Monthly Archives: January 2015

Wilfully Ignorant

Shown here is an Iowa license plate. Note the double helix running through the center of the design, like a coil of smoke rising from the barn below. We have seen this figure on road signs and license plates in at least four other states. It is, apparently, a mystical totem meant to attract technology jobs.

IA_plateWe wondered how many people actually know something about DNA. Hat tip to Ilya Somin for providing the answer in this hilarious post.

Over 80 percent of Americans support mandatory labels on foods containing DNA

The quip about pregnant women passing DNA on to their children reminded us of Penn and Teller’s campaign to ban dihydrogen monoxide (H2O). “It’s in all our lakes and streams,” said the canvasser. Somin goes on to make his familiar argument that, for some people, ignorance may be a rational choice. We like Somin’s ongoing exploration of ignorance, but we draw the line at apologizing for it.

This brings us to one of Jeremiah’s tips for clear thinking – the substitution test. This is a straight up linguistic technique based on the principle of contrastive pairs. We take a statement about “gun rights,” for example, switch it to “gay rights,” and then see how it sounds.

Most Germans get by perfectly well even though 25% of them think the sun orbits the Earth.

See? The sentence doesn’t scan, because everybody knows Germans are well educated. Somin’s position amounts to special pleading for Americans, as if we have a right to be ignorant. This is not to single out Somin. There is, in fact, quite a large ignorance movement in America.

They want people who are just smart enough to run the machines and do the paperwork – George Carlin

Maastricht? Bretton Woods? Those are tourist spots. Don’t bother us with politics or current events. This stuff has nothing to do with real life, and we are too busy to care. It’s all negative energy, anyway. We are – Jeremiah’s favorite – too spiritual. We are above worldly concerns.

The merchants of ignorance are always trying to sell it as some kind of virtue.

The stupidity of the American voter … was really, really critical to get the [ACA] to pass. – Jonathan Gruber

We hate Jonathan Gruber for saying it, but we have to admit he’s right. We are a nation of idiots. Admitting it is the first step. Jeremiah, as you know, blames public education. Our schools fail miserably to educate, because that’s not their purpose. To paraphrase Milton Friedman – public education is always and everywhere an indoctrination program.

See also:  OECD Skills Survey

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The People’s Capitalism

President Obama’s proposal to raise the capital gains tax is a good one, and overdue. No, you have not been redirected to Bloomberg – where the president never has a bad idea. This is about restoring the balance to corporate balance sheets. In fact, the tax disparity may already have damaged American capitalism beyond repair.

Stock buybacks boosted earnings per share by 4% or more on 99 companies in the S&P 500, simply by lowering the number of shares outstanding.

Absent tax policy, companies and shareholders should be indifferent to capital gains. If the company has one dollar per share to spend on dividends, and keeps it instead, then the value of the company will increase. Each shareholder can then take his dollar as a capital gain, at such time as it suits him to cash out.

The argument for a lower tax on capital gains is that, with a six or twelve month holding period, it encourages long term investment. Unfortunately, share prices are a lot easier to manipulate than dividends. Companies can borrow, for example, and use tax deductible debt to buy back shares.

Buybacks only make sense if the company has no prospects that will return more than its cost of capital – which, with Fed funds at zero, is not good news. When we look back on this one, it will be called the “buyback bubble.” Along with the capital gains preference, the buyback bubble is abetted by a high corporate tax rate, the tax deduction for interest, and stock based compensation for executives.

Apple is one of the many corporations that, rather than dip into its cash and take a tax hit, took out debt instead to fund a big stock buyback and dividend program.

President Obama should follow up with a proposal to end the tax preference for debt. Ironically, he has proposed a tax on bank assets – which the banks would not be holding if tax and monetary policy had not overstimulated corporate borrowing in the first place.

One good way to end the tax preference for debt would be to dramatically reduce the corporate tax rate. Everyone knows that corporate earnings are taxed twice – once, as income to the company, and again as income to the investor. Less well known is that this tax is regressive.

Let’s say Alice and Bob both own shares in the company and the company pays dividends. Alice, a wealthy investor, will pay tax on her dividends at a marginal rate of 39%. Bob, a working man, will pay 15%, but only after the company has paid its 39% – money that would have gone into his dividend. On the underlying corporate earnings, Alice and Bob are taxed at the same rate.

