Austerity & Uncertainty are holding back GDP

It's a day of the obvious it seems, but Suzy Khimm has a really great post up at Wonkblog that outlines how much in deficit reduction Congress and the president has already achieved, but also how those savings have depressed our GDP growth. This is, of course, I no-brainer. The government is part of the GDP equation and it's long been established when you cut government spending, you slow economic growth.

But perhaps more substantively for the future. Ms. Khimm notes that Barclays economist, Dean Maki, believes that only entitlement and tax reform can put the US on the path to greater economic growth. Quite honestly this is also pretty obvious. Companies have rebounded from the recession, but many are hording cash right now or looking for mergers and acquisitions to spend that cash on. One of the big reasons for that is governmental uncertainty. If you're a business owner you just don't know what the tax environment and entitlement is going to look like because there's tons of talk around making changes, but nothing has changed yet. It would be better for the economy if the government would do something decisive to give taxation and entitlement clarity to employers. Sadly, as I noted at length yesterday, if one side isn't ready to negotiate then no deal is going to get done.

Raising the Minimum Wage Isn't the Answer

In President Obama's State of the Union address he cited raising the minimum wage as policy goal. Liberals cheered, conservatives sneered, and me, for me it was a "ugh" moment. Let's be for real, the amount of money someone earns annually if they're working full-time in a minimum wage job verges on an insult to our collected humanity if that's what a head of household brings home. I mean, I'm a reasonably frugal guy but $15,000 just ain't a lot of money.

But a federally mandated raise in the minimum wage is a ham-handed way to deal with the problem. There are small businesses out there that hire high school kids or retirees a minimum wage. These aren't head of household employees, they are supplemental income employees and a federally mandated rise in the minimum wage hurts business while given the high school version of me a little more money maybe to save for college, but more then likely to buy another game of bowling. Now, I know not everyone is like me and there are folks that need a living wage. So let's write a smart law to reflect that, without hitting a small business like the one I worked for in high school.

But as Ezra Klein notes, raising the minimum wage isn't really about raising the minimum wage, it's about the growing income inequality going on in this country. It's about trying to see a greater share of corporate profits go to labor. And Ezra does a good job of breaking down some ways this could be tried without raising the minimum wage, or rather, that were tried and even implemented by Congress and Obama, but then allowed to lapse. And if Ezra is right that this is more about winning an issue for Obama and the Democrats at this point, then I may need to eat some crow. But it also means the Democrats and Obama are playing the long game here. They keep offering to compromise and keep hearing no, so they'll ignore compromise and pursue a popular policy that makes Republicans look bad for opposing since it's harder to make them look back for refusing the compromise. It's shrewd politics of the sort that would have the Republicans try and pass a law that makes English the official language.

But my point is this: I believe income equality is a problem in this country and it's a problem that's getting worse. I think it's incumbent on the government to do something about this, but I don't think raising the minimum wage is the right way to address it. It's a popular move with many people, but it doesn't help us address the underlying issue and we shouldn't lose sight of that.

The Larger Import of Dell Going Private

Dell made news last week by announcing the company would be going private through a $24.4 billion dollar buyout of its public shares. It's the biggest buyout since 2007 and for me it reminded me of a piece that appeared in The Economist ahead of the Facebook IPO that considered the retreat of public companies. The Economist remembers with fondness the innovation and participation the advent of public companies caused. I find the nostalgia a bit overbearing, but interesting. And the piece as a whole got me thinking.

The main purpose of any initial public offering (IPO) is to raise capital. An entrepreneur starts a company and grows the company with investors who receive private shares of the company. The logic used to go that a company would grow to a point where it would have exhausted its ability to raise additional large chunks of capital without turning to the broader public. Facing the need for greater capital, the company would "go public" allowing anyone to buy shares. Beyond raising capital, this was often a moment where those initial investors would have the opportunity to be handsomely rewarded for their initial investment, as those private shares they have are now traded publicly, often for much more then they invested to receive them.

Of course, there are down sides to going public. Public companies have extensive reporting requirements and disclosure requirements to the government and to the public. When a company goes public and has the opportunity to enjoy the capital of the greater public, it also has the harsh daylight of public access as well. Additionally, the company is largely beholden to its shareholders. What used to be a handpicked lot of investors becomes a seething rabble of apoplectic financials instruments and traders with varying levels of commitment and a rabid appetite for every quarterly update.

It used to be a company would face the reality of the capital and the rabble and the daylight. Now more so than a few decades ago they face a choice. The uber-wealthy have created or bought in to investment groups, so-called private equity firms. Where companies used to look to an IPO to raise the money required to make the leap to the next level but also looking to the public and the rabble, now there are pools of money looking for something with a potential above market return. Companies can raise the capital without dealing with the rabble and the daylight.

