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The US Supreme Court’s new campaign-finance ruling has prompted a collective pearl clutch by progressive punditistan. Short version: the 0.01 oligarchs have won, or quite nearly. And now their diabolical push for unrestrained, predatory capitalism will go unopposed — except for, as law professor David Bernstein points out, “the legacy mainstream media, Hollywood, academia, publishing, the legal profession, the mainline churches, and the arts … Limit campaign spending, and left-leaning opinion-makers utterly dominate American political discourse.”
If you are genuinely worried about the influence of Big Money on Big Government, the free-enterprise solution is to shrink the influence of Big Government. A government able to pick winners and losers through regulation, spending, or the tax code is a government worth influencing, whether through campaign donations or lobbying activities. Numerous studies and analyses have calculated a massive “return on investment” from lobbying. For instance: a 2013 Boston Globe series found that by forking over a mere $2 million over two years to Washington lobbyists, Whirlpool secured the renewal of an energy tax credit worth a combined $120 million over two years.
What’s more, the reason for lobbying may be changing. Companies used to try to, as Ronald Reagan once put it, get government off their backs. But now, according to economist Luigi Zingales, lobbying has shifted from reactive to proactive, and toward getting government in their pockets to obtain unique privileges.”
Getting back to campaign finance, Bradley Smith sums up:
The practical results of this decision will be to make fundraising easier for party committees and candidates. That is almost certainly a good thing and should help ease concerns that “super PACS” are too influential with parties. Don’t expect a landslide in new giving, however, as the old aggregates did not affect most donors, who contribute to only a few candidates.
Ultimately, this decision is a significant victory for the First Amendment. Perhaps more important than the immediate result is the insistence that the government must have an actual, rather than conjectural, theory of corruption to be prevented. The “monsters under the bed” theory of constitutional jurisprudence seems headed for the dustbin.
As Justice Roberts wrote, “If the First Amendment protects flag burning, funeral protests, and Nazi parades — despite the profound offense such spectacles cause — it surely protects political campaign speech despite popular opposition.”
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The annual House of Representatives budget resolution – you may know it as the “Ryan plan” or perhaps as the “Path to Prosperity” — has turned into a weird Washington phenomenon, one that combines analysis fiscal, political, and psychological. Do the numbers really add up? Will it hurt or help GOP election odds? Does it signal that Roman Catholic Paul Ryan or Randian Paul Ryan is the fellow running the budget committee? And, of course: does the budget suggest Ryan will run for president 2016?
Of those questions, I’m confident only in answering the first. (Alert: CNBC and MSNBC bookers. Ignore that last sentence. I am supremely confident in answering any and all possible questions about the Ryan budget, as well as the 2016 presidential race, the Russian annexation of Crimea, the Yellowstone earthquakes, and the new Captain America film. I also know a thing or two about nanotech.)
Yes, the numbers add up, assuming a sprinkle of CBO-approved, macroeconomic magic from deficit reduction. But close enough for congressional work. Ryan again deserves big, big credit for pushing premium-support reform of Medicare, although the specific details continue to evolve. Another plus is the plan’s emphasis on strengthening work requirements in exchange for government welfare benefits. The GOP should be the party of work, and the Ryan budget nicely reflects that.
The Republican blueprint also has value in demonstrating how fiscally difficult it will be to achieve some commonly-stated GOP goals. To balance the budget and keep the federal tax burden at roughly historical levels in an aging society requires what are likely overly aggressive reductions to future projected safety-net spending. Some programs need reform that could save money, such as disability benefits. Others need reform that will cost money, such as expanding the Earned Income Tax Credit or instituting wage subsidies. (Looking forward to how Ryan fleshes out his vision when he puts forward his anti-poverty program later this year.) I think this exchange I had during a podcast chat with Oren Cass — who want states to manage the safety net with a federal funding stream — is helpful:
Pethokoukis: So this isn’t a case where you’re saying, listen, we’re going to take all this money, we’re going to block grant it back to the states, cut it by 25 percent, and let them start innovating with less money. So this isn’t necessarily a budget device. It sounds to me more like a state-laboratories-of-democracy device and see if they can innovate and use this money better to deal with poverty.
Cass: That’s exactly right. And I think that’s an important point that too often, particularly among conservatives, the anti-poverty issue is actually used as a budget issue, that when we think we’re talking about anti-poverty programs, we’re actually talking about ways to cut the budget deficit. And that’s a fine conversation to have if you’re looking across places to cut from the budget – anti-poverty programs may be one of them, given how big they are – but it’s not a solution to the poverty crisis to cut dollars. That’s not an inherently productive approach.
