Sunday, February 21, 2016

Character Does Count

Last night was another twist in a remarkable election season.   The Former Secretary of State squeezed out an avowed socialist in the Nevada caucuses for the Democrats and in South Carolina a loud mouthed profane candidate won the GOP primary by 10% in a field of six.

This morning on Facebook one friend had photo shopped the picture at the right which expresses my deep feelings about both of the front runners.  A good president, and we need one at this point, has energy and drive but also has a sense of proportion.   Political philosophy is important - obviously a conservative is more to my preference - but character matters.   And the two front runners seem to lack that essential attribute.

For the several decades of being around the public process Clinton has remarkably little real accomplishment.   And scandal seems to follow her around.   Beginning with her fanciful story about making near perfect trades in commodities and carrying through her monumental failure in trying to develop a health plan through her most recent escapades by installing a private and mostly insecure to hide her email (although not to people that matter) there is an arrogance in her character which is almost overwhelming.   What amuses me about Hillary is that many of her supporters can overlook this relatively consistent pattern of failure and deception.

The funny thing about the current front runner in the GOP, he has many of the same characteristics.  Except that while Hillary is at least seemingly diligent on policy, Trump has a disdain for even beginning to understand the issues with any level of subtlety.   He has the same disregard for the facts that she does (yes he did go bankrupt, at least several of his ventures did).   A decade ago he took on Vince McMahon in the World Wrestling Federation's Wrestle Mania (Click on the link to see this highlight of the Donald's career) - somehow that does not, IMHO, qualify him to be president.

Last night Jeb Bush withdrew from the GOP race.  While I think he would have made a good president - he is smart and he does have character - this was not his year.   His withdrawal statement was one of the most gracious I've ever heard.

Some of the chattering class have yammered that Trump is now inevitable and that Hillary will also run the table.   I say in this strange year - why can't we do much better than either of the front runners.   The country is divided almost evenly with the parties trading off electoral victories over the last eight years (Dems won 2008 and 2012 and the GOP won 2010 and 2014).   Let's hope for the country that the pundits are wrong about both.

Dick Tuck quipped at one point that "the lesser of two evils is still evil" - in this case both or the two front runners would not help the country move forward.

Monday, February 15, 2016

Civil Discourse

On Saturday, at a writer's conference in San Miguel de Allende, when the death of Associate Justice Antonin Scalia was announced some of the participants cheered.   On Saturday night, at the GOP debate Donald Trump constantly butted in, as he has almost continuously in each debate and made a series of indefensible comments about George W. Bush and a host of others in the political realm.  He acted like a petulant child.

Both of these incidents are a reflection of the state of civil discourse.  For a republic like ours to survive neither should be tolerated.

Scalia was not timid about expressing his opinions.   He believed deeply in the concept of "originalist" thinking on the Constitution.  He used his intellect to advance his ideas.   He lived his beliefs.   But in his legal writing he was not trying to score political points.   Some of his best decisions were in his dissents.   He often poked fun at arguments made by others, either attorneys appearing before the court or his colleagues. But he used his wit to make a point not to stab.  In remembrances about him, everyone said he was a conscientious member of the court who understood that one's ideas do not always prevail.  I suspect that in years going forward, his opinions will be quoted often in future cases.

One of the first cases I noticed his writing was in the Kelo decision on eminent domain.  In the oral arguments Scalia raised the issue of whether eminent domain could be used by a city to condemn a Motel 6 for a Ritz Carlton - the hapless attorney for New London argued yes. The power of eminent domain should be limited to cases where there is a direct government need.  A fancy hotel is not in that definition.  Interestingly Donald Trump is a big fan of Kelo - although as he demonstrated in a recent debate he does not have a good idea about what the standards for eminent domain are.

Scalia used reason to explain his positions on an issue.  Donald Trump is the opposite.   He often shoots from the hip without reasoning.  His outbursts frustrated voter interest in understanding what type of president each of the candidates would be.   He is a divisive force on the political scene and his outbursts may well reduce the chances of the GOP finding a strong candidate for November.

One final comment somewhat related to the focus of this post.  I agree that the President has every right to nominate a successor to Justice Scalia, even in the last year of his presidency.   And while you will hear that the nomination of Justice Kennedy in 2007 is comparable, it is not.   That being said, the Senate in its advise and consent power has every right to delay or dismiss the nomination after it has been made.   If the President were smart he would find a distinguished jurist, with a record of supporting the Constitution, and nominate that person to the position.   But I doubt he will do that. He will look at the political considerations instead of choosing someone who can actually do the job and the court will remain a badly divided place - which might well turn again if the GOP is successful in November.   We all lose with those rules.

