What Did Goldman Sachs Do?

Some of these financial cases are very, very complicated. This one is pretty simple. Daniel Gross provides a good description of what the SEC charges against Goldman Sachs amount to. He uses one analogy, but I might try my hand at another.

Suppose I sell you a market basket of vegetables. We all know that the vegetables are going to rot sometime, but you're betting that most of the vegetables won't rot before you can sell them at a profit. What you don't know is that I have intentionally selected the vegetables that are most likely to rot quickly. So your market basket is loaded for failure. Why would I do that? Because another customer is paying me a large fee to take his bet that your vegetables will rot.

Nice, huh?

An Addition to Current Reading

Slowly but surely I'm updating the Current Reading list here to show you what I'm actually reading. I just added Journey to the High Southwest to that list. This is a really good travel book, as may be evidenced by its having gone through eight editions. It covers the Four Corners area of Arizona, Colorado, New Mexico, and Utah (not in that order), as well as Santa Fe. We traveled extensively in the Four Corners area last fall - see albums at my Facebook page - and we visited New Mexico again in late March, spending two nights in Albuquerque and a night in Santa Fe. We found this book helpful in Albuquerque, as it steered us to the old Plaza area, to La Hacienda restaurant, and to great birding at the Rio Grande Nature Center State Park.

More later.

You Can't Get from Here to There Via a Tea Party

As I said over on my Facebook profile, I mostly post articles by smart people, that is, by people who agree with me. This column by Douglas Schoen and Pat Caddell is an exception. I think there are a lot of things wrong with Schoen and Caddell's argument, but I'd really like to pick on one paragraph. I think the following indicates both their cynicism and their wrong-headedness.

"[Democrats] must adopt an agenda aimed at reducing the debt, with an emphasis on tax cuts, while implementing carefully crafted initiatives to stimulate and encourage job creation."

In other words, pander to the Tea Partiers by telling them the same lies that the Republicans are trying to sell. Let me repeat this so you'll know it is true:

You cannot reduce the deficit by lowering taxes.

You cannot reduce the deficit by lowering taxes.

You cannot reduce the deficit by lowering taxes.

The mechanics here are pretty clear: The additional economic activity stimulated by a tax cut may generate additonal tax revenue, but it won't generate enough revenue to make up the losses caused by the tax cut itself.

So what about the Laffer Curve? What about supply-side economics? What about the Kennedy tax cuts?

It has become a shibboleth on the right that cutting taxes raises revenue because of the increased economic activity. But this isn't true at all times and in all places. The law of diminishing returns applies to tax cuts, as well as to a lot of other human activities. When the marginal top rate of Federal income tax was 90%, as it was in the Roosevelt and Truman administrations, cutting taxes released a lot of activity and it diminished the amount of tax evasion that had been going on. Cutting taxes from 90% to 71% made it less profitable to hide income, and it provide people with money that they were eager to spend. The postwar boom didn't ride on tax cuts alone, though. During the war demand had been suppressed by forced savings - all those war bond drives with Deanna Durbin and Betty Grable stored up a lot of money, and by rationing. After the war all that stored-up money was turned into cash and used to by newly-available houses, automobiles, and business opportunities.

Similarly, the Kennedy tax cut of 1962, when the top marginal rate dropped from 71% to around 52%, reinforced, but did not cause, a boom that was really led by the German economic miracle, and the recovery of the other countries devastated by World War II. This recovery would eventually turn around and bite the U.S., but in the early 60's we were busy selling stuff to satisfy the recovering demand around the world. And, again, lowering tax rates tends to diminish tax evasion and fraud. Moreover, the Kennedy tax cut was overridden by the stimulus package of the 1960s - Vietnam plus Great Society equaled overheated economy and booming inflation, which made it looks as if tax revenues rose enough to make up for the cuts.

We could go through a lot of economic history, some of it quite contentious. Here's the truth, the whole truth, and nothing but the truth. Taxes are low enough now that we can't hope to release a store of pent-up demand and hidden income by lowering them a little more. Instead of a pile of forced savings on hand, people and companies are serious in debt. The demand isn't there to be released by lower taxes. So cutting taxes will simply reduce government revenue and increase the size of the deficit. Thus endeth the lesson.

