Wednesday, August 14, 2013

Crony Capitalism

I am grateful to Solidarity for turning me on to Jack Rasmus, an independent scholar, trained economist, and Leftist who writes very well. I've bookmarked his homepage. This post is based on Mr. Rasmus' recent Solidarity piece, and a longer article he wrote for Z Magazine here. At the end of the latter, he offers 14 predictions for the US economy for 2013-2014.

I note that Mr. Rasmus and I agree on most of the facts in his article. That's reassuring because he's a real economist, unlike us rank amateurs over here at Trotsky's Children. The disagreements are relevant, however, and are less about economics than about politics.

I think he misstates the Republican position on tax reform. He says
That tax code bill will include massive additional cuts in corporate income taxes, especially in the top corporate tax rate and in taxation of multinational corporations, who are currently hoarding $1.9 trillion in cash with their foreign subsidiaries in order to avoid paying taxes. Corporations are eager to reduce their top corporate rate from 35% to 28% or less--a proposal which Obama has already agreed during his last campaign. They argue that the 35% rate is the highest among advanced economies. What they don’t say, and what the press conveniently ignores, is that US corporations actual effective rate is a mere 12% of total profits--the lowest among advanced economies. They also decline to mention that the 12% rate is about half of what they previously paid annually between 1989-2008.
He leaves out the corollary, namely the Republican proposal substantially cuts loopholes, and they claim it is revenue neutral. They also argue that Obama's counter-proposal, while lowering corporate tax rates, is not revenue neutral, but would in fact collect higher corporate taxes.

So I disagree with three of Mr. Rasmus' 14 predictions:

1) He predicts that corporate tax reform will pass this year. I think that's highly unlikely.

2) He predicts that there will be significant cuts to Social Security and Medicare. I'm not sure what he's referring to, but it may be associated with Obamacare. We'll see if that actually happens.

3) He thinks the Fed will start to taper.

So here's the stunning thing about the remaining eleven predictions: they could have come straight from the pages of ZeroHedge (ZH). ZH is a radical Libertarian blog that forecasts imminent doom and gloom for the US economy. Their favorite investments are gold, guns, and canned goods.

So this is strange. We have a Leftist who, at least in 11 out of 14 points, agrees with the right-wing blog ZeroHedge. What gives?

Presumably Mr. Rasmus subscribes to the Marxist myth: We're poor because the rich people stole all the money. ZH has it's own myth, perhaps not so succinctly stated, but it's roughly We're poor because the government is hopelessly corrupt and bankrupt. Instead of Karl Marx, their prophet is Ayn Rand. These two world views don't have much in common, but they agree on one very important point: crony capitalism is bad.

A crony capitalist is a company whose major income depends on collecting rents. The Post Office is a prime example--they are granted a monopoly over the mail box, and therefore can charge as high a rent as they like for first class mail. When was the last time the price of a postage stamp went down? Never--and that's because rent collection is a sure thing.

ZH argues that much of the financial industry is run by crony capitalists--witness Fannie Mae and Freddie Mac. And likewise with Goldman Sachs and the other too-big-to-fail banks. My Republican friends point to so-called green companies, such as Solyndra, as examples. The main Republican argument against Obamacare is that it turns our entire healthcare industry into a crony capitalist operation.

So the Tea Party and Occupy Wall Street (OWS) both rail against crony capitalism. But they have different conceptions of who a crony is. For OWS, the culprit has to be some rich, white guy, like an evil banker. The Tea Party will agree with that, but also regards unionized public employees as cronies. Their inflated pay and benefits are just as much a result of rent collection as the guaranteed profits of Goldman-Sachs. College professors like me are world-class experts at collecting rents, but do only a mediocre job of education. The OWS folks are bamboozled by union propaganda.

So this is why the Tea Party has a more accurate view of corporate tax rates. What OWS doesn't understand is that our current corporate tax regime very much favors crony capitalists. Big companies, like Amazon, J. P Morgan, etc., can hire the lawyers and accountants necessary to take advantage of all the obscure loopholes. Plus they can effectively lobby for more loopholes. The small fry competition, on the other hand, can't do that--they just end up paying the high corporate tax rate. So the current tax regime discourages competition and benefits the big, incumbent companies. That's why Amazon, for example, has recently changed its tune on collecting state sales taxes--they can afford to do it, but their competitors can't.

So the Republican proposal to lower tax rates and eliminate the loopholes is a point for the little guy. It's also good for consumers, since there will be more competition in the marketplace. The Tea Party wing of the Republican party understands that. It's a pity that OWS doesn't.

I hate to associate Mr. Rasmus with OWS. Occupy is a mostly incoherent movement of very limited political consequence. Mr. Rasmus is much smarter. But in this case he's channeling the OWS line, and this explains the differences between his 14 points, and those the Tea Party might propose. His opposition to Republican corporate tax reform is misguided.

One final clarification--I don't think ZH properly represents the Tea Party. ZH's claim to fame is doom and gloom, not just free enterprise. There is no reason why a Tea Partyer has to be so pessimistic. I'm not--I am very upbeat about the US economy, as described here.

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