From the monthly archives:

May 2016

Lefty poseurs and Brexit

by Chris Bertram on May 20, 2016

I’ve felt myself getting almost irrationally angry over the past few days with a certain sort of person. The kind of person who advocates Brexit from a “left-wing”, “classical republican” or “democratic” perspective. It is bad enough when such people live in the UK or Europe, but at least those people will have to live with the consequences. But it is particularly galling to hear these lectures from across the Atlantic, from people whose sole take on the subject is that the EU is undemocratic, a “bosses club”, enforces a neoliberal agenda, and would be an obstacle the plans of some future hypothetical fantasy Jeremy Corbyn government. (I suspect that Corbyn is imagined in this scenario as the analogue of Bernie Sanders.) Nearly all of the things such people say about the EU are actually true. But before drawing the Brexit conclusion, you at least have to demonstrate that leaving would not make things even worse. You have to ask, “where we are now?”, and consider what the real-world possibilities actually are. And make no mistake, If we vote for Brexit the economic consequences will be pretty awful, many people will lose their jobs, living standards will be hit hard, non-British workers will be in fear of being kicked out, many of our rights will be curtailed, and many of the environmental protections we now have will be ditched. Brexit will energise the most reactionary and xenophobic elements in British society at a moment when the left and its institutions are pretty weak. Even now the right-wing part of the “Leave” are licking their lips at [the prospect of people being subjected to a Darwinian sink-or-swim future]( Perhaps the “left-wing” advocates of Brexit hope that a renewed workers’ movement will be magically conjured into in such an outcome? That’s about as likely as a similar left-wing renaissance under President Trump (who also backs Brexit, by the way). Here’s [a pretty good piece by Alan Thornett]( about why the left should back Remain.

Chris Bertram complained that we’re light on content, so…here goes.

Robert Kagan has an oped on Donald Trump in yesterday’s Washington Post. It’s called “This is how fascism comes to America.”

It’s got the liberal chattering classes chattering. It blames Trump on democracy and the mob, it cites Tocqueville, it gives a hand job to the Framers. For the liberal imagination, it’s the equivalent of a great massage. And it’s got critics on the left clucking. Kagan, you see, is a neocon who supported the Iraq War, so he’s not above suspicion as a commentator on the American way of violence.

But if you say that, liberals will cry, Ad hominem! So let’s pay closer attention to what Kagan says, while being mindful of who he is. The two points, as we’ll see, are not unrelated.

Trump, says Kagan, is not “a normal political candidate.” His appeal has nothing to do with “policy or ideology.” It has little to do with the economic anxieties of the middle class. So what is it about? According to Kagan:

What he offers is an attitude, an aura of crude strength and machismo, a boasting disrespect for the niceties of the democratic culture that he claims, and his followers believe, has produced national weakness and incompetence.

This, remember, is what makes Trump not a normal political candidate. It’s what makes him a candidate whose appeal and program “has transcended the party that produced him.”

What’s interesting about that claim is that it describes, almost to a tee, the sensibility of the extended circle of intellectuals, academics, think tankers, government officials, and journalists, radiating out of the inner circle of Robert Kagan and William Kristol, who not only pushed for the Iraq War and the War on Terror but who pushed for these violent adventures with arguments that he, Kagan, claims are peculiar to Donald Trump.

Many forget just how contemptuous these neoconservatives were about the America that emerged victorious from the Cold War, but I haven’t. [click to continue…]

Sunday photoblogging: Gaol Ferry bridge

by Chris Bertram on May 15, 2016

Gaol Ferry Bridge

A bit out of order, this is another draft extract from my book-in-progress, Economics in Two Lessons. It’s part of the chapter on income distribution, meant to follow the section on unions, and precede the Australia-US data point and the discussion of corporate profits. After this, I plan to conclude the “predistribution” part of the chapter with a discussion of intellectual “property”, then move on to “redistribution” through taxation and public expenditure.

As always, encouragement is welcome, constructive criticism even more so.

[click to continue…]

Over the fold, another extract from my book-in-progress, Economics in Two Lessons. Encouraging comments appreciated, constructive criticism even more so.

Predistribution and profits

As we’ve seen in previous sections, the social constructions of property rights and institutions surrounding employment makes a big difference to the determination of wages and working conditions. These social constructions affect ‘predistribution’, the distribution of income and wealth that arises before the effects of taxes and public expenditure are taken into account.

