Wednesday, August 21, 2019

Don't pave the road to hell with good intentions - From my FB page


  
Peter Lewin
This is an ominous development and reflects a deepening ubiquitous confusion.
Compliments to Michael Bordo who said: "the Business Roundtable’s new stance would have corporate executives behave like regulators".
Anything peaceful agreed to between shareholders and management is fine, but when third parties, like the Roundtable, react to popular, and populist, agitation by trying to force extraneous criteria into that agreement, this signals a very dangerous turn - underlined by the fact that so many CEO's felt constrained to sign the declaration. To think that large scale social benefits come from the good intentions of wealthy businesses is not only untrue, it is in most cases the very opposite of the truth. These "good intentions", insofar as they divert effort away from the creation of value for consumers and thereby shareholder value, contribute to the lack of success of business and reduce long term social benefits. We learned long ago from Adam Smith and others that it is not from the benevolence of the butcher that we get our meat, but from his attention to his own self interest in making a profit (that he might use for his daughter's college, or his favorite charity, or his extravagant vacation); and to require the butcher to act in a compassionate, community-based manner will, indeed, reduce his capacity to give us our meat - in the extreme it will drive him out of business. It is bewildering that this lesson has so thoroughly been forgotten, misunderstood and dismissed by otherwise intelligent people. Our very continued existence as a free and prosperous society depends on it.
·        To think we can produce good results by mandating good intentions is the epitome of what F.A. Hayek called the fatal conceit.

-PL

Move Over, Shareholders: Top CEOs Say Companies Have Obligations to Society

Business Roundtable urges firms to take into account employees, customers and community

By David Benoit
Updated Aug. 19, 2019 6:55 pm ET

The leaders of some of America’s biggest companies are chipping away at the long-held notion that corporate decision-making should revolve around what is best for shareholders.
The Business Roundtable on Monday changed its statement of “the purpose of a corporation.” No longer should decisions be based solely on whether they will yield higher profits for shareholders, the group said. Rather, corporate leaders should take into account “all stakeholders”—that is, employees, customers and society writ large.
It is a major philosophical shift for the association, which counts the chief executives of dozens of the biggest U.S. companies as its members. The group, led by JPMorgan Chase & Co. CEO James Dimon, is a powerful voice in Washington for U.S. business interests. It represents a broad swath of American industry, counting among its members the leaders of technology giants and manufacturing companies, airlines and institutional investors, to name a few.
The Business Roundtable’s old statement of purpose espoused economist Milton Friedman’s decades-old theory that companies’ only obligation is to maximize value for shareholders.
“Each of our stakeholders is essential,” the new statement says. “We commit to deliver value to all of them, for the future success of our companies, our communities and our country.”
A company’s position on the question of corporate purpose can influence issues as diverse as worker pay and environmental impact. It plays a central role in discussions about stock buybacks, corporate spending and how companies respond to activist investors agitating for moves meant to boost returns.
The change doesn’t, and can’t, require companies to change how they do business. Corporate boards have a legal obligation to protect the interests of shareholders.
But companies have a lot of leeway on matters that could affect their shareholders. Courts have given directors and executives substantial latitude to exercise their business judgment.
The new statement of purpose was endorsed by 181 of the Business Roundtable’s 188 CEO members, including the leaders of two of the world’s biggest investors: BlackRock Inc. and Vanguard Group Inc.
The Council of Institutional Investors, however, said the statement gives CEOs cover to dodge shareholder oversight. BlackRock and Vanguard are among the council’s members.
“There’s no mechanism of accountability to anyone else,” said Ken Bertsch, the council’s leader. “This is CEOs who like to be in control and don’t like to be subject to the market demands.”
Seven CEOs declined to endorse the statement, including Larry Culp of General Electric Co.and Stephen Schwarzman of Blackstone Group Inc. The private-equity giant had concerns about its own investor clients and the potential impact of such a broad statement, a person familiar with its decision said.
The statement says companies should work to deliver value to customers, invest in employees, deal fairly with suppliers and support communities, as well as generate long-term shareholder value.
It formalizes a stance taken individually by a number of executives in recent years. Mr. Dimon, for example, has challenged the shareholder-profit focus as too narrow and an impediment to executives’ ability to focus on long-term goals.
The leader of the nation’s biggest bank writes shareholder letters that touch on a range of topics, from corporate governance to politics to economic inequality. In 2016, Mr. Dimon, along with BlackRock CEO Laurence Fink, Berkshire Hathaway Inc. ’s Warren Buffett and other executives, pledged to follow a set of “common sense” corporate principles meant, in part, to redirect the focus from short-term gains.
Democratic presidential candidate Elizabeth Warren has argued that the primacy of shareholder returns has worsened economic inequality, enriching wealthy investors at the expense of workers. Last year, she proposed legislation that would require the directors of big companies to consider stakeholders beyond the shareholder when making decisions.
Martin Lipton, a Wall Street lawyer who has long said executives should have broad authority to make decisions about what is best for the long-term health of a company, praised the announcement as repealing a policy he believes increased inequality because it was based on statistical analysis that failed to take people into account. “To the extent shareholders were benefiting, the employees were suffering a very severe detriment and society was suffering,” Mr. Lipton said.
Still, the idea that companies have an obligation to society isn’t universally popular. Some activist investors and academics have said encouraging companies to focus on a range of stakeholders amounts to grandstanding that misdirects resources. They argue that shareholders, not CEOs, should be the ones influencing society.
“A pronouncement that attempts to change things shouldn’t be coming from the CEOs; it should be coming from investors,” said William Goetzmann, a professor at Yale’s School of Management.
In 1970, Mr. Friedman’s article “The Social Responsibility of Business is to Increase its Profits” set the standard that has long been followed.
“The businessmen believe that they are defending free enterprise when they declaim that business is not concerned ‘merely’ with profit but also with promoting desirable ‘social’ ends; that business has a ‘social conscience’ and takes seriously its responsibilities for providing employment, eliminating discrimination, avoiding pollution and whatever else may be the catchwords of the contemporary crop of reformers.” Mr. Friedman wrote. “In fact they are—or would be if they or anyone else took them seriously—preaching pure and unadulterated socialism.”
Michael Bordo, a Rutgers University economics professor and former student of Mr. Friedman, said the Business Roundtable’s new stance would have corporate executives behave like regulators.
“That’s not what business is; that’s what government is,” he said. “I still think Friedman was right.”
Write to David Benoit at david.benoit@wsj.com

