Economics and similar, for the sleep-deprived

A subtle change has been made to the comments links, so they no longer pop up. Does this in any way help with the problem about comments not appearing on permalinked posts, readers?

Update: seemingly not

Update: Oh yeah!


Wednesday, January 08, 2003

 
Michael Moore - the not very awful truth

I come not to praise Michael Moore, but not to bury him either. There's a fair few things I don't like about Moore. I don't like his tendency to regard his every saloon bar utterance as being worth writing down in a book, and some of his fact-checking makes him a bit of a liability to his defenders. But his heart's in the right place, and he makes good films and tells a few important truths.

Any road up, we all know that the finest sound in the world is one's own voice shouting "HYPOCRITE!", and the right wing internet appears to be beginning to buzz a little with stories of a petulant, diva-like Moore, complaining about not being paid enough and, horror of horrors, "abusing low-paid workers". Because anyone who has remotely left wing politics is, of course, intrinsically a hypocrite if they ever get angry, or indeed if they are not poor. If they're poor, of course, they're just acting out of jealousy.

Here's the story. The first thing that I want to say is that the headline is misleading. I saw Moore's stage show (which is the only reason I'm writing this; I have local knowledge), and he emphatically did not "mock the Sept 11 passengers as scaredy-cats". He was trying to make a point about the docility of the middle classes, and about the fact that middle class people tend to expect others to do uncomfortable jobs for them. He mentioned black people, but also mentioned poor whites, football thugs and (topically for London at the time) firemen as members of dispossessed classes who in their daily lives did not typically have the option of letting other people handle their problems. He also made a rather moving tribute to the white middle class passengers on Flight 93, and I have no reason to believe that he wouldn't have done the same thing on the night which is being written about. His bit on this subject came immediately after a tortured piece of self-questioning about his Columbine film, asking what it was about a police tape that made the parents of the Columbine children hold back from running into the school after their children. I thought that it was an interesting idea, but a bit half-baked. I also thought at the time that it was a mistake to try and conflate the point about conformity with a point about the fact that you don't see many black faces on aeroplanes, and not in the best of taste, but the "scaredy-cats" remark is an unfair precis. Only a columnist as unremittingly stupid as Yasmin Alibhai-Brown could have interpreted it in the way she did, as glorifying black people for being violent.

(For American readers who may thank their lucky stars that they aren't exposed to the media presence of Ms Alibhai-Brown, suffice to say that she has made a profession out of being offended by everything; mainly by white people, but also by everything else. She also has a sideline in pretending that her own experience as a favourite daughter of the most prosperous and successful immigrant community in Britain gives her a unique insight into the lives of anyone with a skin darker than Pantone 469. I've occasionally noted in the past that she's the least credible Alibhai since Lord Lucan's).

Now on to the more substantive charge of hypocrisy. The key paragraph in the linked article reads:
"He stormed around all day screaming at everyone, even the �5-an-hour bar staff, telling them how we were all conmen and useless. Then he went on stage and did it in public," IMDb quotes a member of the stage crew as saying, adding Moore complained during the performance he was making just $750 a night.


OK, a few facts.

First up, I find it pretty unbelievable that Moore was getting paid $750 a night. Even if it was �750 a night, that's still fuck-all. Due to the inexplicable taste of roundhouse.org.uk for massive great unskippable flash intros, I haven't been able to confirm the figures, but I would be very surprised indeed if there were fewer than a thousand seats in the building for his performances. There were three big blocks of seating, plus two smaller blocks at the side of the stage. They were all sold out, and they weren't bloody cheap. I paid thirty quid for my ticket; there were cheaper seats, but not many of them. If we lowball the estimates and guess 1000 seats at �25 a shot, he got 3% of the takings. That's pretty low.

Second up, does this ring true? "Moore complained during the performance he was making just $750 a night". Quite apart from the fact that either a British stagehand has forgotten the difference between pounds and dollars, or Moore's fee is �468.75, is it even remotely likely that he said it in the way that this article say he said it? Is it not possible that there was some degree of self-deprecation, humour or what have you? As I say, I was there, and Moore regularly went off on quite entertaining little rants about the minutiae of his life. The night I saw him, he was banging on about the singing at the Tottenham/Arsenal match, and his visit to the Oxford Union.

