The Fed’s Balance Sheet

There’s an interesting summary of views on the Federal Reserve’s balance sheet and whether it presents a problem over at John Cochrane’s blog.

My own view is that some leakage from the Fed’s balance sheet into the real economy is inevitable and, indeed, unless there is the Fed’s strategy is nonsense. They’re assuming there is. It doesn’t a lot of billions worth of leakage to make a relative handful of bankers and financiers insanely wealthy, aggravating our existing problems with income inequality.

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Portland’s Excessive Compensation Tax

I found this article in Fortune on Portland’s new tax on excessive compensation for CEOs of companies doing business in Portland remarkably uninformative. Here’s what it said:

  • Portland has imposed a 10% surtax on companies that pay their CEOs more than 100 times the median employee pay and a 25% surtax on companies that pay their CEOs more than 250 times.
  • Businesses don’t like it.
  • The system can be gamed.

Where’s the beef? That’s a paragraph not an article.

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Coincidence?

Do you think that it’s a coincidence that Amazon is building its first Amazon Go store in Seattle which enacted its $15 minimum wage law last year?

BTW, Amazon Go has nothing to do with artificial intelligence or recent technology. It’s all based on technology that’s been around for years.

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Dog Bites Man

In his most recent Wall Street Journal column James Taranto remarks, sardonically, about the “fake news” brouhaha:

“Fake news” is a problem on the right—but not only on the right. “Real” journalists, most of whom lean left, ought to look in the mirror. Or perhaps they are looking into their own distorted mirror and don’t recognize what they see.

What I don’t think Mr. Taranto appreciates is that with, the exception of egregious cases like a bunch of Macedonian teenagers clickfarming Facebook, the real news/fake news story is the same old turf battle the newspapers and other major media outlets have been fighting for decades. They’ve lost their gatekeeper status, they aren’t getting it back, and they resent it. As I noted a few days ago, self-importance among journalists is not a recent phenomenon. “Real news” is what they produce. “Fake news” is what anybody other than they produce.

The irony of this is that for every instance of “fake news” produced by bloggers or Facebookers you can probably find ten produced by the newspapers and major media. IMO that is to be expected with the present 24/7 news cycles, thousands of media outlets, staffs cut to the bone, and a general lack of reporting skills on the part of the latest generation of J-school grads working for the husks of newspapers and TV news bureaus that remain.

Keep in mind that there’s more than one way to fake the news—there’s what you report and what you won’t report. Again IMO the biggest scandals right now are what the major news outlets are reluctant to report.

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The Self-Refuting Fareed Zakaria

It isn’t often that a newspaper columnist refutes his own thesis within the first couple of paragraphs but Fareed Zakaria has accomplished that in his most recent Washington Post piece. His thesis is that high levels of immigration have resulted in a right-wing populist backlash, not just in the United States but all over the world, and that “better management” would resolve the problem:

Western societies will have to better manage immigration. They should also place much greater emphasis on assimilation. Canada should be a role model. It has devised smart policies on both fronts, with high levels of (skilled) immigration, strong assimilation and no major recoil.

Eventually, Western societies will be able to adjust to this new feature of globalization. Look at young people in Europe and the United States, most of whom deeply value the benefits of diversity and seek to live in an open and connected world. That’s the future. We just have to ensure that we don’t wreck the world before we get there.

But consider this paragraph:

One way to test this theory is to note that countries without large-scale immigration, such as Japan, have not seen the same rise of right-wing populism. Another interesting case is Spain, a country that has taken in many immigrants, but mostly Spanish-speaking Latinos, who are easier to assimilate. While you see traditional left-wing economic populism in Spain, you do not see right-wing nationalist movements.

There are two countries other than Spain I think should be added to the analysis, both are quite similar to the United States, and neither are experiencing the right-wing backlash he mentions: Canada and Australia. Both have very large immigrant populations and high rates of immigration.

Both countries are highly selective in the immigrants they admit without the diversity quotas or family reunification policies that are primary features of U. S. immigration policy. Canada’s immigrants are mostly from China, India, or Europe. Australia’s immigrant population is overwhelmingly from the United Kingdom, China, or India.