And so I think the more productive approach in terms of actually solving the poverty problem is to figure out how to make the dollars go as far as possible. And if you are successful, you save money anyway. So if you think about that formula for how much money goes to each state, if there are fewer people in poverty in that state, the amount of funding will naturally decline over time. But the way to save the money is to move the people out of poverty. It’s not just to essentially arbitrarily say we’re going to spend less money than we did last year.
Finally, Ryan and the Republicans are right in that we should try to get income and corporate rates as low as possible. But center-right tax reform needs to focus less obsessively on returning to a top-marginal individual rate last seen in the 1920s than creating a modern tax code that (a) reduces biases against both capital and human investment, and (b) raises a realistic level of revenue when considering 21st century American demographics. At the same time, the Ryan budget rightly recognizes that without deep, structural entitlement reform, the US faces some unpleasant fiscal choices and that simply raising taxes ever higher isn’t the solution.
During the 2012 election season, one of Joe Biden’s campaign applause lines was a version of this one he told a Labor Day crowd in downtown Detroit: “You want to know whether we’re better off? I’ve got a little bumper sticker for you: Osama bin Laden is dead and General Motors is alive.” And the crowd roared. They also loved it at the Democratic National Convention. The vice president can really deliver a line with gusto. He surely can.
But that “General Motors is alive” claim is looking like less of a major achievement these days. New GM CEO Mary Barra is testifying in Washington today about GM’s recall of 2.5 million small cars for faulty switches linked to 13 deaths. Bailing out a failing company is a lot easier than turning around a troubled company so it once again makes a quality product. Maybe President Obama knew this. I guarantee Mitt Romney knew this. As he wrote back in 2008: “With a bailout, the automakers will stay the course — the suicidal course of declining market shares, insurmountable labor and retiree burdens, technology atrophy, product inferiority and never-ending job losses. Detroit needs a turnaround, not a check.”
Washington didn’t save GM, if by “GM” you mean an innovating, value-adding, self-sustaining automaker. That’s just not something government really knows how to do. Check out this analysis from a 2014 Harvard Business School working paper:
General Motors was once regarded as one of the best managed and most successful firms in the world, but between 1980 and 2009 its share of the U.S. market fell from 62.6% to 19.8%, and in 2009 the firm went bankrupt. In this paper we argue that the conventional explanation for this decline-namely high legacy labor and health care costs-is seriously incomplete, and that GM’s share collapsed for many of the same reasons that many of the other highly successful American firms of the 50s, 60s, and 70s were forced from the market, including a failure to understand the nature of the competition they faced and an inability to respond effectively once they did.
For decades, GM was a company in denial. And once management woke up, it had trouble changing. Incumbents firms are commonly unable to respond effectively to disruptive innovation from new competitors. Here is another version of the decline of Detroit from MIT:
Disruptive innovation has been credited as the strategy that led to Japan’s dramatic economic development after World War II. Japanese companies such as Nippon Steel, Toyota, Sony and Canon began by offering inexpensive products that were initially inferior in quality to those of their Western competitors. This allowed the Japanese companies to capture the low-end segment of the market. As the performance of their products improved, they began to move upmarket, into segments that allowed them more profitability. Eventually, they captured most of these segments and pushed their Western competitors to the very top of the market or completely out of it.
Last December, the Treasury Department sold the last bit of its GM stake. Government Motors, no more. GM was back. But not really. The Guardian’s Heidi Moore in a must-read piece:
Less than four months later, it seems foolish that any of GM’s fairy tale was believable to anyone. After the recalls and the estimates of driver deaths, all of that talk – of the reborn American automaker, of bets paid and dollars won – seems like a hollow spectacle. And it has to make us wonder: how much were US taxpayers and the government complicit in sustaining a company that researchers had already suggested was unable to compete in the modern automotive industry?
“It’s no ‘new GM’ if they’re doing this,” Dartmouth Tuck School of Business professor Paul A Argenti tells me. “If this has been hidden for 10 years, there’s nothing new about the company. It’s old-school GM. It’s stuff you can’t even imagine a company could do in the 21st century.”
Failure like this doesn’t come out of nowhere. It’s buried in a company’s corporate culture.
