Tag: Economics

So if you’re like most people, myself included, you’ve probably been wondering how the stock market can be going up while American job losses keep rising, and the dollar keeps sinking.

In fact, it seems that there’s a full economic slow-motion meltdown underway in this country, with record numbers of people on food stamps, countless people being evicted, losing their homes, filing for bankruptcy, living in tents …..

Yet the CEO class — you know, those guys who now make half the money in the country — seem to be doing just fine, and their personal little casino known as Wall Street has been having a banner year …

Doesn’t make any sense, does it?  

Well, actually, according to this blog post I just found, it does!  

It makes a lot of sense.

I’ll try to hit the broad strokes:

Daniel Gross points out that part of the reason that the American stock markets are going up even though unemployment is rising and the real economy suffering is because multinational corporations headquartered in the U.S. are experiencing strong sales abroad:

Here’s a puzzle: The stock markets are doing very well, yet the performance of the underlying economy doesn’t seem to justify optimism. The buoyant S&P 500 has risen 53 percent since the March bottom. And while the economy expanded at a 3.5 percent rate in the third quarter, unemployment is high, incomes are stagnant, and consumers are shaky…

It could be that the notion the stock market is an accurate gauge of the domestic economy’s temperature is outdated.

Ya think?   I’d say that’s an understatement.   Of course, if we come up with a new, universally accepted barometer of the domestic economy, the media wouldn’t be able to tell us every day how great the “recovery” is, now would they?   They might actually have to tell us the truth.   And they sure don’t want to do that.  

And anyway, according to the trickle-down economic theory that has been in place in this country for almost 30 years now, supposedly what is good for Corporate America is good for Americans.  Right?  

Don’t American Workers Win?

The fact that companies based in America are raking in profits from sales abroad is good for American workers, right?

No.

Gross points out that American workers don’t benefit because a lot of the goods sold abroad by American multinationals are made abroad.

We’ve all seen that one coming for a good long time.   Sure, having U.S. companies bypass worker-safety laws, environmental laws, unions, minimum-wage laws, and pretty much every other law our forefathers fought and bled and in some cases died for does give us lower-priced goods.    For a while.    But then, the bill comes due.    Suddenly nobody makes anything any more, nobody has a job anymore, and therefore nobody can afford to buy even the cheap shitty crap made overseas.

Ah, but if these corporations are doing so well, there’s a little bit of a silver lining, right?    I mean, they have to pay taxes here, don’t they?  

Don’t Multinationals Pay A Lot in Taxes?

Well, at least the multinationals are paying a good chunk of taxes into the American economy, right?

Not exactly.

The Washington Post notes:

About two-thirds of corporations operating in the United States did not pay taxes annually from 1998 to 2005, according to a new report scheduled to be made public today from the U.S. Government Accountability Office…

In 2005, about 28 percent of large corporations paid no taxes…

Wait a minute.  I had to pay taxes.  And I’m hardly rich, and I’m certainly not a corporation.   So I have to pay taxes, but “large corporations” can get away with paying none?

Dorgan and Sen. Carl M. Levin (D-Mich.) requested the report out of concern that some corporations were using “transfer pricing” to reduce their tax bills. The practice allows multi-national companies to transfer goods and assets between internal divisions so they can record income in a jurisdiction with low tax rates…

[Senator] Levin said: “This report makes clear that too many corporations are using tax trickery to send their profits overseas and avoid paying their fair share in the United States.”

Indeed, as Pulitzer prize winning journalist David Cay Johnston documents, American multinationals pay much less in taxes than they should through a variety of widespread schemes, including:

Selling valuable assets of the American companies to foreign subsidiaries based in tax havens for next to nothing, so that those valuable assets can be taxed at much lower foreign rates

Pretending that costs were spent in the United States, so that the companies can count them as costs or deductions in the U.S. and pay less taxes to the American government

Booking profits as if they occurred in the subsidiary’s tax haven countries, so that taxes paid on profits are at the much lower safe haven rate

Working out sweetheart deals with certain foreign governments, so that the companies can pretend they paid more in foreign taxes than they actually did, to obtain higher U.S. tax credits than are warranted

Pretending they are headquartered in tax havens like Bermuda, the Cayman Islands or Panama, so that they can enjoy all of the benefits of actually being based in America (including the use of American law and the court system, listing on the Dow, etc.), with the tax benefits associated with having a principal address in a sunny tax haven.

And myriad other scams

As Johnston documents, the American economy is hurt by the massive underpayment of taxes by the huge multinationals.

Professor Raymond T. Pierrehumbert, Louis Block Professor in the Geophysical Sciences at the University of Chicago Geosciences, has published An Open Letter to Steven Levitt, the nation’s Super Freakiest Economist.  To put it simply, Pierrehumbert owns Levitt.

By now there have been many detailed dissections of everything that is wrong with the treatment of climate in Superfreakonomics , but what has been lost amidst all that extensive discussion is how really simple it would have been to get this stuff right. The problem wasn’t necessarily that you talked to the wrong experts or talked to too few of them. The problem was that you failed to do the most elementary thinking needed to see if what they were saying (or what you thought they were saying) in fact made any sense. If you were stupid, it wouldn’t be so bad to have messed up such elementary reasoning, but I don’t by any means think you are stupid. That makes the failure to do the thinking all the more disappointing.

Pierrehumbert then takes one specific point from the chapter to highlight this “failure to do the thinking”.  Pierrehumbert’s examination of the issue of whether solar cells’ low albedo (high absorption of solar energy & thus heat) makes it senseless to pursue solar power provides a tour de force examination of the basics of research (using the web) and how Levitt seems to have totally flubbed.

The point here is that really simple arithmetic, which you could not be bothered to do, would have been enough to tell you that the claim that the blackness of solar cells makes solar energy pointless is complete and utter nonsense. I don’t think you would have accepted such laziness and sloppiness in a term paper from one of your students, so why do you accept it from yourself? What does the failure to do such basic thinking with numbers say about the extent to which anything you write can be trusted? How do you think it reflects on the profession of economics when a member of that profession – somebody who that profession seems to esteem highly – publicly and noisily shows that he cannot be bothered to do simple arithmetic and elementary background reading. Not even for a subject of such paramount importance as global warming.

Rather than seeking to summarize or crib his work, let me simply emphasize that Pierrehumbert’s discussion is highly recommended reading — for the substance and style.

Freaknomics was a great read. Interesting and provoking writing, underlining the value of taking commonly understood items, shaking the data, and seeing whether the common understandings could hold up to the light of day.  Even with its problems, you didn’t need to agree with it to gain from reading and thinking about it.

As an ‘analyst’ who values that sort of provocative challenge and who values windows to thinking in different ways, it came as welcome news that a follow-on book would come out this fall.

Sadly, however, this is one of those cases where the sequel isn’t just a disappointment but does a serious disservice to its predecessor.

As Stephen Levitt summarized his and Stephen Dubner’s follow-on book, “SuperFreakonomics, available this October, includes brand new research on topics from terrorism to prostitution to global warming.”

Superfreakonomics came out today and we’d all be better off if it just hadn’t …