Economic

Putting Modern Monetary Theory To The Test

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An unconventional approach called Modern Monetary Theory (MMT) that suggests governments don’t have to worry about debt is gaining traction. Its basic starting point is that a government that can borrow in its own currency can take on much more debt than orthodox economics says is prudent. If you want to spend more on government programs, just print more money with a few key strokes on the Federal Reserve computer.

Governments can manage their economies though spending and taxes instead of relying on a quasi-independent central bank to do it via interest rates. If spending much more than it collects in tax revenue creates inflation, the government can deal with inflation by raising taxes.

MMT is the economic rationale coming from potential Democratic candidates for president and rising political stars like Rep. Alexandria Ocasio-Cortez (D-N.Y.), who argue that the nation can afford large-scale social projects such as the recently proposed Green New Deal, Medicare for All, free college tuition, massive public infrastructure projects, and a job guarantee program with the federal government becoming the employer of last resort.

The MMT enthusiasts acknowledge that ballooning deficits risk triggering inflation, but claim the low inflation of the past decade leaves plenty of room to increase the budget deficit. Advocates of MMT suggest using taxes to pull money out of the economy before it overheats.

Voters punish politicians for tax hikes. Do you really trust them to raise taxes to pull money out of the economy? The theory says government should stop trying to balance the budget because policies aimed at doing it hurt the economy, which forces cuts to social programs. They believe a budget surplus should be avoided at all costs.

This perspective is contrary to the conventional economic thinking that when government spends more than it collects, it either has to borrow or raise taxes. Critics such as Warren Buffet say “We don’t need to get into danger zones and we don’t know precisely where they are.” Other detractors jokingly refer to MMT as magical monetary thinking. They believe you cannot borrow endlessly without risking real economic harm, especially if the return on government investments is below the interest rate on borrowing.

And such policies may undermine the United States’ standing as the world’s reserve currency. When countries reject the dollar as a world currency and foreign buyers such as China do not want to buy U.S. debt, increased government borrowing could eventually cause interest rates to rise as investors demand a better return on treasury bonds. MMT advocates respond that U.S. borrowing costs and inflation have remained low despite our being waist deep in deficits and debt.

Yes, the federal government could print more dollars to pay off the debt if it ever came to that, but is the dollar in danger of no longer being the world’s primary reserve currency and enjoying the lower interest rates and ability to fund budget deficits in perpetuity that goes along with it? Will rising debt and deficits cause foreign investors such as foreign central banks, sovereign wealth funds, and institutional investors to turn away from the dollar because they see increased risks from holding dollars as the government ratchets up borrowing to unprecedented levels?

The real world is much more complicated than ideological simplifications and abstractions. True to form, progressive politicians reveal good intentions, outsize ambitions, and a deficit of humility. Good intentions and grand ideas are frequently blind to the bothersome trivia of execution and to unintended consequences.

Whether you agree with MMT or not, it represents an important heterodox challenge to mainstream economic orthodoxy. Hedge fund king Ray Dalio has said the United States will adopt this economic philosophy to finance big government spending for more widespread growth.

After all, economic growth is the religion of the modern world.

Economic inequality a crisis for capitalism

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Increasing economic inequality and decreasing mobility have entered mainstream consciousness and been identified as among the most pressing challenges of capitalist societies like the United States in the 21st century. Today, capitalism has a distinctly pejorative interpretation here in its free-market Mecca.

Increasingly, Americans are questioning the ideology of capitalism itself. This crisis manifests itself prominently among the nuevo millennial socialists for whom capitalism is all about profit. For them, profit is a bad word. They ignore the reality that in any economic system people hope to gain more value from things than they put into them, and that this is true in whatever you do in life.

According to a new Harris Poll, more millennials would prefer to live in a socialist country (44 percent) than a capitalist one (42 percent). The percentage of millennials who would prefer socialism to capitalism is a full 10 points higher than that of the general population. What’s more, this crowd rejects capitalism as an economic system because it benefits the wealthy and powerful; poses large social costs; and contributes to the obscene prosperity of a tiny, privileged minority.