Corp Tax

So, raising the cap gains tax is a good first step. Additional steps are:

  • End the cap gains preference entirely, taxing all market returns as income.
  • End deductibility of interest – all interest, starting with corporate debt.
  • Reduce the corporate tax rate, so more income flows to personal returns.
  • Raise interest rates.
  • Crack down on HFT and other market manipulators.

These are not anti-capitalist reforms at all. On the contrary, they remove artificial preferences that have distorted our stock market. For example, we have the world’s highest corporate tax rate. Slashing it would repatriate $1.5 trillion, and make America more attractive for jobs and investment. We could make up the lost revenue through progressive taxes on the shareholders, not the companies.

In the old days, ordinary people could invest their savings and earn a good return. Stocks paid dividends, and bonds paid a decent yield. Marx said that “the people should own the means of production,” but capitalism actually made it possible. Americans would cherish their little slice of IBM or General Motors – and they could retire on it.

Broad based participation in the markets would be the best, or at least a partial, remedy for inequality. With an emphasis on unfakeable cash dividends, it would also restore the market’s proper job of allocating capital. The president’s policy objective should be to remove all the distortions – arising from tax policy, monetary policy, and failed regulation – which make the markets unsafe for ordinary people.

See also: Blame Canada

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The Third Arrow

Shinzo AbeThe second of Prime Minister Abe’s “arrows” was a monetary stimulus that demolished the yen. This earned him, and BOJ Governor Kuroda, some scorn from the sound money people. A more optimistic read is here, from Professor Koichi Hamada. Both sides agree that Japan’s ultimate salvation will be the third arrow, structural reform.

The first task should be to eliminate or, at least, reduce the thicket of government regulations that is stifling economic dynamism – Koichi Hamada

This parallels the debate we have had in the West. The plan was to use fiscal and monetary stimulus to buy time and ease the pain of structural reform. Here in America, with the privilege of issuing the world’s reserve currency, we seem to have dodged the bullet. Quantitative easing alone was sufficient to paper over our structural problems until growth resumed.

Europe will not be so lucky. There, reform is a must. Mario Draghi has been dragging his feet on quantitative easing, citing the moral hazard specifically. Politicians will not tackle reform when times are good, and they expect to be bailed out when times are bad.

We refer here to Japan’s structural trap, instead of the more fashionable “secular stagnation,” because it’s more precise and also because of Robert Dugger’s seminal paper on the topic. The other term, due to Larry Summers, admits no policy action – as if stagnation were inevitable. Specifically, reforms that have been proposed for Japan include:

  • Reduce government regulation
  • Open protected industries (farming) to free trade
  • Reduce the corporate tax rate
  • Overhaul labor protections
  • Encourage more women to work
  • Reform the electricity market

This may read like Ayn Rand’s wish list, but it really is Abe’s third arrow. See interview here, for example. Jeremiah has no doubt it will succeed – if it ever flies. The pundits will then forgive Abe’s preparatory measures. He would become the first politician ever to escape a structural trap (the second, if you count Gerhard Schröder). No one will care how many arrows he used.

See also: Governor Kuroda – Genius or Madman?

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The Last Straw

We thought Islamic extremism had jumped the shark last month in Peshawar, and now we have Paris. The Taliban’s murder of Pakistani schoolchildren has galvanized opinion. Decent, God-fearing locals have turned against the Taliban. Prior to this event, authorities have somewhat tolerated the Taliban because they could claim to be fighting the good fight against infidels, apostates, and American stooges.

peshawar-computer__3143320k

Pakistan would shelter terrorists operating in the border region, attacking targets in Afghanistan – and Afghanistan would return the favor. If you think it’s crazy that the Taliban could successfully play two sovereign Muslim countries against each other, look at how Russia and America have failed to make common cause against al-Qaeda in the Maghreb or Islamic State in the Levant.

Egypt’s Grand Mufti recently described the “Islamic State of Iraq and the Levant” (ISIL) as a “terrorist entity” that has “violated all Islamic values and the great purposes of sharia.”

