Results for “corporate tax”

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This is an underdiscussed question, and it is the topic of my latest Bloomberg column.  Here is one part of the argument:

Unlike the U.S., China is full of large, state-owned enterprises. That gives the Chinese government the ability to manipulate a large stock of asset wealth. The U.S. government is more dependent on flows of revenue from taxation and the private sector.

When bad economic news arrives, the Chinese government can instruct the companies it owns to spend wealth to keep workers employed. Think of this as using the companies to conduct fiscal policy rather than laying off workers, building another bridge or erecting another steel plant. Whereas Western economies take an immediate hit to income in bad times, the Chinese have been converting this into a hit to wealth, insulating themselves from major downturns.

That can be useful, but it also can be abused. Indeed, China has ended up with too few bankruptcies and significant excess capacity and lots of low-performing firms.

One problem comes when the stocks of corporate wealth are nearly exhausted, or perhaps sooner when managers of state-owned companies rebel against this policy and demand alternatives. Another problem is that too many low-productivity firms survive. So when the dramatic Chinese recession finally does come, it will be without the protective buffers of wealth that the U.S. had during its financial crisis.

The wealth vs. income distinction still does not receive enough attention in macro.  There is much more at the link.  I also consider under what conditions China might avoid a crack-up altogether, namely if the forces of catch-up keep on validating the ongoing malinvestments.  Forecasting China is more like judging a race than just identifying a bubble.  Note that “At least by traditional metrics, the Chinese system has showed signs of trouble and excess capacity at least since 2006.”

Here is a great little story by Danny Vinik from Politico’s The Agenda on how so-called marketing boards are surreptitiously turned into lobbying boards.

Industries with a large number of producers find it difficult to organize collectively because of the free rider problem. Mostly, that’s a good thing because it prevents cartels. Collective action, however, could also be used to perform research or marketing that’s good for the industry as a whole but too expensive for any small subset of producers. In theory, therefore, some type of collective action could be beneficial and in agriculture governments have created checkoff programs which force producers to pay a tax to fund collective goods.

Checkoffs exist for dairy farmers, mushroom producers, and even popcorn processors. Critics say they violate economic freedom and distort the market; big corporate farmers, they allege, easily find ways to influence the boards and siphon the money off to push their own causes.

“In one sense, it’s a classic case of the larger producers are the more powerful political forces within these organizations,” said Dan Glickman, the Agriculture Secretary at the end of the Clinton administration who largely supports checkoff programs.

For the unhappy hog farmers, the current problem started with the 1985 Pork Law, when Congress set up the National Pork Board and required all farmers to contribute. Today, hog farmers must hand over 40 cents out of every $100 in revenue from pork sales. The board uses the money, totaling nearly $100 million a year, to conduct research and promote the pork industry, but is not allowed to lobby.

But as Adam Smith said “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” Quite so. And in this case by creating a National Pork Board the government is providing the meeting hall and paying for the conversation. According to the law, the money from the checkoff program isn’t supposed to go for lobbying but here is where the story gets interesting.

You may recall the slogan, “Pork: The Other White Meat.” The slogan hasn’t been used for years but the National Pork Board still pays $3 million a year every year for the rights. Why would the Pork Board pay millions for an unused slogan? The key is who they are paying. The slogan is owned by National Pork Producers Council. The NPPC is a lobby group and you won’t be surprised to know that it is closely connected with the NPB (having once even shared offices).

…critics say the two groups have never been as separate as the law calls for, and now are essentially colluding through a deal that lets the Pork Board funnel money to the NPCC by assigning an absurdly inflated value to the “other white meat” slogan; the money then goes to promote the NPPC’s lobbying agenda.

A neat trick. The story is also a good object lesson in Mancur Olson’s thesis about how special interest groups grow in power over time, slowly choking off innovation as they cartelize the economy.

Adam Ozimek has a very good post on that topic, here is one of his final bits:

…many of these programs, including Medicaid and food stamps, are means-tested. That means as you earn more the programs become less generous, and as a result can generate extremely high marginal tax rates for low-income workers. This will reduce labor supply and create the exact opposite effect that “corporate subsidy” critics claim.

Unfortunately, there is little basis to claim that most public assistance programs benefit employers. This is unfortunate because such subsidies would incentivize firms to hire more low-income workers.

Do read the whole thing.

Some portion of the negative real returns on U.S. government securities can be explained by risk premia, but yet many other indicators of risk are these days not so extreme.  Times appear pretty stable, if not exactly what we had hoped for.  So how else might we fit these negative returns into a theory?  Here is one attempt, by me:

1. Imagine that financial institutions and traders have to hold large quantities of T-Bills (and similar assets) to participate in financial markets.  That may be to satisfy collateral requirements, to meet government regulations, to be credible in private market transactions, and so on.

