Curt Doolittle

Theme: Incentives

  • Why 30 Large Companies Paid Only 18% Tax

    Rick writes:

    RE: “One big one is accelerated depreciation that lets them write off equipment faster than it actually wears out. Deductions on executive stock options help. So do tax breaks for research and development and for making products in the United States instead of overseas. Offshore tax shelters play a role, too.”

    They enacted accelerated depreciation because the usa has the second highest total corporate tax burden in teh world, second only to japan. And this tax burden is equally distributed against low risk companies like the financial, legal, accounting, and other services sectors as well as the high risk companies that require significant capital investment in order to function. So what was happening, because of this extremely high corporate tax rate, was that high capital investment companies were going broke or leaving the country, depriving the country of unskilled, and low skilled, labor-class jobs. For example, the state says that your laptop must be depreciated over three to five years, however, in reality, it becomes almost valueless the moment you buy it. IN this way the state artificially increase profits and increases taxes on those profits by disallowing companies to expense things like laptops at the low end and mechanical equipment at the high end. This process effectively forces heavy industry to be uncompetitive on the world stage where other nations actively subsidize those heavy industry investments. These tax breaks effectively BUY JOBS that would depart if not. IN the case of power companies, it makes no sense to tax them if the all it does is pass through costs for energy to consumers. So we are BUYING cheaper energy for consumers by offering tax breaks to them. Executive stock options are not ‘real’. The purpose of stock options is to create an incentive for execs to increase the value of a company for shareholders. Options differ from stock in that they are not taxable until you exercise them. If you grant stock to someone they have to pay taxes on it now, despite the fact that no one has made any money yet. That would be like asking you to pay your taxes for the year, before you could take a job and earn the income. Options differ in that they give people incentives even though they are rarely paid out except in public companies, but that the employee only earns income if the stock appreciates in value – ie: they were successful. Offshore income is necessary because most corporations make their money these days outside the country. If they did not, then they might not even exist. We give shelters to people and companies because if we didn’t they would just circumvent the system or they would leave teh country entirely because the opportunities in the developing world are higher than they are domestically. The majority of depositors in swiss accounts are average european citizens who are hiding their incomes from high taxes so that they can retire safely and in some degree of comfort. Europeans rarely own homes and they tend to live in apartments, and so they do not have home equity to rely upon at retirement. If you want to tax goldman sachs you won’t get any complaints. But politicians making tax policy are far more rational than we think they are

  • Profit Is Not A Motivator – It’s A Sensation

    Profit Is Not A Motivator – It’s A Sensation. http://www.capitalismv3.com/index.php/2011/11/profit-is-not-a-motivator-its-a-sensation/

    Source date (UTC): 2011-11-03 18:23:18 UTC

    Original post: https://twitter.com/i/web/status/132160941457539072

  • Fashion Is Signaling – Of Course ‘Best Dressed’ Means ‘Most Influential’, Not ‘Most Beautiful’.

    Vanessa Friedman of the Financial Times writes about her frustration that the ‘Best Dressed Lists’ actually contain the ‘most influential people’, not the best dressed. See Is Kate Middleton best-dressed or best-addressed?

    So anyone want to join me in a campaign to change “Best Dressed List” to “Fashion’s Most Influential”? It would unquestionably bring some rationalism to the choices — though then again, rationalism has never exactly been high on the fashion hot list.

    Of course. Fashion, cars and houses, as well as manners, posture, body language, and vocabulary are forms of signaling. Pretty is a commodity. Visit any campus. But alpha status is rare, and humans imitate alphas so that they can enhance their own status. The most popular posts I have ever written were on fashion. One declaring tattoos out of fashion in the middle class, the other declaring the northwest hiking ‘look’ out of fashion. I should write a fashion and relationship blog. I’d get far more readers. It would be trivially easy to write (because fashion is signaling – and signaling is economics). So why do I spend my time on Political Economy? I don’t know. Masochism. No other rational reason.

