Economics

CEOs are rigging markets to increase their pay and then sponsor free market mythology to justify their abuse

Published by Anonymous (not verified) on Wed, 15/08/2018 - 5:24pm in

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Economics

It should come as no surprise to anyone that UK chief ex3cutive pay has risen by 11% in the last year. This, of course, vastly outstrips the rate of increase for almost anyone else. It is also wholly unrelated to any real-world performance, except growth in share prices.

But let’s be clear. Many of these chief executives help rig share prices through their share buyback schemes that are intended to keep shares in short supply, and so prices high. This makes the CEOs look good. And it increases the value of the CEO’s share options. They have every incentive to play this game.

And despite protests, there is no reason for them not to do so. Shareholders still cannot constrain pay. There is no maximum pay law. Whatever is paid to a CEO is considered a legitimate tax-deductible expense in the accounts of the company that pays it. And the pension industry - stacked full, as it is, by sycophants who want to ‘make it in the City’ - by and large never says boo to a goose.

So what is happening? Rent extraction is happening. These CEOs do not earn their reward. Nothing says they are worth the sums paid. They are paid this much because they can take this much. And this is what economuc rent is. It is the amount paid for a resource in excess of that needed to secure its use in a process.

And why is it paid? Because power structures are created to permit its payment.

Who bears the cost? Society at large. Other workers, here.

Rent is a redistribution of resources from those without power to those with it.

From worker to executive.

From shareholder to executive.

And more broadly, from tenant to landlord.

Or from credit card borrower to bank.

Or developing country to tax haven.

Power has been created to extract these rents. The CEO pay fiasco is just an example.

And never once let it be said these people are entrepreneurs. Entrepreneurs work in markets. These CEOS rig markets until they cease to exist. And then pay for the propaganda of ‘free market’ mythology.

And yes, that makes me angry.

Why the heck not?

Why Left Economics is Marginalized

Published by Anonymous (not verified) on Wed, 15/08/2018 - 7:55am in

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Economics, policy

After the 2009 recession, Nobel Prize winner Paul Krugman wrote a New York Times article entitled “How did economists get it so wrong?” wondering why economics has such a blind spot for failure and crisis. Krugman correctly pointed out that “the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth.” However, by lumping the whole economics profession into one group, Krugman perpetuates the fallacy that economics is one uniform bloc and that some economists whose work is largely ignored had indeed predicted the financial crisis. These economists were largely dismissed for not falling into what Krugman calls the “economics profession.”

So let’s acknowledge there are many types of economics, and seek to understand and apply them, before there’s another crisis.

 

Left economics understands power

Let’s take labor as an example. Many leftist economic thinkers view production as a social relation. The ability to gain employment is an outcome of societal structures like racism and sexism, and the distribution of earnings from production is inherently a question of power, not merely the product of a benign and objective “market” process. Labor markets are deeply intertwined with broader institutions (like the prison system), social norms (such as the gendered distribution of domestic care) and other systems (such as racist ideology) that affect employment and compensation. There is increasing evidence that the left’s view of labor is closer to reality, with research showing that many labor markets have monopsonistic qualities, which in simple terms means employees have difficulty leaving their jobs due to geography, non-compete agreements and other factors.

In contrast, mainstream economics positions labor as an input in the production process, which can be quantified and optimized, eg. maximized for productivity or minimized for cost. Wages, in widely taught models, are equal to the value of a worker’s labor. These unrealistic assumptions don’t reflect what we actually observe in the world, and this theoretical schism has important political and policy implications. For some, a job and a good wage are rights, for others, businesses should do what’s best for profits and investors. Combative policy debates like the need for stronger unions vs. anti-union right-to-work laws are rooted in this divide.

 

The role of government

The left believes the government has a role to play in the economy beyond simply correcting “market failures.” Prominent leftist economists like Stephanie Kelton and Mariana Mazzucato, argue for a government role in economic equity and shared prosperity through policies like guaranteed public employment and investment in innovation. The government shouldn’t merely mitigate product market failures but should use its power to end poverty.

On the other hand, mainstream economics teaches that government crowds out private investment (research shows this isn’t true), raising the wage would reduce employment (wrong) and that putting money in the hands of capital leads to more economic growth (also no). As we have seen post-Trump-cuts, tax cuts lead to the further enrichment of the already deeply unequal, equilibrium.

 

Limitations to left economics: public awareness and lack of resources

History and historically entrenched power determine both final outcomes but also the range of outcomes that are deemed acceptable. Structural inequalities have been ushered in by policies ranging from predatory international development (“free trade”) to domestic financial deregulation, meanwhile poverty caused by these policies is blamed on the poor.

