all the loopholes in the tax code and constructed a maximally favorable scenario for the Ryan plan (closing the loopholes that were most regressive first). It determined that, even in that scenario, the budget amounted to a further tax cut for the mega-rich, and a tax hike for the poor and middle class.
Ryan, of course, complained about that analysis by... calling the TPC a patrisan organization run by a "former Obama Administration official" (it's actually directed by officials from both the Obama and Bush Administrations, and they weren't in political positions). So that's the plan on taxes. But it gets worse. Ryan makes a bunch of absurd assumptions about the federal government-- he claims he'll be able to cut the federal government to a third of its present size in... unspecified ways (this is, of course, ridiculous, and it doesn't address the problem; the federal government is small already-- social security, health care, defense, and interest on the debt make up over 3/4 of the federal budget; everything else the government does, from running the federal courts to managing national parks, conducting diplomacy, and regulating the financial system take up under a fifth of the budget; somehow, Ryan proposes to cut that by 2/3). It won't happen, and it shouldn't happen-- it's more hand-waving and magic asterisks.
But what's really terrifying is Ryan's vision for health care. The Romney campaign has been attacking the Obama people for "cutting Medicare to pay for Obamacare". Which is untrue, and especially egregious when compared to Ryan's plan. While cost control is a priority, there's a smart way to do it, and a dumb way to do it. Ryan, unsurprisingly, opts for the latter. Health care costs have been rising faster than GDP for awhile (though they've slowed down in the last few years), so controlling them is clearly a priority. The smarter way to do that is to find efficiencies on the demand side-- by determining what does and doesn't work, we can try to cut down on superfluous procedures and consume fewer health care services; in essence, we cut demand for superfluous and expensive procedures without (hopefully) compromising quality. We know that can work because just about the entire developed world spends less on health care than we do, yet has better health care outcomes. The Affordable Care Act takes steps to compile data on the effectiveness of various procedures to make positive steps toward that goal. Then there's the Ryan plan, which involves capping what seniors get for Medicare by placing a cap on the supply side. In essence, it tells them that they can spend a fixed amount on health insurance. And if that insurance doesn't cover all the health care they need, they can pay out of pocket. And if they can't afford it, well, tough luck, they get to die. In other words, according to the Ryan Plan, we can't make cuts to superfluous procedures because that's "rationing", but we can hand people a check, then go to the market and find out that it won't buy them health insurance that actually insures them. But I guess that's "fiscal discipline"-- financing massive tax cuts for the Romneys and the Buffetts, while throwing granny off a cliff. That's not a scare story-- scare stories aren't true.
So no, the Ryans in the Republican Party aren't serious, and they're no more principled than the anti-abortion crusaders-- they are, in their own way, just as nuts as the Akins, and are not to be taken any more seriously. If only the media would try looking at the numbers long enough to figure that out...
Monday, July 23, 2012
Punishment at Penn State
This morning, the NCAA handed down a punishment for Penn State for the Jerry Sandusky cover up. It doesn't look pretty for Penn State football. They have to donate $60 million to an endowment to protect children, give up 10 scholarships a year for 4 years, have their total scholarships reduced from 85 to 65, and are banned from playing in bowls for 4 years. On top of that, Joe Paterno had to vacate all of his coaching wins after 1998. The response from much of the Penn State community has been... sadly predictable. They're calling their new university president (who signed a consent decree acquiescing to the punishment) a coward. They've got some ridiculous conspiracy theory about Louis Freeh, their Board of Trustees, and ESPN all conspiring against them to soil Saint Paterno's legacy. They claim the punishment doesn't do anything for the victims and unnecessarily punishes their players and community for something they had nothing to do with. And, besides the players part, this completely misses the picture.
Their most common claim is that the Freeh Report made inferences regarding certain facts, and came to conclusions based on circumstantial evidence. Because of that, Paterno is somehow being crucified without being granted due process. Which is an entirely banal and stupid argument. Due process rights are granted to people in criminal trials. They have a different standard of proof because we think that criminal penalties for innocent people are really, really bad. This isn't a criminal case. It's not even a civil case (where the standard of proof is a preponderance of the evidence). It's a private governing body's investigation. The Freeh Report is damning in what it says about Joe Paterno. Plainly, it makes a strong case that, amid multiple reports that his former top assistant was raping young boys, he actively engaged in a cover-up, lobbied against suggestions that university administrators go to the police, and concerned himself with what was good for his football program at the expense of past, present, and future victims of a seriously horrific crime. In a way, Paterno and the others were just as bad as Sandusky-- true, they didn't rape young boys themselves. But they were more calculating and deliberate. Sandusky is a sick, sick person-- you almost have to be to do what he did. That doesn't excuse or justify his horrific crimes, but it does mean that he has serious delusions about them; people who don't have those delusions and have reason to suspect that they're occurring have a moral duty to make sure that those things can't happen, especially when they're happening on their watch (and yes, Sandusky did it on their watch, even after he formally retired).
It's certainly true that the punishment does some damage to those who don't deserve it; players who want to play at Penn State will either have to resign themselves to never playing in a bowl, or they'll have to transfer (though the NCAA has made that easier in this case). But what the penalties do, in a blunt way, is absolutely what should be done-- cut the football program at the school down to size. Because that was really the heart of the institutional problem there. Paterno wasn't just the football coach at Penn State-- he was the face of the university. Before this incident broke, 99.99% of Americans outside of Penn State students and alumni had no clue who the president and athletic director were. And, while that's the case at a lot of major D-I schools, Paterno wielded a power at Penn State that was almost unprecedented.
Mike Krzyzewski is by far the best-known employee of Duke University. You could say the same for a whole lot of big-time college football and basketball coaches. Bob Knight was a legend at Indiana. But what seems unique about Penn State was that Joe Paterno was no one's employee. When Bob Knight got himself into trouble at Indiana, he got some leeway. Then he was forced out. If Krzyzewski at Duke were found to have likely covered up a single rape (or, for that matter, any number of less egregious crimes), you can bet the university would dump him, no questions asked. And I don't even like Krzyzewski or Duke. When Penn State tried to push Paterno out the door in 2004, he laughed, told them he wasn't going anywhere, and that was that. His players were exempted from incoming freshman sexual assault education at Penn State. Paterno fought (successfully) to keep them out of the university's disciplinary procedure. The football program was its own fiefdom, and Paterno was the top dog. When the child abuse allegations came to light, it was ultimately Paterno who had the last word. There was an exchange in the Freeh Report where I believe the AD and a top VP agreed to go to child welfare with the 2001 allegations. Then, a subsequent e-mail from the AD said that after speaking with "Joe", he was no longer "comfortable" with that course of action. It's clear that Paterno was at least his ostensible superiors' equal. In all likelihood, they answered to him just as much as, if not more than, he answered to them.