Is any country anywhere in the world experiencing a right-wing populist backlash as a consequence of Chinese immigration? I don’t think so. But I’d really like to know.

The United States experienced very high levels of immigration, mostly from Mexico, over a period of forty years without the right-wing populist backlash that concerns Mr. Zakaria. More recently we’ve had roughly zero net immigration from Mexico. During most of that period we had significantly higher economic growth than we do now. And we didn’t have a populist backlash.

If an abstract “better management” will stave off a populist backlash, let me make a challenge to Mr. Zakaria. What should we have done in the case of the Somali immigrants? After twenty-five years their unemployment rate is still in double digits and they send more soldiers to DAESH than any other group in the U. S.

If by “better management” he means “deport illegal immigrants and don’t accept immigrants from West Asia or North Africa” he may have a point. Let me suggest an alternative model and solely for the United States, the country with which I am most familiar:

  • We can tolerate high levels and a high rate of immigration but
  • We should have a serious regime of workplace and border enforcement and
  • We should deport illegal immigrants and
  • The immigrants we accept from West Asia should be limited to the Iraqis, Afghans, etc. who have aided our military in our wars in the region and their families and
  • The federal government needs to convince the American people that the immigrants we accept will make them (the American people) better off rather than just the immigrants and their families.

If that’s the “better management” he’s proposing, then I’m in agreement with him. But I don’t think it is.

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Hairspray Live!

Last night my wife and I watched Hairspray Live!, the latest of NBC’s forays into live broadcasting of musicals. The one sentence review: it was the best and most ambitious of these productions to date. All in all a pleasant evening that would have been better in a two and a half hour slot than it was in the three hour slot it occupied. The incessant commercial and feature breaks hurt the continuity.

The best things about the show were Kristin Chenoweth, Derek Hough, and Martin Short’s suit of lights in the closing parts of the show. The show suffered from technical problems—both lighting and sound. Those weren’t artifacts of live production. They were artifacts of hurried production.

The ambition showed in the huge sets, the abandoning of the proscenium approach used in prior Live! productions, and the heavy use of body mount rigs for follow shots.

That may offer us a vision of things to come. Will they do more of this for the upcoming Bye Bye Birdie? I don’t see how unless they abandon some of the iconic aspects of the stage show.

The Critics

New York Daily News (didn’t like it)
New York Times (liked it, sort of)
Washington Post (liked it, sort of)
USA Today (liked it)

The review I liked the best as usual was in Variety:

It took about an hour for “Hairspray Live!” to find its sweet spot. The energy was a little low, a line got dropped, and the production — the most complex, it appeared, that NBC has attempted in this current spate of live musicals — took a few musical numbers to settle into a rhythm. But once it did (the energy seemed to kick in with “Welcome to the ‘60s”) the musical easily became the best NBC has attempted.

It’s hard to imagine better casting for the production. Jennifer Hudson stole the show, once Motormouth Maybelle got to the screen; Ariana Grande, certifiable pop star, came away as the show’s MVP, acting as both reliably overlook-able sidekick and, once the situation required it, showstopping diva. Harvey Fierstein was predictably great, reprising his role from Broadway as Edna. Martin Short, frequently misused, found the right profile for himself as Wilbur.

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Cutting Military Spending

In reaction to the report from Craig Whitlock and Bob Woodward that the Pentagon had swept a report finding that if they changed the way things were managed, they’d save $125 billion over five years under the rug, the editors of the Washington Post are outraged:

Mr. Work was right to embark on the project but wrong to bury it so hastily. The U.S. military has vital missions around the globe and is already facing severe budget pressures. In order to justify the money that it really needs, Pentagon leaders must confront openly the burden of bloat and wasteful overhead. According to The Post’s report, one member of the defense board told Mr. Work there would be political fallout from the study, because it might call into question Pentagon budget requests. “You are about to turn on the light in a very dark room,” he said. In fact, turning on that light is an essential first step toward credibility and efficiency. The Pentagon needs to be open and candid about its spending problems, not sweep them under a rug.