[Also this]
              OPINION 
            REVIEW & OUTLOOK

The ‘Stakeholder’ CEOs

Executives who abandon shareholders won’t appease the socialists.

By The Editorial Board
Updated Aug. 19, 2019 5:09 pm ET
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Today’s corporate CEO is a politician as much as business leader, and for proof look no further than the statement Monday from the Business Roundtable ostentatiously redefining its mission to serve “stakeholders” in addition to the shareholders who own the company. A close reading shows there’s less substance here than meets the media spin, but it’s still notable that the CEOs for America’s biggest companies feel the need to distance themselves from their owners.
“Business Roundtable Redefines the Purpose of a Corporation to Promote ‘An Economy That Serves All Americans,’” says the headline over a press release Monday. “Updated Statement Moves Away from Shareholder Primacy, Includes Commitment to All Stakeholders.”
And sure enough, the 300-word “Statement on the Purpose of a Corporation” doesn’t get around to mentioning “shareholders” until the second-to-last paragraph. The statement instead stresses “a fundamental commitment to all of our stakeholders,” which it defines in listed order as customers, employees, suppliers and “the communities in which we work.” Shareholders ride the caboose in this new code of corporate purpose.
At a practical level this is largely symbolic, at least for now. To be successful, any company must serve its customers, adequately reward its employees, cultivate the loyalty of suppliers, and maintain good relations with the communities where it operates. At the Business Roundtable’s level of high-toned generality, who could disagree?
There is also more than a whiff of pre-emptive politics here. The executives—the Business Roundtable is led by JPMorgan CEO Jamie Dimon —know they are political targets.
They see socialism on the rise, with Senator Elizabeth Warren proposing to redefine corporate governance in law with explicit direction to serve “stakeholders.” Her goal is to redirect corporate capital to serve political goals favored by unions, environmentalists and trial lawyers. The CEOs no doubt want to get out in front of this by showing what splendid corporate citizens they are.
Yet these CEOs are fooling themselves if they think this new rhetoric will buy off Ms. Warren and the socialist left. It may even embolden them by implying that corporate rules that require a focus on achieving value for shareholders are somehow morally insufficient. The Roundtable CEOs may be selling Ms. Warren the political rope to hang them.
Politics aside, the moral and practical superiority of the stakeholder model is hardly clear. CEOs are themselves employees hired by directors who are supposed to be stewards of the capital that shareholders have invested. One virtue of the shareholder model is that it focuses the corporate mission on measurable financial results.
An ill-defined stakeholder model can quickly become a license for CEOs to waste capital on projects that might make them local or political heroes but ill-serve those same stakeholders if the business falters. Students of corporate governance have devoted years to analyzing the “agency problem” of holding CEOs accountable to the business owners. So-called activist investors who challenge underperforming managers are one market response.
Consider the long, slow decline of General Electric , which for decades helped mom-and-pop shareholders provide for their retirement. Former CEO Jeffrey Immelt was the model of the stakeholder executive, posing in Vanity Fair as a spokesman against climate change, issuing pronouncements after the 2008 panic about the failures of capitalism.
Yet Mr. Immelt failed in his core duty to find a post-panic business model that enhanced profits and shareholder value. That failure served neither customers, employees, suppliers, communities nor shareholders. From a moral point of view, GE did far more social and economic good when it was wildly profitable and its shareholder retirees could sleep better at night confident in its dividend.

***

CEOs aren’t popular these days, and it isn’t easy to defend profits. By all means CEOs should talk about the broad benefits that flow throughout society if their companies succeed. But sooner or later they will also have to defend the morality of free markets as the greatest source of prosperity for the most people in human history. Platitudes about stakeholders won’t stop President Warren from lining them up first for the gallows.


Monday, July 29, 2019

An inconvenient truth about Islam and its critics.

Judaism has some atavistic doctrines that are repugnant but long discarded, if indeed they were ever enacted, and many other doctrines that classical liberals might condemn. But, it is not an evangelizing religion and certainly not one that preaches violence against unbelievers for being infidels. 

