Category: Economics

Buildings are People My Friends

Former Republican Presidential Candidate Mitt Romney famously said that “corporations are people, my friends.” His comment was in response to complaints by some people about the Supreme Court’s Citizen United case that allowed corporations to donate to political campaigns. I suspect that what Romney was trying to say was that people are heavily involved in corporations, essentially that people create and own corporations, and hence profit from the, and many other people work at corporations, and hence owe their livelihoods to corporations. In this he is correct, but still misses the point.

Exactly the same thing can be said about buildings. People make money from building buildings and from owning buildings, and many people go to work every day in buildings. But we can all see the absurdity in saying that “buildings are people, my friends.” Simply alleging that because many people rely on buildings, or corporations, for their livelihood and well being, does not make a building, or a corporation, a person.

Corporations are an artificial business entity that allows the owners of a business to limit their risk. While this may sound like a dodge, or a way to avoid responsibility, the reality is that this limitation of liability is actually a very good thing. Many high risk endeavors throughout human history might not have been attempted without this limitation of risk. A number of the first American colonies were business ventures and were formed as government chartered corporations. This allowed the investors to invest money in the enterprise without the potential future risk of paying out more of their personal assets should the endeavor fail. Throughout American history corporations have been an important component of the development of canals and railroads and other risky and capital intensive enterprises.

But just because corporations are important does not mean they are without fault. This shield against liability can make a corporation dangerous. The nation’s founders understood this, and in every state strictly proscribed corporations. Most states required that the incorporators obtain a charter granted by the state legislature. This greatly limited the number of corporations, and meant that the incorporators had to convince a legislative body of the need for the corporation and its ability to provide a societal benefit.

It was only after the Civil War, and the growth of large scale industrial companies, that states changed these laws and allowed for general, as opposed to specific, charters of incorporation. But politicians and the courts were still highly skeptical of corporations. Over the years, however, limits on corporations slowly eroded, as business interests lobbied state governments to ease rules and restrictions. Now there are few restrictions on the type and scope of business that a corporation can engage in.

And while most of the largest commercial enterprises in the nation are corporations, and those corporations employ millions of people, and are often the engine of our economy, some owners can and do abuse the corporate form. I am a lawyer and I’ve dealt with business entities that are made up of overlapping and intertwining corporate entities. The purpose for this is not to limit liability but to evade it.

It is very common for the developers of residential real estate to create a corporation for a project – say a residential subdivision –  and then when the project is complete they dissolve the corporation. And then, if there is a problem with a house or a street, and the homeowner or neighborhood association sues, they will be suing a dissolved corporation with no assets. And the developer will move on to another project.  

So Mitt Romney may have been right to suggest that people often benefit from corporations, but that does not make corporations people, my friends, any more than it makes a building a person.

 

  

  

Don’t Like the Results, Kill the Report

Apparently earlier this year the Congressional Research Service (CRS) issued a report on the correlation between the top marginal tax rates and economic growth. Spoiler alert, the report found no correlation between lowering the top marginal tax rate (the rate on the so-called job creators) and an increase in overall economic activity. This result, of course, runs counter to the main thrust of the current Republican economic policy, which is to push for lower taxes on “job creators” in order to create more jobs.

So what did the Republicans in Congress do when they got the report? They demanded that the  CRS withdraw the report.  And since the CRS works for Congress, and Republicans are in the majority, they CRS had no choice but to withdraw the report.

But there is magic in the internet. Things really don’t disappear, so the report is available here.

The New York Times story is also available here.

The overall conclusion of the report:

The top income tax rates have changed considerably since the end of World War II. Throughout
the late-1940s and 1950s, the top marginal tax rate was typically above 90%; today it is 35%.
Additionally, the top capital gains tax rate was 25% in the 1950s and 1960s, 35% in the 1970s;
today it is 15%. The average tax rate faced by the top 0.01% of taxpayers was above 40% until
the mid-1980s; today it is below 25%. Tax rates affecting taxpayers at the top of the income
distribution are currently at their lowest levels since the end of the second World War.
The results of the analysis suggest that changes over the past 65 years in the top marginal tax rate
and the top capital gains tax rate do not appear correlated with economic growth. The reduction in
the top tax rates appears to be uncorrelated with saving, investment, and productivity growth. The
top tax rates appear to have little or no relation to the size of the economic pie.

However, the top tax rate reductions appear to be associated with the increasing concentration of
income at the top of the income distribution. As measured by IRS data, the share of income
accruing to the top 0.1% of U.S. families increased from 4.2% in 1945 to 12.3% by 2007 before
falling to 9.2% due to the 2007-2009 recession. At the same time, the average tax rate paid by the
top 0.1% fell from over 50% in 1945 to about 25% in 2009. Tax policy could have a relation to
how the economic pie is sliced—lower top tax rates may be associated with greater income
disparities.

