A Logical Trap

This note is occasioned by Elizabeth Warren’s recent proposal on corporate governance—to add labor representation on corporate boards and expand the scope of corporate responsibility.  Regardless of what happens to her bill, she has done an important service by calling attention to a fundamental problem.

In recent decades American business has been taken over by the so-called Milton Friedman view of corporations.   That view has a simple prescription for how companies should operate: the world is best-served when businesses focus exclusively on business.  I.e. the role of a corporation should be to generate the maximum possible return to its investors.  Any other concerns (the workforce, community responsibility, etc.) are a perversion of the engine that makes capitalism great.

There are lots of reasons why that is suspect.  Clearly in this world labor has little to say, and in fact even a business’ own interests are not necessarily well-served—investors can walk away if the business gets pillaged for their benefit.  The percentage of business profits returned to investors has gone up dramatically with this philosophy, to the disadvantage of both labor and capital investment in the companies themselves.

The point we want to emphasize here is how damaging the Milton Friedman view is in the environment of today.   We have just passed a massive tax cut that has taken so much out of the federal budget that there is (particularly with the deficits) essentially nothing left for the other problems of the society.  As justification we’re told that private enterprise is the engine that makes everything great.

That is of course a logical trap.   Businesses in this world have no responsibility for the well-being of the country—and the government doesn’t either, because the private sector is always the answer!  Just give it money and let it go.

As a consequence we’re not investing in our people, we don’t have to think about their welfare, and we’re not preparing for the future, because there is no one on the hook to do it.  Even Adam Smith had no illusions about the private sector’s ability to police itself or prepare the population for personal and national success.

Everyone should recognize the true symbolism of the following chart:

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The one significant result of the tax cuts is the huge surge in stock buybacks, essentially returning taxpayer money to corporate investors.  We set a record in Q1, and then almost doubled it in Q2!

Capital investment, by contrast, was relatively flat—little touched by all that money:

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In other words the tax cuts have siphoned off the resources of the country, so that there is nothing left for issues like education, infrastructure, the opioid crisis, climate change—and has delivered that money to corporations who have in turn just passed it through to their wealthy investors via buybacks.

So we’ve become like one big predatory private equity investment, being sucked dry for the benefit of the happy few who are running the show.

Telsa as Example

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However distasteful Elon Musk seems to be, the nuttiness of Tesla’s treatment nonetheless deserves comment.

Tesla was the first (as far as I know) to figure out that current battery technology is practical to power a car.  They have also been the best thus far at figuring out how such a car can be made uniquely attractive.

This is an intensely competitive business, and they have been trying to maintain first-mover advantages in features, battery technology, and the manufacturing process.  That is a very tall order, and it involves enough risk-taking that there is no surprise that it is tough to keep commitments.  Until they reach some sort of stable state vis-à-vis their auto competitors, Tesla has to be regarded as still in a kind of startup phase.  That applies both to risks and rewards.  No one expected iPhone penetration to grow as fast as it did (I can still remember articles talking about mobile phones as a mature, saturated market), and the same kind of thing could happen with electric cars.

Unless you’re a deliberate non-believer in climate change (and these days you have to try hard), the role of electric cars can hardly be overestimated.    Transportation accounts for 28% of carbon dioxide production, and there is no one proposing to put carbon dioxide scrubbers in every car.  Tesla is trying to become the Apple of transportation, with perhaps an even bigger impact on the US economy.

How are we helping Tesla in that undertaking?  Well, we haven’t cut out the electric vehicle subsidy entirely (as the House Republicans proposed to do), but there’s no evidence we’re trying very hard either. The administration is just not interested in anything that raises even the suspicion of climate change.  A carbon tax for example.  We are minimizing Tesla’s value in its home market, while the rest of the world catches up.

As for the business community, everyone seems eager to predict the Tesla’s demise.  Certainly the traditional auto companies would like that, and Musk’s antics make it exciting for the press to think about the deserved fall of arrogance.

However as an indication of what that might mean, people should recognize that all of the core technology in the Chevy Bolt comes from South Korea.  And that story can hold for the rest of the multi-trillion-dollar investment that will be needed to combat climate change.