Christianity has doctrines more tolerant, but historical practice more brutal, also abandoned for want of power to enforce. 

Islam remains the only one of the Abrahamic religions that has not discarded its conquering totalitarian impulses, and in many places retains the power to enforce these doctrines. This is not to say anything about individual Muslims, many of whom have made their own adaptations to the religion for the modern world in which it is a lifestyle choice and not a system of obligatory laws. But the fact that many have not is cause for alarm given the numbers involved.

And yet to say this is to risk being branded Islamophobic because the multiculturalists have been seduced into thinking that the notions of individual rights and equality of individuals (notably men and women) do not apply to other cultures.

Wednesday, April 24, 2019

The Case Against Taxing Capital-gains


Taxing capital-gains is a bad idea, and taxing unrealized capital-gains is much worse.

Capital is not income. It is an estimate of future income. So taxing capital-gains is, in fact, triple taxation - income is taxed 3 times: when a company earns a profit, when it gives dividends, and when its stock price rises and is sold. And taxes, especially capital-gains taxes, discourage effort, innovation and value-creation. Now Oregon Senator Ron Wyden wants to rub salt on the wounds by taxing unrealized capital-gains – this in addition to raising the tax rate on capital-gains to the higher rate at which ordinary income is taxed. If his proposal ever became law the  destructive consequences would be extreme. 

The value of a business’s capital is  always based someone’s (perhaps an accountant’s) best estimate of the business’s future earnings (less all relevant expenses) over the remaining life of the business. This remains true for the value of a public company whose daily share price is a reflection of people’s expectations about the company’s future earnings. When a business or a share of stock on the stock market is sold for more than the buyer paid for it, this indicates that the buyer believes that the future earnings that the company justify the price that he paid. This is true whether the buyer intends to hold onto the purchased asset or not. If he intends to resell it after a short time he must believe that whoever buys it from him will pay him a higher price still and thus either intends to hold onto to it as the earnings materialize or will sell it again in the near future. Somewhere along the line the price paid for the asset will have to be justified by actual earnings, that is, income, or its value will fall and whoever holds it at that point will suffer a capital loss. Any capital-gains along the way will be offset by the capital loss. And although the gains are currently taxed, relief from tax for the losses is severely limited. This is yet another unjust aspect of the way capital-gains are taxed.

Income is the stream that flows from capital if capital is to maintain its value. So taxes based on income should apply only to income and not to gains in capital-value. In fact the capital value of an asset at any point of time already reflects the anticipated taxes that will be paid on the anticipated income.

Yet, Ron Wyden wants to go even further. He has a scheme to tax capital-gains even before they are realized, that is, before the asset is sold at a higher price than its purchase price. This is what is meant by unrealized capital-gains. He wants to tax the value of business assets according to their “market values” on an ongoing basis. Common sense reveals that the market value of any asset is a speculative matter. It is a guess about what price the asset could be sold for in the market. At any one time the estimated market valuation of all business assets taken together exceeds by a wide margin the actual prices at which all those assets could all be sold. This is because in a competitive market such valuations rest upon expectations that are mutually inconsistent. The dreams of some entrepreneurs conflict with those of others. The competitive process rewards the more accurate expectations and punishes the less accurate ones. Thus taxing all assets according to the gains they would hypothetically earn if they were to be sold would be taxing many values that will be proved in the event to have been based on incorrect expectations.

Senator Wyden has tried to anticipate such objections and to imagine a formidable set of rules and a bureaucracy to deal with them. Not least, the so-called “mark to market” exercise that would be necessary for his scheme, to provide an estimate of the momentary value of any asset were it to be sold, would create a nightmare for those trying to evaluate the real value of any business and having to estimate the ongoing capital-gains taxes that will accrue going forward.

Financial markets in which assets are routinely valued and revalued over time according to the estimates of real live buyers and sellers are absolutely indispensable for the creation of economic value in a dynamic, innovative growing economy. Senator Wyden’s scheme would severely compromise this spontaneous market process. Let us hope it suffers an early and permanent demise.

--
Peter Lewin is a clinical professor of finance and managerial economics and Director of the Colloquium for the Advancement of Free-Enterprise Education at the University of Texas at Dallas.
x

Tuesday, March 19, 2019

A new look at the intellectuals and socialism

Some years ago I wrote a short article for FEE (The Foundation for Economic Education) entitled Recycling Discredited Ideas. I was referring then, in 2009, to the renewed embrace by economists and others of discredited Keynesian ideas for dealing with the recession. I had naively thought that the overwhelming evidence against the efficacy of these ideas was sufficient to establish their permanent demise. Not so. Clearly we are doomed by the re-embrace of failed ideas to repeat the mistakes of history. The Keynesians were reborn and are alive and well.

Even worse, however, is the resilience of the idea of socialism. If ever in the history of human affairs there was decisive evidence against something, it is the evidence against socialism, especially as compared with the history of capitalism. Yet, somehow, the faithful refuse to be deterred by the facts and remain undeterred by the mounting dismal failures of socialism and the absence of even one single example of success. Meantime  the benefits of competitive capitalism are spectacularly obvious for anyone who cares to see them. The resilience of the belief in the virtues of socialism is nothing short of miraculous, a testament to the capacity of human beings to create their own reality, a major refutation of the assumption that the scientific method will always win out in an argument involving intelligent, well-meaning individuals. It is not stupidity or meanness that is to blame. It is something much deeper and more insidious; it is the power of hard-wired human presumptions to endure in the face of massive evidence to the contrary.