The Rising Cost of Health Care

The Lane Report has an article titled “The Seven Factors Driving Health Care Cost. ” (Click the title for a link to the article.) Since it was from the Lane Report my assumption was that the seven factors were 1 – 6. Obamacare 7. Medical Malpractice costs. But I was wrong, except for the last item.

According to the article the seven factors are:

1. Paying doctors per treatment and not for health outcomes.

2. A population that is growing older and fatter.

3.  Desire for the newest drugs and treatments.

4. Tax breaks for health insurance, which encourages companies to provide insurance with low deductibles and co-pays for a bigger tax write down, but which allows employees to over-use health care.

5. Poorly informed consumers.

6. Hospital consolidation.

7. Legal issues, like medical malpractice fears and costs, but also fraudulent billing and other issues.

The full report was prepared by the Kaiser Family Foundation and PBS News Hour. It is available here.

The cost of the two main government medical programs, Medicare and Medicaid, are rising at unsustainable rates. We, as a nation, will not get those costs under control until we get the rising costs of health care under control. That is no easy task, but it will only be done by addressing all of the causes, and not simply blaming it on one cause among many.

And the Rich grow Richer

Here’s a link to a fascinating story and analysis on the growth of wealth at the top. The number that jumped out for me was that in 1982, just over 15 percent of the 400 wealthiest Americans made their fortune in manufacturing. Today is is just a bit below 4 percent.

Why the Rich Grow Richer

The article analyzes the changes in the tax code, and other government policy since the late 1970’s, and how it has altered wealth creation in America.

Run Government Like a Business? Yeah, which business?

It is a favorite suggestion of Republicans: government should be run like a business. A recent example is from a Republican candidate for Governor named Phil Moffett. His commentary in the Herald-Leader may be here: http://www.kentucky.com/2010/08/23/1403050/give-teachers-more-authority-parents.html [Note the Herald-Leader tends to hide their content after a few days]

Moffett notes a number of real problems, and I agree with him on some of the solutions. I agree that disruptive students should be removed from the classroom, and I support some forms of Charter Schools.

But the idea that government functions should be run like a business has always amused me. According to the Small Business Administration, one third of small business fail in the first two years, and over fifty percent fail within five years. That is a dismal success rate. The suggestion that government should be run like a business implies that businesses are uniformly efficient and well managed. But the numbers suggest otherwise. The concept also suggests that businesses are somehow unique in their ability to plan for the future, but if anything, the numbers say exactly the opposite.

I also wonder what business they are talking about. Certainly there are well run businesses out there. But we do not compare runners against Olympic athletes. Many businesses fail because of fraud. Remember Enron, or what about Bernard Madoff? Businesses men are no more or less noble than politicians.

You may have seen this headline: Plunging home sales could sink recovery.

Here’s the full story: http://money.cnn.com/2010/08/24/real_estate/existing_home_sales/index.htm?source=cnn_bin&hpt=Sbin

There is such a glut of excess housing that it is not only depressing home prices but it is causing potential buyers to be exceedingly cautious. They do not want to buy a house only to have the price go down. And the price could go down because there are so many excess houses out there.

And why are there so many houses available? Because of the business decisions of home builders and bankers and mortgage lenders (and certainly also decisions by government regulators and bureaucrats). If businessmen are so smart, how did they create this recession? And if they are so smart why didn’t they realize that was happening? And if you want to lay it all at the feet of government bureaucrats (at agencies like HUD and Fannie May and Freddie Mac) then you are admitting that all of those businesspeople were duped. But how could they be duped if they are so smart? Perhaps it is because they are not so smart after all.

Government can certainly learn things from business. But the idea that government should be run like a business is silly and simplistic.    

How Do You Deal With Morons?

That’s not a hypothetical question. How do we deal with people that don’t recognize facts?

Let’s say, for example, that we are doctors and we have an ill patient. A quick test reveals a bacterial infection, and the standard treatment is a penicillin like antibiotic. But let’s say that another doctor says that he doesn’t believe in modern medicine and thinks the best solution is the application of leeches and bleeding. Most people would say ignore the other doctor. But what if he is the chief resident? Or what if he is a United States Senator and the question is not what to do with a sick patient, but what to do with a sick economy?

Republicans are saying that President Obama’s stimulus package was a complete failure. Senator Mitch McConnell has said it, Republican Senatorial Candidate Rand Paul said it, and Congressional Candidate Andy Barr said it. Here’s a news report that says otherwise:  http://www.reuters.com/article/idUSTRE67N55X20100824

According to the report: 

The massive stimulus package boosted real GDP by up to 4.5 percent in the second quarter of 2010 and put up to 3.3 million people to work, the nonpartisan Congressional Budget Office said on Tuesday. 