Thinking Back to the 2008 Crash

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There have been many articles recently reviewing what happened in 2008 and how things have evolved since then.  It’s a good thing we’re thinking about it, but there seems to be a tinge of inevitability to our memories, as if it was all a fact of nature and we need to understand the science of how things turned out as they did.

That’s wrong.  Blithe confidence in deregulation caused the crash.  The Koch-controlled Republican Party chose—with unconscionable cruelty—to prolong the pain of the downturn, so as to get a new President who would deliver massive tax cuts for the ultra-rich.  (Remember the “balanced budget amendment” and compare with the current deficits.)  And they have placed in power and continue to support a person who in their own words “continues to act in a manner that is detrimental to the health of our republic.”  It’s a good idea to think about the crash.

Despite the much-discussed topics of globalization and automation, we are not living with unsolvable acts of God.  And there are no secret demons running around hidden in the depths of the administrative state.  Dramatically rising inequality—and the decline of the middle class—is not an accident, but a chosen result.  The deep divisions that exist in our society are not an accident, but a chosen result.  Follow the money.  Divide and conquer is nothing new.

This country has dealt successfully in the past with industrialization and massive immigration.  And was stronger for both.  And we were able to share that prosperity more broadly than it had even been done before.  We can do it again.  The current, hard-won worldwide prosperity should be good for everyone if it weren’t being sacrificed to greed.

This isn’t going to be easy.  The current inhumane, anti-democratic Supreme Court will be around for a long time.  The much-encouraged divisions in the society will not heal easily.  But we can start by heeding the recent advice of John McCain and vote out this cult that can’t even be called conservatives.  Democrats have a great variety of people running in this critical election.  Breadth of opinions is a good thing.  Belief in democracy is a requirement.

This needs to be done.  What we do matters everywhere.  We are the leaders of the free world, and that leadership is dearly missed.

Small Bits of Reality

Two obvious bits of economic reality worth emphasizing:

  1. Trump and the stock market

Stock prices are directly related to earnings.  Cuts to corporate taxes translate directly to earnings.  Stock prices rose with the expectation of Trump’s corporate tax cuts, and he delivered.

At this point nothing else has happened (other than the uncertainty of the trade wars).  The recent rise in corporate earnings is not a reflection of new business activity, it’s just the reality of the money we’ve all given them.  That’s a matter of profits and the next item to be mentioned ….

  1. How those tax cuts have been spent

Imagine you’re a corporate CEO who has just put together a new business plan.  The cost of capital is extremely low, so money alone cannot be viewed as a serious brake on new opportunities.  You have submitted your business plan to your board, and it has been approved.  Somebody now gives you a bunch of money.  Does that invalidate your business plan?  Were you wrong about the opportunities?

Next you’re an investor in that business.  You’ve watched the tax cuts coming from the beginning, so you know there’s a bunch of new money that just came in.  The CEO has already told you that his business plan is taking advantage of the opportunities worth pursuing.  Whose money is that—it’s mine!

Unsurprisingly, that’s exactly what happened.  “Stock buybacks to boost investor share value.”

In other words, the best thing companies have found to do with taxpayer money is to pass it straight through to their investors!

 

 

NY Times: Inviting the Next Financial Crisis

This NY Times Editorial Board piece is the best summary I’ve seen of where we are and how we got there.

Our comment:

Maybe I missed it, but one thing that isn’t explicitly noted is how much worse this could be than 2008. The major stimulus then came from the US and China, both of whom are far less able today. Also the IMF issued a warning a few months ago about an enormous increase in the global level of debt. What’s particularly galling about the current situation is that the current, hard-won worldwide prosperity IS sustainable if it weren’t being sacrificed to greed.

I was glad to see the article point out the unconscionable cruelty of the Republican party in deliberately prolonging the effects of the downturn so as to sow discontent for the election. We should call things for what they were: the Republicans held the country hostage for six years, so they could deliver massive tax cuts for their ultra-rich donors.

