Relevant and even prescient commentary on news, politics and the economy.

In Defense of Corporate Taxes

This may well have been the subject of a post by PGL. I apologize if I’m covering the same ground… my memory isn’t always the best.

Every so often, someone brings up the idea of eliminating corporate taxes. I haven’t heard it in a few months – no doubt we’re due for it. There are all kinds of justifications for it, but the big one seems to be: the individuals who own the corporation already pay taxes on it, so why should they be taxed twice – once when the corporation makes the profit, and once when it passes on the profits to the individual.

Except in special cases in which a corporation has only a handful of owners (and the accountants can correct me if I’m wrong), in which case the corporation is just a pass-through entity and only the owners pay taxes anyway, the corporation is a distinct legal entity. If you don’t believe me, see what happens if you try to withdraw cash from the bank account of a company in which you own shares of stock.

The fact that the corporation is a separate legal entity means that it has rights – including the right to keep your hands out of its bank account. Those rights are guaranteed by… the government. This is a service provided by… the government. It is separate from the services provided to the rest of us, guaranteeing our rights, for which the rest of us pay taxes.

People who argue that corporations should be exempt from taxes never seem to feel that corporations should be exempt from legal rights and guarantees which cost money to provide. Put another way, whether they realize it or not, they are arguing that corporations should be allowed to free ride upon the rest of us.

There an additional big problem that I can see with eliminating taxes on corporations…. how long would it take for the highest paid employees of any organization – namely those at the top, to cease being employees and become sub-contractors? Eliminating taxes on corporations would quickly make sure that Leona Helmsley’s world, in which only the little people pay taxes, would quickly come to pass. But I imagine for many that’s the point.

I’d like to wish a Happy New Year to my fellow Angry Bears, but I am especially grateful to the readers of this site for giving extending to us the privilege of reading what we write and for all the comments. I don’t use the word privilege lightly. Thank you, and may the next year be a successful one for you.

Update… I changed the first sentence in the last paragraph – as previously written, it was a bit ambiguous.

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The McCain Doctrine

George Stephanopoulos interviewed John Edwards on ABC This Week and they got around to Iraq where Edwards has a difference of opinion with John McCain:

Edwards: Yes, and, hopefully, the next president will understand that what we’ve been doing is not working. And I actually, myself, believe that this idea of surging troops, escalating the war, what Sen. McCain has been talking about, what I would call now the McCain doctrine, it’s—
Stephanopoulos: McCain doctrine.
Edwards: McCain doctrine. He’s been the most prominent spokesperson for this for some time.
Stephanopoulos: The general election is starting early.
Edwards: I’m just telling you it’s his thing, and I know John McCain very well; he and I are friends, but I think he’s dead wrong about this.

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Federal Aid to Africa

Michael A. Fletcher writes:

The president has tripled direct humanitarian and development aid to the world’s most impoverished continent since taking office and recently vowed to double that increased amount by 2010 – to nearly $9 billion. The moves have surprised – and pleased – longtime supporters of assistance for Africa, who note that because Bush has received little support from African American voters, he has little obvious political incentive for his interest. “I think the Bush administration deserves pretty high marks in terms of increasing aid to Africa,” said Steve Radelet, a senior fellow at the Center for Global Development. Bush has increased direct development and humanitarian aid to Africa to more than $4 billion a year from $1.4 billion in 2001, according to the Paris-based Organization for Economic Cooperation and Development.

In real terms, aid to Africa increased by 150% from 2001 to 2006. While this may sound like a large increase, Dean Baker asks us to be this in context:

The current aid level of about $4 billion comes to about $5 per African. That’s helpful, but not exactly a windfall.

Earlier Brad DeLong noted:

What Fletcher never finds space to say is that Bush has raised U.S. aid to Africa per African from $2 per year to $6 per year, and has raised aid to Africa as a share of the Federal budget from 0.08% to 0.17% of federal government spending.

As a percent of GDP, we were spending 0.014% on aid to Africa in 2001 and this year aid to Africa will be 0.03% of GDP. For every $100 in GDP, we send three cents to Africa.

As Dean notes, much of the public thinks that foreign aid comprises a large portion of their tax bill – so putting these numbers in context would be helpful.