Sunday, February 14, 2016

Three comments on Debates

I have now watched more than a dozen debates among presidential contenders. (Both D&R and all of them - I know someone has to do it).   I have a couple of thoughts about the process so far.

First,  I hope soon the American voter will come to the realization that they do not need a fourth grade bully as their President.   Trump's behavior has been boorish and mostly non-substantive.  His performance last night was over the top.   His unwillingness to show up in New Hampshire cost him votes (it should have).

Second, while the free-for-all format of the GOP debates, even with six participants, is annoying each limitation of voices on the stage has improved the possibility that we find out something substantive about the potential candidates.  I only wish the GOP leadership had been a bit more thoughtful about how to expose the views of candidates when the field was so large at the start.   They could have gone with something like a round robin format with single or double elimination.  The undercard format seemed capricious.

Third, I was annoyed at the performance of many of the moderators.   The MSNBC debate was a joke.  They should never get the opportunity to do that again.  The moderator's questions were designed not to provoke understanding but to start fights between the candidates.    At the same time the debates in the lane for the democrats have not given us much usable information.   I was especially bothered that the two moderators from PBS did not think it was an issue to ask a single question about the FBI review of record's practices.   None of us know where that line of inquiry will end up but the public deserves to understand better why the Former Secretary of State chose to set up a mostly unsecured server.   And PLEASE don't use the progressive meme about Rice and Powell.  There is a substantive difference between two emails to one Secretary of State from diplomats on country developments of a non-confidential nature and the email correspondence of aides to another Secretary of State (who did not use Email) on a commercial server like Gmail versus the deliberate actions of a Secretary of State to funnel email through a mostly unsecured private server located in the basement of your house.

Fourth, the remaining GOP candidates present some interesting choices.   I like Ben Carson a lot - he has a compelling story and seems to be a bright guy - but he is not ready to be president.   Cruz seems to be a very bright guy but also very unlikable - not a good potential start to a successful presidency.  Bush was good last night and I think his record in Florida was admirable but I don't think the country is ready for a third Bush.   That leaves Kasich and Rubio.   I thought Rubio did well last night - so did Kasich.   On the edge of who could get a reluctant congress to work on some complex problems I think Kasich seems to have the edge.   But I think Rubio could do the job.

Finally, let's have a little more talk about the substance of Sanders and Clinton.    I understand Sanders does not like Wall Street and bankers.   But if he thinks Dodd-Frank was a great success and bringing back Glass-Steagal would be a good thing - he is deeply misinformed.  Hillary Clinton continues to show herself as the "do whatever it takes" candidate.   The morning after the debate some wag on Facebook showed HRC in an afro.   The problem was based on her performance the night before it was not that much of a stretch.   Sanders meeting with Al Sharpton was pandering of the worst kind (one wag put a photo of the meeting on Facebook which was captioned - the guy who wants to raise taxes speaks with the guy who does not pay them).

Let's see what South Carolina shows us.   I suspect there will be some surprises.

Factors in a State's Economic Performance

The John Locke Foundation in North Carolina published a study describing which states are the most "free."  Although one could easily quibble with the results they come up with (ranking states 1:50) they present some interesting data which tie together a number of issues and link them to economic performance of the state.   For example, if a state has high marginal tax rates or income taxes or property taxes, compared to their counterparts across the country - does it have an effect on comparative economic performance?  The answer seems to be yes.  But then you should not be surprised about that.

The study also looks at how states and localities spend money - which priorities are evidenced in their budgets.   They use the same model here - presenting spending categories and then amassing studies which looked into that issue.   Again, it seems to matter how states spend money.

The study shows that spending more on public safety and economic development and infrastructure have a larger effect on economic performance than spending on education or welfare.

I might part company with the Foundation on their conclusions here.  Some expenditures take a long time to show results.   So, for example, there is clear evidence from California that our investment in higher education in the 1960s and 1970s paid significant dividends to the state's economic performance in the 1990s and beyond.   We got some cutting edge research which in turn helped that state become a location for cutting edge companies.

The interaction between growth and tax policies seems to show up pretty quickly.   Ditto for vast expansions of regulatory activities.   But the relationship of public spending effects to economic performance may be a lot more complex to understand.

Charles Tiebout, who was a graduate student when he first began to think about what eventually become "A Pure Theory of Local Expenditure", understood that taxpayers can "shop" the right mix of amenities in local areas (including taxes).    For example, they may accept a higher level of taxation if they believe that other elements in society (schools for example) are much better than in other areas.

The Locke Foundation offers something to think about, even if you (as I do) question some of their rankings.