Alternatively, proponents of capitalism argue that it is the only system humans have developed that maintains both improvement in living standards and individual freedom. Despite criticism that it is morally bankrupt, capitalism has spread prosperity across the planet. Free markets have generated enormous wealth in recent decades, as documented by the World Bank delivering millions of people out of poverty and raising living standards throughout the world. In 1990, about 40 percent of the global population lived on less than $1.90 a day, according to the World Bank; today it is less than 10 percent.

But the story is different for the average American. Since the 1970s, their wages have stagnated. Since the 1990s, cheap imports made available by NAFTA and Chinese accession to the World Trade Organization benefited consumers, but depressed wages and robbed blue-collar Americans of the secure manufacturing jobs and the health and retirement benefits that went with them.

Technological advances certainly played a major role in worker displacement, but trade policy also contributed to the U.S. losing seven million of its 19.2 million manufacturing jobs from 1980 to 2015. Yes, consumers have enjoyed lower costs for imported products, but displaced workers in the United States have paid the price and contributed to what has been labeled the crisis of capitalism: the growing gap between haves and the have-nots.

How then to define capitalism? In theory it is another ism that describes an economic way of life, a system that emphasizes private ownership of personal property and business assets, property rights that protect ownership, the sanctity of private contracts, using prices to allocate resources efficiently, a reliance on competition and incentives, voluntary exchanges between consenting adults, profit maximization, an effective legal system and limited state intervention.

In practice, capitalism is not monolithic; it takes many forms. For instance, in the United States, government plays a more limited role in economic decisions than under China’s form of market driven state capitalism. There, the government has a substantial role in shaping the rules of the market and is a significant player in the economy. In the Russian style of state capitalism, the Kremlin relies on both direct government intervention in key economic sectors and control of politically connected businessmen to promote the interests of the Russian state and those who run it.

Like any economic system, capitalism is a human institution and, as such, is imperfect. It should be judged on the basis of whether it is the best system available, not the best imaginable. And it is capable of reform. As the saying goes “nothing is forever, not now, not ever, never.”

Finally it is worth remembering, to paraphrase John Kenneth Galbraith’s comment, “under capitalism man exploits man while under socialism the reverse obtains.”

 Originally Published: May 11, 2019.

Not everyone considers socialism a Cracker Jack idea

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Capitalism seemed untouchable several decades ago, but not today. Many politicians aspiring to high office, such as Senator Bernie Sanders, a self-declared democratic socialist, are making the case for the inevitable and Darwinian triumph of socialism.

It is unclear what socialism means to them. It is a word that means many things to many people and has taken many forms. The modern version is different from the textbook variety of public ownership of the means of production, distribution, and exchange, leaving to individuals only the free discretion over consumer goods and creating a paradise on earth. Publicly owned property is preferable to private enterprise, with everyone acting virtuously and focusing on the greater good.

Is it the ideal commonwealth in Plato’s Republic, with a ruling class that has no property of its own and shares all things in common? Or a more robust version of New Deal Liberalism, or perhaps Northern European social democracy? What about the path taken in Venezuela, North Korea, and Cuba?

Or is it a planned economy with benevolent bureaucrats taking the place of free-market capitalism and playing the omniscient busybody in economic affairs to create more opportunity for the underprivileged; open the horizons of education to all, eliminate discriminatory practices based on sex, religion, race, or social class; regulate and reorganize the economy for the benefit of the whole community; protect the environment; provide adequate Social Security and universal health care for the sick, unemployed and aged in a utopian ideal of total equality of opportunity and outcome?

The term has become a blank canvas as presidential candidates embracing some of these ideas become more outspoken about socialism as the solution to problems of social and economic equality, and embracing a political wish list that includes Medicare for All, a Green New Deal and free public college. All grand ideas if they work.

These proposals have great appeal to millennials, the term generally used to refer to people born after 1980 and before 2000. Millennials outnumber baby boomers as the largest generational cohort in American society.