It was this dynamic that needed to be fixed. Joe Paterno ostensibly did some very good things at Penn State-- he graduated a lot of players, he donated a good chunk of money to build a library, and I'm sure plenty of his players have great things to say about him. But, as a person, he was an enormous moral failure. Covering up child rape isn't "one mistake"-- shoplifting is one mistake. Getting into a fight is one mistake. Cheating on a test is one mistake. Even robbing the bank is one mistake. Doing nothing when you have ANY reason to believe a child predator is not just loose, but making use of your facilities to commit his crimes is an enormous moral failure that defines you. The lives of many, possibly tens, of people have been ruined because Paterno stood by and did nothing.
And, in large part, it was the devotion to Paterno and to football that allowed it to happen. Because Paterno talked a lot about honor (though he turned out to have none), graduated more players than most college football coaches, and donated some money to the library, the assumption was that he should get leeway to run his football programs as he sees fit. He was beyond the reach of the administration. In an important sense, he was the most powerful person on Penn State's campus. And he turned out to be a moral coward. But he couldn't have done that on his own. To become that powerful, he needed a campus culture that acceded to it. He needed administrators who wouldn't, or couldn't, push him. He needed students and alumni who saw him as a god. And he got that. The punishment of the football program lashes out at Penn State football because, in an important regard, Penn State football is the problem. Not the players or Bill O'Brien (the current coach), or those people, but the mindset that Penn State football is "above the law" at the university. Crippling that program will hopefully break that hold-- it will put football into a proper perspective. It's a lot of fun, it's a community event for students and alumni, and it's a source of pride. In plenty of cases, it's an incubator of future pros. But, even if football players at Penn State are separate from the rest of the campus (as they are at most high D-I schools), they can't be above reproach-- they should have to attend campus safety workshops with other students; when they do something wrong, they should be punished like other students; and, if something goes wrong that necessitates a response from the administration, they should be subject to sanctions, same as any other students.
At Penn State, the myth of Saint Joe is, in large part, what allowed a child predator to continue raping kids for well over a decade, even though there was smoke out there indicating that he was a problem. Dismantling that mentality is what the sanctions aim to do. And Penn State students and alumni who cry about the "lynching" of Paterno and the victimization of the football program are prime evidence of why that program needs to be sanctioned in that way-- hopefully losing some games will put football and the coach's role in its proper perspective at a place where it was horribly, tragically out of whack.
Their most common claim is that the Freeh Report made inferences regarding certain facts, and came to conclusions based on circumstantial evidence. Because of that, Paterno is somehow being crucified without being granted due process. Which is an entirely banal and stupid argument. Due process rights are granted to people in criminal trials. They have a different standard of proof because we think that criminal penalties for innocent people are really, really bad. This isn't a criminal case. It's not even a civil case (where the standard of proof is a preponderance of the evidence). It's a private governing body's investigation. The Freeh Report is damning in what it says about Joe Paterno. Plainly, it makes a strong case that, amid multiple reports that his former top assistant was raping young boys, he actively engaged in a cover-up, lobbied against suggestions that university administrators go to the police, and concerned himself with what was good for his football program at the expense of past, present, and future victims of a seriously horrific crime. In a way, Paterno and the others were just as bad as Sandusky-- true, they didn't rape young boys themselves. But they were more calculating and deliberate. Sandusky is a sick, sick person-- you almost have to be to do what he did. That doesn't excuse or justify his horrific crimes, but it does mean that he has serious delusions about them; people who don't have those delusions and have reason to suspect that they're occurring have a moral duty to make sure that those things can't happen, especially when they're happening on their watch (and yes, Sandusky did it on their watch, even after he formally retired).
It's certainly true that the punishment does some damage to those who don't deserve it; players who want to play at Penn State will either have to resign themselves to never playing in a bowl, or they'll have to transfer (though the NCAA has made that easier in this case). But what the penalties do, in a blunt way, is absolutely what should be done-- cut the football program at the school down to size. Because that was really the heart of the institutional problem there. Paterno wasn't just the football coach at Penn State-- he was the face of the university. Before this incident broke, 99.99% of Americans outside of Penn State students and alumni had no clue who the president and athletic director were. And, while that's the case at a lot of major D-I schools, Paterno wielded a power at Penn State that was almost unprecedented.
Mike Krzyzewski is by far the best-known employee of Duke University. You could say the same for a whole lot of big-time college football and basketball coaches. Bob Knight was a legend at Indiana. But what seems unique about Penn State was that Joe Paterno was no one's employee. When Bob Knight got himself into trouble at Indiana, he got some leeway. Then he was forced out. If Krzyzewski at Duke were found to have likely covered up a single rape (or, for that matter, any number of less egregious crimes), you can bet the university would dump him, no questions asked. And I don't even like Krzyzewski or Duke. When Penn State tried to push Paterno out the door in 2004, he laughed, told them he wasn't going anywhere, and that was that. His players were exempted from incoming freshman sexual assault education at Penn State. Paterno fought (successfully) to keep them out of the university's disciplinary procedure. The football program was its own fiefdom, and Paterno was the top dog. When the child abuse allegations came to light, it was ultimately Paterno who had the last word. There was an exchange in the Freeh Report where I believe the AD and a top VP agreed to go to child welfare with the 2001 allegations. Then, a subsequent e-mail from the AD said that after speaking with "Joe", he was no longer "comfortable" with that course of action. It's clear that Paterno was at least his ostensible superiors' equal. In all likelihood, they answered to him just as much as, if not more than, he answered to them.
It was this dynamic that needed to be fixed. Joe Paterno ostensibly did some very good things at Penn State-- he graduated a lot of players, he donated a good chunk of money to build a library, and I'm sure plenty of his players have great things to say about him. But, as a person, he was an enormous moral failure. Covering up child rape isn't "one mistake"-- shoplifting is one mistake. Getting into a fight is one mistake. Cheating on a test is one mistake. Even robbing the bank is one mistake. Doing nothing when you have ANY reason to believe a child predator is not just loose, but making use of your facilities to commit his crimes is an enormous moral failure that defines you. The lives of many, possibly tens, of people have been ruined because Paterno stood by and did nothing.
And, in large part, it was the devotion to Paterno and to football that allowed it to happen. Because Paterno talked a lot about honor (though he turned out to have none), graduated more players than most college football coaches, and donated some money to the library, the assumption was that he should get leeway to run his football programs as he sees fit. He was beyond the reach of the administration. In an important sense, he was the most powerful person on Penn State's campus. And he turned out to be a moral coward. But he couldn't have done that on his own. To become that powerful, he needed a campus culture that acceded to it. He needed administrators who wouldn't, or couldn't, push him. He needed students and alumni who saw him as a god. And he got that. The punishment of the football program lashes out at Penn State football because, in an important regard, Penn State football is the problem. Not the players or Bill O'Brien (the current coach), or those people, but the mindset that Penn State football is "above the law" at the university. Crippling that program will hopefully break that hold-- it will put football into a proper perspective. It's a lot of fun, it's a community event for students and alumni, and it's a source of pride. In plenty of cases, it's an incubator of future pros. But, even if football players at Penn State are separate from the rest of the campus (as they are at most high D-I schools), they can't be above reproach-- they should have to attend campus safety workshops with other students; when they do something wrong, they should be punished like other students; and, if something goes wrong that necessitates a response from the administration, they should be subject to sanctions, same as any other students.