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Minimum Wage Increase as a Second Best Policy Response to Poverty

Greg Mankiw emails me to remind me he never said precisely the following:

There was the Greg Mankiw claim that no real economist could support a higher minimum wage

He is correct and my exercise in hyperbole was uncalled for. As I apologize, let me suggest why some of us on the left get frustrated with conservatives reminding us of what we already know – that deviations from a perfectly competitive market involve efficiency costs. When Greg Mankiw said:

Here is a question that I would ask any politician: If you could set your ideal policy to help the poor, wouldn’t you prefer to expand the EITC and abolish the minimum wage? Any politician that fails to answer “yes” is either misinformed or engaging in demagoguery.

Max Sawicky reminded him that 650 economists including 5 Nobel prize winners and 6 past presidents of the American Economic Association, believe that increasing federal and state minimum wages, with annual cost-of-living adjustments for inflation, “can significantly improve the lives of low-income workers and their families, without the adverse effects that critics have claimed.”

Mankiw suggests that these economists may be wrong:

I believe that relatively few economists would include the minimum wage as part of their first-best package of policies.

If one assumes that labor markets are perfectly competitive, then a wage floor has efficiency costs. We all know that. None of those 650 economists ever said otherwise and none said that raising the minimum wage is the only means for reducing poverty. I think most economists recognize that a wage floor is part of a second best strategy. There are other approaches that might be more effective in reducing poverty but these strategies are not exactly being endorsed by Dr. Mankiw’s former boss who does hold the power to veto anything Congress proposes.

Then again, a wage floor might also improve efficiency if the labor market has monopsonistic features.

Look for me to misrepresent what someone else said is inexcusable – especially given the fact that I often resent when those on the right misrepresent what we liberals have said. For that transgression, I apologize.

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Victor Davis "It’s Bad When Other People Do It" Hanson on Saddam’s Funeral

One of the cool things about the NRO is that you find, in one place, people from the entire neo-con spectrum, from those that are more thoughtful to the outright crazies. (Sometimes, you have folks who are pretty rational about most things, but have one or another issue about which they’re clearly unhinged, but we can have a discussion about the mathematician who waxes eloquent about little girls some other day.) Now, one of the voices that I think falls under the outright crazy crowd, but that seems to be somewhat respected in the NRO world is Victor Davis Hanson – who has been cheerleading the whole mess in Iraq for quite a while. Its my impression he’s also been pumping the “US should invade Syria and Iran while we’re at it” meme.) This morning, Hanson shares this:

“One of the most depressing sights of the entire Saddam postmortem were the clips shown ad nauseam of all the dignitaries, diplomats, and obsequious reporters who in years past trekked to Baghdad to flatter or to pay homage to this creepy mass murderer. Watching a younger Kofi Annan, Lindberg like, pump Saddam’s hand, smiling and offering blandishments was sickening. Surely the world can learn from this sordid spectacle, and not repeat the same mistake with Ahmadinejad and Assad. Their demise will come soon enough, and only the clips and outtakes of the appeasers will remain.”

For some reason, he doesn’t mention this. I wonder why.

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Motivations, Constraints, and God

I don’t want to get in the habit of writing about deep religious questions – a lot of people who know a lot more than I have been doing it for thousands of years. Still, last night my girlfriend and I watched a Brazilian movie on DVD (House of Sand – its worth watching), and it got me to thinking about a well-known Brazilian book, which then got me thinking about a loose end in my Christmas post. So please forgive this additional attempt to apply economic tools to the most non-economic of questions. I’d like to repeat what I said at the start of the previous post… I’m not a Christian myself, but I am trying to handle this topic as respectfully as I can; please forgive any failures on my part.

(Corny joke aside…
Q1. What’s the classic Spanish book about the gay farm animal?
A1. Donkey joto.
Q2. What’s the sequel?
A2. Donkey puto.)

Perhaps the greatest book ever to come out of Brazil is “Os Sertoes” by Euclides da Cunha. (I have a translation somewhere called “Rebellion in the Backlands” that’s OK.) Its been a decade since I read the book, but I remember it reasonably well. Frankly, the writing (even in, or perhaps especially in Portuguese) is overblown and pompous, but the story is magnificent – in my opinion one of the most amazing stories anyone has ever told. If you can get over the writing, the book is worth a read. (I note… the story has been retold and fictionalized several times by modern authors – including, as The War at the End of the World by Mario Vargas Llosa.)

The book is non-fiction; da Cunha was a newspaperman, and he was there for many of the events described in the book. Basically, the story centers around a character who styled himself Anthony the Counselor. Toward the end of the 19th century, the Counselor wandered around the boondocks in Northeastern Brazil. (Os Sertoes does a magnificent job of describing the region, and the abject poverty of its residents.) His theology was everchanging and never entirely clear, but apparently he was more or less convinced he was a John the Baptist type figure, presaging the arrival of Jesus, who was going to reinstate the Brazilian monarchy (complete with a long dead king) and then end the world.