And there is not much a $50 billion government check can do about a dysfunctional corporate culture except temporarily paper over it. Look, a dynamic economy promotes free entry of new firms and easy exit of uncompetitive incumbents. Government is there to provide a safety net for workers, not for corporate entities. Being pro-business is not the same as being pro-market, pro-consumer, or pro-worker. Bailouts and barriers to entry — crony capitalism — saps an economy of its vigor. What’s good for Big Business is sometimes really bad for America.
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Have a look!
Is American risk-taking really decreasing? | Noah Smith
“The preponderance of evidence from the literature is that “entrepreneurship lock” exists, though there are varying estimates of its extent.” | Austin Frakt
Is Obamacare Now Beyond Repeal? | Megan McArdle
“A bigger but somewhat slower growing China of the future will contribute about as much to global demand as the smaller but faster growing China of before.” | IMF blog
We have a new buzzword, (at least it’s new to me). Irving Wladawsky-Berger:
Unscaling is made possible by the number of Internet-based platforms and cloud-based services and tools now available to startups and small businesses in general. New companies can now be launched without a massive investment in personnel and IT infrastructure. They can quickly get to market, and compete effectively with far larger companies. Mobile Internet platforms, in particular, make it easier and cheaper to experiment in the marketplace. While most such experiments will likely fail, some, like Airbnb, will succeed and can then quickly scale up their capabilities as their businesses grow.
And this is why unscaling, and the entrepreneurial opportunities implied, is important for most Americans. Again, IWB:
We need to become a much more entrepreneurial society. Global competition continues to drive large companies to aggressively focus on productivity, leveraging IT-based innovations to get their work done with fewer employees. Governments will continue to shed jobs given the pressures they face to reduce costs and slim down. Large numbers of people will have to no choice but to invent their own jobs, based on new types of work organizations that leverage digital markets and platforms.
In Chicago, Fed chair Janet Yellen explains why she believes “there is still considerable slack in the labor market” and “there is room for continued help from the Fed for workers …”:
1.) One form of evidence for slack is found in other labor market data, beyond the unemployment rate or payrolls, some of which I have touched on already. For example, the seven million people who are working part time but would like a full-time job. This number is much larger than we would expect at 6.7 percent unemployment, based on past experience, and the existence of such a large pool of “partly unemployed” workers is a sign that labor conditions are worse than indicated by the unemployment rate.
Statistics on job turnover also point to considerable slack in the labor market. Although firms are now laying off fewer workers, they have been reluctant to increase the pace of hiring.
Likewise, the number of people who voluntarily quit their jobs is noticeably below levels before the recession; that is an indicator that people are reluctant to risk leaving their jobs because they worry that it will be hard to find another. It is also a sign that firms may not be recruiting very aggressively to hire workers away from their competitors.
2.) A second form of evidence for slack is that the decline in unemployment has not helped raise wages for workers as in past recoveries. Workers in a slack market have little leverage to demand raises. Labor compensation has increased an average of only a little more than 2 percent per year since the recession, which is very low by historical standards. Wage growth for most workers was modest for a couple of decades before the recession due to globalization and other factors beyond the level of economic activity, and those forces are undoubtedly still relevant. But labor market slack has also surely been a factor in holding down compensation. The low rate of wage growth is, to me, another sign that the Fed’s job is not yet done.
3.) A third form of evidence related to slack concerns the characteristics of the extraordinarily large share of the unemployed who have been out of work for six months or more. These workers find it exceptionally hard to find steady, regular work, and they appear to be at a severe competitive disadvantage when trying to find a job. The concern is that the long-term unemployed may remain on the sidelines, ultimately dropping out of the workforce. But the data suggest that the long-term unemployed look basically the same as other unemployed people in terms of their occupations, educational attainment, and other characteristics. And, although they find jobs with lower frequency than the short-term jobless do, the rate at which job seekers are finding jobs has only marginally improved for both groups. That is, we have not yet seen clear indications that the short-term unemployed are finding it increasingly easier to find work relative to the long-term unemployed. This fact gives me hope that a significant share of the long-term unemployed will ultimately benefit from a stronger labor market.
4.) A final piece of evidence of slack in the labor market has been the behavior of the participation rate–the proportion of working-age adults that hold or are seeking jobs. Participation falls in a slack job market when people who want a job give up trying to find one. When the recession began, 66 percent of the working-age population was part of the labor force. Participation dropped, as it normally does in a recession, but then kept dropping in the recovery. It now stands at 63 percent, the same level as in 1978, when a much smaller share of women were in the workforce. Lower participation could mean that the 6.7 percent unemployment rate is overstating the progress in the labor market.