It’s Always the Elites and the Foreigners

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A recent book serves as a reminder of what happened in the economic collapse of 2008.  Lessons from 1929 were learned, and the world pulled itself back a few inches from the brink.  Major economies, principally the US and China, pushed enough money into the world financial system to keep it going.   We didn’t have a depression, and ten years later we’re doing well enough that we seem ready to forget.

Who were our friends in 2008?  The Chinese and the competent people who knew what they were doing.  Who won out?  Opportunists of various stripes who saw the near-depression as an opening.   And their villains were the usual suspects:  elites and foreigners.

Elites and foreigners are always convenient scapegoats, but scapegoating these days seems to dominate all political discourse.  That is a problem for both the left and the right.  Let’s start with “elites”.

On one side there is multi-millionaire Trump, who has never wanted for anything or hidden his blatant self-interest, but who has nonetheless successfully portrayed himself as a warrior against elites!  From his inaugural address: “a small group in our nation’s Capital has reaped the rewards of government while the people have borne the cost.”  On the other side I’ll quote a recent email article from Robert Kuttner admiring Trump’s trade war against China and decrying how “the corruption of ruling U.S. elites created a vacuum that opened the door to Trumpism.”

When you come down to it, in both cases the elites are charged with the crime of turning the US into something that doesn’t look like a rose-colored picture of the 1950’s and 60’s, when America was “great.”  It’s convenient to find someone to blame for those changes, but the world is not the same.

You can argue about trade policy (and why it happened), but you can’t wave away the accelerating effects of technology and globalization (itself fueled by technology) with scapegoating.  No nation today can isolate itself behind tariff walls or anything else and maintain its standard of living.  We’ve done a bad job of solving problems of transition for the current real world, but trivializing those problems doesn’t help.  In Trump’s case we have the craziness of reducing support for education and research while promoting coal mining instead.  His trade wars are more a publicity stunt than a solution to the problems of the working class.

There’s another issue too.  As a nation we are in desperate need of elites:  the people who make our economy go and who understand how things work.  Who kept us out of depression following 2008.  But those aren’t the only elites in the picture.  There’s Trump. There are the ultra-rich behind the Koch organization who want to maximize their profits and bring back the not-so-great gilded age.  There are the politicians and lobbyists in Washington.  There are even the sinister invisible elites we keep hearing about behind the scenes.  Accusing “elites” mixes up the picture.  It creates innocent targets as a mask for not solving real problems such as education, wages, economic dislocation, racism, financial and geographic inequality…

With “foreigners” the problem is if anything worse.  It is worth remembering our common interest with the Chinese in 2008.  Despite the current trade war propaganda, China is neither friend nor enemy.  China is a major partner in worldwide, technology-fueled growth that has made the world and us richer.  They are a major player with a common interest in dealing with climate change.  You can’t deny their effect on the domestic economy, but we also contributed to the pain.

We have specific issues that need to be addressed—e.g. intellectual property, opening of markets in a now richer China—however the main challenge from the Chinese is that they are good at what they do.  American high-tech companies have had trouble making headway in China largely because of real competition.  As China grows, we need to remain at the top of our game and to adapt to a world where we are not the largest and richest market (already true).  That could be quite a good future with new products and new markets, or we could all strangle in trade (and possibly real) wars.

The divisions in this country are deep, but it is perhaps encouraging that it is less about issues than about scapegoats.  If we could just remember that it is NOT all about ill-defined elites and foreigners, we could get quite a lot done.

 

 

If Not Now When?

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We are ten years into the current business cycle.  We have not repealed the law of gravity.  The cycle will end, and history says sooner than we would like to think.

It’s important to recognize what that means.  Very simply we have to be realistic about what we’ve put off for tomorrow.  If we’re not serious about something today, there is a fair chance that tomorrow isn’t going to come any time soon.

Let’s make a short list of what we’re not serious about:

Education:  Funding for education has never recovered from the 2008 crash.  This affects all aspects (building, salaries, equipment) and all levels.  It directly contributed to the student loan crisis.  It affects the well-being of young people and our competitiveness as a nation.