The presumptions of socialism are intuitive and appealing. The logic of capitalism is counterintuitive and harsh (at least harsh-sounding). In the course of modern human history they bounce against each other and wax and wane. Just a little while ago very few politicians would have been prepared to adopt the label ‘socialist’. To call someone a socialist was widely regarded as an insult, an accusation of untenable extremism. Suddenly it is completely different. While self-proclaimed socialists have all the while continued their prominence in our academic institutions, hardly diminishing over the years, socialism’s cause has most recently been taken up by our youngest, most ignorant and inexperienced voters, with the result that young politicians and other demagogues, sniffing the opportunity, have risen to national prominence on the socialist banner. The young cannot remember the horrors of socialisms past, they were not alive. And they pay no attention to the lessons of history because studying history takes effort and we have told them it is unnecessary and all wrong anyway. So, in part, it is a failure of collective memory and the downgrading of knowledge about history that is to blame. These, indeed, it seems to me, are important explanations in the re-embrace of Keynesian doctrines as well. But, they cannot be all there is to it when it comes to socialism. Those intellectuals who cling to socialist dreams are neither short on memory nor ignorant of history. Quite the contrary, some of our most intelligent and well-informed intellectuals are among them.  

Now, every day, we get news reports on self-identifying socialist politicians proposing to collectivize aspects of our economy – from healthcare to the environment and in between. How then does one explain this disturbing development?

A new book from the Institute for Economic Affairs (in London) provides an illuminating explanation and I highly recommend reading it. It is Socialism: The Failed Idea That Never Dies, by Kristian Niemietz, which can be downloaded for free from here. An informative subtitle for this book may have been The Intellectuals and Socialism were this not associated with F. A. Hayek’s famous article by that name. “Over the past hundred years, there have been more than two dozen attempts to build a socialist society” (p. 21). Niemietz provides chapters on seven of them – the Soviet Union, Maoist China, Cuba, North Korea, West Germany (the GDR, perhaps the most informative chapter), Albania and Venezuela.  Each chapter provides a brief outline of the history, followed by detailed evidence of the predictable pattern of intellectual assessments that were published at the time. That pattern starts with praise and optimism about the new attempt to create a ‘true socialism’, followed by disillusionment at what actually transpires after the honeymoon period, for which various explanations and excuses are offered, usually suggesting that those in charge failed to follow through, and this in turn is followed, once failure is abundantly evident and abuses are impossible to deny, with condemnation and explanation that this particular historical case was clearly not one of ‘real socialism’, so socialism as such cannot be condemned by it. It was driven by the wrong people or by people who were not able and willing to stay the course. It could have and should have been different. Commonly they point to the absence of democracy that seems to characterize all these cases.

This pattern is repeated over again, with variations, in each case of actual socialist experimentation. First the euphoria, encouragement and praise that accompanied pilgrimages to the new promised land by the intellectuals, including some of the western world’s most prominent intellectuals, then the backtracking by degrees and the making of excuses, followed finally by disillusionment and disavowal – although this last phase is also characterized by a remnant of unrepentants who continue to defend the integrity and the achievements of the experiment, its blemishes notwithstanding. For example, Jeremy Corbyn, who features in just about every chapter, continues to defend the Soviet Union in spite of the extermination of around 20 million people and the brutalizing and abuse of many more, as a noble experiment that was largely successful. According to him nothing good would come from the collapse of the Soviet Union (p. 88).

These case studies are found in chapters 2 through 9 and make up the heart of the book, a valuable source for those seeking an overview of each of these historical experiments. Bracketing these chapters are chapters 1 and 10 which can be profitably read even if the reader reads nothing else in the book. Chapter 1 lays out the problem. Socialist ideas are pervasive. There is a strong knee jerk reaction toward fixing things by putting the government in charge, nationalizing it, especially in vital areas like education, healthcare, and the environment, but in other areas as well. Zero-sum thinking appears to be the default. By contrast, a general understanding of how competitive capitalism works is seriously lacking. The contrast between the miserable failures of tried socialism and the achievements of actual capitalism have somehow produced the opposite of what might be expected, namely, a dissatisfaction with the latter and a hankering after the promises of the former. This, in spite of the fact that, as explained, socialism has been tried over and over again and always ends in disappointment and often disaster.

Some people point to the Scandinavian countries as examples of successful socialism. This borders on the absurd. In fact, apart from the fact that these countries have high levels of taxation and high levels of government involvement in basic services they are very capitalist in nature. There is no widespread state ownership of property. Private property and the pursuit of profit is the norm. Sweden experimented briefly with socialist style tax and regulate policies but abandoned them when they failed. It is now one of the fastest growing economies in the world and one of the most capitalist judging by the rules of production.