At Penn State, the myth of Saint Joe is, in large part, what allowed a child predator to continue raping kids for well over a decade, even though there was smoke out there indicating that he was a problem. Dismantling that mentality is what the sanctions aim to do. And Penn State students and alumni who cry about the "lynching" of Paterno and the victimization of the football program are prime evidence of why that program needs to be sanctioned in that way-- hopefully losing some games will put football and the coach's role in its proper perspective at a place where it was horribly, tragically out of whack.
Wednesday, July 18, 2012
Romney at Bain, and Romney's taxes
The past few weeks haven't been good to Mitt Romney. He's been hit with two body shots, one after the other, relating to his character. There was also something about a horse, but I didn't bother to read about that one-- it might be a nice punchline, but not much more. Of the bigger stories, the first came when the Boston Globe uncovered SEC filings that listed Romney as CEO, President, Chairman of the Board, and sole stockholder of Bain Capital entities as late as 2002, seemingly contradicting his claim that he left Bain in 1999 to run the Olympics and shouldn't be held responsible for offshoring decisions the firm made in regards to certain portfolio companies in the time between Romney's departure and the time when he ceased to be listed in SEC filings. The second came when Romney continually stonewalled efforts to get him to release tax returns. To date, Romney's released the returns from 2010, and those were incomplete (an addition requiring disclosures about offshore accounts is missing). He hasn't released anything else. By comparison, John McCain released 2 years in 2008 (and those weren't particularly interesting; McCain is rich, in conventional terms, but he's solidly middle class compared to the mega-wealthy Romney). John Kerry released 20 years in 2004. Romney's own father, George, released 12 years when he ran for the Republican nomination in 1968. Romney's continually stonewalled any efforts to get additional taxes, which has predictably stirred up a firestorm over what's in his returns. One of those attacks, I think, has merit. The other doesn't.
The first attack is, I think, almost entirely baseless. Lying in SEC filings is certainly a felony. And Romney has been claiming that he left Bain in 1999 to run the Olympics. But my understanding of the filings is that Romney is listed in that capacity for particular Bain entities, rather than the Bain Capital partnership itself (which, of course, makes sense; a partnership the size of Bain Capital doesn't have just one partner, especially one like Bain where there is no charismatic founder or pair of founders inextricably tied to the company a la Henry Kravis and George Roberts at KKR or Pete Peterson and Steve Schwartzman at Blackstone). And, if you really think about it, the story doesn't pass the smell test. Unless you think Romney set up a remote office in Utah and was letting others run the Olympics while he ran Bain from Salt Lake City, there aren't enough hours in a day for anyone to manage two projects of that size.
My bet is this: Romney figured he would be going back to Bain when he left in 1999. He kept some formal authority, but his partners effectively ran the company day to day, while he came back on occasion in more or less a part-time advisory role. They continued to list him as "chairman, president, CEO and sole shareholder" of pass-through entities that distribute payroll and the like (PE funds are set up as a pyramid of different entities for limited liability and tax purposes), but which didn't actually make business decisions or earn profits. It certainly looks bad to a layperson, but it makes perfect sense. And, when you come right down to it, trying to run with it is a waste of time that could be spent looking at more important issues. Now, that doesn't mean that everything that happened after 1999 should be off-limits to attackers; if you buy the anti-Bain line from 1999-2002 hook, line and sinker, it's pretty disingenuous to think that the company somehow transformed when Romney left to run the Olympics, from "job creator" to "job destroyer". A company builds a particular culture. Romney was at the forefront of founding Bain, and he was there for almost two decades. It's not very credible to suggest that the company started doing things in 2000 that it wouldn't have done in 1999 just because Romney left. Whether offshoring is a problem is a separate issue altogether, but if you believe that it is, the "I left in 1999" defense doesn't pass the smell test, even if it's true that he wasn't running the company day to day.
The tax issue, on the other hand, is much more problematic for Romney. There's a long tradition of candidates for president releasing tax returns to the press. While private citizens' returns are certainly their own business, politicians' returns can be very relevant. They present a window into how the candidates conducted their financial affairs in the past. They demonstrate the candidate's values, how far they'll go to avoid taxes, and what kinds of investments they make. Romney's been historically difficult in withholding his returns. And that's a giant red flag. Now, the reality is this. There's a lot of speculation about what this means. But much of the speculation is pretty mundane. I would think releasing it would get media buzz for 3-4 days, and then people would get sick of it. If that's the case, I have to think the Romney political team would bite the bullet, release 4-6 years of returns, take the hit, and move on. But his aggressive refusal to do so doesn't pass the smell test-- it seems that there's something there, and chances are pretty good that it's something that would resonate, and not in a positive way.
I've seen a couple of plausible theories about what this is. One is that Romney paid no tax at all in 2009. This could have happened if he'd taken a hefty long-term capital loss that he could use to offset income. A man worth $250-500 million paying 0 in taxes in a given year isn't exactly a winning proposition to sell the public. It's something I would note, but, to me, it wouldn't be fatal. Though I'm not an election watcher, so the way I'd react may be different from the way others would react. Another possibility is that Romney took advantage of the 2009 IRS amnesty on Swiss bank accounts. Swiss bank accounts are useful to mega-rich people in that they used to provide substantial secrecy, which could be used to shield foreign holdings from scrutiny, play clever games with the tax code to adjust the basis of asset sales, or evade US taxes. The amnesty provision allowed offenders to pay limited penalties upon closing the accounts while remaining anonymous. If Romney took advantage, it would indicate that he was a tax cheat. And that definitely doesn't look so good for someone worth as much as him. A final theory that seems possible is that Romney has substantial holdings in China, and is bullish on the Chinese. That one's pretty mundane-- he's entitled to believe in China's economy. The issue that raises, though, is about honesty, since Romney talks bluntly about how harmful China's currency manipulation is to the US (which is actually something he's not wrong about, though I think China's slowdown is hardly the time to start waving a sword at the Chinese). That would look bad politically, and just confirm how disingenuous a politician Romney is, but it wouldn't be fatal. I tend to think that that's the best-case scenario for him. Though I guess we'll never know unless he caves to the pressure and releases his returns...
The first attack is, I think, almost entirely baseless. Lying in SEC filings is certainly a felony. And Romney has been claiming that he left Bain in 1999 to run the Olympics. But my understanding of the filings is that Romney is listed in that capacity for particular Bain entities, rather than the Bain Capital partnership itself (which, of course, makes sense; a partnership the size of Bain Capital doesn't have just one partner, especially one like Bain where there is no charismatic founder or pair of founders inextricably tied to the company a la Henry Kravis and George Roberts at KKR or Pete Peterson and Steve Schwartzman at Blackstone). And, if you really think about it, the story doesn't pass the smell test. Unless you think Romney set up a remote office in Utah and was letting others run the Olympics while he ran Bain from Salt Lake City, there aren't enough hours in a day for anyone to manage two projects of that size.