Don’t expect the Pentagon to change the way they’ve become used to doing things voluntarily. They aren’t subject to the same forces that businesses are and that force businesses to become more efficient.

I’ll give the advice I have given for decades when the subject comes up:

  1. Do less. Reduce the mission. Only do things that actually make us more secure. Military force should be a last resort.
  2. Reduce the number and size of overseas bases. Tailor to them to the modern way of war.
  3. Cut back sharply on the number of general officers. You’d be amazed on how much that will cut expenses. Every general officer wants to add to his number of subordinates and has a pet project.

Demanding abstract “change” or the chestnut of eliminating waste, fraud, and abuse will have about the same results it’s had for the last 70 years.

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Can We Reduce Income Inequality (Part 2)

Yesterday I promised to do some spitballing about things that could be done about income inequality and today I’ll try to make good on that promise. For the purposes of this post I will only talk about federal adjusted gross income. Not wealth; not gross income. Just AGI. All of my info on incomes is derived from this IRS report, Table 1.

As I also said yesterday most prescriptions use a one-size-fits-all approach that I think is counter-productive so I’ll divide my prescriptions into three categories: the top .1% of income earners, the top 1% of income earners, and the rest of us. To put those categories into some perspective there are roughly 1.4 million people in the top 1% of income earners and 140,000 people in the top .1%. To be in the top .1% of income earners you’ve got to have an AGI of about $2.2 million or greater; to be in the top 1% of income earners you’ve got to have an AGI of $485,000 or greater.

Most of the people in the top .1% are either prodigies, the Michael Jordans ($100 million annual income) or Dwayne Johnsons ($65 million annual income) of the world, CEOs of large to medium-sized companies, or people in the financial sector. They account for about 11% of all income.

The most frequently encountered prescription for reducing income inequality, increasing the marginal tax rates, purports to address those ultra-rich. No proof is ever presented for the effectiveness of high marginal tax rates in reducing income inequality. It’s merely assumed.

IMO increasing the marginal tax rate on the prodigies is not warranted and for the rest of the top .1% I doubt it would be effective. They can just leave, as the Rolling Stones famously left the UK. And when you have that much money there will always be friendly politicians to write handy loopholes into the tax code for you.

It would probably be much more effective for reducing the income of the top 1% of income earners than of the ultra-rich. Amazingly, a lot of the top 1% are W2 employees and most of their income is in the form of salaries. Basically, they’re captives.

CEO salaries haven’t always been as stratospheric as they are now. That started in 1993, the perverse result of a reform to the tax law. The deductibility of CEO salaries from corporate income taxes was capped at $1 million with the the exception of incentive pay which included things like stock options.

Big companies receive government subsidies in thousands of forms. The provision above in the tax law is just one of them. If you take the king’s penny you are the king’s man, so IMO capping executive pay is perfectly legitimate. The reforms I would propose would be to cap the deductibility of executive pay at $3 million indexed for inflation (that should keep them in the top .1%) and eliminate the exemption of incentive pay. It just hasn’t worked. Companies could continue to pay CEOs whatever they cared to. It just wouldn’t be tax deductible.

My prescription for curbing the sky-high compensation in the financial sector is to stop subsidizing it. Prohibit quantitative easing by law. Tax the compensation as ordinary income.

What about the 1%? Most of the top 1% of income earners excluding the ultra-rich are either professionals, upper management in big companies, or in the financial sector. This is the group where a higher top level income tax bracket would be most effective.

My preference over increasing the marginal tax rate would be to stop subsidizing them. If you can’t bear to end the subsidies cap their wages and index that to inflation. I honestly think that this group should be left alone. That greatly reduces your options for greater income equality.

They say if you can’t raise the bridge lower the river and IMO that’s a better solution for producing greater income equality, too. Let’s break that down into pieces.

First, if anyone has a prescription for income equality when 15% of the population are immigrants, mostly without skills or good command of the English language, I’m all ears. I don’t think there is one but I’m willing to listen.

Consequently, I think that immigration reform is a vital component of producing a society with greater income equality. We should have serious workplace enforcement and enforcement at the borders. We should abandon diversity quotas and family reunification as a primary goal of immigration policy.