(By the way, in the interest of full disclosure, Pat Caddell, who was President Clinton's favorite pollster, was a consultant to the TV show The West Wing. Helen and I watched every episode of The West Wing and loved it. On that basis, I hold a certain affection for Caddell. That doesn't mean I don't think he's serious wrong on the present topic.)

A Feel-Good Column on the Economy

Economics has been called "the dismal profession," and economists are prone to shed an atmosphere of gloom and doom. In this column, Daniel Gross is all sunshine and rosebuds. Spring is here, and so are some good signs for the economy. That is to say, for the real economy, if not for the epiphenomenal world of high finance.

I particularly liked the part about Big Belly Solar. This is a new company which makes solar trash compactors. This is great! Because it compacts the trash, each refuse can holds a lot more and doesn't have to be emptied as often. This saves the city on labor for trash pickups. And I suspect it diminishes the problem of the overflowing wastebasket surrounded by trash.

Spring is here, and it's time for some good news about America.

Another Book Completed

Today I finished reading N. A. M. Rodger's fine history, or, as he calls it, anatomy of the Georgian Navy, The Wooden World. One reason the Georgian Navy is of interest, is that this is the navy which fought the Seven Years War (or, as we call it in America, the French and Indian War). This is a thoroughly researched book - one of the appendices covers the number of men being treated for venereal diseases, and well-written. One couldn't call The Wooden World light reading, but it does move along.

Rodger's big point is that the Navy, like the rest of British society at that time, was governed by a combination of personal followings and mutual advantages. A British naval officer of the time didn't so much order his men about, as persuade them that an action was for the good of the ship. And the men, knowing full well that they had valuable and irreplaceable skills, stood up for themselves in a variety of ways.

One of the manifestations of this communitarian, rather than command, relationship, was the tendency for men to follow a good officer from ship to ship. In some cases, an entire ship's complement was transferred into a larger ship with the captain. There were even cases in which men deserted from one ship in order to serve with a familiar captain on another.

Such incidents raises another significant point. While there were 200 capital crimes on land at that period, there were only nine at sea, and most of them used infrequently, and pushed all the way to execution even more rarely. A deserter was likely to be executed only if that crime were aggravated by murder, say, or robbery, while away from his post.

Another strength of the book is Rodger's attention to the recruitment of officers and men and their motivations. Why did men choose such dangerous work, far from home and subject to violent death? Among other things, it was relatively well-paid (at the period in question), and it was far from home - which, when "home" was a pig farm in darkest Lancashire, was a positive advantage.

Good book, good read, and a means of gaining a deeper understanding of a period which has influenced history down to our own day.

Monster Change to the Reading List

I finished reading The Monster Book of Zombies on March 4, and it's now April 24, so it's about time to remove it from the Current Reading list. It was a very entertaining book, and it's a really good value. The most surprising story in the book was the last, "On the Far Side of the Cadillac Desert with Dead Folks."

On the other hand, zombie stories are very much a matter of taste, so I'm not going to give this one an unqualified recommendation. If you like zombie stories, or if you think you're in the mood for some bedtime reading that might give you some odd dreams, The Monster Book of Zombies could be a good choice for you.

Globalization in Action - in South America

Years ago, when I was in graduate school at Duke, I studied Bihar state in India. Bihar is in northeastern India, next to West Bengal. One of the few shining lights in Bihar was Jamshedpur, named for Sir Jamshedji Tata. At that time, Tata was a big company by Indian standards, but had hardly been heard of elsewhere. Now, Daniel Gross is at the Colombian office of Tata Consultancy Services (TCS), talking about Tata's involvement in other "third-world" countries, and how this is sign of progress for Colombia, Uruguay, and Argentina, as well as for India.

My company has a branch in India - Verizon Data Services India, so I deal with people in the new high-tech world of the subcontinent often. One of the development directors whose people work on projects I manage just made a long trip to Chennai - I suppose he's back in Texas today, if the ash cloud hasn't interfered with his itinerary.

Once again, Gross shines a little light into a promising economic trend, and finds an example that connects to a lot of other developments around the world.

The other really interesting bit in this article is that Tata now owns Jaguar and Land Rover. It was bad enough when the essence of British automotive style was owned by Ford, but to think of Jaguar as being run from Jamshedpur ... the mind boggles.