My bet is this: Romney figured he would be going back to Bain when he left in 1999. He kept some formal authority, but his partners effectively ran the company day to day, while he came back on occasion in more or less a part-time advisory role. They continued to list him as "chairman, president, CEO and sole shareholder" of pass-through entities that distribute payroll and the like (PE funds are set up as a pyramid of different entities for limited liability and tax purposes), but which didn't actually make business decisions or earn profits. It certainly looks bad to a layperson, but it makes perfect sense. And, when you come right down to it, trying to run with it is a waste of time that could be spent looking at more important issues. Now, that doesn't mean that everything that happened after 1999 should be off-limits to attackers; if you buy the anti-Bain line from 1999-2002 hook, line and sinker, it's pretty disingenuous to think that the company somehow transformed when Romney left to run the Olympics, from "job creator" to "job destroyer". A company builds a particular culture. Romney was at the forefront of founding Bain, and he was there for almost two decades. It's not very credible to suggest that the company started doing things in 2000 that it wouldn't have done in 1999 just because Romney left. Whether offshoring is a problem is a separate issue altogether, but if you believe that it is, the "I left in 1999" defense doesn't pass the smell test, even if it's true that he wasn't running the company day to day.
The tax issue, on the other hand, is much more problematic for Romney. There's a long tradition of candidates for president releasing tax returns to the press. While private citizens' returns are certainly their own business, politicians' returns can be very relevant. They present a window into how the candidates conducted their financial affairs in the past. They demonstrate the candidate's values, how far they'll go to avoid taxes, and what kinds of investments they make. Romney's been historically difficult in withholding his returns. And that's a giant red flag. Now, the reality is this. There's a lot of speculation about what this means. But much of the speculation is pretty mundane. I would think releasing it would get media buzz for 3-4 days, and then people would get sick of it. If that's the case, I have to think the Romney political team would bite the bullet, release 4-6 years of returns, take the hit, and move on. But his aggressive refusal to do so doesn't pass the smell test-- it seems that there's something there, and chances are pretty good that it's something that would resonate, and not in a positive way.
I've seen a couple of plausible theories about what this is. One is that Romney paid no tax at all in 2009. This could have happened if he'd taken a hefty long-term capital loss that he could use to offset income. A man worth $250-500 million paying 0 in taxes in a given year isn't exactly a winning proposition to sell the public. It's something I would note, but, to me, it wouldn't be fatal. Though I'm not an election watcher, so the way I'd react may be different from the way others would react. Another possibility is that Romney took advantage of the 2009 IRS amnesty on Swiss bank accounts. Swiss bank accounts are useful to mega-rich people in that they used to provide substantial secrecy, which could be used to shield foreign holdings from scrutiny, play clever games with the tax code to adjust the basis of asset sales, or evade US taxes. The amnesty provision allowed offenders to pay limited penalties upon closing the accounts while remaining anonymous. If Romney took advantage, it would indicate that he was a tax cheat. And that definitely doesn't look so good for someone worth as much as him. A final theory that seems possible is that Romney has substantial holdings in China, and is bullish on the Chinese. That one's pretty mundane-- he's entitled to believe in China's economy. The issue that raises, though, is about honesty, since Romney talks bluntly about how harmful China's currency manipulation is to the US (which is actually something he's not wrong about, though I think China's slowdown is hardly the time to start waving a sword at the Chinese). That would look bad politically, and just confirm how disingenuous a politician Romney is, but it wouldn't be fatal. I tend to think that that's the best-case scenario for him. Though I guess we'll never know unless he caves to the pressure and releases his returns...
Tuesday, July 10, 2012
The inanity of presidential campaigns
What's struck me about this presidential campaign is just how inane politicians' election platforms are. They're inane in the way that they promote their own candidates, and they're inane in the way that they attack other candidates. Even if they pick the right issues, I feel like the campaigns draw all the wrong conclusions in the way that they sell themselves on those issues. Two cases in point: the Obama campaign's attack on Romney's taxes, and the Romney campaign's promotion of his time as the chief of Bain Capital and what it means.
The gist of the Obama campaign's attacks on Romney's taxes seems to be that 1) Romney is rich, 2) Romney doesn't pay much in taxes, and 3) Romney holds assets in foreign accounts for tax purposes. Which are (or have recently been) all true. But, in a very substantial sense, they're entirely beyond the point. The link the attacks want viewers to draw is that Romney is dodging taxes, and this makes him "ruthless", and "out of touch", or something along those lines. And if you extrapolate from that that he's doing something illegal, that's a plus for them. Now, to be clear, I don't think there's anyone outside of the fringe who thinks Romney is engaging in tax fraud. At the least, there's no evidence of it. What he's doing is what every rich person (or really every person who bothers to do their own taxes) does-- structuring his investments in such a way that he ends up keeping as much after-tax money as possible to use as he sees fit, whether to buy himself another yacht, or to give more money to a charity or church that he likes. And more power to him for that-- rich liberals do the exact same thing.
For me, all that line of attack does is demonstrate that Mitt Romney made a whole lot of money and engages in tax planning. Shoot him. The more effective line of attack, I think, is to tie the amount of taxes Romney pays to the amount of taxes he supports. There are plenty of rich people in the US. There are plenty of rich people who pay very little in taxes. Warren Buffett has a bigger tax bill than Romney, percentage-wise, but not by all that much. But the difference between Romney and Buffett is that Buffett sees this state of affairs as problematic, while Romney sees it as good and natural. Buyout barons aren't dishing out $50,000 a plate to go to the Hamptons and feed the Romney campaign because they think Obama's policies are destroying the economy-- half of them know a lot about buying companies and very little about anything else. They're out there because they're afraid that, under President Obama, they might have to hand over an extra $5 million of next year's $50 million. And if there's one thing buyout barons think, it's that they earn every penny of those millions. But I'd guess that Barbara the Office Manager making $45,000 a year isn't all that amused that she's paying as much of her income in taxes to the government as Steve Schwarzman at Blackstone. A persuasive implication of the Romney tax bill for me isn't, "Look how out of touch Mitt Romney is, he doesn't pay much in taxes." It's "Look how little Mitt Romney pays in taxes; he thinks this is the natural way things should be; President Obama thinks people who have built their wealth in America, have used America's resources to do it, have workers educated in America's public schools, whose parents' health care is paid for by America's government should give a bit more back to keep America great than people who have been less fortunate." The attack shouldn't be that we need to soak the rich; it should be that we're all in it together, and that means the rich as well as the middle class should pay their fair share.
