Tuesday, May 6, 2014
A Good Year For Top Hedge Fund Managers
The top 25 hedge fund managers earned a total of $21.5 billion last year. The top manager earned $3.5 billion and the "straggler at the 20th position on the list earned only $360 million. Best of all, their earnings are only taxed at 15%. Their big paydays were a reward for producing outsized returns to their investors. In general, last year was not good year for hedge funds. Most of them were unable to beat the S&P 500 index fund which returned over 30% last year.
Monday, May 5, 2014
Corporate Social Responsibility Is A Form Of Socialism
Most CEO's today accept the idea that the mission, and the only mission of the corporation, is to increase shareholder value. Their compensation has also been arranged to satisfy that mission. Most of their compensation is in the form stock options. The origin of this idea is contained in a 1970 WSJ op-ed written by Milton Friedman. Friedman, scolded CEO's for arguing that corporations have a broader responsibility to society. He argued that the CEO's were enabling and abetting the anti-capitalist sentiments of the culture in 1970. Accepting the mission of social responsibility, according to Friedman, was an implicit acceptance of socialist doctrines.
Friedman was successful in launching the idea that corporations only exist to grow profits and increase shareholder value. His 1970 op-ed in the WSJ was also the beginning of a successful effort to transform the culture. Friedman laid the groundwork for equating free market capitalism with personal liberty and democracy. Corporations that engage in activities such as pollution control, or support for environmental goals, are engaged in socialism. The only purpose of the corporation is to increase shareholder value. Government interference that prevents corporations from satisfying their mission should be strongly resisted. It should be regarded as an attack against liberty and free market capitalism.
Friedman was successful in launching the idea that corporations only exist to grow profits and increase shareholder value. His 1970 op-ed in the WSJ was also the beginning of a successful effort to transform the culture. Friedman laid the groundwork for equating free market capitalism with personal liberty and democracy. Corporations that engage in activities such as pollution control, or support for environmental goals, are engaged in socialism. The only purpose of the corporation is to increase shareholder value. Government interference that prevents corporations from satisfying their mission should be strongly resisted. It should be regarded as an attack against liberty and free market capitalism.
Saturday, May 3, 2014
Should We Eliminate The Corporate Tax And Tax Shareholders Instead?
Pfizer's use of the inversion tactic to avoid US corporate taxes is not a good sign. Corporations have numerous ways in which they can shift profits to low tax countries. This proposal from a scholar, at the conservative American Enterprise Institute, proposes that we end the corporate tax and shift the tax burden to shareholders. Dividends would be taxed at the ordinary income rate as well as the capital gain on share values each year. One of the problems with this solution is that total federal taxes would substantially decline. Congress would than have to find new taxes to plug the gap.
Friday, May 2, 2014
Health In US Depends Upon The State In Which You Reside
This article looks at dental health and mortality rates across US states. The deep South is not good for your health. Mississippi is at the bottom of the scale. It has the least healthy citizens who also have the highest mortality rates. Its state government has also decided not to take advantage of federal programs that would extend healthcare to its poorest citizens. Mississippi looks more like a third world country than a state in the world's richest country. Some of that is by choice.
The Financial Times Provides A Lesson On Corporate Tax Avoidance
Pfizer's recent bid to acquire AstecZeneca an reincorporate in the UK is predicated on avoiding the US corporate income tax. Ireland has been the most popular location for multinational corporations. This article provides a primer on the use of tax havens by MNC's. It also discusses some of the responses to these tax avoidance schemes that are being debated. Politicians in both parties would like to do something to curtail this practice but they have not been able to agree on the best strategy. The OECD has also been involved in similar discussions about MNC tax avoidance schemes. The MNC's are likely to find ways around the roadblocks that nation states produce to limit tax avoidance. They will do what is in their best interest. Nation states have a hard time reaching agreement on the national interest.
Pfizer's Bid For UK Drug Company Is Rejected
Pfizer's bid was rejected by AstraZenca's board. Pfizer may have to up its bid to acquire the firm and reincorporate in the UK. Pfizer's strategy to reincorporate in the UK is known as inversion. Many firms are reincorporating in order to take advantage of lower tax rates. The UK may become a favorite tax haven for US corporations. Unless nation states take actions to reverse this trend, the competition between nation states may be entering a new phase. There will be a race to the bottom as multinational corporations make it difficult for nation states to manage their own tax policies.
Why Has Economics Failed?
There has been a lot discussion around the Internet about the failure of economics in the Great Recession. One of the criticisms is about the profession's failure to predict the financial crisis. Krugman provides his answers to that question. He pleads ignorance to the changes that were happening in the financial industry. The shadow banking system played a huge role in the financial collapse, but it really did exist in the shadows. Economists were unaware of its size and influence.
