The Micawber Economy

In David Copperfield Charles Dickens’s character Mr. Micawber said

Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

160 years later that’s still the case.

The editors of the Wall Street Journal observe about taxes and the federal deficit:

Spending rose only 3% overall for the year, according to the CBO gnomes. Federal outlays climbed by some $130 billion to $3.982 trillion. Three percent is probably more than most of our readers received in raises, but by federal standards it’s penurious. Some of the big outlays were, as ever, for the three giant entitlements—3% for Social Security, 4% for Medicare, and 2% for Medicaid as the pace of new enrollments slowed under the Affordable Care Act.

The biggest single spending increase was 45% for education thanks to an upward revision of $39 billion in the “estimated net subsidy costs of loans and loan guarantees issued in prior years.” In plainer English, the Obama Administration low-balled the costs of nationalizing student loans. Tens of thousands of borrowers are defaulting on their student debt, and the taxpayer tab is coming due.

Our problem is that national income is rising at less than 2% per year while federal spending is rising at 3% per year. It doesn’t take a lot of math to tell you that’s a problem. There are only a handful of strategies for coping with the matter:

  • We can just issue ourselves credit, i.e. we’ll “borrow”. That’s what we’ll do. That will continue a positive feedback loop reducing economic growth.
  • Extract more income from the private sector. That will reduce private sector economic growth.
  • Cut spending. As you can see when constraining the increase in spending to just a little more than twice the increase in income is considered a great triumph, that’s difficult to do, particularly as we place increased demands on the federal government. How do you cut defense spending when you’re fighting a half dozen different wars and preparing to fight more?

In optimization theory you optimize a process by focusing on the segments of the process where there’s the most to optimize. Health care spending is growing faster than any other budget component. If the Obama Administration had focused, as President Clinton used to say “like a laser beam”, on constraining health care spending, there might have been a chance of controlling federal spending. It elected to increase health care insurance coverage instead.

Increasing marginal tax rates, extremely unlikely when Republicans control the Congress and the White House, won’t necessarily remedy the problem. For that you need to increase the effective tax rates and those have proven even more resistant to increase than the nominal rates.

So we’ll continue to issue ourselves credit, hoping that there isn’t a flight from the dollar, and reduce our potential for economic growth, wage growth, and employment.

Result misery.

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My Dad’s Birthday, 2017

My dad was born on October 10, 1914 at 14th & Clark in St. Louis in the apartment above the saloon his family owned. As an adult he was tall and a bit pudgy in a way I’ve never been. His hair was always unruly; his clothes nearly always wrinkled.

He wore two shirts a day and shaved twice a day. He had a piercing, intense gaze, a keen intellect, and a good sense of humor. He loved to travel, loved exotic cuisines, worked harder than anyone else I’ve ever known, and was scrupulously honest. He loved to debate and encouraged it in his children. He spoke German as fluently as a native—learned at school, not at home.

He died rather suddenly at too-young an age. I’ve never gotten over it and I don’t think my siblings, all younger than I, have either.

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Truth-Telling

In reaction to the unfolding scandal of sexual harassment and abuse surrounding Hollywood mogul Harvey Weinstein and the company that bears his name, former Weinstein Co. employee Jessica Forsythe writes at RealClearMarkets:

I worked for Harvey Weinstein and it’s everything you can imagine, sans any of the presumed glamour. Curse words fly at and around you constantly, threats and bullying are the prized management modus operandi. The turnover is ridiculous and the office environment is as toxic as they come. The strategy for many employees is to throw a blow-out party at the six-month mark to numb themselves for the following six. Once that year lands on their resume, they leave skid marks a la Wile E. Coyote all the way out of Tribeca. I’m sure a special form of cancer is going to come out of 99 Hudson Street specific to the type of stress born there.

The odd thing is, no one makes any money working for Harvey Weinstein. He pays peanuts and pennies to some of the hardest workers in the United States. The whole outfit is run like a cheap insurance agency in outer Queens.

I hope none of this comes as a surprise to anyone but I’m afraid it might. I’ve known that this was what show business was like since I was a child. It has been true for a century and it may be true a century from now.

Sadly, I think that Ms. Forsythe is kidding herself. There will always be “new thing” young starlets hungry for fame and willing to sell their souls not to mention their bodies for it. I trust that the same is true for young male performers as well these days. We aren’t hearing complaints from them. Only from actresses nearing the ends of their Hollywood careers.