  • postion is that Positional Goods (Status Signals, Signaling, Status Cues), are n

    http://www.econlib.org/library/Columns/Nyepositional.htmlMy postion is that Positional Goods (Status Signals, Signaling, Status Cues), are not redistributable. And that’s because status signals are NECESSARY, not preferential.

    Source date (UTC): 2011-10-19 13:45:00 UTC

  • Nye writes more on Status Signals: “because the West is much richer, positional

    http://www.econlib.org/library/Columns/Nyepositional.htmlJohn Nye writes more on Status Signals: “because the West is much richer, positional or status goods are consequently more important. The struggle over status goods can be masked when you have rapid growth and a lot of mobility. But ultimately, middle and upper middle class people DO care more about health care, location of housing, and elite schooling than poorer people. “

    In marketing, advertising and politics, social signaling matters. Now, my argument is that it’s impossible to have a complex society without social signals. So my argument is that social signals are NECESSARY. Just like money and numbers are necessary. Because we would would literally not be able to THINK if we didn’t have status signals. Just like we wouldn’t be able to THINK if we didn’t have prices.

    Source date (UTC): 2011-10-19 12:38:00 UTC

  • Numbers in financial statements are a record of your decisions, not a predictor

    Numbers in financial statements are a record of your decisions, not a predictor of the future. They don’t predict your business. They predict your behavior. They are predictive to the extent that the quality of your decisions tends to decline if your business changes, tends to remain constant if your business remains constant, and tends to improve if your decisions improve. And the only way to demonstrate that your decision have improved is if your goods and services remain competitive in the market, and profit results from their sale. So, the numbers are a record of decisions. Look to your decisions for insight, not the numbers.

    Why it is that numbers are so addictive to so many people that they inverse the causal relations, and seek insight in the numbers rather than the market is beyond me. I suspect it’s because it’s easier to rely on the false promise of certainty in those numbers, for some, and for others, that their reliance on those numbers allows us to evade the political confrontation that comes from the conflict between the battle for ideas and the organization necessary to execute them, and the constraint on collective resources where everyone in the organization seeks to use them for their own ambitions or fulfillment.

    This is why organizations decline over time: In the organizational battle, the number-certainty-addicts, and rent-seekers win over the customer and market reflectors because of the difference in effort and risk between the two factions.

    The CEO’s problem is to choose whether he will be part of the false-number coalition – a rent-seeker, part of the customer and market coalition – an innovator, or an arbiter between the two – an administrator. And from that decision all other decisions follow.

    Source date (UTC): 2011-10-05 09:02:00 UTC

  • myth of investors as owners – why companies distribute the minimum possible prof

    http://www.capitalismv3.com/index.php/2011/09/the-theory-of-the-firm-as-selfishness/The myth of investors as owners – why companies distribute the minimum possible profits to shareholders.

    Source date (UTC): 2011-09-26 09:46:00 UTC

  • Debating Means Of Stimulus – Tradeoffs Between Goods And Bads

    Karl Smith (correctly) suggests that we could make drastic tax cuts to fund stimulus, and borrow the money cheaply. I think he misses the point of the entire political debate going on in the country today (people don’t trust the government at all, and with the south re-engaging the republican party, both parties are increasingly becoming polarized). But his overall position that we can borrow very cheaply so we’re able to create a stimulus cheaply as long as it produces any reasonable return that doesn’t jeopardize our future. (I know. Thats a lot to ask. But remember that most Keyneisan and New Keynesian economists use a very narrow window of postwar data – a period of exception – on which to base their judgements.) Karl writes:

    If we had enacted $5 Trillion in tax cuts and every bit of it was saved then the total liability that US households face would not have changed. They would owe more in future taxes but they would be able to pay down their mortgages and other debts. And, that is a net plus because the rate at which the government borrows is much lower than subprime mortgage rates and indeed currently negative in real terms. Having the government basically arbitrage the public-private spread is a net win for US households. On top of that I think it likely that some households who didn’t have crushing debt burdens would have taken advantage of the flood of foreclosed homes, cut rates on hotel rooms and dealer mark downs on new cars to get some really great deals. That would have been good for those well positioned households and good for the US economy which was facing a flood of foreclosed homes, empty hotel rooms and autos piling up on dealer lots. It would have been good for those less well positioned households because they could have paid down their debt. The price would be higher future taxes later but with the government paying such low interest rates the real costs of those future taxes would have been smaller than the taxes that were cut. Moreover, the United States could have potentially avoided the devastating effects of a long term balance sheet recession.

    That’s why Galbraith, before he died, me, and a few others recommended paying down mortgages directly with the trillions of available cheap debt. The “demand story” that you keep referencing in your postings regarding the differences in the size of the boom and recession, is quite simple: that appreciation of home values affects such a vast number of households, that they all spend, even though the actual homebuilding sector is relatively small. Homeowners didn’t feel irrationally wealthy because of prices or credit — but because they believed that they had more income or savings to spend. That’s why the boom and bust has been asymmetrical. Now, after the bust, they think they are poorer than they expected to be. And it affected their retirement plans and calculations. So yes, the shrinkage of the economy has been vast. More so than any suggested stimulus so far will accomplish. And paying down mortgages would have the side benefit that it would not have expanded any of the negative sectors of the state and it’s extra-market allies. Which your recommended stimulus methods DO. Which is why the public won’t tolerate them. The public would have had a frenzy repricing if we had paid down mortgages. Pay down mortgages and refinance them at today’s prices. Of course, I recommended all this when it started. Because, as Austrians we use analysis of individual actions. We recognize that patterns of sustainable specialization and trade must eventually reflect some global reality, while at the same time we also realize that digging holes is actually pretty wasteful of all the potential human capital that would be created by people actually working on internationally competitive sectors, while also aware that digging holes is wasteful of possible returns on fixed capital investment. (THe pyramids were a great investment.) And because, I do recognize, as do the NK’s, that it is hard to get people ‘swarm’ irrationally, but when they do swarm irrationally to certain things (becoming property owners) the externalities that are caused are ‘good’. Whereas the externalities caused by expansion of the state are ‘bads’. And we were right to recommend this ‘stimulus’. Absolutely right. For the reasons you’re stating now – in retrospect. It’s not that we cant still do it. People would become emotionally excited and therefore ACTION ORIENTED at the opportunities created. It would foster the impression of wealth far beyond any institutional stimulus – and it would not expand government – something that the people do not want to pay for. If we combined direct mortgage pay-downs (maybe 2 Trillion?) with some form of credit towards home ownership for anyone who has lost a home, (using stricter lending requirements), with investments in energy production (nuclear plants), a new power grid, and roads, we would alter the economy rapidly in just months – because we would be funding multiple time scales, we would be empowering consumers, and the political resistance to expanding the state would disappear. The American people would prefer to live in hardship rather than expand the state that they do not trust. The question remains whether you agree with them or not. Curt

  • Karl Smith Says The Boom Wasnt All That Big, But The Bust Has Been Huge

    Karl Smith wants us to push money into the economy through redistribution. That’s his hammer and everything looks like a nail. In today’s posting, he finds another nail:

    This is a theme I talk about it a lot so I can go into it more but the boom in housing construction was not actually that big. It peaked around 2005. It was offset by a decline weakness in commercial construction. That picked up in 2005 but was in decline by 2007. And public construction ran low right up until 2007. Combine that with the fact that construction is not that big a part of the economy to begin with and the bubble wasn’t really that big. It looks big in part because prices were so distorting and because single family suburban construction really was moving like gangbusters. That’s where a lot of us live but its not where all Americans live and its not where most Americans work. Urban and rural construction was in the dumpster. There is a strong argument that this was classic crowding-out though I am not totally convinced. In any case the boom was small and nothing compared to the bust.