Finally, and most importantly, the "�5 an hour bar staff" at the Roundhouse are bloody useless, and it's about time someone told them so. Five quid an hour for bar work in Camden is really not bad money (Yanks: it's $8/hr, albeit that UK bar staff don't get tips), and they do a terrible job for it. On every occasion I've been there, the staff have been fingers and thumbs; they'll look at a bottle of beer as if it were some strange alien object that washed up on the shore with no clue as to its purpose. It is not a well-run venue from an operational standpoint; it's a great space and it books some great acts, but the logistics do not appear to me to be any good.

What I think is more likely to have happened is this. Promoters in North London are a pretty tough lot. It's an extremely competitive market, and it's in general dominated by veterans of the Irish music scene; the most famous one is Vince Power of the Mean Fiddler organisation. I've no idea who's in charge of managing bookings at the Roundhouse at the moment (someone working for the Roundhouse Trust), but whoever they are, they're unlikely to have got where they are by being a milquetoast. Moore got into a dispute with the promoter about money (there are always disputes between performers and promoters about money) and threw a bit of a tantrum. The operational setup of the Roundhouse as a venue, on the basis of my casual empiricism as a punter, offers a wealth of material for someone to get cross about. The next night, he decided to incorporate some of this material into his act. The promoter threw a strop of his own, and decided to play a few of his own mind games the next night, and stirred trouble with the staff. Happens all the time. I'd also note that on the night I went there it started about an hour late too, so I'm not entirely convinced that the delay on the last night was due to a "strike" by the staff. Then the whole story was embellished about a dozen fold and fobbed off on a credulous reporter.

The moral of the story is that when you're dealing with promoters, count your fingers, and that fat Yanks shouldn't pick fights with tough North London Irish. Nothing to see here, move on.

1 comments this item posted by the management 1/08/2003 06:03:00 AM

Tuesday, January 07, 2003

 
New for the new year, a week late

Forgot I had this one hanging round in the "ready to post" buffer ...

I'm bored. I want to launch a jihad against someone. Any suggestions? I thought about taking on the weblog that this young chap's parents write for him, but it kind of seems like bullying. Not saying that I'm not going to do it, just making conversation; it seems like bullying. Also, I don't really care about Israel all that much, though I do note that it would be really quite funny for anyone who doesn't like the proponent of "benshapiroonline" to continually post sharply worded critiques of it every Friday evening to see whether his religious faith in keeping the Sabbath is greater than his desire to shoot his mouth off. Anyway, I don't think I'm going to, no matter how much fun it would be, mainly because there's something weird about that "benshapiroonline" site. When you click on a link to one of the articles, something about the way that the site loads means that it shows you the picture of Ben for a fraction of a second before scrolling down really quickly to the article. Which means that I've got a retinal image of Ben floating over the page as I read his writing, and it's rather disturbing. Thank God subliminal advertising doesn't work, or there's no telling what I might do.

But anyway, impossible as it sounds, unassuming chap like myself, I find that I have run out of enemies. I suppose I really ought to continue my lifelong crusade against Eric Raymond, but frankly, can I be bothered? If anyone can come up with a suitable target, I will award a small prize (please note; I amusing the word "award" here in an extended, metaphorical sense which does not carry any implications that you'll actually get anything). Otherwise, I guess it's going to be Den Beste, without any great enthusiasm.

Real world experiments you can do ... Make friends with a clinical psychologist at your local secure hospital facility. Then suggest to him that you're a "free speech absolutist", and that in order to make a statement about how much of a free speech absolutist you are, you're going to buy a subscription to Playboy for all of his patients who have been incarcerated for sex offences. Take two steps backward, place the index finger of your right hand on the point of your chin, roll your eyes upward, bat the eyelids and say "do you think that would be a good idea?" Or if that seems like too much trouble, just write a bollock-awful autopilot screed on your weblog about how you and your friends never raped anyone, so anyone who even thinks about a connection between pornography and sex offences is just a MacDworkinite prude who wants to paint out the nudes in Rembrandt.