Recent surveys of Americans 18 to 34 find that 45 percent have a positive view of socialism. It gets even higher marks from Hispanics, Asian- and African-Americans. This attraction may have less to do with their understanding of socialism and more to do with their discontent with the current economic system. In contrast, only 26 percent of baby boomers would prefer to live in a socialist country.

Why the generational disparity? Is it because many of these folks reached adulthood in a dismal job market with crippling student loans caused by the brutal 2007-2009 recession that left them with less disposable income than their predecessors? They end up hating their own culture, even as millions around the world dream of coming to the land of milk and honey. Many agree with Governor Cuomo’s comment that “America was never that great.”

But these proposals also create agita for many politicians. That is why House Speaker Nancy Pelosi, in a recent interview with CBS’s “60 Minutes,” said socialism is “not the view” of the Democratic Party,” and that lawmakers on her side of the aisle “know that we have to hold the center.” The Republicans are trying to paint Democrats with the socialism brush, using accusations of rampant amnesia about the failures of socialism as a 2020 campaign weapon.

Former President Ronald Reagan once mocked Fidel Castro’s brand of socialism with a clever joke. He said Castro was immersed in one of his long speeches when a person in the crowd was heard shouting, “Peanuts, popcorn, Cracker Jacks.” Castro continued on with his speech when a second voice was heard shouting the same thing. This time Castro became angry and screamed, “We will kick the tush of the next person I hear say that all the way to Miami Beach.” At which point the whole crowd yelled, “Peanuts, popcorn, Cracker Jacks.”

 Originally Published: April 27, 2019

Congestion pricing is part of the solution to gridlock

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The problem of traffic congestion is reminiscent of Mark Twain’s comment about the weather, “Everybody talks about it, but nobody does anything about it.” It is no easy matter to deal with the congestion problem in major urban centers.

New York is getting ready to address the issue with a congestion pricing plan. After many years, it may be an idea whose time has finally come, but there is even more governments can do to combat traffic bottlenecks.

Congestion pricing advocates point to an array of health, safety, and environmental benefits, including air pollution, pedestrian injuries, and unclogging city streets. They cite the success of congestion pricing plans in places like London, Stockholm and Singapore.

These cities use different methods to toll drivers in their respective congestion zones. London uses a video surveillance system to record car license plates. Singapore uses larger gantries with sensors to read license plates, or directly charges E-ZPass-like units in cars. Stockholm has installed gantries and cameras at all entry points to the tolled zone.

Some New Yorkers claim congestion pricing is an unfair tax that disproportionately hurts poor people who do not have access to public transit. While affluent motorists can pay for a quicker ride, the working class will struggle to pay the toll. Suburban commuters, of course, see the plan as benefiting the city at their expense.

After years of hesitation, New York is on the verge of becoming the first U.S. city to charge motorists for driving into a central business district. The program is expected to be implemented in 2021, once the necessary infrastructure is in place.

The congestion pricing plan will help pay for badly needed repairs to the city’s transit system and reduce gridlock. The goal is to generate $1 billion annually to secure the issuance of $15 billion in municipal bonds.

Drivers could pay $12 for cars and $25 for trucks to enter the heart of Manhattan. Prices may vary based on time of day and traffic volume, and potentially offer exemptions and credits to certain travelers, such as discounts for buses, taxis and motorcycles. For example, residents in the congestion zone who earn less than $60,000 annually will be eligible for credits.

Not surprisingly, politicians avoided making many of these difficult decisions. Instead, they will be made by a six-member Traffic Mobility Review Board.

The idea of road pricing was developed by Professor William S. Vickrey, the 1996 Noble Prize winner in economics who passed away four days after winning the prize. He argued that the consequences of not charging motorists for their rush-hour usage could be “disastrously expensive”.

Society pays a high price for congestion. When traffic flow nears maximum road capacity, each additional motorist imposes a delay on others (as density increases, speed drops and travel time lengthens). The delays increase geometrically. Vickrey argued that only peak-load pricing could solve the congestion problem in urban transportation.