Predistribution is equally relevant to the other big source of personal income: profit derived from private businesses and corporations. Without legal structures designed specifically to protect businesses from the risks of failure, profits would be far less secure, and the difficulty of establishing and running a business much greater. Corporate profits are not a natural outcome of a market society, but the product of specific structures of property rights introduced to promote corporate enterprise.

The risks of running a business in the 18th century, and well into the 19th, were substantial and personal. There was no such thing as bankruptcy: a business failure meant debtors prison, where debtors could be held until they had worked off their debt via labor or secured outside funds to pay the balance.

After a brief and disastrous experiment in the early years of the 18th century (the South Sea Bubble), joint stock companies were also viewed with grave suspicion.

The prevailing view was Quoted in John Poynder, Literary Extracts (1844), vol. 1, p. 268. [1]

Corporations have neither bodies to be punished, nor souls to be condemned; they therefore do as they like.

This is often misquoted as

“Did you ever expect a corporation to have a conscience, when it has no soul to be damned, and no body to be kicked?

Adam Smith was similarly scathing, though with more of a focus on the principal-agent problem

The directors of such [joint-stock] companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own…. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.

Exceptions were made only for specially authorised quasi-governmental ventures like the East India Company, focused on foreign trade. In general, limited liability companies were not permitted in Britain or most other countries. The partners in a business were jointly liable for all its debts.

These same rules applied in Britain’s American colonies and continued to prevail in the United States until the middle of the 19th century. The introduction of personal bankruptcy laws put an end to debtors prison, greatly reducing the risks of running a business. The creation of the limited liability company was an even more radical change.

These changes faced vigorous resistance from advocates of the free market. David Moss, in When All Else Fails, his brilliant history of government as the ultimate risk manager, describes how the advocates of unlimited personal responsibility for debt were overwhelmed by the needs of business in an industrial economy. The introduction of bankruptcy and limited liability laws took much of the risk out of starting and operating a business.

By contrast, in Economics in One Lesson, Hazlitt doesn’t mention limited liability or personal bankruptcy and seems to assume (like most defenders of the market) that these are a natural feature of market societies. More theoretically inclined propertarians have continued to debate the legitimacy of bankruptcy and limited liability laws, without reaching a conclusion.

This debate over whether bankruptcy and corporation laws are consistent with freedom of contract is really beside the point. The distribution of income and wealth is radically changed both by the existence of these institutions and by the details of their design. In particular, the massive accumulations of personal wealth made possible by capital gains from share ownership would simply not exist. Perhaps there would be comparable accumulations of wealth derived in some other way, but the owners of that wealth would be different people.

A crucial policy question, therefore, is whether current laws and policies relating to corporate bankruptcy and limited liability have promoted the growth of inequality and contributed to the weak and crisis-ridden economy that has characterised the 20th 21st century. The combination of these factors has produced absolute stagnation or decline in living standards for much of the US population and relative decline for all but the top few per cent.

There can be little doubt that this is the case. As recently as the 1970s, a corporate bankruptcy was the last resort for insolvent companies, typically leading to the liquidation of the company in question. As well as being a financial disaster, and a source of shame for all those involved. For this reason, nearly all major companies sought to maintain an investment-grade credit rating, indicating a judgement by ratings agencies that bankruptcy was, at most, a fairly remote possibility.

Since that time, bankruptcy has become a routine financial operation, used to avoid inconvenient liabilities like pension obligations to workers and the costs of cleaning up mine sites, among many others. The crucial innovation was “Chapter 11”, introduced in the Bankruptcy Reform Act of 1978.

The intended effect of Chapter 11 was that companies could reorganise themselves while going through bankruptcy, and re-emerge as going concerns. The (presumably) unintended effect was that corporate managers ceased to be scared of bankruptcy. This was reflected in the spectacular growth of the market for ‘junk bonds’, that is, securities with a high rate of interest reflecting a substantial probability of default. Once the preserve of fly-by-night operations, junk bonds (more politely called ‘high-yield’) became a standard source of finance even for companies in the S&P 500.

At the same time, legislative changes and the growth of global capital markets greatly enhanced the benefits of corporate structures, while eliminating many of the associated costs and limitations. At the bottom end of the scale, the ‘close corporation’ with only a handful of shareholders, became the standard method of organising a small business. This process was aided by a long-series of pro-corporate legislative changes and court decisions (notably in Delaware, which has long led the way in this process, and where vast numbers of US companies are incorporated). At the top end, the rise of global financial markets from the 1970s onwards allowed the creation of corporate structures of vast complexity, headquartered in tax havens and organised to resist scrutiny of any kind.