Department of the Bleedin' Obvious

New Years' Resolutions are always crap, but mine are usually worse than most I've never kept one in the past, and can't see why I'm ever likely to keep one in the future. But still, we beat on, boats against the current, etc. However, this year's is quite important, and I'm hoping to hold myself to it. I've decided to give up having arguments about the bleeding obvious. Specifically, the following propositions:

  • That people making employment decisions are for the most part (probably unconsciously) racist in the way in which they make those decisions.
  • That college admissions have never in the history of the world reflected "ability" in the abstract, even if such a metaphysically dubious quality were to exist and that nor will they ever in the future, whatever happens to government policy.
  • That policemen are very often actively racist in their intentions, and most always passively racist in the effects of their actions.
  • That it is the proper function of civil society to provide a decent standard of living for its members, and that the definition of "a decent standard of living" has nothing to do with caloric survival requirements
  • That the standard of living in France, Germany, the UK or any other G7 country is about the same as in the USA.
  • That equality is a good, particularly in the field of education
  • That the era of imperialism in the 19th century had a profound effect on the development of the colonies
  • That the transatlantic slave trade was the moral responsibility of those who profited the most from it, and that it was the proximate cause of the American Civil War.
  • That there is no problem with respect to the provision of pensions which would be solved by privatising the current state systems anywhere.
  • That the IMF advised developing countries during the 1990s to liberalise the capital account, and that the effects of this policy were disastrous.
  • And that the rates of tax on capital gains, dividends and wage income should be the same

Are no longer up for argument, pending absolutely spectacular new evidence. I've had a number of arguments on all of these points over the last year; I've heard all sides, and I've made up my mind. If anyone has an argument which they genuinely believe to be new, go ahead, but don't expect much. Please note also that I am no longer interested in methodological debates over the merits of statistical studies which purport to prove the matter one way or another on any of these propositions. There are still lots of fairly controversial things over which I'm prepared to argue, partly because I think I might convince someone, and partly because I think it's possible to disagree with me in good faith; I edited the list above down from one three times as long. But if someone genuinely believes that there's no such thing as racism any more, or that welfare recipients are supplicants who should be grateful for whatever they're given, or believes amazingly odd things about economics, then they can go and have an argument with someone else (I believe that the Internet is a good place for this). I'm hoping to spend 2003 on more interesting questions.


0 comments this item posted by the management 1/07/2003 11:05:00 AM
 
New for the new year, a week late

Forgot I had this one hanging round in the "ready to post" buffer ...

I'm bored. I want to launch a jihad against someone. Any suggestions? I thought about taking on the weblog that this young chap's parents write for him, but it kind of seems like bullying. Not saying that I'm not going to do it, just making conversation; it seems like bullying. Also, I don't really care about Israel all that much, though I do note that it would be really quite funny for anyone who doesn't like the proponent of "benshapiroonline" to continually post sharply worded critiques of it every Friday evening to see whether his religious faith in keeping the Sabbath is greater than his desire to shoot his mouth off. Anyway, I don't think I'm going to, no matter how much fun it would be, mainly because there's something weird about that "benshapiroonline" site. When you click on a link to one of the articles, something about the way that the site loads means that it shows you the picture of Ben for a fraction of a second before scrolling down really quickly to the article. Which means that I've got a retinal image of Ben floating over the page as I read his writing, and it's rather disturbing. Thank God subliminal advertising doesn't work, or there's no telling what I might do.

But anyway, impossible as it sounds, unassuming chap like myself, I find that I have run out of enemies. I suppose I really ought to continue my lifelong crusade against Eric Raymond, but frankly, can I be bothered? If anyone can come up with a suitable target, I will award a small prize (please note; I amusing the word "award" here in an extended, metaphorical sense which does not carry any implications that you'll actually get anything). Otherwise, I guess it's going to be Den Beste, without any great enthusiasm.

Real world experiments you can do ... Make friends with a clinical psychologist at your local secure hospital facility. Then suggest to him that you're a "free speech absolutist", and that in order to make a statement about how much of a free speech absolutist you are, you're going to buy a subscription to Playboy for all of his patients who have been incarcerated for sex offences. Take two steps backward, place the index finger of your right hand on the point of your chin, roll your eyes upward, bat the eyelids and say "do you think that would be a good idea?" Or if that seems like too much trouble, just write a bollock-awful autopilot screed on your weblog about how you and your friends never raped anyone, so anyone who even thinks about a connection between pornography and sex offences is just a MacDworkinite prude who wants to paint out the nudes in Rembrandt.