Chapter 10 explains this curious situation by indulging in a bit of social psychology, borrowing ideas from the work of Jonathan Haidt and Bryan Caplan.  The common brain evidently sees in the aims of socialism – equality of outcomes, comradery, compassion, the absence of scarcity, financial security, …, - a ‘cure’ for all the ills plaguing our society. And this perception gets insulated against refutation by various (conscious and unconscious) stratagems. For example, the intellectual case for socialism never actually spells out in concrete terms the specific social institutions that will have to be put in place in order to achieve the socialist nirvana and exactly how this is to be done. The blueprints are confined to the articulation of highly abstract outcomes. And then, with the failure of every ‘new’ attempt to achieve these socialist ideals, the attempt is declared not to be what socialism really is. At bottom every socialist experiment is judged to be socialist or not by its outcomes not by its objectives. So, the fact that there has never been a successful attempt to establish the objectives of a satisfactory socialism is not seen as a shortcoming of socialism as a set of ideas or policies, but rather as evidence that the attempt cannot be labelled as real socialism. It is a perfect strategy for keeping the faith in the face of a challenging reality.

The final chapter (Epilogue) catalogues the pronouncements over the decades of the newspaper The Guardian on matters socialist and makes for fascinating reading as to just how wrong you can be and yet keep going.

There is much more, read the book.

Tuesday, January 29, 2019

UBI and Brexit some thoughts.

Morning musings.
---
UBI - universal basic income, is the latest fresh new idea emanating from the new-new-left, the new-Progressives. Heavy irony here - this idea was first posited by none other than Milton Friedman and was called a negative income tax. Needless to say, he is not getting any acknowledgement for it. As it is being discussed, for example as a solution to poverty in India, there are two important elements being neglected.

1. It was never intended to be, and can never be, a policy for obtaining economic growth. It is not an instrument for growth. One proponent on the BBC suggested that with everyone having a basic income, increased spending would stimulate the economy and make it grow. Ugh. Rather ii is a scheme for alleviating poverty as a safety net. It is expensive and it will inhibit growth compared to no welfare policy. But

2. It was originally proposed by Friedman as a *replacement* for ALL of the welfare programs now in place at all levels of government. It implies a massive downsizing of bureaucracy, waist and inefficiency, and in that sense it would be cheaper and more conducive to growth. There seems to be a vague realization that it should replace current programs. But this implies that it should not carry any increase in taxation. The income subsidy should be limited to the amount that can be afforded under current conditions. This is not recognized and there is talk of dramatically increasing taxes (in India!!) to implement it. That would be a disaster.
======================
Not all no-deal Brexits are alike. There are good and bad ones in various degrees. The best, IMHO, would be one where the UK makes is very easy for those already in the country under EU laws to stay and continue what they are doing. A simple streamlined registration for example. Relatedly they should unilaterally extend to the EU the same conditions as are now in place for cross border workers in the future. An issue in the separation was immigration, so the UK could modify cross border rules to meet its concerns. This should not affect migrants with European job-market skills. Similar accommodations should be extended to investments and banking - this is very important. And border arrangements in Ireland should be establishment to be as close as possible to the current situation. A key element in the separation is the cost to the British taxpayer of subsidies to Europe and these would be abolished. The EU should be invited to match the UK's unilateral accommodations. I suspect eventually officially or unofficially they would. But maybe not. So be it.
My two cents. I suspect my advice will not be followed and we will get an unnecessary botch-up to some degree.

Sunday, January 6, 2019

The ‘cure’ for the trade deficit is in the budget deficit.



In light of current Trump trade policy, it is perhaps worthwhile to review some common sense principles about international trade.

The first, most basic and most important principle is that countries do not trade, only individuals trade. The U.S. does not trade with China. Such a statement is meaningless. Rather, some individuals residing in America buy valuable things (goods and services) from individuals residing in China. These are imports from China. At the same time other individuals resident in America sell valuable goods and services to other individuals resident in China. These are exports to China. (Often these individual actions are expressed through the legal fiction of companies, but the essential units of trade are individual people). There is absolutely no reason why the total dollar value of the first set of transactions (American imports from China) should exactly match the dollar value of the second set of transactions (American exports to China). Such a zero trade balance would be a very strange coincidence indeed, and not a very satisfactory one. In the normal course of trade we expect to import more from some places in the world (for example where manufactured goods are cheapest) than from others, and those places are likely not the places where the demand for our exports highest.

The matter is no different from what happens when people in Texas trade with people in New York. No one expects the balance of trade between Texas and New York to be zero. In fact, almost no one knows or cares what that balance is. Residents in Texas would not be surprised to learn that the trade balance between Texas and other US states varies considerably, some being negative and some being positive and probably none being zero. Negative trade balances are paid for by capital inflows – investments or trade credit. If people in New York as a whole sell more to people in Texas than people in Texas as a whole buy from people in New York, then it must be true that funds to pay for those sales must be flowing from New York and other places to Texas in the form of investments or extensions of credit. These financial transactions are private transactions that automatically ensure that payments always balance. Any aggregate negative (or positive) trade balance is equaled by an aggregate positive (or negative) capital account balance. It happens automatically through the market process. People work it out voluntarily in the routine actions of purchase and sale, investing and granting credit. Prices and quantities adjust to achieve the balance.