At the behest of these corporations, governments have negotiated agreements supposedly designed to ensure that corporate profits are not taxed twice in different jurisdictions. In reality, using a combination of complex corporate structures and governments (notably including those of Ireland and Luxembourg) eager to facilitate tax avoidance in return for a small slice of the proceeds, the effect has been to ensure that most global corporate profits are not taxed even once in the countries where they are earned.

What can be done to redress the balance that has been tipped so blatantly in favor of corporations. The obvious starting point is transparency. Havens of corporate secrecy, from Caribbean islands to US states like Delaware must be made to reveal he true ownership of corporations, in the same way that tax havens like Switzerland, used mostly by wealthy individuals, have been forced to disclose the ownership of previously secret accounts.

The use of complex corporate structures to avoid tax is a much more difficult problem to tackle. Some measures are being taken to attack what is called “Base Erosion and Profit Shifting’, but past experience suggests that slow-moving processes of this kind will at best keep pace with the development of new forms of avoidance and evasion. It’s necessary to re-examine the whole structure of global taxation agreements. Instead of focusing on the need to avoid taxing corporate profits twice, the central objective should be to ensure that they are taxed at least once, in the place where they are actually generated.

More generally, though, the idea that corporations are a natural part of the economic order, with all the human rights of individuals, and none of the obligations needs to be challenged. Limited liability corporations are creations of public policy, useful to the extent that they promote the efficient use of capital but dangerous to the extent that they facilitate gross inequalities of income and opportunity.

The Communist Manifesto In Pictures

by John Holbo on May 13, 2016

I just added an item to my collection of graphical curiosities: a 1948 pamphlet, published by The International Book Store in San Francisco, “The Communist Manifesto In Pictures”.

You can get the PDF version for free. I’m interested in it mostly as a data point in the history of American graphic design. The International Book Store seems to have had some graphical flair:


I don’t own that one. I don’t imagine the contents – apparently republished from Soviet Russia Today – are as fun as the cover.

The Magic Bookstore

by Harry on May 11, 2016

A lovely vignette at the Chronicle by Christopher Phelps about a late night encounter with a bookstore. Which reminded me that somewhere in my office I have a first edition of Spartacus, signed by the author, that I should give to Phelps next time I see him (don’t tell him).

Screenshot 2016-05-10 13.01.23

Ada Palmer’s Too Like the Lightning is finally out (Powells, Amazon), so that you can read it too (I’ve been impatiently waiting to share it with everyone I know). As Jo Walton says here, it’s wonderful. It does something that I think is genuinely new (or at least, if other people have pulled it off, I haven’t read them). Palmer is a historian (here’s an interview I did with her on her book about Lucretius’ reception in the Renaissance) and approaches science fiction in a novel way. Her 25th century draws on the ideas of Enlightenment humanism, but in the same ways that, say, America draws on the writers of the Declaration of Independence and the Federalist Papers. Which is to say that it takes the bits that seem useful, reinterprets them or misinterprets them as new circumstances dictate, and grafts them onto what is already there, throwing away the rest. Palmer does this quite thoroughly and comprehensively – her imagined society is both thrown together in the way that real societies are, and clinker-built (in the sense that she has evidently really thought through how this would be related to that and what it might mean). [click to continue…]

Why is global finance so profitable ?

by John Quiggin on May 9, 2016

In a recent post, I asserted that

activities like tax avoidance/evasion and regulatory arbitrage aren’t peripheral flaws in a financial system primarily concerned with the efficient global allocation of capital. They are the core business, without which the profits of the global financial sector would be a tiny fraction of the $1 trillion or so now reaped annually

As I’m working on income distribution issues my long-running book project, this seems like a good time to see if this claim can be backed up by hard numbers.

First up, here’s my source for the $1 trillion number (actually $920 billion). As a plausibility check, I’ve tried to estimate the total size of the global financial sector. Various sources, including Wikipedia estimate that the banking and insurance sector accounts for 7-8 per cent of US gross product. Extrapolating to world gross product of about $80 trillion that would give around $6 trillion for the total size of the sector. The US is almost certainly more financialised than the world as a whole. Still, the profit number looks about right. A trickier question is whether the rents accruing to managers and top professional in the sector should be counted as part of profits. I’d guess that these rents account for at least another $1 trillion, but I have no real idea how to test this – suggestions welcome.