One factor lowering participation is the aging of the population, which means that an increasing share of the population is retired. If demographics were the only or overwhelming reason for falling participation, then declining participation would not be a sign of labor market slack. But some “retirements” are not voluntary, and some of these workers may rejoin the labor force in a stronger economy. Participation rates have been falling broadly for workers of different ages, including many in the prime of their working lives. Based on the evidence, my own view is that a significant amount of the decline in participation during the recovery is due to slack, another sign that help from the Fed can still be effective.
The FT’s Cardiff Garcia notes that business equipment spending rebounded quickly after the recession ended in 2009, but its annual growth rate has fallen in every year since 2010. Yet many are predicting a 2014 acceleration. Garcia lists reasons for optimism:
It’s what businesses themselves are increasingly saying. … Typical leading indicators are flashing positive signals. … Companies are borrowing more money, and banks are easing standards on commercial and industrial loans. … The capital stock is old (and busted) while capex as a percentage of sales and assets remains low. … The conditions that normally support capex are emerging. … Productivity growth has fallen, and capex is one way to maintain corporate efficiency. … Last year’s capex disappointment is thought to be a one-off.
Well, we’ll see, of course. I should note that JPMorgan recently put out a note saying that the 2014 data so far suggest “hope for an investment boom may have been misplaced; while capex continues to expand at something close to a trend-like pace, there is thus far little evidence of an investment spending surge.”
Garcia also points out an interesting longer-term trend: “The mystery of stagnant investment remains, well, mysterious. Net business investment has peaked lower (as a share of GDP) in each successive recovery since the 1980s.”
That trend is displayed in the above chart. Garcia’s colleague Robin Hardin had a piece in 2013 that explored this mystery, but without firm conclusion: “Explaining the disconnect between profits and investment may help solve some of the US economy’s biggest problems. Theories include everything from the financial crisis, to the hidden side effects of computer technology, and the perverse incentives of corporate executives.”
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We seem to be in the midst of minor “neo-Marxism” boomlet, a bit of which I document in my new NRO coumn. Over at the New York Times, its Room for Debate feature is asking the question, “Was Marx Right?” Some really fascinating discussion follows. These bits really struck me:
Our tough times now heighten our sensitivity to asymmetries, making Marx’s observations particularly poignant. … But these problems don’t mean capitalism will inevitably unravel, as Marx thought. … The social safety net for the truly needy is the example of how culture and politics can correct the excesses of the free enterprise system. We let the free enterprise system create wealth and give people the freedom to pursue their dreams and to flourish, while letting culture direct the fruits of the market to proper social ends. Finding the right balance is the hard work of responsible politics.
There is in fact a problem with stagnant wages in today’s developed economies. But in the United States for instance much of the problem lies in our low productivity health and education sectors, which raise the cost of living for everybody, plus the high cost of renting or buying in desirable urban areas and in good school districts. … The problems are very often rooted in our imperfect institutions, such as lack of accountability in our schools, and a health care system which combines the worst properties of public and private sector incentives, leading to more expensive service and lower quality and access. Less zoning and more high-density construction would ease the housing budgets of many lower-income Americans. …
Marx pointed out, again perceptively, that capitalism might be subject to a declining rate of profit, and indeed the rate of productivity growth generally has been lower since the 1970s. But why? I would cite energy price shocks, greater investments in environmental goods (which may well be optimal), political dysfunction, the difficulty of topping the amazing achievements of the early 20thcentury, a bit of cultural complacency, and a generally greater aversion to risk, failure and also the new NIMBY “not in my backward” mentality. Most of Marx’s analytical constructs are convoluted, replete with contradictions, and in any case not ideally suited toward analyzing those problems.
Marx thought increased investment and capital accumulation diminished the value of labor to employers, and thus diminished the bargaining power of workers — when actually it increased it. But although this third belief was wrong for his day, is it wrong for ours and for our future?