By the same token, the balance of trade with China should be of no concern. Logically it should be balanced by a favorable aggregate capital account balance with our trading partners including China. And, yes, it is. And that would be the end of the matter but for one important fact, namely, government involvement. In cases involving trade across national borders, often involving the conversion of currencies, governments are involved. One might say that governments have polluted the situation by insinuating themselves into what would otherwise be self-adjusting private trade in goods and finance. For this reason, trade balances have become intimately involved in domestic government spending. Government budget deficits are financed in large part by foreign capital inflows.

For example, when Chinese exporters receive dollars from American buyers the Chinese government takes those dollars in return for local yuan currency. For many years these accumulated dollars have been invested in U.S. treasuries. In other words, the U.S. has borrowed from the trade surplus earned by Chinese sellers, to finance its spending in the U.S. This is facilitated by the Chinese government in effect appropriating that surplus. Essentially the U.S. government has obligated its citizens to pay the extent of the debt owed to Chinese citizens who have been obligated by their government to lend money to the U.S. government. The same is true for our other large trading partners.

In October 2018, the Chinese government held $1.14 trillion of U.S. debt. It's the largest foreign holder of U.S. Treasury securities. The second largest holder is Japan at $1.023 trillion. The impetus for this policy has been a Chinese government fear that if it did not ‘neutralize’ the inflow of dollars by buying them, thus increasing the supply of domestic currency, the price of dollars (the exchange value in terms of yuan) would fall. This would mean Chinese exports to the U.S. would become more expensive and imports from the U.S. to China less expensive. In other words, the Chinese government has for many years been motivated by the same disastrous export-led, protectionist goals as the Trump administration now is. Each country wants to limit imports and boost exports by not only imposing tariffs, but also by countering natural flows of goods and finance with inhibiting monetary and fiscal policy. Despite the Chinese government's occasional threats to sell its holdings, it apparently continues to be happy to be America's biggest foreign banker.

At the same time, the U.S. government has become dependent on these foreign sources of finance. And as the debt keeps mounting up, the interest on the debt increases with it. With each passing day babies born in America inherit an increasing debt to our foreign bankers.

Is that a legitimate reason to be concerned about the large trade deficit with China (and other nations) that is fueling the current Trump protectionist trade strategy? No, not really. It is not the trade deficit that is the real problem. It is the U.S. government budget deficit that should receive our attention. Quite simply our government should not be borrowing so much money. The best way to fix this is to reduce government expenditure, not to increase taxes. The latter will hurt the economy and may not even result in a significant increase in revenue; in fact, it may reduce revenue. It is the overall size of the federal government that is the overarching problem of both foreign and domestic economic policy.

If the Treasury borrowed less, and/or if China decided to lend less (buy fewer U.S. bonds, or no bonds), what would happen? The dollar exchange rate would fall, imports would become more expensive, and exports would become cheaper and more attractive. Ironically that is what Trump says he wants. But it would happen automatically and it would mean downsizing the government, so don’t hold your breath.

A shorter version of this was published on January 2, 2018 in the Dallas Morning News.

Wednesday, September 12, 2018

Rosh Hashanah 2018

First day Rosh Hashanah. Rabbi Ari Sunshine’s sermon. I quite liked it and will try to share some parts of it, though, of course, I cannot and should not try to summarize all of it.
It was about our conception of ‘time’. The creation story was a product of its era. It is one of a few such creation stories from that region at that time. But there is at least one significant difference. It shifts the perspective from cyclical to linear time. The prevailing view was of a world sequentially and cyclical created, developed and destroyed, only to be recreated again. In the Hebrew bible God creates the world, almost destroys it, but then vows to Noah never to do so again. Time unfolds linearly, relentlessly. Each moment is unique, the past is gone forever, there are no do-overs, but there is also the opportunity to create something completely new in the future.
Rabbi Sunshine quotes the Psalmist who talks of how we fail to appreciate the gift of each day and, that most amazingly insightful of all biblical works, Kohelet (Ecclesiastes). There is a time for all things good and bad, a time to grieve and a time for joy – and if you do not grieve in the appropriate time you will not feel the joy.
Whereas our ancestors experienced an abundance of time, however, we with all our conveniences are always short of time. With the rapid explosion of technology, we now face a myriad of options with only so much time to experience them. And sometimes we lose track of the value of the important uses of time. We are so tethered to our cell phones that we forget to put them down during meals – a time to connect with friends and family. We rush from one experience to another with hardly any time for reflection.
In this wonderful but harried world we should deliberately slow down and turn to the sanctuary of Shabbat, once a week. He repeats Rabbi Joshua Heschel’s famous characterization of the Shabbat as “an island in time” and Sunshine embellishes and talks of 'islands of familiarity'.
I liked the way he connected aspects of the Jewish religious experience, at this time of Rosh Hashanah – Yom Kippur, when we are so emotionally conscious of the passage of time, to the truly exceptional conditions of our everyday world.
One little bit of humorous irony. This sermon about our experience of time, as apparently is true of all rabbinic sermons, was about one-third too long.