Department of the Bleedin' Obvious

New Years' Resolutions are always crap, but mine are usually worse than most I've never kept one in the past, and can't see why I'm ever likely to keep one in the future. But still, we beat on, boats against the current, etc. However, this year's is quite important, and I'm hoping to hold myself to it. I've decided to give up having arguments about the bleeding obvious. Specifically, the following propositions:

  • That people making employment decisions are for the most part (probably unconsciously) racist in the way in which they make those decisions.
  • That college admissions have never in the history of the world reflected "ability" in the abstract, even if such a metaphysically dubious quality were to exist and that nor will they ever in the future, whatever happens to government policy.
  • That policemen are very often actively racist in their intentions, and most always passively racist in the effects of their actions.
  • That it is the proper function of civil society to provide a decent standard of living for its members, and that the definition of "a decent standard of living" has nothing to do with caloric survival requirements
  • That the standard of living in France, Germany, the UK or any other G7 country is about the same as in the USA.
  • That equality is a good, particularly in the field of education
  • That the era of imperialism in the 19th century had a profound effect on the development of the colonies
  • That the transatlantic slave trade was the moral responsibility of those who profited the most from it, and that it was the proximate cause of the American Civil War.
  • That there is no problem with respect to the provision of pensions which would be solved by privatising the current state systems anywhere.
  • That the IMF advised developing countries during the 1990s to liberalise the capital account, and that the effects of this policy were disastrous.
  • And that the rates of tax on capital gains, dividends and wage income should be the same

Are no longer up for argument, pending absolutely spectacular new evidence. I've had a number of arguments on all of these points over the last year; I've heard all sides, and I've made up my mind. If anyone has an argument which they genuinely believe to be new, go ahead, but don't expect much. Please note also that I am no longer interested in methodological debates over the merits of statistical studies which purport to prove the matter one way or another on any of these propositions. There are still lots of fairly controversial things over which I'm prepared to argue, partly because I think I might convince someone, and partly because I think it's possible to disagree with me in good faith; I edited the list above down from one three times as long. But if someone genuinely believes that there's no such thing as racism any more, or that welfare recipients are supplicants who should be grateful for whatever they're given, or believes amazingly odd things about economics, then they can go and have an argument with someone else (I believe that the Internet is a good place for this). I'm hoping to spend 2003 on more interesting questions.


0 comments this item posted by the management 1/07/2003 11:05:00 AM
 
This is dividend, my friend, my beautiful friend

I like to argue things both ways. Here's an example:

1. It is obvious that the effect of the Bush proposals on dividends will be to increase investment. Cutting taxes on dividends makes stocks more attractive to own, which encourages investors to put their money back into the market.

2. It is obvious that the Bush tax proposals will have a negative effect on investment. When you reduce the tax on something, you increase the incentive to do that thing. If you decrease the tax on dividends, you encourage companies to pay out more of their earnings in dividends, leaving less retained earnings for them to invest.

Which is right? Well, ask an economist, get a rambling answer which leaves you just as confused as you were at the beginning but somehow manages to work its way round to a tirade about personal hobby-horses. Suffice it to say that anyone who was hoping that Post-Keynesian economics weren't going to be at the root of this one is going to be disappointed.

First up, a public service announcement. In an entirely understandable rush to bash Bush, a lot of my coreligionists appear to be saying some pretty silly things about dividend taxation, including a few, like Paul Krugman, who really ought to know better (MaxSpeak does it about the best). In ascending order of objectionableness to me:

  1. It's amazingly inegalitarian. Actually a fairly good objection; obviously a tax cut on dividend income is targeted, as Krugman says "like a laser" on the very rich. But this is America we're talking about, not Sweden. If you're going to complain about inegalitarianism in public policy, you might not want to start here. And in any case, to concentrate on single proposals is bad analysis and bad policy; it's the progressivity or regressivity of the total stimulus package that matters.
  2. It won't stimulate the economy. There could be a sensible version of this critique, but it would have to be hidden in so many thickets of caveats it wouldn't be worth making, and I don't think that Max's argument (that dividend cuts will be offset by the sales of bonds to the same investors) is convincing. Some of the money from the dividend cut will go straight into the government bond market, sure, but some of it will be spent, and some of the deficit will be financed by foreigners. The plain facts of the matter are that a reduction in tax on individuals, gives money to individuals and that's stimulative. It might not be the most efficient way in which to use a deficit of given size to stimulate the economy (in all honesty, the current plan looks like a load of economists got together and said "Hey! Let's smoke a really big rock of crack and design a stimulus package"), but I don't think that one can deny that it is a measure which, in principle, could have a stimulative effect on the economy.
  3. The argument that changing dividend taxes removes double taxation is in some way mendacious or misleading. It isn't. There's a plain fact of the matter here. You pay tax on dividend income, and corporations pay dividends out of post-tax profits. Hence, two levels of tax. One might argue that double taxation is the price one pays to enjoy the benefits of limited liability, and that would be a fairly decent argument. What isn't a fairly decent argument is to start talking about sales tax or what have you. That's a clearly misleading analogy; if you were to count the tax you pay when you spend the money, then dividends are taxed three times, not two.

