Monday, July 30, 2012

We Can't Return to the "Golden Age" of the Postwar Era

Robert Shiller's column in yesterday's New York Times epitomizes an approach and argument that I find totally fallacious and even silly.  The title is "Taxes Needn't Discourage Philanthropy."  He begins by asking the question--"How high can taxes go?" He notes that the top marginal rate in 1944 was 94%.  Yet, we didn't have class warfare and we didn't have an economic disaster. Of course, we were in World War II at the time, which he acknowledges.  He notes that one reason for the high rates was to ensure that the war would not create new millionaires.

After the war, the rate came down a little but not much. In 1963 the top rate was still 91%. Shiller argues that the high rates didn't impact growth negatively since the real GDP growth rate from 1948 to 1963 was 3.7%. This was higher than the overall average growth rate of 3.2 % from 1929 to 2011. He argues that one reason was that we had greater social harmony in those fifteen years, some of which was a hangover from the patriotism felt during WW II. It takes a while, but he eventually gets to his theme of encouraging philanthropy by encouraging positive feelings of reciprocity.  While worthy of comment on its own, I want to focus on the idea of using the first fifteen years after the war as evidence of things we could do today.  I think it is wrong.

People often regard the way things were when they were teens and young adults as some sort of norm.  For people older than I am, this time period was the fifties and early sixties--a time when American business was strong and the economy grew rapidly, as noted by Shiller.  However, this "golden age" was not a normal time period. In fact, it was an aberration.  The was was not fought on US soil and American industrial facilities were not destroyed. The same can not be said for most of Europe and Japan.  We faced no competition for most of that period.  In the sixties, Japanese goods were considered to be cheap and junk by most Americans.  American business people did not have to be particularly wise or innovative to be successful.  Few people talked about the importance of small business since the presumption was that big industry was the norm.  Major industries were oligopolistic and the firms often viewed as invincible.  General Motors was the quintessential American firm.  The economic situation was not viable in the long run.  Europe recovered, as did Japan, and new compeition came along.  To argue that any government policy that persisted at that time must have had either good or benign effects because of the success of the American economy at the time is misguided.  America's role in the world was unique and not sustainable over time.

Another point Shiller makes is that the American public was more harmonious at the time. He writes, "Many people sacrificed their lives during the war, and, for a while, it seemed that the survivors were especially chartiable to one another, on both a personal and an institutional level.  I wonder if African Americans in the deep South who lived at that time would agree with Shiller.  It was a time of white, male dominance that is totally unacceptable today.  Even at the end of  the war, Jews still often could not get into Ivy League schools, or at least could not get on the faculty.  People thought diversity at the time referred to Italians and Irish, not Hispanics and Cambodians.  To me, it is more difficult to see solidarity when society is increasingly diverse.

As the political and economic debate in the country has focused on whether the role of the federal government should be constrained or more dominant, I see references to the early-postwar times as evidence that high marginal tax rates can be associated with strong economic growth.  Shiller's piece is just one of a number of examples I could have used.  But the world has not stood still since 1963.  We need better evidence than appeals to a bygone "golden age."

Monday, July 23, 2012

The Complexity of the Tax System

Today's Wall Street Journal has an article on firms passing up some tax breaks because of the complexity and the hassles.  Since many of the breaks are for small firms, the cost of compliance tends to be more relative to benefits.  The Small Business Administration estimates that the tax-compliance cost per employee for a firm with fewer than 20 employees is about $1600 compared to less than $800 for firms with 20-499 employees.  The article notes that many in Washington decry the complexity of the system, yet the system persists. Why?  The author of the article offers an answer, "...both theWhite House and Congress can't seem to resist fine-tuning the tax code to satisfy their diverse goals."  Precisely.

The complexity is there for the code we pay as individuals also.  Most people don't itemize deductions even though anyone paying a mortgage is likely to have lower taxes by itemizing.  Again, is it the complexity and not wanting the hassle that leads to this behavior? 

During the early years of the Reagan presidency, when the Republicans had captured the Senate for the first time in decades, there was talk of tax reform and simplification.  If I remember correctly, Bob Dole was the head of the appropriate committee in the Senate and he said that he didn't believe in simplification  for the sake of simplification.  I do.