Economists should have known about the moral hazards that existed in the system. Moral hazard is one of the important concepts in the profession. Moral hazard existed everywhere in the system but Krugman did not discuss the role of moral hazard in the financial crisis. Mortgages were originated and sold to investment banks which packaged them into securities. The loan originators collected a fee and passed the bad loans to investments banks which sold the securities to unwary clients who depended upon the rating agencies to determine the risk. The rating agencies obliged the investment banks by putting a AAA rating on securities that did not even conform to the underwriting standards of the investment banks. Everyone was getting rich producing toxic assets, and few were punished for the harm that was done to everyone else. While this was happening bank regulators ignored the warning signals. Alan Greenspan declared that he was shocked that bankers failed to regulate their own behavior because he, and millions of Americans, believed that markets were self regulating. That belief is one of the cornerstones of the economics profession. Regulation is assumed to distort markets. In an ideal world markets, left to their own devices, would produce ideal outcomes. Unfortunately, we do not live in an ideal world. We live in a world in which most of the participants are influenced by an incentive system that encourages otherwise honest people to do terrible things.
Krugman is less concerned about the failure of the failure of the economics profession to predict the financial crisis than he is about its failure to deal properly with the recession. He argues that recessions are due to a lack of demand and that governments should run budget deficits to compensate for the decline in demand by consumers and businesses. That is especially true when the central bank has reached the zero lower bound and cannot reduce interest rates any further. He cannot understand why the profession failed to use the knowledge that it has at its disposal. His favorite model of the economy told him exactly what should have been done.
Krugman's model of the economy is a Keynesian model which assumes that recessions are due to a lack of demand. Keynes believed full employment should be the goal of a market economy, but that the economy could reach an equilibrium below full employment. He did not believe that market forces were sufficient to end the Great Depression. He called for government to end the depression by running budget deficits. The economics profession has been engaged in a war against Keynesian concepts for the last 60 years. Many economists prefer a supply side explanation for recessions. They believe that the economy tends toward equilibrium at full employment and that government policies tend to reduce business confidence. If government would get out of the way, confidence would be restored and the economy would grow its way out of recession. Given this split within the economics profession, it is not surprising at all that the profession would not agree upon the best way to end the recession.
Krugman understands this split within the profession, but he cannot understand why the supply side economists did not change their minds about what should be done when their predictions about inflation and rising interest rates in response to government stimulus turned out to be wrong. He offers some explanations, but they only demonstrate that the economics profession does not share a common theory of the business cycle. Political ideology and economic ideology are necessarily intertwined.
At a deeper level one can also ask whether there is agreement within the profession that full employment is the appropriate mission for the economy. Business profits in the US have been at an all time high during the last few years of the recession. High unemployment keeps wages low and that might be part of the reason for historically high profits. The stock market reflects the high rate of profits, and shareholders have done very well despite the high rate of unemployment. Perhaps profit maximization is the real goal of the economy.
Economists should have known about the moral hazards that existed in the system. Moral hazard is one of the important concepts in the profession. Moral hazard existed everywhere in the system but Krugman did not discuss the role of moral hazard in the financial crisis. Mortgages were originated and sold to investment banks which packaged them into securities. The loan originators collected a fee and passed the bad loans to investments banks which sold the securities to unwary clients who depended upon the rating agencies to determine the risk. The rating agencies obliged the investment banks by putting a AAA rating on securities that did not even conform to the underwriting standards of the investment banks. Everyone was getting rich producing toxic assets, and few were punished for the harm that was done to everyone else. While this was happening bank regulators ignored the warning signals. Alan Greenspan declared that he was shocked that bankers failed to regulate their own behavior because he, and millions of Americans, believed that markets were self regulating. That belief is one of the cornerstones of the economics profession. Regulation is assumed to distort markets. In an ideal world markets, left to their own devices, would produce ideal outcomes. Unfortunately, we do not live in an ideal world. We live in a world in which most of the participants are influenced by an incentive system that encourages otherwise honest people to do terrible things.
Krugman is less concerned about the failure of the failure of the economics profession to predict the financial crisis than he is about its failure to deal properly with the recession. He argues that recessions are due to a lack of demand and that governments should run budget deficits to compensate for the decline in demand by consumers and businesses. That is especially true when the central bank has reached the zero lower bound and cannot reduce interest rates any further. He cannot understand why the profession failed to use the knowledge that it has at its disposal. His favorite model of the economy told him exactly what should have been done.
Krugman's model of the economy is a Keynesian model which assumes that recessions are due to a lack of demand. Keynes believed full employment should be the goal of a market economy, but that the economy could reach an equilibrium below full employment. He did not believe that market forces were sufficient to end the Great Depression. He called for government to end the depression by running budget deficits. The economics profession has been engaged in a war against Keynesian concepts for the last 60 years. Many economists prefer a supply side explanation for recessions. They believe that the economy tends toward equilibrium at full employment and that government policies tend to reduce business confidence. If government would get out of the way, confidence would be restored and the economy would grow its way out of recession. Given this split within the economics profession, it is not surprising at all that the profession would not agree upon the best way to end the recession.
Krugman understands this split within the profession, but he cannot understand why the supply side economists did not change their minds about what should be done when their predictions about inflation and rising interest rates in response to government stimulus turned out to be wrong. He offers some explanations, but they only demonstrate that the economics profession does not share a common theory of the business cycle. Political ideology and economic ideology are necessarily intertwined.
At a deeper level one can also ask whether there is agreement within the profession that full employment is the appropriate mission for the economy. Business profits in the US have been at an all time high during the last few years of the recession. High unemployment keeps wages low and that might be part of the reason for historically high profits. The stock market reflects the high rate of profits, and shareholders have done very well despite the high rate of unemployment. Perhaps profit maximization is the real goal of the economy.
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