Pakistan and Afghanistan will now share intelligence, treating the Taliban as a common enemy, and jointly defending the border region. As much as Jeremiah has favored military support for Afghanistan, it’s hard to deny that this breakthrough owes something to the waning of American influence in the region.

No longer can the Taliban claim to be fighting a foreign aggressor. They are, themselves, the enemy of innocent Muslim civilians. It’s pretty hard to attach terms like “holy struggle” and “martyrdom” to the slaughter of children.

The same goes for Paris. Sheikh Nasrallah of Hezbollah, hardly an American stooge, was quick to denounce the extremists, saying that they are a bigger insult to the faith than any number of satirical cartoons. It doesn’t get much press in the West, but Islamic leaders have been denouncing terrorists for some time.

The fatwa by Muhammad Tahir ul-Qadri … terrorism is “haraam,” or forbidden by the Quran

Back in August, the Grand Mufti of Egypt denounced ISIL, and so did President al-Sisi. Muhammad Tahir ul-Qadri of Pakistan issued a lengthy and stern fatwa. A roundup of condemnation from official Muslim sources is here. The list is long, and it didn’t just start this week. If you are squatting in the banlieue somewhere, thinking you can suicide bomb your way into heaven – you’re wrong. Stick with prayer and fasting.

On the other hand, there are plenty of Muslims who really do believe the crazy stuff, like killing people who leave the faith. Eugene Volokh is here, with a nice roundup of both sides. He also reminds us that Christianity went through its own crazy period, including the Inquisition, right up until the nineteenth century – or later, if you count Belfast.

At this point, just as Christianity was in 1527, Islam is ripe for al-Sisi’s revolution. The crazies can keep the term “jihad,” which they have stained with blood, and the mainstream can shun them. Some change in language or customs would be appropriate. Catholics kept their monopoly on “priests,” for example, and Latin.

As policy, we should certainly support the anti-terror clerics – with the caveat that overt American support might be counterproductive. What we can do is keep up the pressure of moral condemnation on all sides. The civilized world, including Islam and all faiths, denounces violence, which is the faith of the faithless. Those are the true apostates.

See also: Peshawar Photo Essay

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Freeze-Frame Economics

Socialist policies have a way of freezing their object at a point in time, like taking a snapshot. Take, for example, laws intended to give workers a better income. European governments have been doing this for years, making their companies uncompetitive and raising barriers to new workers. That’s why youth unemployment is so high. Chart by Reuters.

unemployment-1024x1024They start with good intentions, of course. Everybody wants workers to have a better wage, time off, health care, and early retirement. There’s a moral hazard, though. Politicians can pass these laws all day long, because they don’t have to bear the costs. They will compete to befriend the working class and, whatever level of largesse might be appropriate, they will overshoot.

Wherever there is a good intention, there must be a tradeoff. Policy is all about balance. If you can’t see the tradeoff, then you haven’t understood the problem (or you have succumbed to a moral hazard).

We think France has the most absurd labor laws – see here, here, and here – though Italy may be worse. When companies can no longer support their “social charges,” they’re not allowed to reduce staff. Like a snapshot, socialist policies froze Europe’s workforce at a point in time. Those who are in, are locked into the good life ‘til retirement. Young workers are locked out.

If you’re a hardcore socialist, you may feel that companies should bear unlimited social costs. Any profit above zero means that workers are being exploited. If “the people” owned the means of production, then every penny could go to the workers. Wherever this has been tried, unfortunately, the result has been a freeze-frame economy.

At the time of the revolution, the Russian economy was all primary production and a little heavy industry. The new Soviet government took ownership of mines, farms, dams, steel mills and crude factories – all labor intensive, the best possible industries for socialism.

Fifty years later, it was the same grainy photograph. Outside the Soviet Union, steel production moved to electric mini mills, farmers enjoyed the “green revolution,” Shockley invented the transistor, and Sony gave us the Walkman. In the free world, competition drove innovation and human progress.

The causes and effects of the Soviet tragedy are well known, and we needn’t go into details. Our purpose is to show a general rule, which is that socialists invariably look at history synchronically. They seek to protect today’s workers in today’s economy – preserving them in aspic, as it were – and they end up condemning the workers of tomorrow.

See also: Second Class Workers

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