Category: corporate privilege

Steve Keen on the financial crisis

Aussie economist Steve Keen, whom I have mentioned before in an investing context, has interesting recommendations for dealing with our economic meltdown.  His analysis distinguishes between capitalists and financiers, recognizing the former as labor’s allies in the production of wealth, and the latter as parasites who crashed the economy. His immediate solution for rebooting the economy now is that about 2/3 of the debt needs to be written off, tho he recognizes that legitimate savers must be protected in this process.

But long term, how to prevent something like this from happening again?  It seems that his key proposal is to restrict stock trading. Corporations could still issue stock, with voting and dividends as today.  And the stock could be traded.  However, as soon as a share of stock is traded, its “perpetual” life would be shortened to 30 years.  He says that would prevent people from leveraging the purchase of stock, which represents a big part of the debt that got us in this mess. Certainly it would require investors to look more closely at what their money is actually being used for, and would tend to make corporate ownership more focused on the long-term future.

His second proposal seems to be a restriction on the amount of debt that can be secured by real estate, limiting it to 10 times the rental value. (However, the video is truncated before he can discuss this point.)

How Georgist is this?

In a geoist world, privilege would be eliminated or taxed, including public collection of essentially all economic rent.  As a result, the value of stock could only represent real capital, which generally lasts less than 30 years.  And of course, with rent publicly collected, investors would (we expect) realize that real estate leverage cannot be profitable.  So I think Keen is proposing an alternative, more complicated way of achieving something similar to a Georgist reform.

There’s much more in the video, about his modeling work and the details of the mess we’re in.  Probably the most interesting part is near the end, where he makes his 30-year-limit-on-stock proposal.  The (New York) audience, probably people in the securities business, cannot accept this.  “Who would trade stock if doing so reduced its value?” “If people didn’t trade stock, how would traders know what it was worth?” “If I didn’t buy Microsoft stock when it was first issued, how could I buy it?”

Just as with land, everybody assumes that they will get rich off the stock market.  And that they should.

note: This link (repeated from above) takes you to Keen’s blog article, which includes  links to an MP4 video of the presentation as well as a pptx file (pretty much readable by Impress) of his slides.  There is also a paper (which I did not read).

China collecting some rent

Bloomberg reports that China has imposed what appears to be a 5% severance fee for coal, oil, and gas in one western province, and will extend it to others.  Revenue will be used to fund development projects in the area.

In principle, this is collecting the rent for the benefit of the community.  How it will actually work out cannot be known.

How we’re subsidizing the big banksters

This will not be news to most of us, but here’s a nice summary posted on Yahoo’s Tech Ticker.  Banksters borrow from the Federal Reserve Bank at zero (or from savers at practically zero), lend to the U S Treasury at 2% or 3% (by buying U. S. Bonds), and pocket the difference. Courtesy of the taxpayers, and especially those of us who have saved.  (Yeah, I know many folks don’t pay federal income taxes, but isn’t everyone entitled to a share of what the government could fund if it wasn’t paying the banksters?)

Free “enterprise” at work

It’s true that census confidentiality is imperfect and could be used to compromise civil liberties, but I can’t imagine any way that it could be used to steal one’s identity (especially if one is cautious enough not to provide name information on the form). IRS, that’s a different matter.  Anyway, Equifax has found another way to sell their protection racket.  If it’s “only $4.95” for the first month, how much is it thereafter?

taking advantage

Measuring the costs of political corruption

Trying to do some investment research, I got diverted to a couple of articles from the Review of Financial Studies.

In Corruption, Political Connections, and Municipal Finance, the authors assert that “Higher state corruption is associated with greater credit risk and higher bond yields.”  They apparently can measure the corruption and the cost; however the actual article is behind a paywall. I wonder if their results allow us to estimate how many dollars Illinoisans pay in higher debt service due to our political culture, or if the current estimate of “lots and lots” is sufficient.

