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Economics in Wonderland

from David Ruccio

“When I use a word,” Humpty Dumpty said in rather a scornful tone, “it means just what I choose it to mean—neither more nor less.”
“The question is,” said Alice, “whether you can make words mean so many different things.”
“The question is,” said Humpty Dumpty, “which is to be master—that’s all.”

Alice in Wonderland (pdf) is the key to understanding much of what is happening in the world today—especially the language of economics.

For example, we’re going to hear and read a great deal about tax reform in the days and weeks ahead. But, based on the proposals I’ve seen, nothing in the way of tax reform is being proposed.

The usual meaning of reform is that it involves changes for the better. Most of the so-called reforms that are being proposed by the Trump administration—including the vague speech by Donald Trump yesterday—are just cuts in the tax rates that will directly benefit wealthy individuals and large corporations.

fredgraph

Supposedly, the rest of us will eventually benefit because of increased investment. However, as is clear from the chart above, both corporate profits and private domestic investment are doing just fine without a cut in tax rates. But the benefits to the rest of us simply haven’t appeared. 

Moreover, as I have explained before, U.S. corporations are not losing out in the competitive battle with foreign corporations because they face tax rates that are much too high.

And, no, as I have also explained, repatriating corporate profits will not lead to more investment, government revenues, and jobs.

In fact, as Patrician Cohen makes clear, the whole idea of repatriating profits held abroad makes no sense.

That’s because repatriation is not really about geography. Most of the money is not stashed in some underground vault overseas, but already in American financial institutions and capital markets. Repatriation is in effect a legal category that requires a company to book the money in the United States — and pay taxes on it — before it can be distributed to shareholders or invested domestically.

The whole notion of earnings trapped offshore is misleading, Steven M. Rosenthal, a tax lawyer and senior fellow at the Urban-Brookings Tax Policy Center. “The earnings are not ‘trapped,’” he said. “They’re not offshore. They’re not even earnings. They’re accounting gimmicks that allow earnings to be shifted abroad.”

What’s more, companies already get something akin to tax-free repatriation by borrowing against those funds, with the added bonus of being able to deduct the interest paid on those loans from their tax bill.

What if corporations are induced to book their overseas profits in the United States? We probably won’t see much if any increase in private investment, since corporations aren’t facing any kind constraint in profits or their ability to borrow beyond their current profits. What is much more likely is some combination of more mergers and acquisitions, more stock buybacks, more payouts to shareholders, and more compensation distributed to CEOS.*

And that’s going to lead to even more inequality in the United States.

Alice surely would have seen through the meanings of all these misleading words concerning tax reform.

 

*AT&T is a good example of a company that already passes a low effective tax rate by exploiting tax breaks and loopholes. However, according to Sarah Anderson,

Despite the enormous savings AT&T has realized, the company has been downsizing. Although it hires thousands of people a year, the company, by our analysis at the Institute for Policy Studies, reduced its total work force by nearly 80,000 jobs between 2008 and 2016, accounting for acquisitions and spinoffs each involving more than 2,000 workers.

The company has also spent $34 billion repurchasing its own stock since 2008, according to our institute report, a maneuver that artificially inflates the value of a company’s shares. This is money that could have gone toward research and development or hiring.

Companies buy back their stock for various reasons — to take advantage of undervaluation, to reward stockholders by increasing the value of their shares or to make the company look more attractive to investors. And there is another reason. Because most executive compensation these days is based on stock value, higher share prices can raise the compensation of chief executives and other top company officials.

Since 2008, [AT&T CEO Randall] Stephenson has cashed in $124 million in stock options and grants.

Many other large American corporations have also been playing the tax break and loophole game. Their huge tax savings have enriched executives but not created significant numbers of new jobs.

Boeing is another good example. As Justin Miller explains,

Boeing has received a tax refund in five of the past ten years. It saves itself $542 million a year using a special domestic manufacturing tax break, and $1.8 billion in further cuts thanks to a research and development tax credit. Boeing also benefits from the immensely favorable depreciation schedules on capital that has saved it billions of dollars over the past decade.

Boeing also entered into a $9 billion tax incentive deal with Washington state back in 2013—the largest corporate subsidy ever—to “maintain and grow its workforce within the state.” But, as Michael Hiltzik points out in the Los Angeles Times, the company has since cut nearly 13,000 jobs (about 15 percent of its Washington workforce) as it sets up shop in cheaper states that offer incentives of their own.

It still manages to enrich its shareholders though. On the same day that it announced a production slowdown in December, Hiltzik notes, Boeing also announced a 30 percent increase in its quarterly dividend and a new $14 billion share-buyback program.

  1. September 5, 2017 at 10:58 am

    Excellent piece. But I don’t think “Wonderland” is the apt analogy. Bernard Mandeville’s satirical poem called “The Fable of the Bees,” seems to fit better. For us today, Mandeville’s poem highlights that ethics in capitalism is purely optional, purely extrinsic. To expect morality in the market is to commit a category error. Capitalist values are adversarial to Christian ones. (How such as evangelical Christians can also be the most aggressive proponents of an unbridled free market is a matter for their own consciences.) Capitalist values also oppose democratic ones. Like Christian ethics, the principles of republican government require us to consider the interests of others. Capitalism, which entails the single-minded pursuit of profit, tell us to accept that it’s every man for himself. So, we should not be surprised when corporations grind down the poor, cheat and mistreat their workers, and feel no sense of shame or guilt for any of this. Shafting your workers, hurting your customers, destroying the land, and leaving the public to pick up the tab are not anomalies. This is how capitalism works: you get away with what you can and try to weasel out when you get caught. Taxes will always benefit the rich and corporations. They will only benefit others to the extent necessary for weaseling out. Clinical psychologists and psychiatrists call such actions psychopathic. We’ve created an entire mythology around capitalist psychopathology. The poor are lazy, stupid, and evil. The rich are brilliant, courageous, and good. They shower their beneficence upon the rest of us. Giving us jobs, wealth, and security. Problem being, it’s just not true. Neither entrepreneurs nor the rich have a monopoly on brains, sweat or risk. Most who work with them to create products and services that make life better and more rewarding are just as smart, determined, and willing to take risks as any entrepreneur, only they are interested in different rewards. Scientists in new knowledge, artists in new expressions of the world, and scholars in improving human understanding. They’re all needed to make society stable and durable. To improve human life. Mandeville believed the individual pursuit of self-interest could create public benefit, but unlike Adam Smith, he didn’t think it did so on its own. Smith’s “hand” was “invisible” — the automatic operation of the market. Mandeville’s involved “the dextrous Management of a skilful Politician” — for us today, legislation, regulation, and taxation. Or as he put it in verse, “Vice is beneficial found, /When it’s by Justice lopt, and bound.”