Anyway, the whole bit about reinstating the monarchy was a problem for the new Republic, as were a few other things he preached, and a local worthy decided to have the Counselor arrested, whereupon his followers fell upon the officers and butchered them. More significant attempts to arrest him followed, with similar results. Eventually, this came to the attention of the state governor, and then of the Federal Government.

Meanwhile, the Counselor had founded a town called Canudos, out in the middle of nowhere. The town grew quickly – each failed attempt to seize the Counselor being more evidence of his holiness. I note that along the way, a number of miracles were attributed to the Counselor, with the requisite witnesses and so forth.

Eventually, the central government dispatched a heavily equipped military expedition, led by Brazil’s greatest war hero. Brazil’s greatest war hero and his heavily equipped men were set upon by tens of thousands of peasants – men, women and children – and butchered. Bear in mind – the Counselor’s people were poor, illiterate peasants. Most, if they were armed at all, were armed with old rifles or machetes.

In any case, the destruction of this military expedition led to another, much larger (6,000 men), much more well equipped expedition. (Euclides da Cunha accompanied this expedition as a military correspondent.) This expedition wiped out the Counselor, his followers, and their town.

Here’s what makes the story particularly interesting… for the most part, none of the Counselor’s followers surrounded. In the last pages of the book, da Cunha describes how, when the sun rose on the last day, there were four followers of the Counselor still alive – a boy, two men of what would normally be considered of fighting age, and an old man. They stood up against a modern Army and fought and died, literally to the last man, woman, and child.

The only parallel of which I’m aware is Masada. But, if anything, Canudos is more impressive. The number of people who fought to the death was much greater at Canudos, and the opportunities to flee or surrender were also much greater. Now, clearly, Canudos, people had Faith. You don’t charge a cannon with your bare fists, as many Canudos residents did, unless you truly believe. I think we can all agree, those who believe in a religion and those who don’t, that the residents of Canudos were wrong. The Counselor, in whom they placed their Faith, was not a holy figure, he was not John the Baptist, and he did not presage the second coming of Jesus. And I think we can agree that the miracles that many people saw the Counselor perform a number of extraordinary miracles, these did not really happen.

Human beings are fallible. Large crowds are able to remember seeing miracles that did not actually happen. This raises a point… consider the perspective of a Deity as described by each of the major Western Religions. The motivation of such a Deity appear to include, if I interpret these Holy Books correctly, to be worshipped. (I honestly can’t see why that would be, but I am willing to grant that there is a Deity, much about that Deity would be beyond my ken.) Limiting the number of people who worship false gods also seems to be a motivation. The constraints upon such a Deity, of course, are nil, though because of Free Will, the Deity wants to give everyone the opportunity to accept Faith, or turn it down.

As a result, somehow the Deity needs to differentiate the True Faith (i.e., information about Itself) from false beliefs. If the Deity does not do so, It is in effect encouraging people to develop false beliefs. Now, how can it do so? Creating miracles doesn’t seem to work. Most false faiths have their miracles. There are new faiths developing all the time, each with new miracles (and witnesses to those miracles).

So what is left? Well… telling the future. Not in a Revelation kind of way… but rather, clearly and unambiguously stating things that are unknowable to any but a Deity. Obvious examples would be “There will be an earthquake off the coast of Japan on X date and Y time” or “The temperature at the center of Kansas City, MO, on X date and Y time will be Z.”

Now, I realize that this in effect forces God to behave as Fortune Teller, but if any of the Holy Books are to be believed, the evidence of God is not any different than similar but false evidence given on behalf of false gods and testified to by many, which in effect makes it nearly impossible to differentiate the True Faith from a false one. This, of course, explains the proliferation of false faiths. For example – let us say that Christianity as practiced in the US is the True Faith. Even assuming that this is so, the miracles that followers of Jesus claim he performed are no more impressive and have no more witnesses nor more credible witnesses than the miracles that followers of other holy figures have performed.

To a non-Christian such as myself, this doesn’t seem to match the combination of motivations and constraints attributed to God by Christians. I realize that as described, God is so much above and beyond all human knowledge. Still, it is hard to see how a God as believed by any of the major Western faiths today would be OK with a situation where so many people are fooled.

