A License to Print Money 2

Let me preface this by saying that I'm a fan of Paul Krugman. I've read most of his books, read almost everything at the Paul Krugman archive, and read all of his columns and blog posts since he started working for the NY Times. This blog even has a 'Krugman was right, I was wrong' tag that I use on occasion.

Another strand to this post is that, over time, I've generally come to the conclusion that the simplest way out of the current economic mess for the U.S. would be to print money and distribute an equal share to each citizen until they get a little bit of inflation and a reduced debt load for debtors.

So imagine my disappointment when I read this recent post by Paul Krugman where he said,

"So why not forget about open-market operations, and just drop the stuff from helicopters? Well, remember that at this point cash and short-term bonds are equivalent. So a helicopter drop is just like a temporary lump-sum tax cut. And we would expect people to save much or most of such a tax cut — all of it, if you believe in full Ricardian equivalence."

Both Tyler Cowan and Brad Delong immediately noted that this didn't make any sense, as did a vast number of commenters on the original post.

How disconnected from reality do you have to be to think that if you give money to people who don't currently have any, they wouldn't either spend some of it or pay down their debts with it?

What vision of America must you have to imagine that the only people in America that exist are people who, given a $5,000 cheque from the government, would save all of it and not spend a dime.

It's especially frustrating because it seems as though there is almost a conspiracy of silence around pretending that America's economic woes couldn't be solved by printing a little money. And when one of the few prominent people you can expect to be both knowledgable and a straight-shooter takes on the issue, he uncharacteristically dodges the question with half-truths and deception.

The jedi mind powers of the creditor class are powerful indeed.

---
Updated to add, if you are interested in more elaboration on my opinion that printing money is the solution to the U.S.' economic problems, this post does a good job summarizing my views on the topic.

Quote of the Day (or perhaps the Quarter Centruy)

"Unfortunately the working class still can't find the pinata."

From 'Beezer', commenting on a post over at Mark Thoma's about why Washington doesn't seem to be too concerned about very high unemployment rates.

Much Ablog About Nothing

I try to vary my topics here at CAtO, but I can't deny that some stories just seem to push my blogging buttons, so to speak. Still, making a strenuous effort, I am not going to blog about today's front page National Post story, "Canada 'adrift': CEOs. Political 'vacuum' threatens nation's standard of living" -

- other than perhaps pointing out that when the article warns of "skyrocketing government spending -- up 20% on a per-capita basis over the past five years", and the CEO's say, "The country's fiscal base remains strong, but is threatened by runaway spending growth,", a balanced approach might have contrasted this whining with the fact that CEO compensation increased by roughly 100% last year.

If this pace of increase was to be sustained for 5 years (and as the Globe article notes, "Compensation experts say the surge in total payouts is likely the beginning of a string of banner years for top executives"), this would compound to a 3100% gain over 5 years.

Which kind of puts public spending increasing by 20% over 5 years (roughly 3.7%/year, which is probably less than nominal GDP growth over the same period) into perspective.

Also, when the CEOs put out a plan for Canada which says that, "Governments should ensure their activities contribute to future economic growth, rather than redistributing wealth for current consumption." they should perhaps pick their words more clearly or people will think they are suggesting an end to progressive taxation and all welfare programs, which might seem a little heartless and selfish coming from people who make millions of dollars a year.

But I'm not going to blog about that. The other thing I would normally blog about but am going to ignore because I've already said too much on this topic recently, is the stupidity of the Conservatives. In case you haven't heard, faced with the prospect of same-sex marriage legislation passing, here was the crybaby Conservative reaction (hat tip Gen X at 40):

"Conservative Leader Stephen Harper says the government's same-sex legislation will make it through the House of Commons only because of support from the Bloc Quebecois, and that, says Harper, means the legislation "lacks legitimacy." BQ Leader Gilles Duceppe immediately pounced on Harper's remarks, saying his party has as much legitimacy as the Conservatives. On his way into question period on Monday, Harper told reporters that the majority of federalist MPs will vote against the bill that extends the right to marry to gays and lesbians. He warned that the Liberals will face a backlash from voters outside Quebec over the bill. "It makes it an issue of Quebec versus Canada. Most Canadians have a skeptical view of Pequistes breaking up the country," said Conservative deputy leader Peter MacKay."