We (1) move things with large muscles; (2) manipulate things with small muscles; (3) use our hands, mouths, brains, eyes, and ears to make sure that ongoing processes and procedures stay on track; (4) via social reciprocity and negotiation try to keep us all pulling in the same direction; and (5) think up new things for us to do. The coming of the Industrial Revolution –the steam engine to power and the metalworking to build machinery — greatly reduced the need for human muscles and fingers for (1) and (2). But it enormously increased (3), for all those machines needed to be minded and all of that paper needed to be shuffled. …
But there is no iron law requiring that technologies of power application and matter manipulation must always advance more rapidly than technologies of governance and control. What happens when our machines take over (3) and leave humans seeking employment with only (4) and (5)? How many and at what wage can we employ people in the social arts of personal services and as inventors and creators? …
The optimistic view is that our collective ingenuity will create so many things for people to do that are so attractive to the rich that they will pay through the nose for them and so recreate a middle-class society. The pessimistic view is that some pieces of (3) will be (a) mind-numbingly boring while (b) stubbornly impervious to artificial intelligence, while (4) will remain limited and for the most part poorly paid. In that case, our future is one of human beings chained to desks and screens acting as numbed-mind cogs for Amazon Mechanical Turk, forever.
The American economy has grown by 3.3% annually, on average, since 1950. To break it down: real GDP grew by 3.6% in the 1950s, 4.3% in the 1960s, 3.2% in the 1970s, 3.3% in the 1980s, and 3.5% in the 1990s. Since 2000, however, things have slowed markedly. RGDP growth has averaged just 1.8% through 2013, 2.6% in the 2001-2006 period and 1.1% in the 2007-2103 period.
Going forward, some analysts think economic growth has permanently downshifted. As Washington Post columnist Robert Samuelson noted today, economists at Morgan Stanley just cut their estimate of potential RGDP growth from 2.5% annually to 2%. The CBO pegs RGDP at 2.1% through 2014. In a report last year, JPMorgan economists wrote that the “long-run growth potential of the US economy continues to slide lower, by our estimate, to around 1.75%; if realized this would be the lowest of the post-WWII era.” Even the Obama White House has warned that growth in the 21st Century “is likely to be permanently slower” than it has been since World War II.
Samuelson wonders whether “the financial crisis and Great Recession mark a significant break with America’s dynamic economic past.” But the slowdown seems to have preceded the crisis, a phenomenon Larry Summers has attempted to explain via his “secular stagnation” thesis about chronic inadequate demand. And economist Robert Gordon has popularized the idea that the days of game-changing innovation are over. With population growth slowing, however, the US economy will need to be more innovative to keep growth high. Predictions of sluggish innovation and tepid growth are also central to arguments about rising inequality, as seen in the buzzy new book, Capital in the Twenty-First Century by inequality researcher Thomas Piketty.
My area of focus recently has been on how cronyism is stifling growth. US Senator Marco Rubio recently gave a speech at Uber’s Washington office about the regulatory piece of cronyism and how it affects innovation. Here is a key, on-point bit from the op-ed version of the speech: “Of course, the problem of anticompetitive, outdated regulations is not unique to Uber and it’s not unique to local governments. Entrenched interests are constantly protecting the status quo, creating new laws and regulations, and preventing the kind of disruptive changes that lead to new opportunities for entrepreneurs, workers and customers.”
Exactly right. And anti-growth, anti-innovation regulation takes many forms, from newsy attempts to quash Uber and Tesla to less high-profile occupational licensing schemes. Dodd-Frank financial reform may be the mother of cronyist laws. And don’t forget about attempts to strengthen intellectual property law to guarantee the revenue streams of powerful incumbents. As a new Joseph Stiglitz paper concludes:
We have shown that tighter intellectual property regimes, by reducing the newly available set of ideas from which others can draw and by increasing the extent of the enclosure of the knowledge commons, may lead to lower levels of innovation, and even lower levels of investment in innovation, as a result of the diminution in the size of the knowledge pool
Advocates of stronger intellectual property rights, while noting the positive partial equilibrium effects, have ignored the even more important general equilibrium effects. The real lesson is that considerable care is needed in designing intellectual property regimes, with particular focus on the extent to which any particular regime increases or diminishes the technological opportunities upon which others can draw.
What we may be seeing is the clogging of the American Growth Machine, one regulation and rule at a time.
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Call it a tale of two economies. Joseph LaVorgna and the Deutsche Bank econ team make a good point about US economic growth:
Over the past year, the US economy has demonstrated a significant acceleration. From a near-stall in late 2012 (due to Hurricane Sandy), GDP growth in year-on-year terms has accelerated from 1.3% at the start of last year to 2.6% at year-end. We expect this trend to continue in 2014. In turn, this will have significant implications for both employment and inflation. This acceleration is due to a combination of improving domestic economic drivers and significantly reduced fiscal drag. In fact, real GDP ex-government grew 3.8% last year (4.7% in H2).
Actually, the increase in fiscal drag in 2013 was accompanied by faster private GDP growth. You can probably thank for the Fed for that.