Anyway, any opinions? As with the previous post’s comments, please be respectful.

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Shotgun Marriages as the Cure for Poverty

As soon as John Edwards announced he’s running for President, Rich Lowry runs an attack op-ed over at the National Review. As usual, Mr. Lowry shoots and misses. Lowry is arguing that Edwards ducks some sort of marriage issue when Edwards notes the issue of poverty. Before you say that Lowry has lost his mind, let’s take a look at his argument:

Edwards’s anti-poverty proposals aren’t compelling because they fail to acknowledge a basic truth: It is impossible “to grow the middle class,” as he puts it, without spreading middle-class values. Edwards famously talks of “two Americas.” In one America, by and large, women find a suitable mate, marry him and then have a baby. In the other America, by and large, women have the baby first, creating nearly insurmountable difficulties for themselves on the path to the middle class. Edward tiptoes up to this point. In a major speech on poverty last year, he referred to the social ills besetting young mothers who “aren’t married.” But his prescription for this problem is to excoriate teen parenthood and say that people should be expected “to hold off having kids until they’re ready.” He refuses to offer as the obvious solution the M-word that rhymes with carriage. This is because the word “marriage” is something of a taboo in the Democratic party unless it is prefaced by “gay.” But marriage is the crux of the matter, not age or being “ready.” The recent surge of out-of-wedlock births is not taking place among teens, but young adults. Only roughly 14 percent of out-of-wedlock births are to women in high school. The Left wants to address out-of-wedlock births through distributing condoms in high school and collecting more child-support payments from absent fathers. But most of these births are deliberate, so birth control is irrelevant, and child support is no substitute for a father in the home.

Let me see if I understand what Lowry is saying. The problem is not that women are giving birth to kids too early. Oh no – that’s a good thing. The problem is that those they had sex with aren’t forced to marry the mother. So if we had shotgun marriages – poverty in America would be eliminated. Someone call Brad DeLong as I think his contest on Stupidest Man Alive is over. Congratulations to Rich Lowry for winning fist place.

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Thomas Sowell Endorses a Free Market for Baseball Players

It would seem that Thomas Sowell and I agree on one thing:

It is the same story when Derek Jeter gets paid millions of dollars to play shortstop for the Yankees. He gains by exchanging his time and skills for the money that George Steinbrenner pays him. But Steinbrenner also gains by paying Jeter to play shortstop – which helps bring in more money in gate receipts, the sale of television rights, and other sources of revenue. As for the rest of us, it is none of our business what Steinbrenner pays Jeter. It’s their deal. If we don’t understand it, there is no reason why our ignorance should influence what happens.

If Sowell is advocating a free market determining the salaries of baseball players, I agree as does Andrew Zimbalist. Might I suggest that Dr. Sowell actually read Baseball and Billions: A Probing Look Inside the Big Business of Our National Pastime as he seems to be unaware of all the means that the baseball owners have conspired to turn a competitive market into an monopsonistic cartel.

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The Government, the Private Sector, Chocolate Chip Cookies, and a Flag-Waving Member of the Local Chapter of Kiwanis – an Anecdote

I had a post earlier today about the government and the private sector, and the relative (in)efficiencies of each. Which got me to thinking about why the government can sometimes be so damn inflexible…

I think back to something I once saw on tv. My recollection is hazy, I think this was just after my comps in grad school and my brain wasn’t entirely there. I think it was on a C-Span, and I think it was the head of some cookie company testifying before Congress. Anyway, this guy showed up with a prop – it was this enormous book, which he said was the US Army manual on making cookies – presumably for contractors, if they wanted to sell cookies to the military.

And the guy said with a smirk (and I do remember that), something like this: “This is the US Army’s specs on a chocolate chip cookie. But my company sells more cookies every day than the Army eats. And we don’t have no stinking manual like that. We have a recipe. And we do just fine. See how inefficient the gubmint is! Bad gubmint! Bad gubmint!”

Now, even if my memory is faulty and I’ve hallucinated this whole thing, there are plenty of good captains of industry who will compare their own way of doing business to that of the government quite favorably. Some of them are, no doubt, right.