Then there's the Romney campaign's promotion of his record at Bain Capital. And there's no doubt that his time there was extraordinarily successful. His first fund averaged annual returns of over 80%, which is extraordinary even in the rarefied air of private equity. He earned a whole lot of money, and is now worth somewhere between a quarter and half a billion dollars, which makes him mega-rich. The Romney campaign claims that his time at Bain makes him uniquely well-equipped to create jobs, and that attacks on his time there amount to an attack on success. The second claim is hogwash-- being rich or successful doesn't qualify someone to be president. George Soros is arguably the most successful hedge fund manager of all time-- if wealth equates to success, he's got Romney trumped. Romney counts as mega-wealthy with a net worth of up to half a billion. Soros is worth about 40 times that, $20 billion. And he's given away another $8-10 billion or so. Despite this sterling career, I don't know of anyone who thinks that being a great hedge fund manager somehow qualifies Soros to run a country. Heck, I wouldn't hire him to run the Treasury or the Fed either. While he's a unique investor with a legendary understanding of markets, he's not a policymaker, and pretending that knowing how to make money in one way makes him good at everything is completely backward thinking.
The other claim Romney makes is that his time at Bain taught him how to create jobs. This is also nonsense. To begin with, private equity is NOT in the job creation business-- it's in the return on investment business. If this means adding jobs, great. If it means slashing jobs, no problem. If it means cutting company employees and outsourcing their work, well, that's the price of business. This isn't the "wrong" thing to do-- they're a business, not a charity. But that analogy runs another way-- business isn't a charity, but government isn't a business. This is a line of attack that the Obama campaign hasn't mentioned, but it's one that is profoundly true, and should be hammered home. Even in business areas that are more closely in the innovation rather than financial engineering business, like technology and manufacturing, running a big company has very little in common with running a country. While laying out the differences between a business and a country would take a whole post, it suffices to say that a business 1) doesn't sell 80% of its product to its own employees, 2) seeks to maximize a single metric, such as return on equity or stock price, rather than balance competing social goals that are often in tension, and 3) is, unlike a country, in direct competition with others in its industry. Lost profit opportunities for Bain will be picked up by KKR. A bad fund performance for KKR means client money will run to Blackstone. By contrast, if China goes into recession, the US doesn't "win"; it loses a huge potential market for things it produces. Running a private equity firm doesn't make Romney a job creator. It doesn't qualify him to run a country. And it doesn't mean he has a secret formula from his time at Bain that he can apply to restore America's success.
But here's what Romney CAN claim his time at Bain means-- that he knows how to manage an organization. While a government runs nothing like a company, the West Wing of the White House DOES operate somewhat like a company unit. The President is, in a very real sense, the CEO of the west wing. He needs to synthesize advice coming at him from a number of different advisers. He needs to deploy those advisers to their most productive uses, taking advantage of their skills. And he needs to combine their input to make good political and policy decisions. This is, I think, President Obama's biggest weakness. I don't think he's been a particularly effective manager as president, and the result has been a first term that's lacked focus and has too often seemed afflicted with terrible ADD. He's had exceptionally talented people advising him on all different kinds of policy matters, but he can't seem to come to any kind of conclusion about who's right. The result has been a first term that's lacked vision. This is where Romney can draw a contrast. As head of a buyout firm, while he was managing an organization that looked nothing like a government, the skills he can claim to have cultivated may well be very transferable. If he can argue that he can parlay his time as an executive into the ability to quickly and effectively synthesize information, develop a strategy, and execute that strategy, he can draw a contrast between his own focus and the disjointedness that's seemed to plague the Obama administration.
What might really be a compelling line from Romney would sound something like this: I'm not going to claim to be a job creator, but I will claim that I can manage this government more effectively than the President has. Of course, for campaigns, sound bites and polling trump true arguments and sound logic, but it might be refreshing to see the campaigns change tack just a little bit.
The gist of the Obama campaign's attacks on Romney's taxes seems to be that 1) Romney is rich, 2) Romney doesn't pay much in taxes, and 3) Romney holds assets in foreign accounts for tax purposes. Which are (or have recently been) all true. But, in a very substantial sense, they're entirely beyond the point. The link the attacks want viewers to draw is that Romney is dodging taxes, and this makes him "ruthless", and "out of touch", or something along those lines. And if you extrapolate from that that he's doing something illegal, that's a plus for them. Now, to be clear, I don't think there's anyone outside of the fringe who thinks Romney is engaging in tax fraud. At the least, there's no evidence of it. What he's doing is what every rich person (or really every person who bothers to do their own taxes) does-- structuring his investments in such a way that he ends up keeping as much after-tax money as possible to use as he sees fit, whether to buy himself another yacht, or to give more money to a charity or church that he likes. And more power to him for that-- rich liberals do the exact same thing.
For me, all that line of attack does is demonstrate that Mitt Romney made a whole lot of money and engages in tax planning. Shoot him. The more effective line of attack, I think, is to tie the amount of taxes Romney pays to the amount of taxes he supports. There are plenty of rich people in the US. There are plenty of rich people who pay very little in taxes. Warren Buffett has a bigger tax bill than Romney, percentage-wise, but not by all that much. But the difference between Romney and Buffett is that Buffett sees this state of affairs as problematic, while Romney sees it as good and natural. Buyout barons aren't dishing out $50,000 a plate to go to the Hamptons and feed the Romney campaign because they think Obama's policies are destroying the economy-- half of them know a lot about buying companies and very little about anything else. They're out there because they're afraid that, under President Obama, they might have to hand over an extra $5 million of next year's $50 million. And if there's one thing buyout barons think, it's that they earn every penny of those millions. But I'd guess that Barbara the Office Manager making $45,000 a year isn't all that amused that she's paying as much of her income in taxes to the government as Steve Schwarzman at Blackstone. A persuasive implication of the Romney tax bill for me isn't, "Look how out of touch Mitt Romney is, he doesn't pay much in taxes." It's "Look how little Mitt Romney pays in taxes; he thinks this is the natural way things should be; President Obama thinks people who have built their wealth in America, have used America's resources to do it, have workers educated in America's public schools, whose parents' health care is paid for by America's government should give a bit more back to keep America great than people who have been less fortunate." The attack shouldn't be that we need to soak the rich; it should be that we're all in it together, and that means the rich as well as the middle class should pay their fair share.
Then there's the Romney campaign's promotion of his record at Bain Capital. And there's no doubt that his time there was extraordinarily successful. His first fund averaged annual returns of over 80%, which is extraordinary even in the rarefied air of private equity. He earned a whole lot of money, and is now worth somewhere between a quarter and half a billion dollars, which makes him mega-rich. The Romney campaign claims that his time at Bain makes him uniquely well-equipped to create jobs, and that attacks on his time there amount to an attack on success. The second claim is hogwash-- being rich or successful doesn't qualify someone to be president. George Soros is arguably the most successful hedge fund manager of all time-- if wealth equates to success, he's got Romney trumped. Romney counts as mega-wealthy with a net worth of up to half a billion. Soros is worth about 40 times that, $20 billion. And he's given away another $8-10 billion or so. Despite this sterling career, I don't know of anyone who thinks that being a great hedge fund manager somehow qualifies Soros to run a country. Heck, I wouldn't hire him to run the Treasury or the Fed either. While he's a unique investor with a legendary understanding of markets, he's not a policymaker, and pretending that knowing how to make money in one way makes him good at everything is completely backward thinking.