Major U.S. cities including Los Angeles, San Francisco, Seattle and Boston are exploring various forms of congestion pricing to unclog city streets and raise money for transportation. And the time may be right to consider tying price to performance. Money-back travel time guarantees could be offered to help customers accept higher prices for transportation services.

For instance, a turnpike a charge of 10 cents per mile during a particular time of day would be linked to a minimum average speed. If the average falls below the minimum, customers are charged progressively less. Advances in technology make it possible to put customers first and introduce a new level of accountability for public transportation providers by offering these guarantees.

This would promote customer trust and acceptance of pricing changes and provide a turnpike operator with an incentive to insure that the road is providing superior service. Former House Speaker Tip O’Neil famously said, “All politics is local”. The same can be said for trust in government transportation agencies.

Originally Published: April 12, 2019

 

Stock market boom doesn’t float everyone’s boat

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Forgetting history is an American pastime. The current bull market that ranks among the great rallies in stock market history began 10 years ago this month, just about the time when Lady Gaga’s “Poker Face” was the number one song in America.

The stock market party has been going on for a decade, but many Americans have not been invited. The Standard & Poor’s 500 index has soared over 300 percent since March 2009, but the gains are heavily concentrated among the richest families.

The richest families are far more likely to own stocks than are middle- or working-class families. Eighty-nine percent of families with incomes over $100,000 have at least some money in the market, compared with just 21 percent of households earning $30,000 or less, according to a Gallup survey.

Overall, 62 percent of families owned stocks before 2008. That number has fallen to 54 percent, the Gallup poll found. The psychological and financial damage inflicted by the 2008 financial crisis and the subsequent Great Recession continue to weigh heavily on the average American, just as memories of the Great Depression influenced financial habits for decades.

In March 2008, the Financial Meltdown, Financial Apocalypse, Financial Collapse – call it what you will – began, with the feds arranging a shotgun marriage between Bear Stearns and JPMorgan Chase. In March 2008, Bear Stearns, the smallest of the five major Wall Street investment banks, was unable to fund its operations and was bleeding cash, having lost the confidence of the market. The feds were faced with a choice between letting the company fail or taking extraordinary steps to rescue it. They choose the latter.

Bear Stearns was sold to the JPMorgan Chase, with the Federal Reserve providing $29 billion as an inducement to the acquiring bank. Bear Stearns may have ceased to exist as an independent firm, but it continued to haunt the financial world like Marley’s Ghost for months thereafter. Its collapse signaled the real start of the financial crisis. Bear’s demise started a banking liquidity crisis in which financial institutions became unwilling to lend to each other, and credit markets seized up.

A growing number of formerly solid financial institutions were turned into basket cases. After their years of kindergarten management games, shooting up on short-term borrowings, ample use of leverage fueled by low interest rates, and binging on risky trades blew up in their faces. Freezing their lending to businesses and individuals alike caused vast portion of the nation’s business activity to grind to a halt, leading to the Great Recession.

The Financial Meltdown of 2008 was one of the most critical events in American history, a biblical-style plague tanked the stock market by nearly 60 percent in the fall of 2008, killing off other financial and credit markets in the process. Banks and firms either vanished into bankruptcy or had to be rescued by taxpayers. The financial system nearly collapsed, triggering an economic crisis.

The deepest recession in decades wiped out some $11 trillion of wealth and vaporized more than eight million American jobs by September 2009. It froze up the nation’s vast financial credit system, leaving many firms without enough cash to operate. It forced the Federal government to spend $2.8 trillion and commit another $8.2 trillion in taxpayer funds to bail out crippled corporations like General Motors, Chrysler, Citigroup, AIG and a host of other too-big-to-fail private institutions.

In addition to their jobs, it cost millions of Americans their homes, life savings, and hopes for a decent retirement. These Americans were in no position to invest in stocks and benefit from the subsequent run-up in the stock market. By contrast, the wealthy have gotten even richer.

This was a cataclysm far worse than any natural disaster the nation has experienced, and its ripples continue to be felt today.