Sunday, September 2, 2018

Afrikaans is such an expressive language


If you grew up Jewish in South Africa, you had access to untranslatable words from both Yiddish and Afrikaans, delightful, expressive words that one simply cannot fully translate with all the nuance and emotion. Here are some from Afrikaans – sit down with your biltong and enjoy.
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AFRIKAANS is without a doubt the most expressive language ever
How do you explain the word "sommer" to someone who is not South African? It's not only a foreign word, it's a foreign concept. Perhaps the English never do anything "just sommer". There really is no equivalent.... "Why are you laughing? Just sommer."
"Bakkie" is another one, very useful around this house for all sizes and shapes of containers and dishes. Also used for what they call "utes" in OZ or "pickup" in England. I find it an indispensable word.
We all know "voetstoots" of course. It's been officially adopted into South African English. There's no concise, one-word equivalent in English. "As is" just doesn't hack it. And it's such a humorous word, conjuring up images of pushing that brand new car home...
There's no good English word for "dwaal". It doesn't mean dream, or daze. It's close to absent-mindedness, but that's not quite it. Being in one so often myself, I'm not likely to stop using it.
I think "gogga" is the most delightful word for insect I've ever heard. Children all over the world should use it. "Insect" just doesn't stand a chance.
And then there's "gatvol". OK, I know it's very rude. But it's so very expressive, ? "Fed up" doesn't have half the impact. "Gatvol" is a word used more frequently than ever in the workplace and the media these days, with increasing intensity.
While we're on the subject, another phrase which outstrips any English attempt is "Hy sal sy gat sien". "He'll get his come-uppance" definitely lacks the relish in comparison.
"Donder" is another very useful word, used as an all-purpose swearword, which again has no good English translation. Thunder does not even come a good second. Used as a verb, it can express any degree of roughing up. As a noun, it is a pejorative, as they politely say in dictionaries, to mean whatever you want it to mean. And there's no good translation for "skiet-en-donder" either.
It says something about the English that they have no word for "jol". Probably the dictionary compilers regard it as slang, but it's widely used for "Going out on the town, kicking up your heels, enjoying yourself.
Although curiously, the word "Yule" in Yuletide is related to "jol" and derived from Old English. So somewhere along the line, the English forgot how to "jol".
How do you explain the passion of "lekker!"? "Wow last night was a "lekker jol".
I've yet to meet a South African over the age of two who doesn't use the word "muti". Translation is impossible - "witches potion" is about the nearest I can get. It needs a long cultural historical explanation. Between "muti" and the pedantic "medication", there's simply no contest.  [Still use it today!]
And of course, my personal favourite "Kak en betaal" , which just says it all, doesn't it? A bland English translation would be "Cough and pay", or "Breathe and pay". But it just doesn't cut it, does it? Not by a long drop.
Other words that come to mind: "jou bliksem", "wag 'n bietjie", "nie so haastig nie", "just now", "sakkie-sakkie music", "ou swaer", "Ya, nee", and one of my personal favourites, "Poephol".
"Dudu". Telling your infant to "go to bed" is just not the same as, "Go dudu now, my baby!"
How about "bliksem"? "I'm going to bliksem you!". Wonderful Afrikaans expression with nothing to compare in the English language, at least nothing that gives the same satisfaction.
"Mielie pap" - there is no word like "pap", here. They have porridge, and when they say porridge, they mean oats. There's no Maltabela, no Tasty Wheat, No Creemy Meal... In other words, there's no "pap"!
"Mislik" - such a 'lekker' word. "Why are you so mislik, you little skelm?"
Which brings us to "skelm" - here you just get "baddies", but that doesn't have the same sneaky connotation of a proper skelm, does it?!
"Loskop" is another favourite. The English just don't understand when I say, "Sorry, I forgot - I'm such a loskop!"
And finally..... "moer". There simply isn't a word here that denotes the feeling of dread behind the phrase "If you don't clean your room, I'll moer you!"

Sunday, August 19, 2018

Ludwig Lachmann -"It need never have happened"


In 1967, at the impressionable age of 19, having decided, for reasons I can no longer remember, to study economics, I encountered Ludwig Lachmann. Lachmann was a Jewish émigré from Germany, having come to South Africa in 1950 to assume the position of chair of the department of economics and economic history at Wits (the University of the Witwatersrand). He came via London, after leaving Berlin with his wife in 1933, the year that Adolf Hitler came to power. Though attracted even then to the teachings of the Austrian School of Economics, this interest appears to have been greatly enhanced by many years of study with Friedrich Hayek at the LSE (London School of Economics). It was apparently during this time that his lifelong interest in capital theory was formed, though, at that time, it was mostly in connection with the energetic efforts of those many young scholars in the “Hayek circle” to understand the workings of the business cycle in order to come up with an explanation for the deepening crisis in which they found themselves in the 1930’s.

By the time he got to Wits the Great Depression was over and the protracted post-war period of economic growth was about to take off. In 1956 he published his most well-known book, Capital and its Structure, which cemented his reputation as an Austrian capital theorist and by the time I came to be in his class, in Economics II (as a second year undergraduate) he was devoting considerable attention to capital theory and growth theory in his lectures. It was through a lens shaped by this experience that I viewed him.