Is tax avoidance/evasion and regulatory arbitrage a big enough activity to account for a substantial share of a trillion dollars a year? Gabriel Zucman estimates that there’s $7.5 trillion stashed in tax havens, of which around $6 trillion is untaxed. He estimates the tax avoided at $200 billion . I’ll estimate that half of that ($100 billion) is creamed off in financial sector, mostly as profits or rents. That implies a profit margin of a bit under 2 per cent, which seems reasonable.

Tax evasion by wealthy individuals is only a small part of the story. Legal tax avoidance is almost certainly more important. Most of that involves companies, but it’s important to distinguish between “close” corporations, which hide the activities of an individual or family and large global corporations. I don’t have any idea how to measure the cost of avoidance through close corporations. As regards global corporations, Zucman estimates that “a third of U.S. corporate profits, or $650 billion, are purportedly earned outside the country, with a cost to the US of $130 billion a year . Extrapolating to the world as a whole, that would be at least $500 billion. Again, assuming the financial sector creams off half of the sum, we get $250 billion (the fact that the finance sector itself accounts for around 40 per cent of all corporate profits means there’s a problem of recursion that I haven’t worked through)

Then there’s manipulation of exchange rate and bond markets. I have no idea how to measure this, but given that the notional volume of trade in some of the markets concerned is measured in the hundreds of trillions, it seems plausible that the profits and rents from market-rigging must be at least in the tens of billions.

These are probably the biggest scams, but there’s also regulatory arbitrage, privatization (a huge source of rent over recent decades), domestic tax avoidance and more.

Adding them up, I’d suggest that $500 billion a year is a low-end estimate for the profits and rents associated with various forms of anti-social financial sector activity.

There’s lots of potential error around these numbers, but the order of magnitude seems reasonable to me. As against the claim that the explosion in financial sector activity and profits over the past 40 years has been driven by the benefits of a more efficient allocation of capital by rational markets, the claim that it’s all about tax-dodging and socially unproductive arbitrage seems pretty plausible.

Obviously, the social cost of a financial system devoted to undermining tax and regulatory systems far exceeds the profits earned from the activity. That’s true of any kind of socially destructive, but privately profitable, activity. But the problem is greater in the case of financial sector activity because of the disastrous effects of financial crises.

Aristotle: On Trolling

by Henry on May 7, 2016

Via Cosma, this, by Rachel Barney at the University of Toronto, is the best thing I’ve read on the Internets in quite a while. UPDATE: since it has been Creative Commonsed, as I should have spotted immediately, am publishing the whole below the fold, free to all finders, birds, beasts, Elves or Men, and all kindly creatures.

That trolling is a shameful thing, and that no one of sense would accept to be called ‘troll’, all are agreed; but what trolling is, and how many its species are, and whether there is an excellence of the troll, is unclear. And indeed trolling is said in many ways; for some call ‘troll’ anyone who is abusive on the internet, but this is only the disagreeable person, or in newspaper comments the angry old man. And the one who disagrees loudly on the blog on each occasion is a lover of controversy, or an attention-seeker. And none of these is the troll, or perhaps some are of a mixed type; for there is no art in what they do. (Whether it is possible to troll one’s own blog is unclear; for the one who poses divisive questions seems only to seek controversy, and to do so openly; and this is not trolling but rather a kind of clickbait.)

Well then, the troll in the proper sense is one who speaks to a community and as being part of the community; only he is not part of it, but opposed. And the community has some good in common, and this the troll must know, and what things promote and destroy it: for he seeks to destroy. Hence no one would troll the remotest Mysian, or even know how, but rather a Republican trolls a Democratic blog and a Democrat Republicans. And he destroys the thread by disputing what is known to be true, or abusing what is recognised as admirable; or he creates fear about a small problem, as if it were large, or treats a necessary matter as small; or he speaks abuse while claiming to be a friend. And in general the troll says what is false but sounds like the truth—or rather he does not quite say it, but rather something very close to it which is true, or partly true, or best of all merely asks a simple question about the evidence for climate change. Hence the modes of trolling are many: the concern-troll, the one who ‘sees the other side’, the polite inquirer into the obvious. For the perfected troll has no need of rudeness or abuse, or even of fallacy (this belongs rather to sophistic or eristic, and requires making an argument): he only makes a suggestion or indication [sêmainein]. [click to continue…]

Rubin gets it right

by John Quiggin on May 7, 2016

Crises upend all kinds of assumptions, and the crisis in the Republican Party is no exception. Who would have thought, for example, that the National Review crowd might end up voting for the Libertarian candidate while lots of self-described libertarians are backing Trump.

