Category: Op-ed

Economism and Economics

By James Kwak

One point I try to be clear about in my new book is that economism—the assumption that simple Economics 101 models accurately describe the real world—is not the same as economics. There are people who think that all of economics, or at least all of modern, mathematically inclined, “neoclassical” economics, is at fault for the growth of neoliberal capitalism and the increase in inequality in rich countries. I am not one of them.

In my mind, the problem is knowing just a little bit of economics—the proverbial little bit of knowledge. (My favorite form of that proverb, despite its religious origins, is the following: “A little knowledge is apt to puff up, and make men giddy, but a greater share of it will set them right, and bring them to low and humble thoughts of themselves.”) When you learn more economics, you learn that the world has more than just supply, demand, price, and quantity.

Matt Yglesias has even tried to argue that “on a whole lot of issues the basic econ 101 view supports the liberal position.” I think he’s exaggerating his point—on a whole lot of issues, Economics 101 tells you that market failures are possible, but that doesn’t necessarily dictate a liberal policy outcome. But whatever is actually in an introductory textbook, the problem is that what people think they remember—or what people who never took economics think the subject teaches—is that competitive markets produce optimal outcomes. As Paul Samuelson wrote in the first edition of his textbook (and I never tire of quoting), the idea that “any interference with free competition by government was almost certain to be injurious … is all that some of our leading citizens remember, 30 years later, of their college course in economics.”

The historical development of economism, and its divergence from economics, is the subject of chapter 3 of my book, and also of my new article in the Chronicle Review. The article also includes some of my thoughts on how the teaching of economics might be modified to give students a richer and more balanced understanding of the discipline. For more, head on over there.

Conflicts and Corruption

By James Kwak

To be clear, the idea that Donald Trump will be president while he or his children effectively own a company that does business all over the world is preposterous. (Quick primer on trust law: A trust is managed its trustees for the benefit of its beneficiaries. In this case, we know the trustees include two of Trump’s children, and the beneficiary is likely to be either Trump or his children.) If people, companies, and foreign governments want to pay bribes to the president of the United States, they need only give favorable deals to the Trump Organization. An in any of his official actions, the president will have the temptation to do what’s right for his company, not for the country.

The point I wanted to make in my Atlantic column today, however, is that this is just the most obvious and egregious example of the larger problem of corruption: government officials acting in the interests of themselves, their family and friends, or their business associates. The example I focus on is estate tax repeal, because that one thing alone would be worth more than $1 billion to the Trump family. It’s a classic example of a president doing what’s in his own personal interests and the interests of his core constituency of gazillionaires, while pretending it’s for the good of the country.

Betsy DeVos is another great example, perfectly illustrated by this graphic from the AFL-CIO:

screen-shot-2017-01-12-at-11-17-30-am

The way American politics works is that people and organizations with money—today, largely billionaire families—invest in politicians and demand policies that favor their private interests. Donald Trump just eliminated the middlemen—not only winning the presidency, but also inviting fellow billionaires like DeVos into his cabinet. This is why, beyond the ongoing catastrophe that is the Trump presidency (which technically hasn’t even started yet), we still need to fix our democracy, so everyone has an equal say in our government.

For more, see the full article in The Atlantic.

Economism and the Future of the Democratic Party

By James Kwak

I haven’t written much about the election itself (except to point out that the same data can be interpreted in diametrically opposing ways). That’s because the election was so close that the fact that Clinton lost can be explained by any number of but-for causes, and much of the Democratic Internet has been a cacophony of people insisting that their preferred cause (Comey, Russian hacking, not enough attention to African-Americans, too much attention to minorities, not enough attention to the white working class, too much emphasis on Trump’s personality, etc.) was the One True Cause.

I do think, however, that if Democrats (a group in which include myself) want to return to power and change the overall political dynamics of this country, one thing we need to recognize is that Republicans have been crushing us on the economic messaging front for decades. We have adapted by becoming Republicans Lite—no longer the party of jobs and the working person, but now the party of minimally intrusive market regulation, technocratic expertise, and free trade agreements.