Policy is masked by theory or beliefs (eg. about free trade), but the theory seems to be created to support opportunistic outcomes for those who hold power to decide them. The purely rational agent-based theories that undergird deregulation have been strongly advocated for by particular (mostly conservative) groups such as the Koch Network which have spent loads of money to have specific theoretical foundations taught in schools, preached in churches and legitimized by think tanks.

There have been others who question the centrality of the rational agent, the holy grail of the free market, believe in public rather than corporate welfare, and the need for government to not only regulate but to make markets and provide opportunity. This “alternative” history exists but is less present – it’s alternative-ness defined by sheer public awareness, lack of which, perhaps, stems from a lack of capital.

Financial capital is an important factor in what becomes mainstream. I went through a whole undergraduate economics program at a top university without hearing the words “union” or “redistribution,” which now feels ludicrous. Then I went to The New School for Social Research for graduate school, which has been called the University in Exile, for exiled scholars of critical theory and classical economics. In the New School economics department, we study Marxist economics, Keynesian and post-Keynesian economics, Bayesian statistics, ecological and feminist economics, among others topics. There are only a few other economics programs in the US that teach that there are different schools of thought in economics. But after finishing at the New School and thinking about doing a PhD there, I understood this problem on a personal level.

There’s barely any funding for PhDs and most have to pay their tuition, which is pretty unheard of for an economics doctorate. Why? Two reasons – 1. Because while those who treat economics like science go on to be bankers and consultants, those who study economics as a social science might not make the kind of money to fund an endowment. And 2. Perhaps because of this lack of future payout, The New School is just one of many institutions that doesn’t deem heterodox economics valuable enough to warrant the funding that goes to other programs, in this case, like Parsons.

Unfortunately, a combination of these factors leaves mainstream economics schools well funded by opportunistic benefactors, whether they’re alumni or a lobbying group, while heterodox programs struggle or fail to support their students and their research.

 

The horizon for economics of the left

Using elements of different schools of thought, and defining the left of the economics world, is difficult. Race, class, and power, elements that define the left, are sticky, ugly, and stressful, and don’t provide easily quantifiable building blocks like mainstream economics does. Without unifying building blocks, we’re prone to continuing to produce graduates from fancy schools who go into the world believing that economics is a hard science and that the world can be understood with existing models in which human behavior can be easily predicted.

Ultimately the mainstream and the left in economics are not so different from the mainstream and the left politically, and there is room for a stronger consensus on non-mainstream economics that would bolster the left politically. It’s worth exploring and strengthening these connections because at the heart of our economic and political divides is a fundamental difference in opinion regarding how society at large should be organized. And whether we continue to promote wealth creation within a capitalistic system, or a distributive system that holds justice as a pinnacle, will determine the extent to which we can achieve a healthy, civilized society.

Fortunately, the political left in many ways is upholding, if not the theory and empirics, the traditions and values of non-mainstream economics. Calls from the left to confront a half-century of neoliberal economic policy are more sustained and perhaps successful than other times in recent history, with some policies like the federal job guarantee making it to the mainstream. After 2008 the 99 percent, supported by mainstreamed research about inequality, began to organize.

There’s hope for change stemming from a new generation of economists, in particular, the thousands of young and aspiring economists researching and writing for groups like Rethinking Economics, the Young Scholars Initiative (YSI), Developing Economics, the Minskys (now Economic Questions), the Modern Money Network, and more. But ideas and policies are path dependent, and it will take a real progressive movement, supplemented by demands by students in schools, to bring left economics to the forefront.

By Amanda Novello.

 

A version of this post originally appeared on Data for Progress’ Econo-missed Q+A column, in response to a question about the marginalization of leftist voices in economics.

Amanda Novello (@NovelloAmanda) is a policy associate with the Bernard L. Schwartz Rediscovering Government Initiative at The Century Foundation. She was previously a researcher and Assistant Director at the Schwartz Center for Economic Policy Analysis at The New School for Social Research.

 

The post Why Left Economics is Marginalized appeared first on Economic Questions .

Labour’s fiscal rule is much worse than the headlines suggest

Published by Anonymous (not verified) on Tue, 14/08/2018 - 11:36pm in

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Economics

The response from commentators (Jo Michell, Jonathan Portes, retweeted by Simon Wren-Lewis) on Twitter to the ongoing debate on Labour's fiscal rule that I sparked has been to say that the likes of Bill Mitchell and I, who have responded to them, have not understood what the rule says. Jonathan Portes, for example, says this:So, let me avoid doubt and reproduce the rule in full as Labour has published it (and I have no clue who actually wrote this version):

The defence is that the headlines are wrong, although they are highlighted, and are what it is clearly intended people read and understand.