Friday, July 20, 2012

Edmund Phelps on Why Germany is Right to Ask for Austerity

Edmund Phelps has a good op-ed piece in yesterday's Financial Times. He offers a different perspective on the crisis in Europe, arguing that it is not caused by the euro and that the fix is not to aid the insolvent in order to avert defaults.  Instead, he claims that a combination of Keynesianism and "corporatism", which he defines as, "...state projects serving cronies and vast social protection programmes, both run by elites." He argues these programs surged in the 70s and 80s in much of Europe.  By the mid-1980s Italy was running sizeable fiscal deficits and the same for France in the early 1990s.  In 1990 the Basel I agreement lowered a bank's capital requirement on sovereign debt to zero, which increased public debt.

Phelps continues, "This was wonderful in the Keynesian view: more wealth supported rising consumer demand. In the 'structuralist' view, however, it spelt trouble." Both Italy and France saw productivity growth stop in the late 90s. Incomes increased but based on debt rather than productivity. Eventually, credit markets recognized the problems and interest rates increases. Given the interconnections among European banks and the governments, all are nearly insolvent.  Phelps examines some ways in which Italy, France and Greece could move away from the status quo, but I think are unlikely to take place.

Phelps concludes by arguing that there is a split between those who want to continue with corporatism and Keynesianism, and those who want greater fiscal responsibility and a well-functioning capitalistic system. 

For anyone who has access to the newspaper, the article is worth reading and remembering.

Tuesday, July 17, 2012

The Presidential Contest is Shaping Up to be a Debate Over Globalization

David Brooks' column in todays NY Times provides a good discussion of how the presidential contest should shape up. That is, he argues that the president's attacks on Romney's record at Bain is essentially an attack on globalization.  In other cases, the president has not seemed to attack globalization or those who have employed outsourcing as a strategy, e.g., Steve Jobs.  You cannot have exports without also importing. And, American firms will not be able to compete broadly if they cannot rationalize their production processes in light of where they can produce cheaply and service overseas markets.  Politicians of both parties can revert to mercantilistic arguments at the drop of a hat--or in pursuit of a vote.  We need some leaders who acknowledge the benefits of free trade and globalization and who will argue accordingly. 

Monday, July 16, 2012


I finished yesterday Jerry Muller's, The Mind and the Market: Capitalism in Modern European Thought. It has been on my shelf for several years; I should have read it sooner. It is interesting and worth looking at.  He offers several insights I had not seen, showed that several ideas I have used are older than I realized, and provided an interesting balance of intellecutals who were supporting capitalism, opposing capitalism, and were ambivalent to capitalism.

His openning chapter, which provides the historical backdrop to his work, discusses the general hostility toward trade and money-making within two old traditions in European thought--the Christian tradition and the tradition of civic republicanism.  In the latter, Plato, Aristotole and most ancient philosophers disparaged commerce.  The goal of society was to enable free men to live a good life, which included heavy civic involvement and the military defense of the city-state. Merchants were often permitted in the cities due to necessity, but usually could not be citizens.  Muller claims that the Church softened its stance a little as a result of a more dynamic economy in the Late Middle Ages (1100-1300). 

Another important feature of intellectual life prior to modernity was the idea that the state should aid its members to achieve a shared good life.  There would be a purpose to society that all agreed upon, or at least the leaders agreed upon.  Again, virtue might be seen as a key part of it.  But the religious wars of the 16th and 17th centuries induced some to reject the idea of a shared goal.  Muller writes, "The great historical fact that served as the moral backdrop for thinking about capitalism was not the factory or the mill, but war--not war with the foreign invader, but internal war, civil war, between men with rival views of ultimate salvation, men who were so sure of their view of salvation that they were prepared to shed the blood of their fellow man in order to save his soul."  It was against this backdrop that some began a search for a way to live together without an overarching shared goal, but one that allowed people to pursue their own goals. Muller continued, "As long as religious factions saw the state as a proper tool for the enforcement of faith, religiously based civil war was a possibility. And as long as the state legiimated itself as guiding its citizens to a single, unified purpose and vision of the good life, the state would be prey to religious civil war."  Muller notes, "These seventeenth-century thinkers envisioned the future as one in which the state would restrict its claims to realize a shared vision of the good life. Much of modern politics has been a revold against this rejection of the good life as the pupose of politics."

Muller has chapters, or parts of chapters on, Voltaire, Adam Smith, Justus Moeser, Edmund Burke, Hegel, Marx, Matthew Arnold, Weber, Simmel, Sombart, Lukacs, Freyer, Schumpeter, Keynes, Marcuse, and Hayek.  I have used Hayek's idea that we live in two worlds at the same time--the communal or familial world and the great society and we operate differently in these two world.  I had not realized how much of this thought is found in Hegel.  One unifying thought among all the intellecutals discussed by Muller is that they accepted the idea that capitalism was extremely productive at increasing wealth; but not all thought this was a good thing, or at least thought that other costs associated with capitalism were too great.