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Caution

I’m preparing to commit political science. The political scientists won’t do it so I’m leaping into the fray. I’m doing an analysis of Illinois’s highly gerrymandered Congressional districts, providing measurements of just how gerrymandered they are, and examining the objectives of gerrymandering for each district.

Those of my readers who are Illinois residents or who otherwise have knowledge of Illinois’s Congressional districts, please contribute your observations in the comments of this post so I can incorporate them in my final results.

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What Else Would You Expect?

While in his Washington Post column Robert Samuelson laments the sorry state of the U. S. economy:

The spoils society advances.

The “spoils society” is a phrase I coined some years ago to illustrate a basic problem of wealthy societies, including, of course, the United States. After all, our annual gross domestic product is approaching $20 trillion. The problem is that, as societies become richer, so does the temptation for people to advance their economic interests by grabbing someone else’s wealth, as opposed to creating wealth.

We see the resulting redistributive struggles all the time. They’re part of the social fabric: divorcing couples fighting over the marital assets; Congress debating who should — or shouldn’t — get tax cuts or subsidies (say, Social Security); lawyers launching “class action” suits to remedy alleged wrongs; patent “trolls” suing tech companies over possible infringement issues.

What else would you expect? Considerably more money can be made via rent-seeking at lower risk than via entrepeneurship. That’s why the money spent on lobbying is so high. The return on investment is great and it’s an arena in which only the big boys may play. Just as a single example, IMO the balance sheets of pharmaceutical companies more resemble lobbying organizations that do a little research on the side than research organizations that do some lobbying.

Also, we graduate twice as many MBAs annually as we do undergraduate engineers and vastly more than we do individuals with advanced engineering degrees. That points to the rewards of manipulating the financial economy compared to the rewards of making things and creating processes.

But notice the symmetry between Mr. Samuelson’s column and the other two articles to which I’ve linked today. Mr. Ryu and Dr. Summers are arguing in favor of the status quo, the “spoils society” that Mr. Samuelson is complaining about.

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Summers’s Lament

And I agree with many of Lawrence Summers’s complaints about Trump’s tax proposal, expressed rather harshly in a Washington Post op-ed:

I have strong disagreements on tax policy with Republican economists such as Greg Mankiw, Glenn Hubbard and Martin Feldstein and with Treasury alumni such as Nick Brady, John Snow and Hank Paulson. Nothing I have ever heard or read from them seems absurd or dishonest in the way that almost everything coming out of this administration does.

We know enough to say that a tax-reform plan along the lines of the administration’s sketch would not substantially increase economic growth, would blow out the budget deficit and would make the United States an even more unequal place.

I think he exaggerates the role of the tax code in producing income inequality. I could list a dozen different policies that have probably been more significant including immigration policy, trade policy, and propping up the big banks during the financial crisis all of which were supported by Dr. Summers. He was also the Obama Administration’s Director of the National Economic Council when President Obama signed into law the single largest increase in the taxes of lower and middle income people in the history of the United States. I don’t recall his complaining about income inequality then. Should I mention his role in the Clinton Administration during which reforms which led to the enormous increase in executive compensation were enacted, China was granted Most Favored Nation trading status, and China was admitted to the WTO? He has also spoken in favor of the deindustrialization of the United States, one of the greatest factors in exacerbating income inequality. Under the circumstances I think he owes it to us to tell us what he supports rather than merely complaining about what he doesn’t like.

It’s too bad that Dr. Summers did not advocate for needed reforms to the tax code eight years ago when he had considerably more influence than he does now. Like the rest of the Obama Administration he took his eye off the economic ball and now he’s confronted with an administration whose priorities are very different from his.

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Will Corporate Tax Cuts Create Jobs?

I tend to agree with Marcus Ryu’s observation in his New York Times op-ed:

As an entrepreneur myself and a friend to many others, I know that lower tax rates will not motivate more people to start companies. People start companies for many reasons: a compelling idea, ambition for fame and fortune, a desire to be one’s own boss, frustration with one’s employer. I have never heard someone say, “I would have started a company, but tax rates were too high” or “I wouldn’t have started this company, but then George W. Bush cut tax rates, so I did.”

to the effect that cutting corporate income tax rates won’t increase the number of jobs. What he neglects to consider is that our present corporate tax code is already costing jobs and, worse, they’re the very sorts of jobs we need—managerial jobs, higher staff jobs—and replaced with nothing. “Inversions” to avoid the U. S.’s tax rates have taken place and continue to take place and when they do whole corporate headquarters move, too, taking their highly compensated jobs with them.