Thursday, February 4, 2016

Thomas Piketty and Reality of Capital in the 21st Century

This post violates a couple of key principles of blogging - it is very long (so was the book) - as you will see I was not a fan of his work,  which I guarantee will be not read but will be quoted liberally by many on the left.   This originally was posted in my Goodreads account but I have done some edits beyond that.

Ideally a book called Capital in the 21st Century might address two sets of questions which are very current.   The first would be “what is likely to happen to capital in the 21st Century?”  Two prominent economists (Robert Gordon and Tyler Cowan) have argued that the boom in technological advancement is coming to an end - we’ve “picked all the low hanging fruit” (in Cowan’s words).   They both argue that those developments are a problem.  The second question is even tougher.   In all developed societies the last couple of decades (depending on how you count and when you begin) have witnessed a gradual increase in inequality in both incomes and wealth.   Those trends have happened almost in spite of which policies a country chooses to adopt  Inequality has grown in the last seven years in the US, even though the Administration is committed to reducing it.  So what are the causes of those changes and how can we as societies respond to them?

Another possible set of questions might address some issues about capital formation when much of what we are creating is tiny - in health and technology.  Does our understanding of what constitutes capital and how to develop it change when things are digitized and done on the nano level? I think we probably need to do some thinking about that.   But again Piketty fails to consider these questions and instead concentrates on the increasing inequality of income and wealth.   Like many other Malthusians he uses linear logic elegantly.   A lot of what he offers as logical chains is, at best, tautological.

Finally, there is a third topic worth discussing.   At each financial panic, those in the governing class assume that the best way to "smooth" the market is to enact a new law.   So after the Enron fiasco, we adopted Sarbanes-Oxley.   After the bank silliness, we adopted Dodd-Frank.   But there is a lot of evidence that those and other "reform" measures actually did nothing to fix the problem and may have actually created new ones.   So with Sarbox, we got a significant increase in the number of startups wanting to stay private and thus avoid the perils of the accounting rules in the law.    A few years after D-F we find that the number of start-up banks has gone to almost zero.   Both of those laws have changed the way capital is created an allocated in society - but Piketty chose not to look at the issues.

Let me offer ten questions about the book.    #1 - Why I didn’t I read this when it came out?   When the English version first came out I bought it immediately with the intention of letting it sit for a while before I tackled it. I thought that Capital in the 21st Century is likely to become something akin to two other economics standards (The Wealth of Nations /Theory of Moral Sentiments and Das Kapital).   Both are distinguished as being the most quoted and least read books in the field.  While I think most of Kapital is bunk, it has had a significant influence on the field.  These kinds of books enter into discussions but often with distortions from the original that are significant.

I also delayed reading the book, even though I read a lot of commentary when it first came out (and one of the best short critiques was in the Economist magazine - ) because I wanted to be able to take the book in without much noise.  Deirdre McCloskey also wrote a good review for Cato (  Finally Casey Mulligan wrote a review for the Independent Institute which I thought was excellent (  Mulligan's comment was especially funny (in an economist's perspective) he said even though the book had come to him free there was an opportunity cost attached to reading the book.   Indeed, there was.  The point is there was a lot of commentary on the book early on.   By waiting many months it was possible to let the dust settle.

#2 - Does an Economic Model Influence any Economist’s Perspective?  Right after James Buchanan won the Nobel in Economics, he gave a lecture at the University of San Diego.  In it, he described two ways to begin the study of Economics.   The first is to imagine supply and demand curves.   If the is X supply of a good then at some level of demand the suppliers and consumers will produce an optimal quantity to satisfy both.  That simple model can be expanded to all sorts of complexity.  But there is an alternative way to begin the study.  Assume that you produce apples and I produce oranges.   And that I am the better farmer for either crop.   If I concentrate on the product I produce best (oranges), we will both be better off.   In the first model one soon gets into the idea of scarcity - if you Google the word “economics” you soon encounter the term “scarcity.”   As Buchanan argued that night, relying on scarcity instead of beginning with the idea of the benefits from trade drives you in much different directions.  Most of life is better seen in a cooperative light rather than a zero-sum game.   Scarcity, and indeed most of Piketty’s analysis is based on an operating assumption on the left which from my view it is not helpful to understanding complex problems because you ultimately spend more time on allocation issues rather than figuring out how to make everyone better off.

Piketty is a logical successor to Thomas Malthus - whose Treatise had such an influence on much of economic thinking but began with flawed data and linear assumptions.   Malthus, whose work was designed to influence Parliament’s debates on the poor laws projected the most horrible consequences to humanity because he thought food supply would be eclipsed by population growth.   But his careful logic was linear and failed to project for things like the steel plow. All of a sudden a few years after his book came out the plow began to produce almost geometric increases in the food supply because it tilled the soil more effectively.  The problem with most Malthusians is they never seem to recognize that flaws in data and logical models can have consequences.