    • robert locke
      September 5, 2017 at 3:27 pm

      “The poor are lazy, stupid, and evil. The rich are brilliant, courageous, and good.”

      When did this become the folklore of America. I can remember when hard, sweat work, was considered a virtue, as was the common man; it was the dignity of labor, the lumber jacks, the steelworkers, the mechanics, the farmers, who built America and were the heroes of literature and moving pictures made from it, The Grapes of Wrath, while the villains were babbits, the speculators, etc. Was it the Cold War that did in the common man. Or was the transformation of the Left into special causes, gays, womens’ lib, minority rights, etc. that made the dignity of labor a lost cause.

      • September 6, 2017 at 11:45 am

        Robert, this controversy is not new or news in America. In fact, you could say it’s the history of the USA. Bill Moyers, in an essay a few years ago put it this way, “In one way or another, this is the oldest story in our country’s history: the struggle to determine whether “we, the people” is a metaphysical reality—one nation, indivisible—or merely a charade masquerading as piety and manipulated by the powerful and privileged to sustain their own way of life at the expense of others.” For most of American history, the nation was a democracy in name only, and was segregated not just according to wealth, but also by race, gender, religion, and immigration history. We were seldom one nation, indivisible. The Revolutionary War didn’t change this. Nor did the Mexican War, the Civil War, the Indian Wars, the Spanish American War, or World War I. But after America’s violent form of bad-mannered capitalism collapsed and then the very existence of the nation was threatened by world-wide fascism, the USA, for a time returned to the neglected parts of its founding mythologies. The yeoman farmer, the politically active small business owner, and inventors who solved problems by inventing whole new worlds became heroes who saved the nation (including its powerful and privileged) and gave it unheard of prosperity and power. But it couldn’t last. The powerful and privileged wanted their nation back. Beginning about 1975 they began taking it back. Now, today, after nearly 50 years, they’ve got it back. Now, the poor are lazy, stupid, and evil; the rich brilliant, courageous, and good is not just folklore and policy, it’s the unquestioned and unquestionable reality of everyday life.

      • robert locke
        September 7, 2017 at 9:40 am

        “Labor is prior to, and independent of, capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital, and deserves much the higher consideration.”
        – Lincoln’s First Annual Message to Congress, December 3, 1861″

        The problem is that you have neglected the other side of US history. Sure the billionaires of the gilded age, worked their men 12 hours a day, thus giving credence to the labor theory of value the great commoner seemed to have recognized. In 1957 I took a course on “American Reformers and Reform Movements” taught by Theodore Saloutos at UCLA, in which we learned that America was awash with protest in the 19th century. My father was a labor organizer during the 1930s, was fired for it, goons were sent to beat him up (he beat up the goons), and local 12 of the Operators Engineers Union, which addressed the membership as “brothers” (it was a brotherhood) eventually worked out very good benefits and wages for its members in the construction industries in California immediately after WWII (health, retirement pensions, etc,) There were not only protests but results, and the reformers and reform movements are not mentioned in your description of the American heritage. My question is where did the protest go, why did it disappear?

      • September 7, 2017 at 1:22 pm

        Robert, it seems the quote from Moyers captures the struggle you mention, “In one way or another, this is the oldest story in our country’s history: the struggle to determine whether ‘we, the people’ is a metaphysical reality—one nation, indivisible—or merely a charade masquerading as piety and manipulated by the powerful and privileged to sustain their own way of life at the expense of others.” The struggle was and is real. During sporadic periods, the challengers of the powerful and privileged counted some victories. But the only sustained period of success by the challengers was from just after the end of WWI until about 1975. And this required, as I say the combination of the “Great Depression” and the rise and spread of world-wide fascism. The struggles during this period, some quite violent were part of the development of modern mass-technology capitalism in the US and the UK, and then the rest of the world. One of my many research/recommendations areas is penology. In that area, a chronology of prison riots is often repeated – 1) prisoners riot; 2) prisoners make demands; 3) prison officials assert control; 4) prisoners surrender. The steps seldom vary, so goes the thinking, since after all, in the end prisoners are inside a prison they do not and cannot control. That’s the situation of workers in mass-technology capitalism. They may win some concessions but they do not control the prison. And consequently, can’t change how the prison is operated or what it’s designed to accomplish. The protests and opposition to capitalist production and politics hasn’t stopped, but it won’t “change the prison” until shareholders do not control corporations alone, but equally with all the other stakeholders who affect and are effected by corporate capitalism. Trump and the Republican Congress are today reversing the movements in this direction achieved over the period 1918-1975 (Progressives, T. Roosevelt, public education, voting rights, etc.). The penalties for opposing these changes are ever more severe (e.g., protesters (“rioters”) at Trump’s inauguration face up to 20-year prison terms).

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