I'm assuming you don't need me to point out how dumb it is to write off the elected representatives of almost an entire province as illegitimate so there's no need to blog about this either.

What I will blog about today, is the book, 'The Efficient Society' by Joseph Heath.

First, some background. Over the past Christmas holiday I read a book called 'The Rebel Sell' by Andrew Potter and Joseph Heath. I posted my review here and in the comments Andrew Spicer suggested I might like Heath's earlier work, 'The Efficient Society'.

Andrew recently reviewed the Rebel Sell and concluded that the two books were worth reading as a pair. It's too late for me to do it in the proper order, but nonetheless I got a copy of The Efficient Society from the excellent Vancouver public library (I'm coming to think of it as the free version of Amazon with a better backcatalogue) last week and even found enough free time to read it.

The central premise of the book is that Canada is an efficient society because, when faced with decisions over whether economic functions should be carried about by government or by the market, we go with whatever works best (most efficiently) in that situation - as opposed to just putting personal freedom / fear of government ahead of efficiency (the 'American' approach) or putting collective thinking / fear of the private sector ahead of efficiency (the 'French' approach).

I'm not going to write a review here, beyond saying that I think anyone interested in understanding the proper role of government in Canada (and the world) should get hold of a copy and read it for themselves (it's an easy, not particularly long read and even just reading the first few chapters will give you a pretty good sense of the book as a whole).

What I am going to do, in my next few posts, is to highlight and discuss a few of the concepts in the book I found most interesting, starting with the contrast between a society motivated by improving/maintaining the virtue of its citizens and a society motivated by improving efficiency.

Did Your Pay More Than Double Last Year?

If not, don't worry because your CEO's did.

The Globe's Report on Business figures that the 161 top executives in Canada received average total compensation of $5.5 million each last year, thanks mainly to cashing in some stock options.

So let's do some math. $5.5 million x 161 = $885.5 million. Over 5 years that adds up to a little over $4.4 billion dollars. Hmm, roughly $4.5 billion over 5 years, that rings some kind of bell...

Just to refresh your memory, here's some quotes from a Globe story last week:

"Business leaders roasted the minority Liberal government's decision to boost spending by $4.6-billion and cancel corporate tax cuts [worth $4.6 billion over 5 years] to buy NDP support for its beleaguered budget.

They warned it will cost Canada billions of dollars in lost investment, job gains and tax revenue, and erode the business-friendly reputations of Prime Minister Paul Martin and Finance Minister Ralph Goodale.

"I think it puts Mr. Martin's credibility in doubt and Mr. Goodale's credibility in doubt," said Nancy Hughes Anthony, president of the Canadian Chamber of Commerce."

and more,

"Thomas d'Aquino, president of the Canadian Council of Chief Executives, warned that rolling back corporate tax cuts will discourage the investment needed to generate the future tax revenue needed to "pay for the massive federal commitments to expanding social programs and equalization payments."

Jack Mintz, president of the C.D. Howe Institute, predicted Canada will lose "billions of dollars in investment" as a result of Liberal missteps on corporate taxes."

and my favourite,

"Perrin Beatty, head of the Canadian Manufacturers & Exporters, said Liberals are turning their back on businesses. "The government put those tax cuts in the budget because they recognized that Canadian business faces unprecedented competition"

So forgoing a $4.6 billion future tax cut for Canadian business will cost us billions of dollars in investment, destroy the credibility of the government, make business unable to compete in a tough global environment and is enough to pay for massive federal commitments to social spending and equalization.