Right before he goes into his policy proposals, he has a section on sovereign wealth funds and argues that if oil gets to $200 per barrel that the oil exporting countries could soon control a lot of the world’s capital.   And if that does not happen (woe is me!) some of the other funds like China’s will control because of how much stuff they will accumulate.   It is hard not to laugh out loud about these kinds of projections.   I suspect he thinks the projections reinforce his policy proposals.  They don’t.

#3 - Is Piketty Uriah Heap?  Piketty should be given some points for effort.   This is a complex book with a lot of theory.  He tries (I think often successfully) to explain just how complex income deciles and things like GINI coefficients can be.    His book is nothing, if not comprehensive in its view.   But it relies on a series of very shaky assumptions.  The most important is his assumption about a term called “purchasing power parity” (he believes you can make reliable comparisons between times and across borders) but as Diane Coyle points out in her excellent short book on GDP “the large margin of uncertainty around this information should never be forgotten.”   Unfortunately, Piketty concedes the problem and then uses the data to prove his points using the same data.   He fits into the character of Uriah quite neatly.   Even more annoying is his tendency to make historical comparisons which are based on the novels of Balzac, Austin, and Henry James - as if their writing involved a careful analysis of the structure of the economy at the time.  

#4 - Should he dismiss the Kuznets Curve so quickly?   He credits Simon Kuznets for his excellent work on the development of national income data.  He should.  Kuznets was the father of National Income Accounts.   One of Kuznets’ key contributions was also something called the Kuznets Curve which postulates that as the economy goes through technological development cycles economic inequality first increases, then decreases.   A good example of the phenomenon started at the beginning of the industrial age (after the Civil War in the US).   Large fortunes came to those who developed new technologies - the early payoffs were huge.   But as the cycle progressed, income disparities began to be reduced.   Some economists argue that the apparent increased concentration of wealth in many societies during the current period is partially as a result of that same kinds of trends.   Early winners in technology got huge compensation.    

But the current inequality is not just from technology rewards to entrepreneurs.  This period is also influenced by larger compensation to stars (movies, music, sports) - where the value of super-stardom (because it is so easy to replicate a performance) has increased significantly. Caruso in his time got paid a few multiples of what an average opera singer got paid.   Now the difference between a run of the mill tenor and a star is huge.   We also began to pay lawyers and doctors and bankers more than we did in earlier times.  But the question is whether all of these higher wages will be sustained or diffused as the cycle continues. Because it has happened over the last several years (or even decades) does not mean it will continue forever.   The salaries of young law associates and investment bankers have begun to plateau - if that continues those professions will attract fewer of the best and brightest.   Piketty sees the world as an economist who ultimately believes we live in a zero sum world.   There is plenty of evidence that assumption is false.

#5 - Does he offer anything useful or reliable about the long term trends on income/wealth?  The author certainly sees the world in terms of good and evil.  One of the most frustrating discussions in his book is about the growth of what he calls “super managers”  he argues that the US and the UK have led  the growth in inequality as a result of over compensating what he describes as the top of the corporate hierarchy.  But his numbers don’t tell the same story.   He estimates that 5% of the top 1% are actually performers (by that he means stars - my guess is that his number is low) and that 20% are financial types but that the rest are these over compensated super managers.  That picture is simplistic.   We began to compensate lawyers and doctors more generously, beginning several decades ago.   They certainly are not “super-managers” but they are in the 1%.  

Another flaw in his logic is that most of these professionals (highly compensated lawyers and bankers) are in countries which control a large percentage of the global financial deals - that means the US and Britain and not France and most of the rest of Europe.  (The US, UK and Japan are just under 50% of the total capitalization of world financial markets).   In California at least a lot of the very rich have two characteristics.   First, they are relatively young and second they (or their kids) may or may not be in the top brackets in the future.   The payoffs to technological innovators have been huge.   As the Kuznets curve suggests - over time those initial payoffs disburse into the broader society.  Piketty makes some speculations about what might happen as the people who were highly compensated age; but none of his scenarios are convincing unless you believe there is no economic turbulence.  

There is also the discussion of the Modigliani Triangle - which was used to torture Economics students and postulates a life cycle theory of investing; in essence, we accumulate dough when we are young when we can so we can live through retirement.   I am not a fan of how Piketty explains this elegant piece of theory but the book does present some very interesting data on how estates developed and were distributed over time. (again qualified with the complexity of doing inter-temporal comparisons)  If the population is aging and wealth is accumulating - the natural transitions between generations may be disrupted.   I don’t think I agree with Piketty’s conclusions but his data made me think about what might be happening.