The corporate income tax is a very inefficient tax and the U. S. corporate tax code is out of line with those of other OECD countries. Reducing corporate tax rates wouldn’t be a master stroke that solves all of our economic problems but it would be a step in the right direction. If you’re concerned about its potential for worsening income inequality, increase the personal income tax rates.

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Life Imitates Art

Consider:

Carmelite Sisters Danced the Electric Slide from Carmelite Sister on Vimeo.

and

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Who Was “Josh Billings”?

There are a tremendous number of misattributed quotations out there. I’ve attributed quotations to the wrong people myself from time to time and I assume that I still do. I try to correct my mistakes over time.

I’ve noticed a pattern in misattributions. There’s a sort of system of archetypes at work. People attribute sayings to Einstein as a shorthand for indicating they think it’s smart, Ben Franklin when they think it’s clever, and Sam Clemens when they think it’s witty.

Just as “Mark Twain” was Sam Clemens’s pseudonym and the name of the character that he portrayed on the lecture circuit, very different from his actual personality, so “Josh Billings” was Henry Shaw Wheeler’s pseudonym and the character he played on the lecture circuit, sort of a rough-hewn Westerner. Wheeler was a rough contemporary of Sam Clemens’s, second only to him in popularity as a 19th century American humorist.

Here are some of the many quotations that are things that Henry Shaw Wheeler wrote that are generally attributed either to folk wisdom, Mark Twain, Ben Franklin, etc. (I’m translating from the original thick dialect in which he wrote and spoken on the lecture circuit.)

  • The squeaky wheel gets the grease.
  • It ain’t what you don’t know that gets you into trouble but what you do know that just ain’t so.
  • The lion may lie down with the lamb but the lamb generally doesn’t get back up again.
  • There is as much difference between vivacity and wit as there is between lightning and the lightning bug.
  • Love is like the measles; we can’t have it bad but once, and the later in life we have it the tougher it goes with us.
  • As scarce as truth is, the supply has always been in excess of the demand.

There are dozens if not hundreds of others. Here are some of his witticisms I wish were more widely known:

  • You should watch out for someone who pities everybody. The changes are they are profiting slily from the misfortunes of others.
  • About half the pity in this world is not the result of sorry but of satisfaction that it’s not our horse that’s broken its leg.
  • When a woman wears the britches, she generally has the right to them.

I think that more people should be familiar with Henry Shaw Wheeler, just as with Finley Peter Dunne (Mr. Dooley).

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Cost/Benefit Analysis

I have a quibble with this article at the Harvard Business Review, “The Great Recession Drastically Changed the Skills Employers Want”:

In recent research we investigate how the demand for skills changed over the Great Recession (2007-09). Using nearly all electronically posted job vacancies in 2007 and 2010–2015 collected by the analytics company Burning Glass Technologies, as well as geographic differences in economic conditions, we establish a new fact: the skill requirements of job ads increased in metro areas that suffered larger employment shocks in the Great Recession, relative to the same areas before the shock and to other areas that experienced smaller shocks. Our estimates imply that ads posted in a hard-hit metro area are about 5 percentage points (16%) more likely to contain education and experience requirements and about 2–3 percentage points (8‒12%) more likely to include requirements for analytical and computer skills.

Moreover, the vast majority of this “upskilling” persists through the end of our sample in 2015. That is, even while most measures of local labor-market strength had converged back to pre-recession levels, differences in advertised skill demands remain. This holds true even when we statistically control for the availability of skilled labor and the composition of ads across firms and occupations. In fact, we find that the same firms that upskilled by 2010 drive the persistence later in our sample period – the companies that reacted to the recession by looking for more skilled workers were still pursuing that strategy five years later.

My quibble is that they’re neglecting what is to me an obvious reality. Managers do things for reasons. They don’t just do them in a sort of Brownian motion or random walk. If managers are convinced that there is a reliable and unending supply of low-end workers or of workers with higher skills than present workers at lower pay (or they can use the claimed need for higher skills as a pretext for replacing present workers with workers who will work for lower wages), they will do so.

But such convictions are based on politics and policies and may be reversed. Then they’ll do something else. Managers may not be emotionless robots or perfectly rational but they’re not single-celled organisms or mindless particles, either.

The question that I wish were being considered but no one seems to be is why did so many companies, particularly large companies, have so many nonproductive employees previous to 2007 whom they continued to employ? I think that’s the $64 trillion question.

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