But the same amount (probably more if you consider the time value of money) paid to the CEO's of just 161 companies is no doubt a wise and necessary cost of doing business which will more than pay for itself by creating incentives for CEO's to try and do a good job - something which a salary of $700,000 (on average) apparently wouldn't be enough to encourage them to do thus requiring the incentive of cashing in stock options if the share price goes up.

Here are some quotes from the Globe article on executive compensation:

David Beatty, head of the influential Canadian Coalition for Good Governance (CCGG), agreed that some CEOs, such as Power Financial's Mr. Gratton, have created "tons of value" for their shareholders, but others "are just riding on the boat" that has been lifted by overall rising market levels. "They are giving away a lot of the company for nothing. There are other ways to reward people."

...

Bill Mackenzie, head of Institutional Shareholder Services Canada, formerly Fairvest, said it's hard to link huge option gains with individual performance. "It just means there were big grants. Whoever has options has beautiful leverage, and they are making a killing."

...

Claude Lamoureux, CEO of the Ontario Teachers Pension Plan, argues that options do not always reward performance. "It is very random. You could do wonderful work and not be rewarded, and you could do crappy work and make a lot of money with your options."

...

Mr. Hugessen [from Mercer] expects investor groups will pressure boards to be more selective about when they hand out share units, rather than just making grants a given every year for anyone "who fogs a mirror."

"It begins to feel a little like a money machine. People are hankering on to this."

...

Citing the work of Harvard law professor Lucian Bebchuk, he [David Beatty] said many compensation decisions are based not on performance but on a desire for collegiality, a sense of loyalty to the CEO and conflict avoidance. The result, he said, has been "outrageous costs."

Just something to think about next time you hear dire warnings of doom and gloom from our CEO's when the government fails to cut corporate taxes quickly enough for them or when they talk about how we need to keep costs down in order to be competitive.

Corporate Profits

Back on January 20, I analyzed a TD Economics study which was complaining that, despite significant increases in GDP/capita, Canadian's after-tax income hadn't increased much in the last 25 years.

I figured that the GDP growth had to be going somewhere and wrote:

"Anyway, the next question is what about the difference between 25.5% growth in GDP/capita and 9.3% growth in after-tax income. Since GDP is a measure of total income for the country, any growth that didn't go to people would have to either go to corporations or to the government. While the study notes this, it doesn't say anything further about the change in corporate income over this period - which seems pretty odd. Maybe corporations caused some of this gap and maybe they didn't, but if figuring out the source of the gap is the point of your study, wouldn't you want to look into it?"

At the time, I didn't really have any data on corporate profits so I left it at that, but I recently ran across the Feb 12-Feb 18 issue of the Economist which had a couple of articles (subscribers only) on corporate profits as a % of GDP. Here are the relevant quotes:

"UBS, a Swiss Bank, estimates that in the G7 economies as a whole, the share of profits in national income has never been higher. The flip side is that labour's share of the cake has never been lower."

and

"Over the past three years American corporate profits have risen by 60%, wage income by only 10%."

not to mention,

"there is another factor that might have raised the return on capital relative to labour in a lasting way, namely the integration of China and India into the world economy, along with their vast supply of cheap labour. To the extent that this increases the global ratio of labour to capital, it will lift the relative return to capital."

Now to be clear, I have no problem with corporations making profits or even much of a problem with corporate profits increasing as a % of national income (the one drawback being that given the unequal distribution of share ownership, this leads to greater inequality), I'm just putting this out there for the record so when you hear right wing folks blaming high taxes for the low dollar, the high dollar, the lousy weather, the breakdown in family values, the poor quality of television programming and the fact that after tax income hasn't grown at the same rate as GDP growth, you can point out that - at least for that last one - there's more going on than high taxes, and that corporate profits taking a bigger piece of the pie is a big reason why wage growth has been slow in recent years.

As a long term goal going forward, it would be ideal for all members of society to earn income from a mix of wages and share ownership so we could end the artificial divide between owners and workers but that's probably a long way off.