The other claim Romney makes is that his time at Bain taught him how to create jobs. This is also nonsense. To begin with, private equity is NOT in the job creation business-- it's in the return on investment business. If this means adding jobs, great. If it means slashing jobs, no problem. If it means cutting company employees and outsourcing their work, well, that's the price of business. This isn't the "wrong" thing to do-- they're a business, not a charity. But that analogy runs another way-- business isn't a charity, but government isn't a business. This is a line of attack that the Obama campaign hasn't mentioned, but it's one that is profoundly true, and should be hammered home. Even in business areas that are more closely in the innovation rather than financial engineering business, like technology and manufacturing, running a big company has very little in common with running a country. While laying out the differences between a business and a country would take a whole post, it suffices to say that a business 1) doesn't sell 80% of its product to its own employees, 2) seeks to maximize a single metric, such as return on equity or stock price, rather than balance competing social goals that are often in tension, and 3) is, unlike a country, in direct competition with others in its industry. Lost profit opportunities for Bain will be picked up by KKR. A bad fund performance for KKR means client money will run to Blackstone. By contrast, if China goes into recession, the US doesn't "win"; it loses a huge potential market for things it produces. Running a private equity firm doesn't make Romney a job creator. It doesn't qualify him to run a country. And it doesn't mean he has a secret formula from his time at Bain that he can apply to restore America's success.
But here's what Romney CAN claim his time at Bain means-- that he knows how to manage an organization. While a government runs nothing like a company, the West Wing of the White House DOES operate somewhat like a company unit. The President is, in a very real sense, the CEO of the west wing. He needs to synthesize advice coming at him from a number of different advisers. He needs to deploy those advisers to their most productive uses, taking advantage of their skills. And he needs to combine their input to make good political and policy decisions. This is, I think, President Obama's biggest weakness. I don't think he's been a particularly effective manager as president, and the result has been a first term that's lacked focus and has too often seemed afflicted with terrible ADD. He's had exceptionally talented people advising him on all different kinds of policy matters, but he can't seem to come to any kind of conclusion about who's right. The result has been a first term that's lacked vision. This is where Romney can draw a contrast. As head of a buyout firm, while he was managing an organization that looked nothing like a government, the skills he can claim to have cultivated may well be very transferable. If he can argue that he can parlay his time as an executive into the ability to quickly and effectively synthesize information, develop a strategy, and execute that strategy, he can draw a contrast between his own focus and the disjointedness that's seemed to plague the Obama administration.
What might really be a compelling line from Romney would sound something like this: I'm not going to claim to be a job creator, but I will claim that I can manage this government more effectively than the President has. Of course, for campaigns, sound bites and polling trump true arguments and sound logic, but it might be refreshing to see the campaigns change tack just a little bit.
Monday, July 9, 2012
Tax policy, Mitt Romney and "job creators"
Tax policy is, without a doubt, one of the biggest issues dividing Democrats and Republicans. The left argues that the mega-rich are under-taxed, while the right loves to claim that taking money out of the pockets of these "job creators" means everyone else's jobs disappear, too. Now, the Republican argument about taxes at this point is convoluted and hard to disentangle. Rhetorically, it's a mess, but there are elements of logic to it that are useful to untangle. The first issue is that they conflate short-run arguments with long-run arguments, so that's probably the place to begin.
The argument goes that raising taxes on anyone (including the "job creators") is contractionary fiscal policy-- it takes money that consumers could be spending out of the economy and puts it into the government's coffers. In the present circumstances, strictly speaking, this is true so long as tax cuts are paid for by borrowing rather than by cutting government spending. Although they like to pretend that private spending is somehow qualitatively better than government spending, the reality is that the government buying a Volvo for $30,000 and Bob from Jersey buying a Volvo for $30,000 is economically identical in terms of GDP, so a $30,000 tax cut matched with a $30,000 government spending cut is growth-neutral if you assume away secondary effects. What's interesting about that argument is just how vehemently Republicans reject the same exact logic when it applies to cuts to government spending. The position that contractionary fiscal policy is only contractionary when it involves tax hikes and not when it involves spending cuts is not only economically incoherent, but more than likely completely backward-- there's considerable evidence of a multiplier effect that applies to government spending more than tax cuts (because tax cuts can be saved while a dollar spent by the government goes directly into the economy). This incoherence aside, what's really interesting is the long-run argument for low tax rates on the Romneys and the Kochs.
Paul Krugman tackles this issue in a very interesting post on his blog. Krugman points out the absurdity of the talk about tax hikes on rich people as some kind of horrible job killer. The usual defense of the right to paying people like Steve Schwarzman, Henry Kravis, Bill Gates, and Mark Zuckerberg tens of millions of dollars annually is that they create a whole lot of value. Let's assume for a second that this is true (though I think Gates and Zuckerberg create a lot more value than Schwarzman or Kravis, but that's a separate issue). The argument is that we can pay Kravis $50 million next year because he's produced $50 million worth of GDP. This is, in fact, the Microeconomics 1 explanation; as Krugman notes, in a perfectly competitive market, workers are paid their marginal product (this assumption is problematic, but for the time being, let's assume this away too). This assumption justifies massive paydays for buyout execs. But it simultaneously destroys the argument that taxing "job creators" at high rates somehow degrades the lives of everyone because they take their magic job creating sauce out of the economy, and the jobs disappear.
But the implication of the labor market model used to justify huge paydays for the mega-wealthy is that their withdrawal from the economy is harmful... only to them. It's useful to illustrate this with an example. Let's assume for a second that Mark Zuckerberg really does contribute $40 million worth of GDP to the economy in a given year, and his paycheck reflects that (this is a much more plausible scenario than the assertion that hedge fund manager John Paulson generated a few billion in GDP shorting the housing market in 2009, but we can set that aside). Let's further assume that Zuckerberg has been reading Ayn Rand novels, which has turned him into a loony sociopath, and he's decided that the government is snatching too much of his hard-earned cash. So he's going to go on "capital strike" like the Randian hero John Galt and go sit in a valley in Utah and deny the economy his skills. The economy is $40 million poorer because Mark Zuckerberg isn't participating... and the economy is also paying $40 million less to Mark Zuckerberg to add $40 million to the economy. To believe that Mark Zuckerberg leaving the economy in this scenario is a net loss to more than just Mark Zuckerberg, you have to believe that there's a market failure in the executive compensation market, and Zuckerberg is actually being underpaid for his services. I kind of doubt that even they would be audacious enough to make that claim.