CBO’s latest estimate indicates that the stimulus effort, which remains a political hot potato ahead of the November congressional elections, may have prevented the sluggish U.S. economy from contracting between April and June.

That is hardly a failure. Now the stimulus may not have been the best way to revive the economy, it might be bad economic theory, and it might be an inappropriate governmental intrusion into the economy. All of those statements are matters of political opinion. But to call the stimulus a failure is simply false.

And that brings me back to my question: how do you deal with people that do not recognize facts?

How can we address important public policy issues with people who are simply incapable of dealing with facts that they do not like? Would we go to a doctor who does not believe in modern science? Probably not. But the problem is that we have people who are in positions of power who are incapable of believing in facts and much of the modern world. And because of their elected position we have no choice but to deal with them on some level. But how?

I think that the only thing that we can do is to restate the base line facts in every interchange. Every time a Republican politician says the stimulus was a failure, point out that the CBO says otherwise, and then say we can debate the policy but we shouldn’t have to debate the facts.

There is an exercise in philosophical debate called the definitional inquiry. Before any philosophical discussion the parties agree on the basic underlying facts and the meaning of the terms that they will be using. That way they can have a rational debate. The law engages in a similar exercise. Early on in any case the parties have to set out some agreed facts so that the court and the parties know roughly what is in dispute. You don’t want the parties to a car wreck wasting time on issues regarding divorce or defamation. Unfortunately there is nothing even remotely similar in public and political discourse. But there should be. How can we debate the economy, and possibly craft a solution to current economic problems when the parties to the debate don’t even agree on underlying facts? It makes the process impossible. And that it part of the problem with our current national debate on most issues.      

Symptom and Disease

Rand Paul is a doctor. Surely he understands the difference between the symptoms of a disease and the cause. Surely he knows that the only way to cure a disease is to treat the cause and not simply address the symptoms.

In a speech before the Kentucky Farm Bureau on July 22, 2010, Dr. Paul said that the budget deficit is the most important issue facing the nation. Specifically he said that the deficit was his “number one concern.”

Hopefully the fact that the deficit is Dr. Paul’s number one concern means he will address the cause of the problem and not just the symptom. But if you look at his stated positions, (see his web site: www.randpaul2010.com) he is focused almost entirely on reducing the deficit, and doesn’t even seem to grasp that it is part of a larger problem.

Make no mistake, the deficit is a symptom of a larger disease. The current national budget deficit is a product of the changing economy, it is not the cause of the changing economy. The deficit is the symptom, the disease is the changing world and national economy. The world economy has been changing dramatically for the last 20 to 30 years, and the pace of change just keeps getting faster. Computers have dramatically altered the marketplace in many ways, including my eliminating entire career fields. Secretaries, draftsmen, and bookkeepers are largely a thing of the past. When I first started practicing law about 15 years ago, most law firms, even sole practitioners, had at least one secretary for each lawyer. Today most solos don’t have a secretary, and the ratio of lawyer to legal secretary at big firms is one secretary for every three lawyers. Computers and word processing software have made legal secretaries obsolete. Automation has similarly changed manufacturing. Robots and computers have replaced workers in factories. Because of automation, most companies produce more manufactured goods with fewer employees, and make more money doing it. This is good for a company’s bottom line (and good for their investors) but it is bad for employees and bad for national employment. Foreign competition is also cutting into domestic manufacturing, and in many cases preventing domestic companies from raising prices or wages. All of this has led to a general economic slowdown. The overall economy was slower in the first decade of this century than at any time since the end of the Second World War. And the last ten years have seen almost no job growth.

The national economy has slowed and this means that government revenue has slowed. But unfortunately the size and scope of government has not slowed. If you chart the growth of the economy since the sixties and the growth of government during the same period you will notice that the two roughly parallel each other. But the line for the economy essentially flat-lined during the Bush Administration, but unfortunately the line for the government continued up on about the same slope as in previous years. And the difference between these two curves is partly responsible for the budget deficit. During the flush economic times we – government and business – made commitments that made sense at the time (health care benefits, retirement benefits) but that are no longer economically feasible.

Solving the budget deficit is definitely important, but it won’t bring back jobs lost to computerization and automation. Lawyers are not going to start rehiring legal secretaries and factories are not going replace robots with laborers if the federal budget is balanced. The Chinese economy is not going to stop growing if the Congress passes a balanced budget amendment. Certainly fiscal restraint will mean that more money can go into the private sector than the public sector, but that alone will not solve the larger systemic changes to the economy.

If Rand Paul’s prescription for the ailing economy is nothing more than ending the deficit, he is treating the symptom and ignoring the disease.