So anyway. What's to recommend altering the taxation of dividends? Well, quite a bit, on general taxation policy grounds. Obviously, the Bush team are, to put it as charitably as possible, overly keen on structural solutions to cyclical problems (to put it more bluntly, a la Krugman, they're keen on structural non-solutions that make cyclical problems worse but benefit some very narrow class interests). But altering the system of dividend taxation in this way is not a bad thing to do.

Why? Well, the point is that debt interest is a tax deductible expense for corporations, but dividends aren't. So (and here I oversimplify mightily), someone planning the financing of his company is comparing the pre tax cost of debt with the post tax cost of equity. It makes a big difference in dealing with the investors and capitalists who finance your plant and equipment, if you give them something that you can pay out of pre-tax income; effectively, debt financing is subsidised to the tune of the rate of corporation tax. This is a subsidy to gearing, and as any ex-employees of Enron or Global Crossing will know, debt gearing is not necessarily something which the government ought to be in the business of subsidising. As well as the general principle of tax policy that a tax ought to cause as few distortions in behaviour as possible, subsidising gearing is particularly pernicious because it fuels booms and busts; it's a lot easier to get a dodgy takeover, leveraged buyout or startup proposition off the ground if you're always able to make the post-tax cash flow numbers look a bit better by adding more debt to the balance sheet. So a subsidy to debt is a subsidy to the creation of WorldCom-like companies, with balance sheets that are incredibly vulnerable to any change in sentiment or business conditions.

But under the proposed Bush plan, the idea is that every time a company pays a dividend, it passes out along with it a tax credit, allowing the investor to deduct the corporation tax already paid on the profits from which the dividend derived from his income tax bill. It's a lot more complicated than that, obviously. But that's the gist of the thing. In principle, and if it works, there will no longer be an incentive to gear up on debt, because investors will be prepared to provide equity capital on cheaper terms in order to get those lovely tax credits.

Which is where we came in. There's clearly two factors at work here; on the one hand, dividend tax "reform" encourages people to provide equity finance to corporations on cheaper terms. But on the other hand, having provided that finance, it encourages them to demand that the profits of those firms are paid out as dividends rather than being reinvested. What's the net effect?

I'm going to ignore a whole strand of the financial economics literature here which suggests that the demand for larger dividends is irrelevant. Basically this theory, which quite deservedly won Franco Modigliani a Nobel Prize, points out that a company which pays out its entire profits as dividends can always then ask its shareholders to subscribe to a new equity issue to fund any profitable investment projects it has lying around. This theory actually goes back even further to Irving Fisher (who proved that investment decisions in capital are logically separable from decisions about how to finance that capital), and goes forward in time to Michael Jensen, who argued that it's actually better for firms to pay more of their cash flow out, because the discipline of the marketplace is better at making investment decisions than incumbent company management. I'm going to ignore this strand of the literature because a) empirically, firms didn't behave in this manner in the UK during the period in which we abolished double taxation of dividends, and Stuart Myers gives decent theoretical reasons why (asymmetric information between lenders and borrowers means that internally generated cash is always the cheapest source of income), and b) Michael Jensen was the academic guru of leveraged buyouts and junk bonds, so I regard it as safe to laugh at him rather than arguing against him these days. Terribly unfair I know.

But the Post-Keynesian point I want to make is not that far removed from Fisher's theorem proving the separability of investment and financing decisions. The point is, as Paul Davidson spends the first five chapters of his excellent book "Financial Markets, Money and the Real World" (no amazon link provided as the bloody thing costs eighty quid!), the word "investment" in the modern world has two meanings:

a) "Investment" refers to the purchase of capital goods by entrepreneurial firms

and

b) "Investment" refers to the purchase of financial securities by individuals.

What do these two definitions have to do with each other? According to the Post-Keynesians, not enough.

There is no very strong force at all which equilibrates Investmenta, the amount of money that firms want to spend on capital goods with Investment b, the amount of money that you and I want to chuck into the financial markets. In national income accounting, they have to add up, but that's a bit of a cheat; national income accounting counts stocks of unwanted goods piling up in a warehouse as "investment", and in this sense, ex post, investment has to be equal to ex post spending. But it's clear that this sort of "investment" isn't going to drag us out of a recession.