Do Politically Connected Boards Affect Firm Value? might not seem to be a question worth asking, but it’s nice that academics have, they say, hand-classified corporate board members as “politically connected” to either of the two dominant U S parties. They find that nomination of a politically-connected individual to a board tends to increase stock prices, and that after the 2000 election, stocks associated with Republican boards went up, whereas those associated with Democrats went down.  Again, I cannot see the original article.

How corporate taxes caused the crash

Well, not entirely, but the deductibility of interest and the nondeductibility of dividends certainly encouraged corporations to borrow more than they otherwise would have.  Combined with tax incentives, interest payments were effectively subsidized more than 100%, as explained here.

Why are drug costs so high?

Apparently the cost of research and development isn’t the cause.

Large drug companies simply can’t afford to keep spending as much as they are now, when about 10% to 20% of revenue goes to R&D

That’s 10-20% of drug company revenue, not including the markup your pharmacy and “health insurance” company add.  I wonder how much of the remaining 80-90% is spent, directly or indirectly, on lobbying and enhancing their privileges.

Why campaign contribution limits can’t work

This is from House Banking Committee Chair Barney Frank, specifically on the subject of whether car dealers should be subject to regulation in regards to auto loans, but the significance is much more general:

“I have not had a problem because of campaign contributions. The problem is democracy: it’s people responding to people in their districts: community bankers, realtors, auto dealers, as I said, end users, insurance agents.”

“The local auto dealers are very popular in their districts,” Frank says. The more an interest group can make an issue district-specific and the more it can relate on an everyday level, Frank argues, the better it will do. “That’s why the realtors always beat the bankers. The bankers sit and they go [Frank makes a dour face, leans back in his chair and tightly folds his arms, miming an aloof posture]. The realtors are out there joining the Kiwanis and sponsoring little league.” The same is true with John Deere, dairy farmers and other back-slapping boys from back home.

How can we overcome this? Of course Realtors are going to support their own interests, ditto farmers [or, more likely, farmland owners], and other groups. One solution would be for us to treat government as a service administering common assets for the common benefit, rather than a means of transferring wealth to ourselves or our favorite groups.  Not easy, but at least it’s right.

Also relevant to this article, HGS students may remember this passage from Social Problems (1883).

The map of the United States is colored to show States and Territories. A map of real political powers would ignore State lines. Here would be a big patch representing the domains of Vanderbilt; there Jay Gould’s dominions would be brightly marked. In another place would be set off the empire of Stanford and Huntington; in another the newer empire of Henry Villard. The States and parts of States that own the sway of the Pennsylvania Central would be distinguished from those ruled by the Baltimore and Ohio; and so on. In our National Senate, sovereign members of the Union are supposed to be represented; but what are more truly represented are railroad kings and great moneyed interests, though occasionally a mine jobber from Nevada or Colorado, not inimical to the ruling powers, is suffered to buy himself a seat for glory.

Compare to this, from the  Huffpo article, Frank talking about his 71-member(!) committee:

“What’s happening now is the pro-regulation forces are being out-grassroots-ed by the antis,” Frank says. One member, he says, represented tons of title insurance companies. Another came from the headquarters of credit unions. A third’s district is home to LexisNexis; another to Equifax. Each of those entities received special treatment because their representative sits on the committee — and the more members on the committee, the more special treatment is needed.

HT, Felix Salmon

Ripping off PBGC, too

I guess no one should be surprised at this; I’m just noting for my own information that

GAO found that 40 executives for 10 companies received approximately $350 million in pay and other compensation in the years leading up to the termination of their companies’ underfunded pension plans.

However, it’s all perfectly legal.

GAO did not find any illegal activity with respect to  executive compensation on the part of either the 10 companies or the 40 executives under review.

pdf summary here, complete report here.

Big Enough to Break Up

This is so sensible that I can’t imagine it will pass.

We urge the immediate enactment of the Too Big to Fail, Too Big to Exist Act, which directs the treasury secretary to compile a list of those financial institutions that are too big to fail in the next 90 days, and to break up these banks and insurance companies a year after the legislation is signed into law

You can sign Sen. Bernie Sanders’ petition for it.

Via Barry Ritholz.