Originally Published: March 29, 2019.

All strategy is relative

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The word strategy has undergone much inflation in recent years. There is no strategy deficit; today, everyone is a strategist. The word is employed promiscuously as a value-enhancing qualifier: a strategy for tax preparation, for breastfeeding, for losing weight. The word has been drained of meaning.

In the business world, books about strategy are legion. For instance, airport bookshops, as any regular traveler knows, are replete with books on successful business strategies that make extravagant promises. The road to strategy is paved with platitudes in these popular books: Think outside the Box, Break Down Siloes, Move the Needle, Paradigm Shift, Low Hanging Fruit, and Aim High, so if you miss you won’t shoot your foot off.

When reading books on business strategy that offer prescriptions for managers, often one comes away with the uneasy sense that each author has defined the term in self-serving ways to support whatever management shtick he or she happens to be promoting, creating a strategic straightjacket, if not a cottage industry, with thoughts that don’t extend much beyond the drabbest clichés.

In this context, strategy may seem like nothing more than an impressive label pasted on an author’s pet idea to boost sales of his or her book. As the late Peter Drucker, a widely noted management consultant, educator, and prolific author once commented, “I have been saying for many years that we are using the word ‘guru’ because ‘charlatan’ is too long to fit in a headline.”

Put simply, strategy is aligning means with ends, and the trick is getting the proportions right. The alignment, like beauty, is in the eyes of the beholder. The question that haunts every strategy is “how”. How do you get from means to ends? It is always the how before the who and why. Strategy happens in the space between means and ends. It is the relationship that unfolds at the intersection of the two.

Consider an example from the wide world of sports: regardless of the quality of its players, no National Football League team can hope to reach the Super Bowl without an effective strategy to guide its performance. The ability to develop and implement a strategy is the secret to success for such coaching icons such as Bill Walsh, Tom Landry, Vince Lombardi and of course, Bill Belichick.

They all understood the importance of beginning each season with a strategy that incorporates everything knowable at the time about the performance potential of their own players and how best to exploit these resources, plus the potential of opposing players and how best to defuse it. Not to be overlooked is that the competition gets a vote. And all this knowledge is written down (along with accompanying tables and diagrams) in thick playbooks.

But they also understood that no pre-season strategy is ever carved in stone. It must be continually revised in response to the inevitability of events that can never be anticipated—like injuries to key players and to those on opposing teams, the unexpected emergence of star rookies and the mystical ability of battered old pros to somehow pull it together one more time as the season unfolds.

To quote the justly criticized former Secretary of Defense Donald Rumsfeld: “stuff happens”. No meaningful National Football League strategy ever has a half-life of more than a week or so. Top coaches know this. They even welcome it because of the fresh opportunities it can bring.

The dirty little secret they understand is that you don’t have to get your strategy perfectly right, as long as it’s not so far wrong you cannot put it right quickly. If the competition has a poor strategy, your strategy only has to be less poor. Strategy is a relative venture.

Finally, it is always useful to remember Damon Runyon’s advice: “Maybe the race isn’t always to the swift. Or the battle to the strong. But that’s still the way to bet.”

Originally Published: March 16, 2019

 

Automakers face a challenge in managing the future

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When businesses are initially established, their success largely depends on their value proposition and unique offering to the market. This success enables companies to grow and expand. But then what?

Large organizations often become so focused on current revenue streams that they lose sight of priorities like imagining the future, identifying innovations and making smart strategic choices about where to invest. Instead, they move into survival mode, trying to maintain their current positions rather than taking the risk of transitioning into new ones.

Put differently, the challenge for companies is how to deliver on this year’s goals while simultaneously trying to position themselves to be successful in the future. This dynamic is playing out big time in the transportation industry. There is perhaps no better current example of this dilemma than traditional automakers. These companies are facing disruptive technologies such as electric vehicles, connectivity, autonomous vehicles, a change from vehicle ownership to purchasing transportation as a service, and the global emergence of subcompact vehicles. They also face an unexpected wave of new competitors such as Waymo, Tesla, Uber, Lyft and others from Silicon Valley, as well as BYD and LeEco from China.