One of the odd things later in the book is the author’s lack of understanding of investment returns and the returns of hard work.   He argues that it is impossible to be sure what percentage of large fortunes came from effort, theft or simply good luck (being born with the right parents).   Sure that is true, but so what?   Was the payoff to Bill Gates for his efforts on developing an operating system and other technology innovations justified?   I honestly don’t know.  Piketty wants to make those allocation decisions more “democratic” by which I think he means more political.  From my view, moving those kinds of decisions into the political realm would be a disaster.  In order to make Piketty's theory work, you need to assume there is a lot of luck in anyone's success.  Hard work and having a good idea - need to be discounted.   For anyone else, it is impossible not to attribute luck to some of a person's success.   But from my view, Piketty seems to think it is a lot more important than I do.

My best assessment of his understanding of investment is that he is almost uniquely naive about how investments work.   Without that knowledge, it is hard to take his ideas about what should happen to policies which affect the allocation and return on capital.   That is harsh but I think it is appropriate.

Piketty argues that it is appropriate to force individuals to disclose the amount of their wealth as somehow being more democratic?  I will come back to that issue in the final question,   For now, just why is it a good idea to force public disclosure of income and wealth?  

Many of his arguments - about the long-term structure of capital, about the relative distribution of wealth in a country or across borders are based on two very faulty assumptions.   First, as he admits, his data is uncertain.  But second, they are based on linear assumptions.  Consider an argument made in the late 1970s - if the Japanese economy continues to invest in US assets, by XXXX they will own the entire US economy.   That did not happen because of the dynamic effects of innovation.  Configural logic is a lot harder to work with - but as we found in the Japanese example - it is often better in hindsight.   When the Japanese economy began to implode and the Nikkei, which had been at 36,000, began to fall - we were able to buy back all of those assets they bought for pennies on the dollar.  When writers were expressing opinions about the “Japanese way of managing” Americans were working on technological changes which began to make the organizational structure and technological structure of Japan out of date.   All the smart money was on companies like Sony (Current Capitalization of $27 billion and change) not on ones like Apple (Current capitalization of $565 billion - or a cap value of almost 20X).  He could have benefitted from reading Schumpeter on creative destruction.

#6 Has he bothered to think about the implications of tax theory?   He also seems to not understand the differences between rates and share in tax systems. Even though tax rates were considerably higher in the nineteen fifties, the percentage of GDP paid to taxes has remained about the same and the distribution of burdens has changed toward more progressivity.   There is plenty of evidence from the 1986 Tax Reform Act that, at least in the US, as rates were reduced and the base broadened, the highest income taxpayers paid an increasing share of the total tax bill.   (The Tax Foundation estimates that at this point the top 1% gain about 19% of total income and pay just under 40% of the income taxes in the US.)  So what is a better way to do a tax system - with confiscatory rates and lots of complexity or with low rates and little complexity.   He seems to think that higher rates do not induce complexity - the evidence, at least from the US, is to the contrary.

In one chapter he makes the absurd assertion that a change from 0-30% on taxes on capital the main effect will be reducing inequality.   Take that logic to its extreme and tax all capital at 100% and see how much we improve inequality and, for that matter, capital formation.

A fundamental concept in tax theory is called the substitution effect.  If you tax something, at some point, people will substitute something else for the taxed thing.   Thus, if you tax root beer at 10%, and not Dr. Pepper - one would expect more people to buy Dr. Pepper.  Piketty in all of his argument for a progressive tax on capital never seems to think that the highest income taxpayers would begin substituting capital preferences.   Again, the evidence in the US example is against him.

Complexity, which is mostly an unseen cost in the tax system - decreased through 1986 and then began to increase where we now have moderate rates and labyrinthian complexity.  The evidence from the Economic Recovery Tax Act (1981) and the Tax Reform Act (1986) is that the simplification of of capital structures and the lowering of capital rates offered some huge incentives to the fuel technological boom we experienced over the last couple of decades (which Gordon and Cowan now say is now nearing its end).

#7 - What is the right GINI?  Piketty explains the implications of relying on the GINI coefficient as an indicator of how well we are doing in promoting an equitable society.  I think he is right.    Corrado Gini, an Italian, came up with this formula to express how equal incomes/wealth were in society in 1912.   (Another tool to torture students of Economics)  There is a lot of discussion in the field about what the distribution of wealth and income should be.   A GINI of 0 would have each of the 10 deciles in the coefficient being equal.    Don't we want to reward effort and skill to some degree?  The question is how much is fair.   If you can’t hit homers then you think the distribution of income among baseball players is unfair.   I do not know what the right distribution of wealth or income should be, except in very general terms.   One of the problems with thinking about GINIs is that there is always someone at the bottom.   Piketty does a lot of discussion about using centiles not deciles and that seems like a good idea.   With centiles, you might be able to make more intelligent observations about what is happening in the middle.