This is the subject of my article in Literary Hub today, “The Failure of Democratic Storytelling.” Now that Democrats are out of power virtually across the board, we have the opportunity to develop a new vision, without having to compromise with Joe Manchin, Arlen Spector, and Susan Collins to squeak legislation through Congress. The question is what we make of that opportunity.

The Problem with Personality Contests

By James Kwak

This presidential election has come down to a referendum on Donald Trump, the man muppet whatever he is. Tactically speaking, that’s probably a good thing. Trump is an absolutely horrendous life form, and as long as he can’t get more than 43% of the vote, he almost certainly can’t be president. (Gary Johnson just isn’t that appealing.) Of course, focusing on personal attributes has been the Hillary Clinton strategy all along, even dating back to the primaries, when she focused on her experience and seriousness in the face of Sanders’s popular proposals (single payer, free college, etc.). It’s been even more true of the general election, in which Clinton has gone out of her way to portray Trump as a unique, rather than as the culmination of the evolution of the Republican Party.

Ordinarily we bemoan the focus on personalities rather than issues. (How many millions of times have Democrats complained about voters who chose George W. Bush because they would rather have a beer with him than Al Gore or John Kerry?) This time around, we seem happy enough with the personality contest, either because it increases Clinton’s chances of winning, or because Trump is so toxic that, this time, personality really does matter.

Continue reading “The Problem with Personality Contests” →

Is Credit Suisse Really in Jail?

By James Kwak

Credit Suisse’s guilty plea to a charge of tax fraud seems to be a major step forward for a Justice Department that was satisfied both before and after the financial crisis with toothless deferred prosecution agreements and large-sounding fines that were easily absorbed as a cost of doing business. A criminal conviction certainly sounds good, and I agree that it’s better than not a criminal conviction. But what does it mean at the end of the day?

Most obviously, no one will go to jail because of the conviction (although several Credit Suisse individuals are separately being investigated or prosecuted). And for Credit Suisse, business will go on as usual, minus some tax fraud—that’s what the CEO said. A criminal conviction can be devastating to an individual. But when public officials go out of their way to ensure that a conviction has as little impact as possible on a corporation, it’s not clear how this is better than a deferred prosecution agreement.

Continue reading “Is Credit Suisse Really in Jail?” →

Retirement Accounts for Everyone

By James Kwak

The Connecticut legislature is considering a bill that create a publicly administered retirement plan that would be open to anyone who works at a company with more than five employees. Employees would, by default, be enrolled in the plan (at a contribution rate to be determined), but could choose to opt out. The money would be pooled in a trust, but each participant would have an individual account in that trust, and the rate of return on that account would be specified each December for the following year. Upon retirement, the account balance would by default be converted into an inflation-indexed annuity, although participants could request a lump-sum deferral.

The legislative session ends in less than two weeks, and while the bill has passed through committees, I believe it’s not certain whether it will be put to a floor vote. On Friday I wrote on op-ed for The Connecticut Mirror about the bill.

Continue reading “Retirement Accounts for Everyone” →

Software Is Great; Software Has Bugs

By James Kwak

I’m not qualified to comment on the internals of Bitcoin; I’m neither a programmer (OK, Alex, not much of a programmer) nor a computer scientist. But I do know that Bitcoin exists because of software that people wrote, and every means by which we use Bitcoin also operates because of software that people wrote. The problem here is the “people” part—people make mistakes under the best of circumstances, and especially when they have an economic incentive to rush out products. That’s why, while we love what software can do for us, we also like having a safety net—like, say, the human pilots who can take over a plane if its computers crash. This is the subject of my latest column over at The Atlantic. Enjoy.

$100M for Eric Schmidt?