The great challenge for senior industry executives is how to manage the decline in traditional vehicle sales until the return on new technology investments fill the void. In this way, auto executives are facing a situation similar to what traditional entertainment companies faced with the switch to streaming, or brick-and-mortar retailers with the rise of e-commerce.

The challenge presented is what strategic bets should automakers make going forward and how can they modify current business models to maximize positive outcomes for all stakeholders? Companies are having to reengage fundamental questions such as where and how they should compete.

Automakers aren’t the only one faced with challenges by a changing transportation industry. For those born since the 1980s, owning a car and getting a driver’s license aren’t the life milestones they once were. Younger buyers are more interested in ease of transportation and mobility, and with often crippling student loan debt they are thrilled not to have car payments. Students graduate college with an average of about $37,000 in student loan debt. It all adds up to $1.5 trillion across the country.

Millennials are also killing the motorcycle industry. For instance, Harley Davidson is struggling with declining sales and an aging demographic that is increasingly hanging up its boots. Being an “Easy Rider” is no longer easy for an aging customer base, and younger consumers are more interested in less expensive bikes that generate lower margins for manufacturers. To attract younger customers to the brand, Harley Davidson is setting up riding schools around the country and is releasing an electric motorcycle called the “Livewire,” which will be priced at just under $30,000. The manufacturer’s suggested retail price for the entry- level Toyota Prius is about $23,500.

In the unlikely event you are not clear on this, everyone – individuals and institutions – are living in an age of disruption. The growing challenges of globalization and the rapid spread of digital technologies and artificial intelligence offer existential threats as well as new opportunities. The younger generation will experience the consequences of these disruptions for many years to come and will witness industries in transformation through their own daily experiences as they change the way Americans live and work.

It once again shows that the late, great author V.S. Naipaul was right when he said, “The world is always in movement.”

 Originally Published: February 9, 2019

Find an intelligent way to deal with China and economy

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Trade policy is a contentious issue in contemporary America. A common refrain in trade discussions is “all we want is a level playing field.” President Trump portrays his tough trade sanctions, especially against China, as a confrontation aimed at remedying decades of America being ripped off in the global marketplace.

This represents a major reversal in America’s China policy. Since President Nixon’s opening to China in 1971 and across eight subsequent administrations it was generally believed that engagement would induce China to work with the West and become a peace-loving democracy with no designs on regional or global power.

As a candidate, Trump stood out for his embrace of America-first policies and his promise to “Make America Great Again” by addressing the grievances of ordinary citizens who feel dispossessed. Once in office, Trump, a self-described deal maker, has not been fond of large multilateral deals. He was quick to withdraw from the Transpacific Partnership agreement. After first threatening to void the North American Free Trade Agreement by executive order, his administration renegotiated it.

Countries often use protectionism tools such as tariffs and quotas to support domestic industries until they are able to compete internationally. Tariffs are taxes imposed by a country that make imports more expensive. Quotas amount to quantitative restrictions on imports. It helps to keep in mind who loses and who gains from a tariff or quota. Domestic producers and employees gain and consumers lose. Governments also benefit from tariffs because they generate revenue, but tariff revenues are typically not a big consideration in developed countries.

Countries can also impose stringent quality and safety standards on foreign products. A country can tailor the standards to the product descriptions at home, thereby giving domestic producers an advantage. Consider the continuing debate over stricter standards for antibiotics in the European Union versus the United States. Are these measures of safety or a way to protect a domestic industry? Then there are all kinds of red tape that delay exporters from gaining access to a country’s market.

Still, there is another insidious tool that a country can use to promote its domestic industries. China and other countries build national champions with government funding of state-owned enterprises (SOEs). China is the world’s second largest economy, accounting for about 15 percent of global economic output. It has seen extraordinary economic expansion over an extended period, with double-digit growth for close to 30 years.