Infrastructure:  Both candidates raised the issue in the election, but nothing serious has been done.

Opioid crisis:  This is a monumental problem that has thus far received only lip service.

Wages:  Businesses got a huge tax break with the Trump tax plan, but nothing has shown up in wages.  We can’t even talk about raising the minimum wage from its historic (inflation-adjusted) lows.

Medical coverage:  ACA has been deliberately crippled with nothing coherent to replace it.

Climate change:  We can pay now or pay more later, but we won’t be able to run away from it.  Thus far we’ve just closed our eyes, but the changes will be non-trivial.  Carbon capture—the least drastic path in the most optimistic estimates—would be at least 5-10 Trillion dollars a year worldwide.

 

In these good times we’ve chosen not to address any of those issues.   Tax cuts for businesses (now turned into stock buybacks) took precedence.

Unless something changes soon we should recognize that we have chosen to live with all of those problems—for as long as anyone can see.

Learning from Apple

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On the occasion of Apple’s rise to become the first $ 1 T company, the NY Times had a good article with graphic displays showing the size of Apple (as well as Google, Microsoft, Amazon, and many others) in the US economy.  There are a number of lessons to be drawn from this.

1. The surprisingly dominant role of Apple—together with the other three just mentioned—shows the importance to this country of technology leadership. That’s what supports our standard of living and always has. Railroads, steel, automobiles were all high-tech in their day.  We cannot pretend that even behind high tariff walls we can build a successful economy out of staying put.

Our challenge is to seize the opportunities and bring everyone along.  One important positive from this story:  much of what these companies sell didn’t exist twenty years ago, which says a lot about opportunities for the future.

2. It’s worth recognizing that (despite all the fuss) China’s rise has been a good thing for Apple and for the US economy generally. The iPhone is a prime example of why trade deficit arguments are wrong.  One of the most profitable American products ever is a loser in the trade deficit, because profits are declared in Ireland for tax purposes!  Are we really going to tell China: “Don’t send us any more of those cheap iPhones that we sell everywhere at 300% markup until you can buy more yourselves”?

For the future, now that China is richer, East and West are actually joined at the hip.  Continued growth has to be collective, so the last thing anyone needs is a trade war.   Sure they tried to copy us—we should do something about that, but the bigger challenge is that they’re good at it.  To be successful we need to play to our strengths:

–  A skilled workforce.  Implies support for education.

–  Equality of opportunity, so that we can use all talents and ideas.  Education is a big part of it, but healthcare and other contributors to family stability are important too.

– To be the place where people with entrepreneurial ideas will want to come realize them.  Google (with an immigrant founder) and Apple (Steve Jobs’ father was a Syrian immigrant) are convenient and far from exceptional cases.

– Creating a global environment for trade and cooperation where we can be successful.  That means international engagement on rules for all.

3. Apple is also emblematic of the high-ticket corporate welfare we are now practicing. It’s hard to argue that Apple, of all companies, needed a huge tax break on $252 B of repatriated profits plus a current-income tax break, all yielding $100 B of stock buybacks. US companies were doing fine before the new tax plan, and stock buybacks have been the primary result of their tax savings.  In other words, companies have decided the best thing to do with their tax cut money was just to give it back—for the benefit of the rich people who own them.

The other side of that policy is our current inequality of wealth and opportunity.   We have refused to help our population move to the increasingly high-tech future—and created a cast of bogey men to blame for it. We won’t spend money on education, infrastructure, or people—despite the difficulties of transition.  We’ve fought unions and anything that gives workers clout. But it’s the Chinese, or the Europeans, or the liberals, or the immigrants who are to blame.

 

We’re moving toward a worst of possible worlds: a capitalist mal-distribution of wealth combined with socialist top-down economic policy.  We’re fighting tariff wars so senseless that even the Kochs are complaining, because Trump feels empowered to decide which sectors of the economy ought to be winners.

Apple’s success shows what happens when we build to our strengths.  We know how to do that.  We did it for a long while.   But for now we’d rather shut our eyes to the opportunities, and pretend we can bring back the good old 1950’s.