By James Kwak

Over on Twitter, Matt O’Brien wrote:

That inspired me to take a look at the article O’Brien referred to: a column by Steven Davidoff asking why JPMorgan gets pilloried for giving CEO Jamie Dimon $20 million while Google can give Chairman Eric Schmidt $106 million without incurring the wrath of the public.

I went into it thinking I would agree with O’Brien—that there is something worse about lavish Wall Street pay packages than lavish Silicon Valley pay packages. Part of that was home team bias: I spent most of my business career working for companies based in Mountain View, Sunnyvale, Menlo Park, San Mateo, and Foster City (that’s two companies and five office moves). But I ended up mainly agreeing with Davidoff.

I think O’Brien is right on the narrow question of why people are mad: JPMorgan has done a lot of bad things in recent years, while Google’s role in the world is more ambiguous. But at the end of the day, voting the chairman of the board enough money to buy a Gulfstream 650 and an entourage of 550s is not a good use of shareholder money. And it’s shockingly tone-deaf in this age of rising inequality and cuts to food stamps. That’s the topic of my latest Atlantic column.

Non-Lessons of the Financial Crisis

By James Kwak

As the fifth anniversary of the Lehman bankruptcy approaches, the Internet is filling up with reflections on the financial crisis and the ensuing years. My main feeling, as expressed in my latest Atlantic column, is amazement at how little we seem to have learned. Looking back, the period in late 2008 and early 2009, when it was obvious that the financial sector would have to change in important, structural ways, now seems like a naïve, youthful delusion. Sure, there are some new rules around the margins, but for the most part little has changed—not just in the financial sector itself, but more importantly in the political and ideological landscape that shapes regulatory policy.

Of course, this isn’t simply the product of collective amnesia. It’s the result of the fact that ideas are shaped by money and political power. And that’s where little has changed.

Yet Another Proposal To Raise My Own Taxes

By James Kwak

In chapter 7 of White House Burning, we proposed to eliminate or scale back a number of tax breaks that I benefit from directly, including the employer health care exclusion, the deduction for charitable contributions, and, most importantly, tax preferences for investment income. We did not, however, go after tax breaks for retirement savings, on the grounds that Americans already don’t save enough for retirement.

Well, in my latest Atlantic column, I’m going after that one, too. I changed my mind in part for the usual reason—the dollar value of tax expenditures is heavily skewed toward the rich. But the other reason is that the evidence indicates that this particular subsidy doesn’t even do what it’s supposed to do: increase retirement savings. Instead, we should take at least some of the money we currently waste on tax preferences for 401(k)s and IRAs and use to shore up Social Security, the one part of the retirement “system” that actually works for ordinary Americans.

Of course, this isn’t going to happen anytime soon. President Obama proposed capping tax-advantaged retirement accounts at $3.4 million, which is a step in the right direction. ($150,000 would be a better limit, since most people reach retirement with far less in their 401(k) accounts.)* But even that was attacked by the asset management industry as theft from the elderly.

* Yes, I know about the issue of small business owners who only set up accounts for their employees because they want to benefit from them themselves. It’s a red herring. First, if an employer doesn’t have a 401(k), employees can contribute $5,000 to an IRA—and $5,000 is a lot more than most middle-income, small business employees are currently contributing. Second, the right solution would be to default everyone into a retirement savings account instead of relying on employers to decide whether or not to set up 401(k) plans.

Incentive Effects of Higher Wages

By James Kwak

My Atlantic column this week is on a familiar theme: why don’t Barack Obama and Democrats provide an clear alternative vision to the Romney-Ryan state of nature, instead of slowly stumbling along in the Republicans’ wake? But it also brings up a question that I haven’t seen before.

The theoretical argument against higher tax rates is that it reduces the incentive to work because it changes the terms of the tradeoff between labor and leisure. That is, higher taxes reduce your effective returns from labor, while your returns from leisure remain constant, so you will substitute leisure for labor.