That year was the beginning of a lifetime association with Professor Lachmann, my most important economics teacher. Upon graduating my BA in 1968, I joined his honors seminar until I left for the Ph.D. program at the University of Chicago in 1972. (I returned briefly to South Africa 1976-1978, during which time I taught economics and resumed attending the honors seminar.) Little did I know that by the time I left Lachmann had completed and published his book The Legacy of Mac Weber. I was only dimly aware of who Weber was and oblivious as to why Lachmann might be interested in him. Looking back I realize how abysmally ignorant and conceptually immature I must have seemed, although less so than my peers. Lachmann must have struggled to find thinkers with whom he could truly converse. The opportunity to do so later, must have been very welcome, when he became a yearly visitor to New York University (and with some frequency to George Mason University), where he encountered Don Lavoie and other “mature” thinkers, some of whom would have been knowledgeable about the history of Germany and German social thought. I was aware of this from afar, when I returned to Austrian economics after Chicago, but my main interests lay elsewhere.

Now, in my 70th year, I find myself reading the third essay of his Legacy of Max Weber through a greatly expanded lens. It is an eerie experience. I hear him talking to me from beyond the grave, “Do you understand now what I was doing? Do you understand what I was trying to communicate, and why?”

In this connection I think of one particular episode from our early acquaintance. I was a junior lecturer at Wits, and a member of the Lachmann honors seminar, circa 1977 (Legacy had been published a few years earlier). I had a colleague that I introduced to the seminar, an Israeli living in South Africa. It so happened that he found himself one time alone with Lachmann in his office, perhaps arriving early for the seminar. Unlike me, who was extremely reticent in my demeanor toward my professors, he was very forthcoming and unrestrained in his curiosity, and, thus, asked a question I never would have. Knowing that Lachmann had left Germany in 1933, and knowing that he was Jewish, and strongly identified as Jewish, he asked him what he thought about the Holocaust! As I remember what my friend reported to me at the time, he replied that it was, indeed, a terrible tragedy, all the more so because it was something that “need not have happened”.

This has stuck with me over the years. I had no clue what he could have meant by this, what it implied to him, and even how anyone could say such a thing. Was he making excuses?

Now as I read his third essay on “Political Institutions”, and encounter a detour describing German history and the climate of opinion from German unification in 1871 until the rise of Hitler, I suddenly see what may be what he meant. My impression is strengthened by the fact that it is exactly what he was immersed around the time of the conversation in question.

My brief summary will not do justice to the subtleties of Lachmann’s account and is meant simply to indicate the nature of his preoccupations at the time he wrote this essay. He is referring to the fragility of the Weimar Republic. The unification in 1871 established the Great Compromise of the Rechstaat, the term by which it was known, which translates loosely as ‘the rule of law’. The power of the traditional Prussian agrarian elite, the Junkers, though diluted in the new institutional structure of the German Empire remained important. The Junker nobility was influential beyond its economic and political power across a wide range within the broader population. The new coalition of interests agreed, however, on the importance of institutional stability in the face of the rapid changes occurring as a result of industrialization. And this notion of institutional stability included the principle of freedom of contract and broadly laissez faire rules within a facilitating constitutional framework of “fundamental institutions”.

Industrialization brought with it a rapidly growing working class that did not seem to fit well within the new institutional order. From the 1880’s the Great Compromise was being challenged by the ascendancy of Marxist thinking, albeit subject to much revisionism, that saw history as an inevitable march toward the triumph of socialism. World War I shattered the institutional framework of the Great Compromise  and whatever influence the elite still had, and the coalition that constituted the Wiemar Republic formed in its wake, included a strong contingent of socialists ( for whom, as dedicated professionals, Lachmann interestingly expresses some admiration) who worked with the rest of the coalition to promote economic growth with the conviction that it was a necessary step along the path to socialism. And when in 1933 Hitler rose to power they viewed it in the same light, heralding an aspect of the impending collapse of capitalism. By this time, Lachmann suggests, quite simply the “fundamental institutions” of the Rechstaat had disappeared. There was no bedrock set of principles, or any strong political group who embraced them, to push back. Had these institutions and the principles they represented not been so eroded the Holocaust might never have happened (my interpretation).

To my knowledge, Lachmann never wrote about the Holocaust. But, I found his choice of words in this passage quite provocative.

“The mere fact that after the holocaust of Nazi rule and the Second World War the new German state was again erected on the same foundations as the Weimar Republic had been, because there were no others, seems to us to attest the inherent strength of the social forces underlying both.”

And he continues:

“Where, then, lay the weakness of the Weimar Republic? It so happens that the critical source of its weakness lay in … [that] its fundamental institutions rested on no firm basis. The compromise [between the parties of the coalition, notably by the socialists] was regarded by too many of the participants as a temporary rather than a permanent one, not as a Great Compromise [Rechstaat] but rather as a petit compromise”.


For Lachmann the Holocaust was a matter of personal experience. He was in a very real sense a ‘survivor’. I know nothing of the fate of his extended family, of friends and colleagues or of his personal feelings about those of his associates who rode the Nazi bandwagon, including his thesis supervisor Werner Sombart. I for one regret that he never addressed these matters publicly. After reading this essay I also wish he would have written a book on the history of modern Germany fleshing out the insights he presented so briefly in this essay. He refers the reader to the “brilliant” work of Joseph Schumpeter on this subject, but I can’t help feeling that Lachmann could have added much of value to that work, though, given my limited expertise, I make no judgment as to its standing relative to other different interpretations of that tumultuous history.