#8 - If the percentage of consumption/wealth in the world continues away from the US, is that a bad thing?   He spends some time on the diffusion of consumption in the world. The US is “slipping” from a predominate force in the world.   More people from poorer (or formerly poorer nations) are able to get all sorts of new consumer goods.  The question I always have for someone who thinks this may be bad is “are we worse off with more consumers in the world?”   The answer is no.   A zero-sum analysis is often plain silly.  We should applaud increases in consumption in places which had little.  And we should not be worried if our share of the total diminishes - so long as the pie gets bigger.   He says the pie cannot expand forever and that is true.  But we do not know the limits of pie expansion.

#9 Should we watch out for secondary effects?  Piketty makes a series of proposals to solve to inequalities which he never ultimately defines.  I am pretty sure I like some inequality in incomes and wealth but just not too much.   Piketty seems to live by the same standard - although we would differ on how to achieve equity.   Many of his ideas may a) not solve the problem in the direction he supports (and which most of the American people would oppose) and b) may also create externalities in other areas.  

A clear example, which Piketty would probably not support (based on a gratuitous comment he makes later in the book on public pensions) is what effects a program like social security has on wealth.   A number of countries, including Chile, have privatized their retirement systems.   Workers in Chile are required to pay into a retirement account with a limited number of options but the government role in the system is to set the rules.   What would the effect on capital be if other countries did the same?   In the US we are forced to contribute to a system which does not accumulate wealth although it does have a modest positive effect on incomes of retired persons (which might be even larger if we were to adopt a Chilean system).   So what would be the effect on Capital in the 21st Century if we were to begin to change from the US system to the Chilean one?  (He contrasts the two systems as PAY-GO versus CAPITALIZED pensions.)  

#10 Was the last section written first?  A quarter of the book is dedicated to proposing things to solve the scourges he describes in the first three sections.  

At the outset of the last section, Piketty shows his cards.   He wants more of everything provided by government - he keeps referring to the “social” state.   And he argues that collective action is not possible without taxation.   That is simply not true.   Much of what passes for political debate these days is in that simplistic form.   But Piketty conflates two issues which should always be separated.   First, how much of a good do we want to provide for society?  And second, what is the most efficient way to provide it?   There is a good body of literature on the inefficiencies of governmental provision.  Piketty seems to have missed that.   Government does not always have to be the provider.   One could use his discussion of pensions to prove the point. 

He argues that one reason for keeping the current system of “pay as you go pensions” is that the long-term risks associated with investments cannot be borne by most workers.  Yet he does not seem to concede that the demographics in most developed countries are against sound funding for these programs.  Has he ever bothered to look at the capitalized pension systems that have been adopted around the world which simultaneously increase a country’s stock of capital, assure higher benefits and in the end assure a greater chance that savings in a country will be less concentrated at the highest income levels?  In the first instance, present in many of the “developed” countries of the world - government is the provider; in the alternative or “capitalized” model, government sets the rules for the system to work and mandates how much citizens must save out of their wages.   The pay-go system in almost all instances is lurching toward insolvency.  

He makes some absurd claims including that the American income tax system has become more regressive.   The Tax Foundation numbers show something completely different.  The top 1% earn about 18-19% of the income in this country and pay almost 40% of the tax.   Not sure how anyone could describe that as “regressive.”

His tax discussion, ultimately pushing for a worldwide progressive tax on capital, which even he admits is utopian is a mishmash of jargon and speculation.   For example, he argues that the growth in executive salaries in the US began to grow with the Reagan tax cuts of 1981 and 1986.  He never seems to make a distinction between contingent and salary payments.   A good part of the compensation of what he calls super managers is contingent.  The fault in at least some of those systems may be the point of analysis not the incentives.  But he never gets to those questions.

In this final section Piketty would clearly favor two things - an international or at least multi-national progressive tax on capital and a higher percentage of national income being contributed to what he refers to as “social” (read governmental) spending.   Oddly he goes into some detail to explain how complex it has been for the European Union to agree on some very simple common elements in the fiscal constitution.  Yet, he breezes by those large potholes to suggest how we should move to a system which even the EU cannot seem to agree on.   Did he bother to look at the discussions in several EU countries about whether the country should work toward additional integration?   Getting even the major economic powers to agree on a tax system that would collect and distribute revenue among countries would be very tough.