Then there is a weak force trying to bring the two into equilibrium, which is the same sort of ambiguous, difficult-to-understand kind of supply/demand dynamics which apparently tells that that government deficits are (on the whole and in the long run) associated with higher interest rates (on the whole and in the long run). If there's a lot of spare investmentb hanging around, then it will tend to depress the return on investment, which lowers the opportunity cost of investmenta, because you might as well buy a new lathe if all you can get in the stock market is 3% a year.

But this equilibrating force is very weak. The discount rate (the opportunity cost of capital tied up in a project) is important in capital budgeting. But it's not the most important thing. If you're planning on a bit of capital investment, the most important thing you want to know is whether there's going to be a demand for the goods you want to produce at a price which will keep you in business. How do you work out the answer to that question? Anyone? Bueller?

"Sir, you can't work out the answer to that question in any statistically reliable manner, sir, because economic processes are nonergodic, sir, because the economy is subject to positive destabilising feedback sir!"

Very well done that pupil. The rest of you, go back to the books and revise.

And now we have most of the theoretical framework to understand Keynes' great insight, Post-Keynesian interpretation thereof. The great problem in the economy is in managing the fluctuations in investmenta, a quantity which is not directly related to any economic variable today in any straightforward way, with investmentb, the planned saving of the economy, because this is the level of saving at which the economy can be in full employment equilibrium. An excess of investmentb over investmenta is what is meant by "excess saving" or "deficient aggregate demand".

To take this further, we need to think exactly what we mean by "saving" in this context. The reason that investmentb is called "investment" in the first place is that a lot of what people do when they save involves buying claims on capital assets; long term debt or equities. Although there can certainly be an excess of this kind of saving relative to capital investment plans, there is another important distinction to make which gives the model its specifically Keynesian flavour. This is the distinction between the personal sector's decision to hold claims on capital assets, and its desire to hold money balances.

Money is at the centre of Keynesian theory, because it is quite unlike any other savings instrument. Specifically, it's fully liquid, and it isn't invested in anything. You own money balances because you want something that can be converted into consumption goods instantaneously and with certain value. Some readers may remember this discussion from my now-restored archives on the subject of risk-free assets; the point I was rather obliquely trying to make was this one; for some purposes, particularly the postponement of a fixed amount of consumption in the abstract from today into an unspecified point in the future, nothing will do except a liquid asset. And the point about a liquid asset is that it's not invested in anything; if it was, it would be illiquid.

Which means that the composition of savings matters, because that's what determines whether the weak equilibrating force can work at all. Money is not a substitute for securities for people who care about liquidity, so it is possible for world to get into a situation in which the saving population wants to hold money and doesn't want illiquid assets (because asset returns are also assumed to be nonergodic, and thus there is no scientific way of answering the question "at what level of the Dow am I fairly compensated for the risk?"). In this situation, because money is not a substitute for illiquid assets, there is no change in the price of illiquid assets which will convince the population to buy illiquid assets (and thus finance investmenta) rather than holding money, and whatever money is poured into the system will be held rather than spent on illiquid assets. This is the "liquidity trap".

So to recap, there are two distinct Keynesian concepts of a recession. You can have a situation in which the companies who carry out investmenta don't want to invest because they don't expect the demand to be there for their products, whatever the supply of capital. And you can have a situation in which savers don't want to carry out investmentb because they don't expect any investmenta plans to be successful, whatever the demand for capital. Note that in both cases, the imbalance turns into a problem because a proportion of the population is employed in producing goods the consumption of which is unrelated to current income, because they are capital goods whose utility depends on perceptions of future income and consumption. If those perceptions get out of line in the economy, then the market for capital goods has some buyers who either can't (for lack of finance) or don't want to buy them, and there will be a negative income shock to the producers of those capital goods which is not offset by a positive income shock elsewhere.

So, is the Bush plan stimulative? Well, it frankly depends on what sort of a recession we are looking at. The plan under discussion would subsidise the supply of capital, by reducing a tax on the activity of investmentb. That might conceivably help matters if we were in a situation in which the problem was a liquidity trap; it's effectively a subsidy from the government which you only get if you invest in illiquid assets. But I personally don't believe that this is a reasonable characterisation of the US or world economy at the moment; I don't think that what is holding the economy back is a shortage of financing. If the problem in the economy is that the corporate sector is unable to digest the last big investment it made and can't see any profitable new investments at all, then reducing the cost of capital isn't necessarily going to help matters. The prescription for that kind of situation would be to do something to stimulate demand. Which we've already established that a dividend cut will do, but probably not enough ....