But some of them…. Well, I know a little about how the military contracts. I do a little bit of work for the military. And a bit for NASA and similar agencies. Sometimes, the work I do involves looking at some of the contracts they give out to try to spot early signs of non-performance and the like. And if the Army ended up with an 8 pound tome on making cookies, which may or may not be the case, I know exactly how it happened. And my bet is that the dude with the smirk, he not only knew how it happened, but was the cause of at least 4 of the 8 pounds…

Say there’s an Army base opening up in the middle of them states that Right Wingers like to call the real America. And say somewhere in the state there’s a company that makes cookies. And say its 1952, or 1962, or at most 1972. Now, sooner or later the Army base and the cookie maker will get together, because Army personnel, like the rest of us, enjoy a good cookie.

So the procurement folks at the Army try a few cookies, decide they’re satisfactory, and put in an order for A chocolate chip cookies at price B every day. And for a month, things are good. And then some of the Army personnel start to joke about how the cookies are getting smaller. A month later, there is a new, one page spec on cookies. It only indicates that all chocolate chip cookies must be C inches in diameter.

And for another month all is well. But then, the number of chocolate chips in each cookie starts to magically decrease. Another month goes by, and there’s a new Army spec, indicating not only that all chocolate chip cookies must be C inches in diameter, but that to qualify as “chocolate chip” cookies, they must have at least D chocolate chips.

Now, you might wonder – why doesn’t the Army just cancel the contract? Well, there are a few reasons. One is that the cookie maker is well connected, and canceling the contract is going to piss off one the local congressional delegation. Another is – who the heck else is going to make the cookies? How many bakers that can handle that kind of daily volume were there in the middle of Idaho or Alabama in 1952?

So the process continues… Eventually, the Army has a spec that indicates even situations that a rational person would say – “This makes no sense. Everyone knows that.” But the rational person wouldn’t realize that when the Army specifies that no sawdust is to be used in making flour, or that no more than X parts of per million of rat droppings will be in the cookie, that the Army has a damn good reason for having that in there, namely that some upstanding leader of the community who waves a flag and is a member of the local Kiwanis actually tried to pass such things off on American military personnel. And of course, that upstanding leader of the community who waves a flag and is a member of the local Kiwanis is happy to lecture one and all about how much more efficient the private sector is than the public sector – exhibit A being the Army’s specs on making a chocolate chip cookie.

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John Edwards on Fiscal Policy

Just as this Rubin-esque Bear decides that John Edwards should be our next President, Steve Benen discovers Edwards is closer to Krugman than to Rubin as to fiscal policy. Steve credits Ezra Klein for capturing what Edwards said in Iowa:

Q: No one seems to have talked about the deficit, and I see that as a twofold problem. Not only are we going into debt, but we’re mortgaging our future to the Chinese – last time I noticed, they weren’t really allies of ours, weren’t really our friends. I wonder what would your approach to the piling up of the deficit be?
Edwards: Well, I have to first off say what everybody here knows…when George Bush came into office we had surpluses as far as the eye could see, and now we have deficits as far as they eye can see. I think the honest answer to this question is that there’s a tension between our desire to eliminate the deficit and create a stronger economic foundation and eliminate some of the debt our children will inherit, there’s a tension between that deficit and our need to invest and make America stronger for the 21st century.
I think that, if we’re honest, you cannot it, it’s just common sense in the math, have universal health care, and invest in energy, and make a serious effort to eliminate poverty, to strengthen the middle class, and do some of the work that I think America needs to be leading on around the world, and at the same time, eliminate the deficit. Those things are incompatible. And anybody who claims – politicians who say ‘I’m going to give you a big tax cut, and give you health care, put more money into education, and oh by the way, we’re going to balance the budget in the process,’ it’s just make-believe, it isn’t the truth. So I think there’s gonna be hard judgments that have to be made – my commitment is to have universal health care, to do things that have to be done about this energy situation and global warming, because I think they’re enormous threats, not only to the people of America but to the future of the world, for America to lead on some of these big moral issues that face the world, and I think America has to do something about poverty, I just do. Those are higher priorities to me than the elimination of the deficit. I don’t want to make the deficit worse and I would like to reduce the deficit, but in the short-term, if we don’t take a step to deal with these other issues, it in my judgment, undermines the ability of America to remain strong in the 21st century.

Add to this an email I got from David Altig suggesting Edwards might be a trade protectionist too – and it does get a little dicey. But could we have deficit reduction and a commitment to our future? I harken back to something I quipped just after hearing one of President Clinton’s early comments on fiscal policy: “Read My Lips, Much Higher Taxes”. Hey – one can be for fiscal restraint and government investment too if one isn’t saddled with the obsession of telling people (dishonestly) that “we’re giving you your money back”. But if Edwards picks Lou Dobbs as his advisor on international economics, I’m out of here.

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