In the long term, however, real wages tend to go up; even in the past three decades, which have generally been bad for labor (and good for capital), they’ve gone up by about 11 percent. If tax rates remain constant, that should increase the effective returns to labor, causing people to substitute labor for leisure (i.e., work more). Put another way, you could increase tax rates and keep the tradeoff between labor and leisure constant.

I generally don’t buy these pure theoretical arguments, but my point is that if you believe that higher taxes reduce labor supply through the substitution effect, then you should acknowledge that the effect of higher taxes could be swamped by growth in real wages.

Why Raise Taxes on Poor People?

By James Kwak

My Atlantic column today is on the bizarre fixation that some conservatives have with taxing poor people, pointed out by Bruce Bartlett in his latest column. Here’s one explanation:

The other, even-more-disturbing explanation, is that Republicans see the rich as worthy members of society (the “producers”) and the poor as a drain on society (the “takers”). In this warped moral universe, it isn’t enough that someone with a gross income of $10 million takes home $8.1 million while someone with a gross income of $20,000 takes home $19,000. That’s called “punishing success,” so we should really increase taxes on the poor person so we can “reward success” by letting the rich person take home even more. This is why today’s conservatives have gone beyond the typical libertarian and supply-side arguments for lower taxes on the rich, and the campaign to transfer wealth from the poor to the rich has taken on such self-righteous tones.

Also, in some housekeeping news, I’ve switched to a personal Twitter account, @JamesYKwak. My blog posts should generate tweets in that account; Simon’s should generate tweets in the old account, @baselinescene. I’ll try to aggregate all the stuff I write in various places in my new Twitter stream.

The Baseline Scenario Facebook page should be aggregating both of our Twitter streams, but I had a little difficulty with it on Monday, so who knows. It seems like Facebook changes the way everything works every other Tuesday, so you never know when something will break.

What Do Companies Do with Their Political Spending?

By James Kwak

Whatever they’re doing, it doesn’t seem to be good for shareholders. That’s one conclusion of a new paper by John Coates, a Harvard law professor, which I discuss in today’s Atlantic column (which originally misdated the Citizens United decision, thanks to some faulty proof-reading by me). Coates compares firm valuations with levels of lobbying and contributions by corporate PACs and finds that, outside of heavily regulated industries where everyone lobbies heavily, political activity is associated with lower firm value—implying that it’s more like a CEO perk than like a good investment from the shareholder perspective.

Can We Afford Medicare?

By James Kwak

The conventional wisdom, repeated endlessly by the so-called serious people, is that we can’t afford traditional Medicare and hence it has to be radically overhauled (see Ryan-Wyden for the latest round). But I’ve never seen a convincing argument for why we can’t afford traditional Medicare. Yes, costs are rising as a share of GDP. But in principle, to make the case that we have to reform the program, you would have to argue that revenues can’t rise enough to keep pace—which in most cases, just shows that you don’t want revenues to rise enough.

More specifically, you have to know how big the Medicare deficit is and how fast it is rising. By my calculations, relying mainly on the 2011 Medicare Trustee’s report, the deficit was 1.7% of GDP in 2010 and will be 3.0% of GDP in 2040. So the argument that we can’t afford traditional Medicare relies on the proposition that this 1.3% of GDP is the straw that will break America’s fiscal back. Needless to say, this is nonsense, especially since other tax revenues not related to Medicare will be rising over the same time period, at least under current law. For all the details and sources, see my latest Atlantic column.

Medicare has its problems. But we have choices.

What Good Is the SEC?

By James Kwak

This week’s Atlantic column is my somewhat belated response to Judge Jed Rakoff’s latest SEC takedown, this time rejecting a proposed settlement with Citigroup over a CDO-squared that the bank’s structuring desk created solely so that its trading desk could short it. I think Rakoff has identified the heart of the issue (the SEC’s settlements are unlikely to change bank behavior, so what’s the point?) but he’s really pointing to a problem that someone else is going to have to fix: we need either a stronger SEC or stronger laws. I’d like to see an aggressive, powerful SEC that can deter banks from breaking the law, but we don’t have one now.