I also was not as aware as I should have been on the historical linkage between anticapitalism and antisemitism. Jews had moved into commerce and banking in Europe, often because other sources of employment were not open to them. Then, when they were relatively rich, were villified as the plunderers of the people.  Hayek, who was not Jewish, tended to almost consider himself a Jew because his intellectual milleau in Austria were primarily Jews, and he identified with them as in some sense an outsider to the society. He sought a society where being a Jew would not matter, which he thought more likely in the great society than in the parts of society that were more communal.

Muller also offers some interesting quotes from Keynes.  Muller writes, "He [Keynes] disparaged this elevation of the future over the present as an attempt 'to secure a spurious and delusive immortality.'"  It sounds like his "in the long run we're all dead" line was not just a rhetorical flourish. Keynes focused on the short run and disparaged the long run and saving in general. Keynes linked deferred gratification with the quest for immortality as well as usury and the Jews. Muller quotes Keynes again, "'Perhaps it is not an accident that the race which did most to bring the promise of immortality into the heart and essence of our religions has also done the most for the principle of compound interest and partuclarly loves this most purposive of human institutions."  Muller cites volume 2 of the three volume biography on Keynes by Robert Skidelsky for Keynes' views on Jews.

In some of my work on why so many thelogians don't like markets, I have noted that for many, especially those in Radical Orthodoxy, the history of an idea is important. Muller has helped with this. But what Muller also does and the theologians tend not to do, is also related the history of ideas to history--the things going on in the lives of people that provide a backdrop to the ideas.  I am more convinced of how important this task is.  Muller has done a good job, in my view.

Sunday, July 15, 2012

A Mixture of Articles in Today's NY Times

Several interesting pieces in today's NY Times, although of different themes and topics.  These include an article on the difference in family incomes between people who are married and those who are not.  It cites research on how much changes in family structure for middle class Americans has affected incomes and is responsible for a substantial share of increasing income inequality.  It is well done and provides interesting data.  I was somewhere recently and heard a speaker encourage students to realize that economic success is related to getting a degree, getting married, and having children--in that order! (I wish I could remember who said it but I cannot.)

Tyler Cowen's article in the business section is also very good. He writes on Medicaid in light of the recent Supreme Court decision. He notes the weaknesses in the way Medicaid has been established and thinks it is likely many states, and not just those with Republican governors, will choose to not expand Medicaid.

An op-ed piece questions whether liberal Christianity can be saved.  He notes that Bishop Spong some years ago argued the Episcopal Church had to change or die, but that it has changed as the Bishop had encouraged, and is dying.

Finally, another article related to religion is in the sports section.  It looks at American marathoner, Ryan Hall, and his unorthodox training methods. It also  focuses on Hall's religious beliefs. He is a charismatic Christian. A former Olympic athlete who attends the same church compared him to Eric Liddell.  Quite  interesting and in depth.

Thursday, July 5, 2012

Interesting Pieces in Today's WSJ

Several interesting pieces in today's Wall Street Journal.  John Taylor on monetary policy and the next crisis is quite good.  He doesn't say so, but it strikes me that if price controls distort, continued low interest rates must also distort.  On a different note, Stephen Moore writes about lessons regarding energy policy from the power outage in his neigborhood.  He argues that as we pursue green energy and actively disourage coal and natural gas, we can expect such outages on a regular basis.  Austan Goolsbee writes about the impact of the Supreme Court decision on Obamacare, claiming there wasn't one. He argues that this shows that the slow recovery is not due to business fears over regulation. If so, markets would have dropped and they did not.  This relies on the belief that the markets had not anticipated the Supreme Court's decision though.  He offers some other interesting empirical tests though.
Finally, a news article that got a lot of attention on Squawk Box this morning--some cities are considering using eminent domain to seize mortgages from banks, write down the amount so the owners can stay in their homes.  To do so, they would have to compensate the holders of the mortgages, but the plan would be to pay them the "market value" of the mortgage rather than the contracted amount.  There has been a widening of the power of eminent domain to take property even when it is not to be used by the government.  I find this very disconcerting.  It strikes me as a weakening of the rule of law--one of the key ingredients for an economy to be successful