I think in time this new arrangement tells us a few things we need to be wary of as business and business forms move forward.

First, the growing predominance of these private equity firms is another sign of the bulging inequality in the United States. There is a section of the populace with access to vast fortunes of money, which I don't begrudge them, but they are using this sea of money to create investment groups that lock out the standard investor in many instances. There are some institutional investors in private equity firms and even some public private equity firms (if that makes sense), but most are not readily accessible to Joe Schmo. The heavy lift of capitalism is happening far above the level of the individual stockholder, creating a parallel exclusionary system which will only entrench the financial divisions in this country as those that would aspire to join the group are increasingly without the buy-in capital necessary because they can't find the investment opportunities that allow them to compete against the entrenched and monied interests.

Second, we need a collective "come to Jesus" moment for shareholders of public companies. You invest money, you want to see a return, but tremendous sums shoot around the system based on who made a nickel per share in the third quarter earnings report. That's not investing, it's hot potato. And it's unhealthy for the sustained success of public companies. I can appreciate, in part, Michael Dell's desire to take the company private. Dell is at a crossroads. They need to evolve to remain a viable company in five years time, but this isn't a company that's on the verge of collapse. Yet shareholders demand immediate return and as the evolution were to take shape, shareholders could have abandoned the company hastening the demise of a company that wasn't dead yet. So we need to encourage a change in shareholder behavior that looks beyond the next quarter to the next year or the next decade. Now that doesn't mean Dell is a great investment, but perhaps it would temper the velocity of retreat.**

Third, and this point could surprise some people, let's take a look at the regulation and reporting regime around public companies. If you're going to ask the public to invest in something they need to know what they're investing in, but there is the counterpoint to that where the reporting burden outweighs the benefit of raising capital in the public space. I'm concerned we've designed a regime to try and prevent the bad apples (looking at you Enron) and not a regime that facilitates the good apples. The Economist says, "[politicians] have heaped regulations onto Western public companies, blithely assuming that businessfolk have no choice but to go public in the long run." I think there's something to that statement. The reality is that companies have far more options then they did when the regime was original designed and added upon and policymakers should consider the regime, how to maintain the sterilizing effect of daylight, while also making the prospect of going public more attractive to companies.

So why does this all matter? Why does it matter where a company gets its capital? I think it matters because our economy works best when we all have a vested interest in it, and that interest needs to go beyond having a job or being able to buy a cheaper TV. Our economy and capitalism works best when everyone has a share in the continued prosperity of business enterprise. The expansion of private equity firms, I believe, is likely to lead to an even greater reality of haves and have-nots, because it makes the world of investments out of reach for your standard office worker. Much was made in the presidential campaign of Warren Buffet and Warren Buffet's secretary. I think the economy works best when Mr. Buffet and his secretary both have the regular opportunity to invest in a company, even if the volume of that investment is different. Again, not equality, equal opportunity.

Postscript on point number two: I don't have the data to know this, but I would be curious how much of the quarterly report tweakers, or at least the money they represent, are folks who also have shares in private equity firms. In other words, in their never ceasing profit seeking behavior are they diminishing the luster of being a public company because they want an immediate return? Seems the traditional investment interests like mutual funds and 401(k)s change investments, but exist for those longer timelines.

Economists Are Right, Pundits Are Wrong

Over at Wonkblog, Neil Irwin does a great job breaking down why many political pundits think our current deficit and debt are nation-threatening problems, and why many economists think that's ridiculous. From past writings it should come as no surprise which side I come down on, the economists. Irwin, I think it's fair to say, is more inclined to agree with the economists, but he does a good job considering the arguments the pundits make.

To my mind, the most compelling case the pundits have to make is centered around risk management.  Here's Irwin making the argument for the pundits:

We don’t really know what the future holds and if our debt levels remain in the trillions, we may have less capacity to deal with unexpected contingencies. Suppose there is a new recession in the next few years in an already feeble recovery, which could knock the nation’s deficit reduction progress off the rails. What if there is another war? What if climate change happens so quickly and severely that the nation must start investing hundreds of billions of dollars to protect Florida from the sea?
The future is unknowable, and when there are high debt levels, even if the interest burden is seemingly manageable, it could cramp a future government’s ability to respond decisively to the challenges of the future. 