He makes the claim that the confiscatory rates in the US tax system improved transparency in the US.  But the history does not support his claim.   As the 1920s frenzy in stocks began to grow, several leading academics and professionals on Wall Street began to argue for more clarity in business accounting standards.  Benjamin Graham started his book Security Analysis in the late 20s as a result of his teaching at Columbia.   He published the first edition of his massive and still useful work in 1934, well before the implementation of although the first high rates were introduced under Hoover in 1931. (63%)  The rates above 63% (which is pretty confiscatory) were added later in FDRs term.

Part of his discussion focuses on debt reduction and in exploring in a rudimentary way what the ideal level of debt for a country should be.   What he does not seem to care about is why every mature democracy has significant problems with national debt.   As the literature in Public Choice theory suggests log-rolling on spending is a huge problem.   Everybody gets something like a “bridge to nowhere” and suddenly you have $20 trillion in debt.

Some final comments - In the last section Professor Piketty makes two pitches - one which I agree with and one which I do not.   The professor clearly thinks that we underinvest in the public sector, even though in the countries on which he focuses the percentage of GDP going to government is between 35 and 55%.  He even makes the odd statement that  “Private wealth rests on public poverty.”  Is the question underinvestment or is it faulty allocation?  

At the very end of the discussion he makes an impassioned argument that Economics is not science and he prefers (as I do) to use the term political economy.   He suggests that part of what economists must do is lessen their reliance on numbers and formulas (although he thinks better data helps us understand what is going on in a particular area) and do a bit more thinking about what the proper mix of government and the private sector should be.   In my opinion his argument here is right on target.  Where we surely differ is what the appropriate division should be.

Wednesday, February 3, 2016

The Election Guide gets even simpler

This election CAN get more bizarre even if it is now a bit simpler.  In the post on the election guide I mentioned that two candidates had dropped - making both sides a little easier to decipher.   Today Ron Paul got added to the list.   Paul is up for re-election in Kentucky and decided to concentrate on that race.   Unlike his colleague Ted Cruz, Senator Paul seems to be a constructive voice in the senate.

Then there is the story of Donald Trump (devout religious fellow that he is) who tried to put money into the communion basket for the church he was attending on Sunday.

Then there is the story of Ted Cruz congratulating Dr. Ben Carson on leaving the race.  Only problem is that Dr. Carson is still in the race and has not suspended his campaign.    When Abe Vigoda died last week, there were lots of stories about the prior stories of his death.   Twain was also caught in false news stories about his demise.   In this election season, the inevitability of the field narrowing further is absolute.  Let's see what happens in the next few weeks.

Two other comments are worth adding.   First, I did not like the process for debates that the GOP used this time.  The undercard and big table options seemed contrived allowing some candidates more spotlight than they deserved.   A better idea would have been to do a winnowing process where four candidates got to debate each other by lottery.   As the process evolved winners of the first round would then get to go on to a second and third round.   From my perspective it would have been fairer and perhaps substantive candidates would have emerged sooner.

Second, despite what the pundits said, I believe that Trump's chickening out of the last debate before the caucuses hurt him.  The exit polling seems to have confirmed that even if Mr. Trump tries to deny that.  It should have hurt him.

Tuesday, February 2, 2016

The 2016 Election in Short Form

I began my career working in Washington for one President, one Senator, one Member of Congress and a couple of others.  I then worked in the California Legislature for a year before beginning a long career with an Association of Independent Colleges.   So politics has always been of interest to me.

This election cycle has been frustrating.   I think the country faces enormous challenges - in part because of the last two presidents (especially the current one) and in part because a connected world is more complex.  Yet I hear a lot of talk about no good choices and no one with any serious plans.  I think there are some choices who are worth looking at.   And, even though I disagree with many of them, I think there are some very clear differences in what each of the candidates proposes to do, if elected.

Let me make one comment before I explain my classification system.  There is one candidate who I do not believe has made a serious attempt to explain what he would do if elected.  That is Donald Trump.  Brett Stephens of the WSJ described him thusly - "A bigoted braggart with a laughable grasp of public policy and leering manners you would expect from a bar room drunk."   He is a demagogue and a buffoon at the same time.   I hope the American people will not be fooled.  One radio host called him the Kim Kardashian of politics.  I think that is about right.  The NY Daily News had a wonderful front page this morning.   Don't be fooled - second place will not knock him out.  If NH goes poorly, he may begin to stumble.

After the caucuses a couple of candidates hung it up - O'Malley in the dems, and Huckabee in the GOP.  My expectation is that Santorum and Paul and Fiorina will be out in a week or two.  They should be.   With fewer choices voters can begin to look at candidates seriously.  If NH is closely bunched like IOWA some other candidates might be forced out.