Endnote: The probability that I've got those superscript a's and b's right is pretty small. If anyone notices a wrong 'un, give us a shout in the comments section?

1 comments this item posted by the management 1/07/2003 09:12:00 AM

Monday, January 06, 2003

 
Back on the DHSS

I'm following some of the discussions on tort reform and the spiralling cost of medical malpractice insurance in the USA with interest. One point that I don't think anyone's made so far is that, whatever you do, it's not possible to legislate economic losses out of existence. All that you can do is to ensure, via tort reform or similar methods, that the cost of medical malpractice falls on the victims, as individuals, rather than on the medical profession. This strikes me as rather inequitable but thinking about it, I don't see any solution to the problem which wouldn't involve unrealistically far-ranging changes to the kind of society that the USA is. My analysis ...

On the basis of cursory examination of the literature, admittedly mainly cribbed from "Asymmetrical Information", it seems that the problem with respect to medical malpractice awards is, in large part, the cost of awards made in the US court system for "economic damages"; in other words, lost earnings. If one wanted to be cynical and unpleasant about this, not to mention pretty swinishly sexist to boot, one would say that the stereotype American malpractice case is one of a fairly typical obstetric complication of the kind that goes wrong all the time through no particular fault of anybody's, which is blown up into a multimillion dollar settlement because the mother swears blind that, but for this calamity which has befallen her new child, she would have continued in her prepartum career as a high-flying middle manager until the age of 60, and should be awarded economic damages comensurately. The actual "tort reform" crowd (see my earlier post on "pension reform" for my views on the word "reform" as a danger sign) would also engage in some fairly moronic populist lawyer-baiting, but since I don't believe that juries are any less reasonable in jury rooms than in their normal lives, I'll pass on that.

So in any case, what could account for the fact that economic damages are so deliriously high in America? Well, think about it this way; in which country in the developed world has the lowest "replacement rate" (ratio of social benefits to average earnings)? I haven't looked it up and don't propose to, but I'd be surprised if the USA wasn't right up there. And which country has the greatest degree of inequality in earnings? Now this time, I'm pretty sure that the USA is up there. The proposition I'm trying to advance is this; in the USA, more than any country on earth, the "replacement ratio" for a middle class wage earner -- the amount of money which you would have to give a middle class wage earner in order to leave their lifestyle unchanged if they were unable to continue in paid employment -- is higher than almost anywhere else, and has got a lot higher over the last ten years. Note for the minute that I am using "middle class" in its English sense, the sense in which it is a term that makes a meaningful distinction, not in its American sense which appears to refer to the segment of Americans who earn more than subsistence farmers but less than investment bankers.

I'm not sure I've made this clear, so let's approach the problem from another angle. The idea behind a medical negligence award is (jurisprudential theorists, cut me some slack here) to make the plaintiff whole; to award them a sum of money such that they can live the kind of life which they would have led had the medical mishap not taken place. This includes a sum of money for the additional medical care they will need, plus a sum of money reflecting the fact that, for one reason or another, their earning capacity is less. We'll ignore "mental distress" here, although it is a damn sight easier for us to ignore it with scare-quotes than for someone suffering it to ignore it as a fact. The point at issue is the economic damages; they're what's driving the cost inflation in medmal insurance, and without them, there wouldn't be a problem.

So now, if you're still with me, cast your mind back to the last time you saw a really bitter argument between a European and an American about relative living standards. Chances are, I was involved ... Often, the crux of these arguments runs thus:

Europe: But what about the things which the government provides in Europe like education, healthcare, childcare, theatres, holistic massage, socks, etc?

America:: What about 'em? They don't make a difference in terms of GDP. You can't claim that they're more valued by Europeans who don't have to pay for them than by Americans who can pay for them if they want 'em.