Instead, we are meant to note that:

  1. If the Bank of England is so kind the rule can be suspended. In other words, the Bank and not the government is left in charge of economic policy, even when they have no hope of using monetary policy;
  2. The five years rule does not mean five years: it always means five years hence. In other words, this is a policy for 'never, never': Labour never has to balance the books because it always says it will do so in five years time. This reminds me of St Augustine's prayer that God make him chaste, but not yet. It's pure rhetorical nonsense, in other words if read in this way (as we are apparently meant to do). I am not a fan of disingenuous claims;
  3. And the reason why we must do this is that 'the credit card will be maxed out' if Labour does not do so. Or to put it kindly, the household analogy for macro is adopted in its entirety and the fallacy of composition that it embraces is accepted, lock, stock and barrel;
  4. Despite this debt will always be falling as a part of GDP, but how is not explained;
  5. And borrowing for investment is outside this book balancing exercise, except it clearly is not because total debt has to fall in proportion to GDP, meaning that in all likelihood a current surplus has to be run: after all, how else might this be guaranteed?

I accept the criticism that I, at least, did not read the full horror of the rule into what I wrote. That's because I could not believe that the accredited authors really meant it to be as bad as it is.

But apparently they do.

So I point out that it is much worse when read literally and in full than if just the headlines are noted as a summary of the whole.

On tour

Published by Anonymous (not verified) on Tue, 14/08/2018 - 8:35pm in

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Economics

Touring again. Regular blogging to be resumed during the weekend.

The UK tax system is a mess but it could be sorted

Published by Anonymous (not verified) on Tue, 14/08/2018 - 5:09pm in

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Economics

Paul Johnson of the Institute for Fiscal Studies has written an article for the FT this morning that says the UK tax system is a mess. For once I have to agree he’s right. But there is a problem with this analysis. It lacks ambition.

He suggests that the tax system is a mess because it does not tax capital, and housing wealth in particular, sufficiently, And, he argues, pensions and ISAs now create perverse tax incentives that are deeply unjust intergenerationally.

It is hard to dispute this, but Johnson makes no real prescription for change. Nor does he look beyond this very particular issue. So let me go where he has not gone and say what needs to be done to make the UK tax system work.

First, it needs to be funded. HMRC needs to have the resources to collect tax from all who owe it. A level playing field where everyone who owes tax pays it is the prerequisite of social justice, fair trading and economic success. As Turkey is showing, the latter is especially important. No country can have macroeconomic success without collecting the tax due to it, and the UK can’t be bothered to do that right now. This is especially disastrous for honest small business who are undermined by this policy. And do not doubt it is a policy. Investing in fair and appropriate tax collection is the most pro-business tax policy a government can run.

Second, we need more progressive income tax rates. This can be created, in part, by removing the absurd lower rates on higher incomes in the national insurance system, because NIC is just another income tax,

Third, the fact that NIC is only a tax on labour has to be corrected.  When capital is undertaxed in every way this is absurd. So, anyone with investment income of more than £5,000 a year should be subject to an additional tax rate of 15% on the excess to level the playing field. Pensioners should have a higher allowance, but not be exempt above UK average earnings. Botched up measures, such as the dividend tax, should go as a result.

Fourth, council tax must be reformed. A revaluation would be a start. So would more higher rate bands help. Lower rates on lesser valued housing must be introduced. Land value tax should follow. Those mainly living on benefits should not pay.

Capital gains should be taxed as income. A small annual allowance should be used to avoid admin complexity, but that is it.

Capital gains should apply to houses on last disposal without reinvestment. This will usually be on the second death in a relationship that has owned property. Rules to cover earlier disposal will prevent abuse.

Inheritance tax needs radical reform. Many reliefs need to go. Most are abused. Bands should be progressive.

Many income tax reliefs also need to go. Pension and charitable tax giving reliefs need to be at basic rate only. The idea that we subsidise savings has to be consigned to history. Savings serve little macroeconomic purpose and providing tax breaks for the wealthy is socially unjust.

Corporation tax needs to be reformed. Small companies should have their rate aligned with the basic income tax rate. Dividends should be subject to an investment income tax, as noted above.

Large companies should pay a corporation tax premium over small business as they enjoy massive market advantages that they need to compensate for.

Large business should be taxed on an apportioned part of their worldwide profits to stop the artificial game playing with tax haven arrangements.

Payments by businesses to tax havens where economic justification cannot be proven by them should not be subject to tax relief in the UK until an apportioned tax base is introduced. The burden of proof must be on the companies.

In tax avoidance, a general anti-avoidance provision should be introduced and the burden of proof should be on the taxpayer to show that their arrangements had a commercial and not a tax avoidance motive when what appear to be artificial structures are used.

VAT exmeptions on activities that appear to most attract spending by those with wealth, such as private education and healthcare, should be ended.