As Krugman points out, though, the only real net benefit to an efficiently compensated CEO working rather than going on capital strike is... the taxes they pay to the government coffers, which provides services to others. The socially optimal tax rate for the mega-rich, then, isn't the 14% that Romney pays on his dividends and investments, but the rate that maximizes government tax revenue; in short, the point at the top of the Laffer Curve. In just a few easy steps, then, it becomes apparent that believing in efficient labor markets supports keeping tax rates on the wealthy at the level at which tax revenue is maximized. The inevitable counter-argument will ask why the revenue-maximizing rate shouldn't apply to all earners. And the simple reason is that, where markets exist, it's only the mega-wealthy that can afford to go on "capital strike". Strictly speaking, if the labor market is efficient, a clerk at Wal-Mart earning $7 an hour leaving the labor force will cost the economy only the amount that she earns; the same logic that applies to the CEO applies to the rank and file. However, the unemployed clerk also won't be earning any income to pay for her needs. What this means is that, while the economy only values her up to the value of her salary, if she isn't working, she can't spend that nonexistent salary to support herself. As a result, she starves (or lives off of charity). The economy produces things, in short, because everyone needs things to live. But, for someone who has accumulated enough money to live on forever, assuming an efficient labor market, the only loss to society comes from the lost tax revenue. Otherwise... enjoy the leisure time, John Galt.
Now, I think the most interesting question here is the assumption involving efficient labor markets, and it's something that Krugman doesn't tackle in his post. It's no secret that inequality has exploded in the US-- the rich have gotten REALLY rich, and the poor and middle class have been left behind. In the 1960s, a CEO earned a few tens of times what an average employee earned-- maybe 20 or 30. Today, a CEO earns a few hundred times what an average employee earns-- 400 or so. This means one of two things must be true: either chief executives today are roughly 20 times more skilled now than they were 50 years ago, or the labor market is inefficient. And if the latter is true (which I think is a pretty safe assumption), the movement of income from labor to management and capital means one of two things is true. Either our compensation system used to redistribute wealth from management and capital to labor (in other words, CEOs and investors used to be wildly underpaid, and this subsidized rising wages for workers and the middle class; moreover, they also paid more in taxes then, so being upper-income must have been REALLY hard then...), or our compensation system now redistributes wealth from labor to management and capital.
I think the last statement rings most true, and the reasoning is pretty simple: workers productivity has been rising in the US pretty steadily. We're a technologically superior nation now to what we were when middle class wages stagnated, around 1980 (our communication systems are infinitely faster and more complex). We're a better-educated nation now than we were then. But somehow, in real terms, the gains have flowed almost entirely to the wealthiest 1%, and even more precisely to the wealthiest .1%. To believe that rising inequality is justified by market signals, you have to believe that the only Americans who have improved at what they do in about 30 years are executives, lawyers, doctors, and financiers. To me, that's a pretty hard case to make.
Where all this brings us is to Mitt Romney; both to his tax rate, and to his career at Bain Capital. The Democratic attacks on Romney's taxes have tended to go in the wrong direction. They've focused on how unfair it is that he has offshore accounts and imply that he's done something illegal. Let's be frank: I don't think there's any reason to believe that Romney's done anything illegal or untoward with his taxes. Like anyone, he's minimized his tax revenue under legal constraints. That's all well and good. But the question shouldn't be whether Romney pays an illegally low tax rate, but whether Romney and people like him, in the long run, pay a tax rate that's optimal from a social perspective. The answer to that, I think, is a clear no. Rather, I think our tax code provides a windfall to the mega-rich like Romney, and we should change that policy so that, instead of paying 15 or 20% of his income in taxes, Romney and people like him pay 30 or 35 or, God forbid, 40% of his income in taxes. If that sounds extravagant, it's useful to note that the implication of the efficient labor market postulate says the optimal top marginal tax rate for Romney and high earners like him is over 70% (the rate at which revenue is maximized). No one proposes that... but it should be in the discussion.
A last point concerns Romney's time at Bain Capital. Romney boasted of his work "creating jobs". The reality, though, is that private equity is not in the business of creating jobs. At its best, it's in the business of accelerating "creative destruction" by putting yesterday's companies out of business and paving the way for tomorrow's companies. But there's substantial evidence that what companies like Bain do in part is transfer wealth from labor to management and capital. Previously unionized labor is outsourced to contractors, whose workers receive lower pay and worse benefits. Tenured workers are laid off in favor of younger workers who are cheaper (there are market-based arguments for this, though there are also counter-arguments that workers start at these companies at sub-market wages due to the promise of advancement that used to come with making a career at a particular company). And the windfall goes to... managers, Bain executives, and Bain investors. Now, it's true that those investors aren't just rich folks-- they're pension funds and mutual funds and other retail investors. But it's equally true that a chunk of the gains represent a simple redistribution-- a transfer of wealth from workers to managers and investors that allows them to capture a chunk of society's wealth that is disproportionate to the value of their work.
So I think, in a narrow sense, there is class warfare. And, looking from the sidelines, I get the distinct sense that what we've got is a society in which the very richest are overcompensated, and are overcompensated at the expense of their workers. At the least, this makes a case for taxing them at a substantially higher rate, so that those workers can enjoy more of the benefits that they create, but which don't show up in their paychecks, and hasn't in decades. That, for me, is the way to think about how to make America the middle-class country we used to be, rather than one in which any and all social gains go toward making the rich super-rich instead of making the poor slightly less poor, or the middle class better off. That's not class warfare-- it's economics.
The argument goes that raising taxes on anyone (including the "job creators") is contractionary fiscal policy-- it takes money that consumers could be spending out of the economy and puts it into the government's coffers. In the present circumstances, strictly speaking, this is true so long as tax cuts are paid for by borrowing rather than by cutting government spending. Although they like to pretend that private spending is somehow qualitatively better than government spending, the reality is that the government buying a Volvo for $30,000 and Bob from Jersey buying a Volvo for $30,000 is economically identical in terms of GDP, so a $30,000 tax cut matched with a $30,000 government spending cut is growth-neutral if you assume away secondary effects. What's interesting about that argument is just how vehemently Republicans reject the same exact logic when it applies to cuts to government spending. The position that contractionary fiscal policy is only contractionary when it involves tax hikes and not when it involves spending cuts is not only economically incoherent, but more than likely completely backward-- there's considerable evidence of a multiplier effect that applies to government spending more than tax cuts (because tax cuts can be saved while a dollar spent by the government goes directly into the economy). This incoherence aside, what's really interesting is the long-run argument for low tax rates on the Romneys and the Kochs.
Paul Krugman tackles this issue in a very interesting post on his blog. Krugman points out the absurdity of the talk about tax hikes on rich people as some kind of horrible job killer. The usual defense of the right to paying people like Steve Schwarzman, Henry Kravis, Bill Gates, and Mark Zuckerberg tens of millions of dollars annually is that they create a whole lot of value. Let's assume for a second that this is true (though I think Gates and Zuckerberg create a lot more value than Schwarzman or Kravis, but that's a separate issue). The argument is that we can pay Kravis $50 million next year because he's produced $50 million worth of GDP. This is, in fact, the Microeconomics 1 explanation; as Krugman notes, in a perfectly competitive market, workers are paid their marginal product (this assumption is problematic, but for the time being, let's assume this away too). This assumption justifies massive paydays for buyout execs. But it simultaneously destroys the argument that taxing "job creators" at high rates somehow degrades the lives of everyone because they take their magic job creating sauce out of the economy, and the jobs disappear.