The American is right in this context; things like this don't make a heck of a lot of difference at the level of national income. But they do make a heck of a lot of difference if you're a plaintiff in the professional classes who's been rendered unable to earn a living through medical malpractice. If you're a European, then there's whole chunks of your life which remain unchanged, because they were being provided to you and your middle class friends free of charge anyway, as a sort of kickback from the tax system. If you're American, then you and your friends were paying for those things out of your own pocket, so anyone who is going to compensate you for your loss is going to have to get you to a point at which you can go on paying for them -- as it were, they're going to have to "Put your kids through college". Lionel Jospin used to have a good riff on "yes to the market economy, no to the market society", and I think that the cost of medical insurance in the USA throws his meaning into sharp relief. Because if you're going to have a market society -- a society where a socially desirable lifestyle cannot be supported without both adult members of the household taking part in the wage economy -- then your only alternatives are to accept that the cost of compensating victims of medical negligence is going to skyrocket (which appears to be inconsistent in a practical sense with the economics of the medical profession as it is currently organised) or to insist that victims of medical negligence have to bear the majority of the cost of medical negligence themselves (which is intolerably inequitable).

I have no idea where this points in terms of policy conclusions. But it does throw a bit of light on one particular statistic which has always struck me as bizarre; the fact that the USA spends 20% of its GDP on healthcare. When you realise that, through the medical negligence insurance system, this spending actually includes a fair old chunk of what is provided under other categories of government spending in Europe, it seems a bit less bizarre, although I do have to admit that I still think that it is pretty bizarre to fund these provisions via the attorneys acting for two insurance companies and an HMO rather than through general taxation. I'd also note that there is a reason why the UK used to have a single government department in charge of "Health and Social Security", and that when you think about what the words mean rather than thinking of the various cack-handed government attempts to implement them "social security" sounds like the sort of thing that one would really like to have some sort of insurance protecting one for.

May 2003 bring you all good health, and continued social security.

1 comments this item posted by the management 1/06/2003 07:25:00 AM

Friday, January 03, 2003

 
Grasshoper mind, part whatever it is

More flapdoodle and what have you, on a fairly scattershot day ....

Great. So now we're being brought to the brink of annihilation by the idiot son of a mass murderer who has foolishly been given access to weapons of mass destruction. Not only that, but Kim Jong-Il is pretty scary too.

Nobody on the left seems to have a good word for professional wrestling, but where else on mass market television do you see the owner-class uniformly and consistently portrayed as villains1? Furthermore, I'd always suspected as much, but Subcommandante Marcos' latest escapade (challenging Spanish judge Baltasar Garzon to a public debate, with the stakes being the revelation of his identity) reveals squarely that he's using the mask to put himself squarely in the Mexican luchador tradition of the masked man who comes to save the day for the underdogs. Wrestling is radical

As far as I can see, a lot of people on the internet appear to hold the view that the people themselves know what is best far better than any central organisation of experts could ever do, and should thus be trusted on every subject except that of the correct size of medical negligence settlements. As far as I can tell, these wise, fair-minded sage-citizens, who know so much about the correct allocation of local tax policy and have such exquisite judgement in popular television, immediately turn into venal, slack-jawed, profligate dupes the moment they enter a courtroom, just waiting for a lawyer to whip them up into a frenzy of pity and class hatred against rich doctors. Then they leave the courtroom, having dumped vast amounts of largess on the head of some malingering ne'er-do-well, and return to Olympian sagacity, leaving behind any traces of resentment of their betters. Don't laugh, it could happen.

This article seems to miss what has always seemed to me to be the best evidence for the existence of a divine being; that an awful lot of people over the years, including a disproportionate amount of people who have proved to have been utterly honest on every other issue, have reported experiences of the divine. Given the vast number of accounts in history of experiences divine revelation, I never quite understand why people are not content to argue for the existence of God on empirical grounds alone. Unless, of course, one is using the word "empirical" to mean "all and only all those kinds of experience which tend to confirm the scientific viewpoint", or in other words, that one is going to say out of hand that anyone claiming to have had a divine revelation is mad or lying, at which point the circularity of most atheist arguments becomes pretty plain.

Supply and Demand, at work.




1The Von Mises Institute essay is an absolute bloody riot, and someone should be given a medal for it. Where else on the Internet are you going to find out that " the most serious assault on upper-level management currently underway on American television is occurring in the world of professional wrestling, and in my expert opinion the leading cultural indicator in the U.S. is the Worldwide Wrestling"? I'm seriously considering adding them to my permalink list above. The really hilarious thing is that this website is also a massively important web resource of old Austrian texts. I'd pay a small amount of money for a "random page from the Mises Institute" button.

1 comments this item posted by the management 1/03/2003 08:53:00 AM


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