    Karl, People are not only price oriented, but future (opportunity) oriented. Their willingness to spend is based not only on prices but on meta-level discourse, and their ability to flock or school to opportunities. I know you know this, but how does that play into your model? If people see an uncertain future (like before an expected war, or loss of national competitiveness) then simply reducing interest rates won’t work. If they don’t trust their government (from either pole) then they won’t allow government to grow. The only thing left is a great deal of strategic spending on competitive industries that people will politically support. There are plenty of avenues for that investment. And simply channeling the political discourse to direct investment will eliminate both the irritation with the government and the uncertainty, allowing people to flock/school toward those investments (creating new patterns of sustainable specialization and trade so to speak), and creating demand. Demand comes from schooling/flocking toward opportunities. I realize that in a neutral polity, lower rates allow people to chase status-oriented consumption. But in a non-neutral, hostile polity, status-chasing can come from destroying the economy itself. You’re right that we need stimulus. You’re wrong that we can take the lazy way out. That stimulus must go into increasing the international competitiveness of the private sector and productive returns. The population will support that. They wont support aggregate spending, or political expansion. THey just won’t and you won’t convince them. So what’s stopping you from solving the problem through the third axis? Is it knowledge of what to invest in? (Maybe.) Is it time (you’re losing time anyway by tilting at the political windmill). SO WHO IS BEING IRRATIONAL? In effect, you are. THe people have decided. And no, your desire for totalitarianism so that you can use your two preferred methods in stead of the third is just not a good idea in the long term. Curt

  • Karl Smith Says The Boom Wasnt All That Big, But The Bust Has Been Huge

    Karl Smith wants us to push money into the economy through redistribution. That’s his hammer and everything looks like a nail. In today’s posting, he finds another nail:

    This is a theme I talk about it a lot so I can go into it more but the boom in housing construction was not actually that big. It peaked around 2005. It was offset by a decline weakness in commercial construction. That picked up in 2005 but was in decline by 2007. And public construction ran low right up until 2007. Combine that with the fact that construction is not that big a part of the economy to begin with and the bubble wasn’t really that big. It looks big in part because prices were so distorting and because single family suburban construction really was moving like gangbusters. That’s where a lot of us live but its not where all Americans live and its not where most Americans work. Urban and rural construction was in the dumpster. There is a strong argument that this was classic crowding-out though I am not totally convinced. In any case the boom was small and nothing compared to the bust.

    Karl, People are not only price oriented, but future (opportunity) oriented. Their willingness to spend is based not only on prices but on meta-level discourse, and their ability to flock or school to opportunities. I know you know this, but how does that play into your model? If people see an uncertain future (like before an expected war, or loss of national competitiveness) then simply reducing interest rates won’t work. If they don’t trust their government (from either pole) then they won’t allow government to grow. The only thing left is a great deal of strategic spending on competitive industries that people will politically support. There are plenty of avenues for that investment. And simply channeling the political discourse to direct investment will eliminate both the irritation with the government and the uncertainty, allowing people to flock/school toward those investments (creating new patterns of sustainable specialization and trade so to speak), and creating demand. Demand comes from schooling/flocking toward opportunities. I realize that in a neutral polity, lower rates allow people to chase status-oriented consumption. But in a non-neutral, hostile polity, status-chasing can come from destroying the economy itself. You’re right that we need stimulus. You’re wrong that we can take the lazy way out. That stimulus must go into increasing the international competitiveness of the private sector and productive returns. The population will support that. They wont support aggregate spending, or political expansion. THey just won’t and you won’t convince them. So what’s stopping you from solving the problem through the third axis? Is it knowledge of what to invest in? (Maybe.) Is it time (you’re losing time anyway by tilting at the political windmill). SO WHO IS BEING IRRATIONAL? In effect, you are. THe people have decided. And no, your desire for totalitarianism so that you can use your two preferred methods in stead of the third is just not a good idea in the long term. Curt