Friday, July 8, 2011

Salam on the US Economy

. Friday, July 8, 2011


This is why it is so damn frustrating when people say, “Hey, Barack Obama has been great for the private sector economy. Check out those huge corporate profits!” Huge corporate profits reflect product markets that are not sufficiently competitive. Product markets become less competitive in economies defined by high barriers to entry, including costly labor market regulations. This isn’t about President Obama. Rather, it is about the accretions that happen in any stable, affluent society.

And this:

I really want to live in a world in which center-right types would say, “Yes, enormous corporate profits are a bad thing — they’re bad because they’re a symptom of crony capitalism. The solution isn’t to tax away profits and use them to expand an inefficient public sector. Rather, it is to facilitate exploratory innovation by reducing barriers to firm entry.”

This is something that center-left folks (and progressives) also do not understand. The TBTF problem and huge profits in finance are reinforced by regulations. Regulations, even the well-crafted and necessary, will tend to support large incumbent firms almost all the time. And not just because they can lobby more effectively, but because they have the resources and market base to comply more easily than new competitors would. The fact that our financial sector is so profitable and so top-heavy is a strong sign that our regulatory code is seriously screwed up. As is the rise of the shadow banking system.

Although perhaps desirable for other reasons, raising taxes does not solve this problem and could even exacerbate it, by reducing the gains to entry even further.

I would like to see a program along the lines that Salam suggests later in the post, including an overhaul of the tax code using Simpson-Bowles as a starting point. The swiss cheese system of deductions, depreciation write-downs, loopholes, and credits is distortionary and generally benefits those who don't need much help rather than those that do. I would like to see policies designed to reward innovators rather than incumbents, and that will mean less regulation in some areas. I would like to see a program of work supports similar to what Salam describes, which sounds (to me) like something similar to the German system. I do not want to see major cuts in entitlement programs, as Salam does, as I believe a stronger safety net is more important in a more-competitive and more skills-driven economic system.

In short, at the same time the US worked to make the global economy more open and competitive, it did not enact policies that made itself more open and competitive. For a long time, our dominant global position meant that we could collect rents from the rest of the world, which we then distributed according to political demand. But those rents are now being competed away while the political demands have not. It's a fixable problem*, I think, but not until we recognize what the problem is. Right now it doesn't appear that either major political party does.

*And, at the global level, it isn't a problem at all. Competing away US rents is a good thing for the world.


Anonymous said...

I agree that no tax hikes, better tax policy, and better regulations are the ideal set of policies for sustainable growth long-term. However, if we can't get these things and if tax hikes and public spending on the unemployed are possible, that would be my second choice. We can't have 9.2% unemployment for too long. That might be socially unstable now and would wreck productivity in the long term, in the sense that many people wouldn't have the skills or might be psychologically damaged to do any meaningful work in 5 or so years from now.

LFC said...

You don't say anything about the issue of executive compensation (and a glance at Salam indicates he doesn't either). How can current levels of exec. pay be considered anything other than grossly inefficient (not to mention normatively undesirable)?

Kindred Winecoff said...


I can't get too animated about that. To the extent that it's a problem it's a symptom, not the disease itself. If we remove rents and make industries more competitive, a lot of that will go away. If exec compensation is inefficient (I'm sure that's true), then increased competition will force greater efficiency. I'd rather target the source.

Plus, I support a more progressive tax code. That relies on a class of rich people to pick up the majority of the tab.

I certainly do not support a legal prohibition on compensation.

LFC said...

KW -
Well, I support less oligopoly and a more progressive tax code also, but I can easily get animated about execs earning 400 X what the average worker in their companies makes as opposed to 30 X (or something like that) in the 60s and most of the 70s. (The W.Post had a longish piece on this several weeks ago. Focused on a Texas-based dairy bottling co., I think it was, whose CEO lives in an enormous Dallas mansion, spends time and owns property in that place in Wyoming where the v. rich congregate (I'm drawing a blank on the name) and belongs to multiple golf clubs etc etc.) To say that we need a class of grossly overpaid execs to support a progressive tax system does not cut it w me. I'm enough of a realist to realize that in the system we have execs are going to be well paid regardless, but the current levels of compensation are, for the most part, absurd.

Kindred Winecoff said...

The reason why it's tough for me to get animated about it is that it isn't super-clear who deserves more if the CEOs deserve less. Shareholders? They're the ones that set executive pay packages. Employees? Maybe, but it isn't self-evidently true that most employees provide the sort of value that merits greater compensation. It isn't self-evidently true that CEOs in the 1960s weren't *under*paid, or that there have been fundamental shifts in the economy that lead to more superstar-like compensation tendencies.

The average employee may not do as well relative to her CEO as the average employee in the 1960s, but the average employee today does much better than the average employee 50 years ago.

Moreover, who gets to make these decisions? If a Texas dairy company wants to pay their CEO too much, who am I to say they shouldn't be allowed to? I can agree that it's absurd, but I think a whole lot of things are absurd. And quite often, absurd things do not persist, especially in competitive markets. So that's where I'd rather focus my attention.

Salam on the US Economy




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