This is an excellent reason to be mindful of our current deficits and stake steps to reduce our overall debt load. And Irwin outlines, as others have, that current law will reduce our long term debt prospects. Not dramatically, but it means we don't have as far to go as some might suggest.  And of course, there is the problem of going to far toward austerity.  Irwin cites the United Kingdom:

Britain has been implementing deficit-reduction measures for the past three years, and while it has succeeded in cutting deficits, its economy has been stagnant as austerity sucks the wind out of growth. As a result, its debt to GDP ratio has been rising! (By the IMF’s numbers, Britain’s deficit has fallen from almost 9 percent of GDP in 2008 to 5.6 percent in 2012—yet in that span its debt level has risen from 61 percent to 84 percent).

I don't think that's a path we should look to replicate since it "saves" today at the expense of tomorrow. But the pundits will say our entitlement programs are a huge problem, complicating our deficit and debt issues. Hell, I've said that, but Irwin says what I have also said. It doesn't mean cuts make the most sense:

 It is certainly the case that as the post-World War II generation retires, it will put a strain on the federal government’s finances. The costs of entitlements—mainly Social Security and Medicare—for this generational bulge would be more easily managed if deficits were lower.But there are two weaknesses in this argument. First, the fact is that the costs are manageable today, and arguments that we should preemptively adjust the programs’ finances to match projections of their future challenges have an odd circularity to them: “We have to cut entitlements, because otherwise in the future we might have to cut entitlements.”

And Irwin gets even more to the point when looking at healthcare. It's not that Medicare is unsustainable as a program, it's that the healthcare sector costs are outpacing basically every other sector in cost growth year after year. So Medicare isn't the problem, healthcare costs are. Control the costs, bring the program back in line.

Finally, Irwin addresses the most quipped contestation of our deficit and debt. The specter of Greece is brought up. We will be unable to borrow. We will end in a cycle of despair. But, as Irwin notes, "there is not even a shadow of a hint of this risk priced into financial markets."  It's an unpredicatable world and financial markets are often volatile  but the economists are right. The sky is not falling. Let's work the problem, but let's not panic and make things worse.

Gun Control via Liability Insurance

NPR has a really great post tied to a story they ran on Morning Edition this morning. In it some experts suggest one practical way to achieve a measure of gun control and price in the potential for negative externalities is by requiring gun owners to purchase liability insurance.  If you own a gun you must also purchase a liability policy to cover the cost of any damage your gun incurs, very similar to the requirement many states have requiring car owners have, at minimum, liability insurance. But there's another wrinkle that could be throw in there.  Here's Prof. Justin Wolfers from the University of Michigan:

Another even more powerful approach is to recognize that the problem isn't guns per se, but gun violence. Thus, instead of taxing guns, we should tax gun violence. Basically, this is the same as saying that we should make gun owners liable for any damage their guns do. Not only would this discourage some people from buying guns, it would lead those who do keep guns to be more careful with how they're stored. Indeed, greater care would surely have kept Adam Lanza out of his mother's cache. The problem though, is that Nancy Lanza is neither with us to pay the damages her gun caused, nor could she afford to pay for the enormous damage her gun wrought in Newtown. And so the only way this solution works is if guns required mandatory liability insurance, much as we force car owners to buy insurance for the damage their machines wreak.

This is an intriguing solution to me, and one I think may sportsmen and women would find very compelling. I know my dad would. He's a card carrying member of the NRA, hunter, gun enthusiast, and all the rest. In the wake of the tragedy at Newton our annual Christmas Eve dinner started out talking about gun control. You won't find a bigger proponent of the second amendment, but you won't find a bigger proponent of individual responsibility either. He thought it made perfect sense that if your gun is used in a crime, you are charged as if you had committed the crime. What if the gun is stolen? Did you report it? Was it locked in a gun safe or did you have a trigger lock on it?

Of course, the trouble with requiring the purchase of "gun insurance" or "gun violence insurance" is that some people just won't buy it. Here's Russ Roberts a research fellow at the Hoover Institution:

[T]he logic is not quite as neat as it might appear. Many people already buy and own guns illegally without license or registration. Adding the cost of insurance would further discourage honest gun ownership. That would make matters worse not better. And is it so obvious that all guns are harmful to others and that gun ownership should be made more expensive to every owner?

Point taken, but we know there are folks on the road who don't have liability insurance. It's part of the landscape, but it doesn't mean doing this is a bad idea. It was a bit like Mr. Wayne LaPierre at the Senate Hearing yesterday saying background checks wouldn't do anything, so we shouldn't do them. Wonder what he would think about requiring liability insurance to be purchased.

Also, if you didn't see this Daily Show segment about how hard it is for the ATF to do it's job, a job Mr. LaPierre said it should be doing, you're missing out.

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