But the implication of the labor market model used to justify huge paydays for the mega-wealthy is that their withdrawal from the economy is harmful... only to them. It's useful to illustrate this with an example. Let's assume for a second that Mark Zuckerberg really does contribute $40 million worth of GDP to the economy in a given year, and his paycheck reflects that (this is a much more plausible scenario than the assertion that hedge fund manager John Paulson generated a few billion in GDP shorting the housing market in 2009, but we can set that aside). Let's further assume that Zuckerberg has been reading Ayn Rand novels, which has turned him into a loony sociopath, and he's decided that the government is snatching too much of his hard-earned cash. So he's going to go on "capital strike" like the Randian hero John Galt and go sit in a valley in Utah and deny the economy his skills. The economy is $40 million poorer because Mark Zuckerberg isn't participating... and the economy is also paying $40 million less to Mark Zuckerberg to add $40 million to the economy. To believe that Mark Zuckerberg leaving the economy in this scenario is a net loss to more than just Mark Zuckerberg, you have to believe that there's a market failure in the executive compensation market, and Zuckerberg is actually being underpaid for his services. I kind of doubt that even they would be audacious enough to make that claim.
As Krugman points out, though, the only real net benefit to an efficiently compensated CEO working rather than going on capital strike is... the taxes they pay to the government coffers, which provides services to others. The socially optimal tax rate for the mega-rich, then, isn't the 14% that Romney pays on his dividends and investments, but the rate that maximizes government tax revenue; in short, the point at the top of the Laffer Curve. In just a few easy steps, then, it becomes apparent that believing in efficient labor markets supports keeping tax rates on the wealthy at the level at which tax revenue is maximized. The inevitable counter-argument will ask why the revenue-maximizing rate shouldn't apply to all earners. And the simple reason is that, where markets exist, it's only the mega-wealthy that can afford to go on "capital strike". Strictly speaking, if the labor market is efficient, a clerk at Wal-Mart earning $7 an hour leaving the labor force will cost the economy only the amount that she earns; the same logic that applies to the CEO applies to the rank and file. However, the unemployed clerk also won't be earning any income to pay for her needs. What this means is that, while the economy only values her up to the value of her salary, if she isn't working, she can't spend that nonexistent salary to support herself. As a result, she starves (or lives off of charity). The economy produces things, in short, because everyone needs things to live. But, for someone who has accumulated enough money to live on forever, assuming an efficient labor market, the only loss to society comes from the lost tax revenue. Otherwise... enjoy the leisure time, John Galt.
Now, I think the most interesting question here is the assumption involving efficient labor markets, and it's something that Krugman doesn't tackle in his post. It's no secret that inequality has exploded in the US-- the rich have gotten REALLY rich, and the poor and middle class have been left behind. In the 1960s, a CEO earned a few tens of times what an average employee earned-- maybe 20 or 30. Today, a CEO earns a few hundred times what an average employee earns-- 400 or so. This means one of two things must be true: either chief executives today are roughly 20 times more skilled now than they were 50 years ago, or the labor market is inefficient. And if the latter is true (which I think is a pretty safe assumption), the movement of income from labor to management and capital means one of two things is true. Either our compensation system used to redistribute wealth from management and capital to labor (in other words, CEOs and investors used to be wildly underpaid, and this subsidized rising wages for workers and the middle class; moreover, they also paid more in taxes then, so being upper-income must have been REALLY hard then...), or our compensation system now redistributes wealth from labor to management and capital.
I think the last statement rings most true, and the reasoning is pretty simple: workers productivity has been rising in the US pretty steadily. We're a technologically superior nation now to what we were when middle class wages stagnated, around 1980 (our communication systems are infinitely faster and more complex). We're a better-educated nation now than we were then. But somehow, in real terms, the gains have flowed almost entirely to the wealthiest 1%, and even more precisely to the wealthiest .1%. To believe that rising inequality is justified by market signals, you have to believe that the only Americans who have improved at what they do in about 30 years are executives, lawyers, doctors, and financiers. To me, that's a pretty hard case to make.
Where all this brings us is to Mitt Romney; both to his tax rate, and to his career at Bain Capital. The Democratic attacks on Romney's taxes have tended to go in the wrong direction. They've focused on how unfair it is that he has offshore accounts and imply that he's done something illegal. Let's be frank: I don't think there's any reason to believe that Romney's done anything illegal or untoward with his taxes. Like anyone, he's minimized his tax revenue under legal constraints. That's all well and good. But the question shouldn't be whether Romney pays an illegally low tax rate, but whether Romney and people like him, in the long run, pay a tax rate that's optimal from a social perspective. The answer to that, I think, is a clear no. Rather, I think our tax code provides a windfall to the mega-rich like Romney, and we should change that policy so that, instead of paying 15 or 20% of his income in taxes, Romney and people like him pay 30 or 35 or, God forbid, 40% of his income in taxes. If that sounds extravagant, it's useful to note that the implication of the efficient labor market postulate says the optimal top marginal tax rate for Romney and high earners like him is over 70% (the rate at which revenue is maximized). No one proposes that... but it should be in the discussion.
A last point concerns Romney's time at Bain Capital. Romney boasted of his work "creating jobs". The reality, though, is that private equity is not in the business of creating jobs. At its best, it's in the business of accelerating "creative destruction" by putting yesterday's companies out of business and paving the way for tomorrow's companies. But there's substantial evidence that what companies like Bain do in part is transfer wealth from labor to management and capital. Previously unionized labor is outsourced to contractors, whose workers receive lower pay and worse benefits. Tenured workers are laid off in favor of younger workers who are cheaper (there are market-based arguments for this, though there are also counter-arguments that workers start at these companies at sub-market wages due to the promise of advancement that used to come with making a career at a particular company). And the windfall goes to... managers, Bain executives, and Bain investors. Now, it's true that those investors aren't just rich folks-- they're pension funds and mutual funds and other retail investors. But it's equally true that a chunk of the gains represent a simple redistribution-- a transfer of wealth from workers to managers and investors that allows them to capture a chunk of society's wealth that is disproportionate to the value of their work.
So I think, in a narrow sense, there is class warfare. And, looking from the sidelines, I get the distinct sense that what we've got is a society in which the very richest are overcompensated, and are overcompensated at the expense of their workers. At the least, this makes a case for taxing them at a substantially higher rate, so that those workers can enjoy more of the benefits that they create, but which don't show up in their paychecks, and hasn't in decades. That, for me, is the way to think about how to make America the middle-class country we used to be, rather than one in which any and all social gains go toward making the rich super-rich instead of making the poor slightly less poor, or the middle class better off. That's not class warfare-- it's economics.
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