A friend recently expressed frustration about the debate process thus far (I've watched every one - often with a good beer in hand).  And I came up with a classification system that is handy for me to think about all of the candidates we have at this point.

Here are the classifications -

#1 - AYOOYFM (Are you out of your f*****g mind?) - I understand why some of these people think they should run but cannot understand why any person would seriously consider them.   Donald Trump has an over-sized ego with an ability to say whatever comes into his head AND never bother to consider whether what comes out has any basis in fact.   Hillary Clinton is an uninspired campaigner who will say anything to get elected, has a history of pathological deceit and a contempt for many Americans.  Bernie Sanders is simply nuts.  His economic "thinking" would continue us in mediocre growth and fewer opportunities for all Americans while at the same time bankrupting the country further.  I understand why each of them wants to be President but cannot understand why anyone would, after any serious consideration, give them the keys to the White House.

#2  IFIMHTCTs (If forced I might have to consider them) - I think Ted Cruz has not been a good senator.  Bob Dole once described Newt Gingrich in the following terms 'Why do so many people take an instant dislike to Gingrich?  It just saves time."  I think Cruz never learned the lessons of working together.  That being said, there are a lot of things wrong with Washington but that does not mean that the people we elect should not make a good faith effort to find common ground with their opponents.   Christie seems like a pretty smart guy but I've read his proposals on taxes and Social Security and I think they are wrong.   But if confronted with Clinton or Sanders - for the sake of nothing else than the potential supreme court nominations in the next 8 years - I would vote for them.

#3 - JWDYTQYTBPs (Just what do you think qualifies you to be President) - In this category I have two Ben Carson (who seems like a very nice guy and has a distinguished career as a surgeon - but seems to have no clue about the job he is applying for) and Carly Fiorina - who seems to be great at rhetoric but her corporate record was not a recommending quality.   At the same time her one other run for office showed her as an ineffective campaigner against the weaker of the the California senators.

#4 - WAYEBAIIPARs - These two are the Harold Stassen wannabes.  Rick Santorum and Mike Huckabee ran a couple of times.  The voters, for a lot of good reasons, did not choose them.   Their time has passed.

#5 MLLMRAIDLMRs (Most looks like Mr. Rogers and I did not like Mr. Rogers) - O'Malley was a credible governor of a small state.  But he is not ready for prime time.  Every time I hear him I think of "It's a beautiful day in the neighborhood" ringing through my mind.   And as I said, I did not like Mr. Rogers (who in the world could not like him?  ME)

#6 TMBADPs (They might be a decent president) -There are three candidates who might actually be a good President.  I want to learn more.   John Kasich was a bang up member of the House - as budget chair he helped to negotiate the budget deal at the end of the second Clinton term which allowed a balanced budget (at least on paper not counting the Social Security transfers). He was also a force on welfare reform.   He has been a good governor of Ohio.   Jeb Bush had a distinguished record in Florida and seems to be the candidate who has put out the most detailed plans on what he would do if elected.  But he has the legacy of his brother - which weighs heavily on his chances - that is unfair but a reality.   Marco Rubio has some great rhetoric (although at times he seems a bit programmed).   He also seems to have a great sense of humor- he did a recent ad making fun of his misplaced football pass to a young kid.   And yet he does not have any executive experience.

Monday, February 1, 2016

Opening a new dialogue

More than a decade ago I began a Blog which rambled through politics and economics and Mexico and Baseball - four of my interests.   But in 2014, I got tired of writing about a lot of the same things. So I stopped.   This new Blog will cover many of the same topics and and maybe some new topics.

The old blog - which is still up with a total of more than 2500 posts - violated a lot of the common rules for bloggers.   A lot of the posts were long form - trying to get into an issue with a bit more depth.  If you want Tweets - go somewhere else.   

The name of the Blog comes from my consulting practice - which is called Buffalo Consulting.  My logo is an image of a Buffalo Nickel and my tag line is "When you need more than a Nickel's worth of good advice" - I spent a career working with colleges and universities in the US (mostly in California) and Mexico so this firm deals with linking colleges and universities with other colleges and universities or with others who want to find them (for example, cities).

Rules of the road are simple.  I also spent a lot of time teaching for universities (again in the US and Mexico) so I do not mind people who disagree with my point of view.   But I will demand that our exchanges be civil (unfortunately a lost standard in much of what we see in public discussions).

My first two posts have been prepared over the last couple of days.  The first on the state of the 2016 election and the second a very long review of Thomas Piketty's book Capital in the 21st Century.   Then I am not sure where this will lead me.  But let me invite you to join in.