At least as surprising to me is that, among all the attempts from establishment Repubs to understand the disaster that has befallen them, the most insightful and accurate (that is, the closest to my own analysis) has come from Jennifer Rubin at the Washington Post, someone I’ve never before taken seriously. Unlike nearly all the NeverTrumpers she accepts the obvious implication of the fact that around half the Republican electorate has gone for Trump’s tribalism

The GOP discovered (in part, through Sen. Ted Cruz’s collapse despite perfect mechanical execution) that there is no majority supporting the Reagan agenda. Certainly, Cruz was a politician of limited talent and imagination, but if he could not sell the “three-legged stool” to the masses, perhaps there are no masses receptive to that sort of stuff. Even in a GOP primary, there is no majority looking to roll back gay rights or give huge tax breaks to upper-income Americans.

Second, she nails the role of climate change denialism in the intellectual collapse of the political right

Along with all of this, conservatives have to end their intellectual isolation and self-delusions. They need to stop pretending that climate change is not occurring (the extent and the proposed solutions can be rationally discussed) or imagining that there is a market for pre-New-Deal-size government. Conservatives must end their infatuation with phony news, crank conspiracy theories, demonization of well-meaning leaders and mean rhetoric

Contrast that with, say, Will and Krauthammer, who denounce Trump in extreme terms, but peddle lunatic conspiracy theories themselves.

In this context, I was struck by this piece headlined The outlandish conspiracy theories many of Donald Trump’s supporters believe. Despite the headline and the spin in the text, the data reported in the article shows that Trump supporters are only marginally more likely than Cruz and Kasich voters to accept the standard set of Republican conspiracy theories. To give a fairly typical example,

Fifty-two percent of his supporters said [the claim that vaccines cause autism] was possibly or definitely true, compared to 49 percent of those who supported Cruz and 45 percent of those who supported Kasich

These differences are barely outside the likely margin of error in a poll of this kind. The differences between groups of Repub voters on any given issue are far smaller than the differences arising from more or less extreme conspiracy theories (for example, only about 20 per cent of each group think that the Sandy Hook shootings were faked).

If there is one prediction that can safely be made it is that the Republican party of 2017 will be very different from that of 2015, before the Trump eruption. Whether it moves in the direction of sanity remains to be seen.

The Party Divides?

by John Holbo on May 7, 2016

In the tail end of comments to this post I linked to a New York Magazine excerpt/adaptation from a forthcoming book with the intriguing title Ratf***ed: The True Story Behind the Secret Plan to Steal America’s Democracy, by David Daley. The book is about the triumph of gerrymandering that is the Repubican headlock on the House for the foreseeable future – even in the event of a total Trump implosion. (But be aware that Republican advantages in this regard may be somewhat overdetermined.)

All very interesting and terrible. But I’m thinking about this bit from the tail end of the article: [click to continue…]

UK elections open thread

by Maria on May 6, 2016

After last year’s horror I can barely turn on the computer, let alone the radio or TV. Oh, we don’t have a telly. Anyway. Some titbits of info are still filtering through.

Scotland. Seriously? You lot are dead to me. OK, I can see that you are now just voting pro or anti Union, but it’s a rum day to see the Conservatives in second place. And yes, Blair and post-Blair Labour gave you the middle finger way back when, but let’s pin it on the guy who got the job last summer.

Wales. You do know UKIP is for English people? They don’t like you, either.

Norn. Irn. I don’t blame you. Not one bit. If I had to choose between SF and the DUP, I’d emigrate.

London. I get that Sadiq – the man the Conservatives changed from a dull, machine politician into a racy radical – is winning. But who-TAF are all those people voting for Goldsmith? Do they live on my street? Did I smile at them in the polling station? Or is it just the combined forces of Kensington, Wandsworth and Richmond who think it’s a good idea to vote for the shouting-like-a-mofo-at-your-dog-Linton-in-a-public-place-and-then-kicking-the-bejaysus-out-of-him-when-he-comes guy?

Dudley. I don’t know what to say to you.

The rest of England. Whatever. Carry on.

I’ve been saying for months that Donald Trump is the George McGovern of the GOP, the fractious leader who so alienated the elders of his party that they deserted him in droves, handing the election to his opponent. We’re already seeing the signs. [click to continue…]

Spurs threw it away, totally lost their heads tonight, so Leicester win the Premier League with two games to spare. It is hard to think of a sporting achievement that compares to Leicester City’s. 5000/1 at the start of the season, widely tipped for relegation, and now [this](