2. The demand for these assets is now so high and so persistent that the assets have persistently low nominal returns and often negative real returns.

3. The holders of these assets do not however receive negative returns on their portfolio as a whole, when deciding to hold these T-Bills.  Holding the T-Bills is like paying an entry fee into financial markets.  And once they are in financial markets of the right kind, these market players can earn high returns by possessing special trading technologies (the technology may vary across market participants, but think HFT, hedge funds, prop trading, employing quants, and so on).

4. Let’s say you are not a major financial institution.  Then you really will earn negative returns on your safe saving.  You might try holding equities, but a) you are not wealthy and thus you are fairly risk averse, and b) as a small player you do not have access to these special trading technologies and indeed you must trade against those who do.  You thus will often earn negative or low returns on your portfolio no matter what.

5. The implied prediction is that differential rates of wealth accumulation will be a driver of inequality over time.  This seems to be the case.

6. This equilibrium is self-reinforcing.  The crumminess of T-Bill returns drives some individuals into trading against those with special trading technologies, even though that means they do not get a totally fair deal.  The ability to trade against these “suckers” increases the value of paying the entrance fee into the higher realms of financial markets and thus increases the demand for T-Bills and keeps their rate of return low.

6b. Bailouts and moral hazard issues may reinforce the high returns to the special trading technologies, at social and taxpayer expense.

7. In this equilibrium this is a misallocation of talent into activities which complement the special trading technologies.

8. Imagine a third class of agent, “Napoleon’s small shopkeepers.”  These individuals earn positive rates of return on invested capital, though those returns are not as high as those enjoyed in the financial sector.  You become a shopkeeper by saving some of your earnings and then setting up shop.  Yet now it is harder to save and accumulate wealth for most people (the rate of return on standard savings is negative!), and thus the number of small shopkeepers declines.  This hurts economic growth and it also thins out the middle class (“Average is Over”).  Most generally, the quality of your human capital determines all the more what kind of returns you will earn on your financial portfolio and that is a dangerous brew for the long term.

9. Business cycles may arise periodically if those who control the special trading technologies periodically “empty out” the real economy to too high a degree; you can think of this as a collective action problem.  Then the financial sector must shrink somewhat, but unfortunately the game starts all over again, following a period of recovery and consolidation.

10. The John Taylors and Stephen Williamsons of the world are right to suggest there is something screwy about the persistently low interest rates, and thus they grasp a central point which many of their critics do not.  Yet they don’t diagnose the dilemma properly.  Tighter monetary policy would simply add another problem to the mix without curing the underlying dysfunctionality.

11. In this model, fixing the negative dynamic requires financial sector reform of such a magnitude that real rates of return on safe assets rise significantly.  That is hard to pull off, yet important to achieve.

11b. It would help for the Chinese and some other East Asian economies to diversify their foreign holdings into riskier and higher-earning investments.  They need a new trading technology in a different way, and you can think of their demands for safe assets as a major market distortion.  Edward Conard saw a significant piece of this puzzle early on, by noting that a globalized world will skew real rates of return on safe assets (it is easiest to overcome “home bias” on the safest and most homogenized assets of a foreign country).  Singapore and Norway are to be lionized in this regard for their risk-taking abroad.

12. If you so prefer, monetary and fiscal policies can have the “standard” properties found in AS-AD models.  Yet in absolute terms they will disappoint us, and this will lead to fruitless and repeated calls to “do much more” or “do much less,” and so on.

13. In this model, the activities of the Fed can be thought of in a few different ways.  In one vision, the Fed is the world’s largest hedge fund and has the most special trading technology of them all.  Forward guidance on rates is actively harmful and the Fed should instead commit to a higher rate of price inflation or a higher rate of ngdp growth.

13b. Under another vision of the Fed, they understand this entire logic.  Interest on reserves is a last resort “finger in the dike” attempt to keep rates higher than they otherwise would be.  Of course both visions may be true to some extent.  (And here I am expecting Izabella Kaminska to somehow make a point about REPO.)

14. Unlike in models of demand-side “secular stagnation,” the observed negative real rates of return do not imply negative rates of return to capital as a whole and thus they do not have unusual or absurd implications.  They do require some degree of market segmentation, namely that not everyone has access to the special trading technologies, but those who do have enough wealth to push around the real return on T-Bills, especially if China is “on their side.”

That is what I was thinking about on my flight to Tel Aviv.  It should be thought of as speculative, rather than as a simple description of my opinions.  Still, it fits some of the data we are observing today.  Another way to put it is this: the recent secular stagnation theories need a much closer examination of the financial sector and its role in our current problems.  We should focus on the gap in returns, rather than postulating a general negativity of returns per se.