The chances of doing any of those things are approximately zero which I believe means we should start getting our heads around a non-egalitarian society with substantial income inequality.

However, let’s continue. The graphic at the top of the page is from a Pew Research report and it illustrates three factors behind income mobility, i.e. making the poor richer rather than making the rich poorer. In summary they are race, education, and married status.

IMO the education point is bogus—cargo cult thinking. It might be that if we had much more narrowly focused higher education subsidies they would be effective in boosting the incomes of the people in the lowest income quintiles if

  1. They finished high school.
  2. They finished college.
  3. We created more jobs that required higher education.
  4. We stopped importing people to fill those jobs and thereby allowed the wages for those jobs to increase.

That’s a lot of ifs.

That leaves us with race and married status. I’ve been saying we should have much more narrowly tailored programs aimed at creating more prosperity among native-born African Americans, the descendants of slaves, for decades. Many of the policies and programs that have been put in place have the perverse effect of boosting the fortunes of immigrants from sub-Saharan Africa and the Caribbean and leaving our native-born black population to fend for themselves.

I’ll leave it to you to come up with policies to encourage marriage that are effective, narrowly tailored, and would be politically possible. Hey, if this stuff were easy we wouldn’t have the problems.

I encourage you to put your own prescriptions in comments.

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The Strategic Implications of Killing Bin Laden

As the chorus of retrospectives on the presidency of Barack Obama rises, the killing of Osama Bin Laden is inevitably mentioned. That in turn brings up an interesting question. What were the strategic implications of killing Osama Bin Laden?

That’s the subject of this post from the Rand research organization from earlier this year:

Research draws varying conclusions. Some analyses show that terrorist organizations may be able to replace their losses, as al Qaeda did with Ayman al-Zawahiri, also a long-time jihadist. But leadership is a precious commodity, which high-value targeting degrades — although in some cases the replacements for terrorist leaders killed proved to be more effective than their predecessors.

As a strategic tool, high-value targeting does not simply eliminate terrorist leaders but sends them deeper underground, impedes their ability to communicate, and degrades their ability to function. Obviously, it adversely affects morale. While al Qaeda’s terrorist capacity has declined, the loss of bin Laden was just one factor. Many of its most effective operational planners and commanders also have been eliminated; either captured or killed before or since bin Laden’s death.

Still, the demise of bin Laden cost al Qaeda its most charismatic and effective communicator. His successor, al-Zawahiri, certainly has the experience and ability to lead al Qaeda, but he lacks bin Laden’s moral authority and motivational skills. Since bin Laden’s death, Zawahiri may have come to fear that communications can be risky business for terrorist leaders. Over the last five years, Zawahiri has issued fewer than half the number of audio and video messages that he issued in the five years before the raid on Abbottabad.

Read the whole thing. It’s interesting.

The bottom line seems to be that the strategic implications of killing Osama Bin Laden have been ambiguous and it certainly wasn’t decisive. Which is essentially what I said five years ago.

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Chicago’s Total Shootings

In a recent column in the Chicago Tribune and echoing points I made last week, John Kass makes an interesting observation about Chicago’s homicide rate:

Murders don’t tell the true story of violence. The true number is the shootings. And by shootings, I don’t mean people firing guns into the air.

I mean people pulling triggers to send bullets to penetrate human bodies.

In 2014, there were just shy of 3,000 shootings in Chicago, 2,988 to be precise.

So far this year, there have been more than 4,100 people shot, and we’ve got almost a month of homicides and shootings to go.

Factor in the brilliant advances in emergency medical technology, and dedicated Chicago Fire Department paramedics and the fine work of hospital emergency rooms and trauma centers, and you can make a terrible argument.

It is the argument that Chicago violence now is as bad or worse than it was in the early 1990s, when in each of three years more than 900 people were slain.

Because with more than 4,000 shootings this year, it’s reasonable to assume the 2016 homicide total would be well more than 700 by this point if it weren’t for modern medical techniques and the paramedics.

I don’t think there’s any question about it. And, as Mr. Kass notes, the problem isn’t guns. The problem is street gangs with guns. Rejecting that is just self-excusing claptrap.

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