The banking industry needs to be subject to a financial transaction tax on all flows to compensate for the lack of VAT paid by it. This would be progressive, and at very low rates for most UK households, but should rise in rate as flows increased. This tax should be charged to businesses and replace business rates. It would as a result charge large monopolies the most. It would level the playing field with online companies. Those companies and individuals seeking to move accounts out of the UK would be assessed to an additional UK income tax instead at an overall higher rate.

Additional revenues raised should be used to lower tax rates, most especially for those with lower income. This is not a plan to increase tax rates: it is a plan for a better tax system. All should gain from it. This means that in a nutshell this is a plan for tax reform that could really make the UK tax system, and its economy as well as its social structures work better.

It’s time tne IFS was saying things like this. Most certainly it could be elaborated. And tweaked. but the principles on which change should be based are clear. It's time for them to be heard across the spectrum.

Where does the money come from?

Published by Anonymous (not verified) on Mon, 13/08/2018 - 7:10pm in

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Economics

Stephanie Kelton in action.

Worth watching

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What Is Money?

What Is Money?Ryan Grim interviews Stephanie Kelton, economic adviser for Bernie Sanders 2016, about MMT by popular demand from our audience. There will be time for questions & answers. MMT = Modern Monetary Theory

Gepostet von TYT Investigates am Mittwoch, 7. Februar 2018

Turkey will be happy to make it to Christmas

Published by Anonymous (not verified) on Mon, 13/08/2018 - 5:22pm in

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Economics

Turkey  is in trouble.

It’s banks cannot pay their foreign currency debts.

People have borrowed in cheap foreign currencies and now cannot afford to repay.

Inflation is out of control.

The economy is overheated.

Erdogan is President and not showing willing to appreciate the problem.

But very few have noted what a core element in the problem is. That is Turkey’s shadow  economy. This has averaged 31% over the last two decades (See page 54 here).

Every rule of sound management of a currency has been broken. It has not been used to collect tax. Parallel currencies of consequent greater value have been allowed to circulate in its place. And the government has lost control of its economy as a result.

People think tax gaps are just measures of tax authority efficiency. They are that. But they are very much more. They show whether a government is in charge of its economy and currency. And they are, then, able predictors of crises.

Tax gap measurement is, I think, a key macroeconomuc tool. We should get used to it.

The system of capitalism we have now cannot deliver

Published by Anonymous (not verified) on Mon, 13/08/2018 - 5:01pm in

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Economics

According to the FT, the overwhelming common characteristic of the books that are being considered for its Business Book of the Year award is their concern for the future of capitalism, coupled with doubts as to the consequences of the prevailing modus operandi of the world’s economies.

I will be quite honest in saying I have read few of the books on the list: there is only limited time in life. As a result I am not passing comment on them, as such.

But that this is the mood is hardly surprising. It’s not just that we are ten years after the biggest crash in living memory. Nor is it the fact that seemingly many politicians and economists’ response is to hanker for times past.  It’s not even the inability to control the continuing excesses of capitalism that really gets people. Deep down the real issue is that people know the form of capitalism we have cannot deliver now.

I am not saying that there is no role for markets. That is not true, in my opinion. They continue to be important.

What I am saying is that people know now there is no guiding hand that leads to well being for all. It’s just not present. Whatever the blackboard theory says, the unequal  predistribution of wealth, the persistence of monopoly, the power of banks and landlords to extract rent, the inability of the tax system to really redistribute as things stand, and the ever-present failure of the veneer of regulation undertaken by cronies, means the system does not work.

The greatest need in the twenty first century is for a system of economic management that embraces markets, but which always puts the needs of people, and the imperative of meeting them, first whilst recognising the reality of climate change.

Modern capitalism does neither of those things. The doom-mongers are right to say so. But too few are thinking about what comes next. And that’s largely because they cannot get their heads round the state being the agent for change.

Easterlin’s paradox or why economic growth does not make us happier

Published by Anonymous (not verified) on Mon, 13/08/2018 - 12:02am in

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Economics

In Easterlin’s (1974) seminal paper, he finds that within any one country, in cross sectional studies, there was a strong correlation between income and happiness. One would easily conclude that money can buy happiness. However, looking at a cross section of countries, one comes to a different conclusion … For 10 of the 14 countries […]

So much for value-free economics

Published by Anonymous (not verified) on Sun, 12/08/2018 - 11:28pm in

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Economics

Back in 1992, New Jersey raised the minimum wage by 18 per cent while its neighbour state, Pennsylvania, left its minimum wage unchanged. Unemployment in New Jersey should — according to mainstream economics textbooks — have increased relative to Pennsylvania. However, when economists David Card and Alan Krueger gathered information on fast food restaurants in […]

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