Its SOEs have facilitated that growth and are the backbone of the Chinese economy. The nation’s approximately 150,000 SOEs control around $16 trillion in assets, constitute about 40 percent of China’s gross domestic product and employ 35 million people in strategic industries such as energy, technology and telecom.

China’s government helped launch new and emerging industries by channeling capital into SOEs. For example, it flooded global markets, depressed prices, and literally shut down hundreds of U.S. solar-panel startups. China’s SOEs are front and center in implementing China’s One Belt One Road initiative, the nation’s vision for massive development of trade routes between Asia, Africa, and Europe.

These government subsidies stimulate excess production, depress market prices, and enable state-owned enterprises to capture market share. Closely related is the theft of intellectual property and forced technology transfers, often by SOEs, that highlight the need to constrain these enterprises. Countries such as China hesitate to allow state-owned enterprises to fail for fear that it would unleash a tidal wave of unemployment.

While trade talks between China and the United States may be productive in dealing with tariffs, the Trump administration should also address less traditional tactics that amount to cheating. They include China’s use of subsidies to key state-run companies to undercut their American competitors. What should be clearly understood here is that dealing with the Chinese is like engaging in unprotected sex.

Originally Published: January 27, 2019

Sham tax ‘reform’ proves more than ever that isn’t about reform, it’s about money and influence.

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The imperfect tax bill President Trump signed into law on Dec. 22 is further evidence of the rot in Washington,. The tax bill isn’t about tax reform, it’s about money and influence.

Consider the giveaway known as the carried interest rule. It’s another outrageous example of the powerful getting what they want, as they always do. This will come as no shock to anyone over the age of five.

The term “carried interest” derives from the share of profits that 12th-century ship owners and captains were given as an interest in the cargo they carried, usually a 20 percent commission to provide an incentive to keep an eye on the cargo.

Today carried interest is the 20 percent of profits from their funds with which private equity firms, venture capitalists, and real estate partnerships compensate themselves. These proceeds are taxed at a capital gains rate of 20 percent, about half the top individual income rate, which will fall to 37 percent under the new tax law. Critics argue that this money is effectively income and should be taxed at individual income tax rates. The constituents for the deduction argue that removing the incentive would reduce entrepreneurial risk taking.

The reason for the loophole’s survival comes down to campaign contributions to key lawmakers and intense lobbying to maintain the favorable tax treatment. As Gary D. Cohn, director of the White House National Economic Council said, “The reality of this town is that constituency has a very large presence in the House and the Senate and they have really strong relationships on both sides of the aisle.”

The American Investment Council, a Washington trade association that represents private equity firms, reported some $970,000 in lobbying expenditures for the first three quarters of 2017. This is in addition to the smart investment made by way of campaign contributions targeted to key lawmakers. For example, employees of the private equity firm The Blackstone Group L.P. contributed $212,000 to Senator Majority Leader Mitch McConnell in 2017 alone. In turn, politicians serve their contributors by protecting the carried interest preference.

Private equity firms have the means and vanity to get what they want. It is further proof that money is the mother’s milk of politics and that big money gets its way in Washington, D.C.

During the presidential campaign both President Trump and Secretary Clinton gave a pitch-perfect populist performance, wanting everyone to know that they were militantly opposed to this loophole, a form of welfare for the wealthy. When a politician says something like that, sports fans, try inserting a negative and you are likely to hit pay dirt. Political rhetoric is as unrelated to the truth as an advertising campaign.

The power of money seems eternal. Politicians love it like a child loves Christmas, and all are working hard to avoid reading their own political obituaries. Knowledge that it has always been this way is no consolation.

They tell pro forma lies to the public and the media, and then begin to believe what they read. Not laying blame, just putting truth into words. So House Ways and Means Committee Chair Kevin Brady (R. Texas), with a truly magnificent smile, said on the Morning Joe talk show “carried interest, we can talk about that for the next hour if you like, but for most Americans they could care less about that.”

In its pursuit of a free lunch, the public is often a bit too eager to accept the things they want to hear at face value, even though they should know that truthfulness is not a long (or short) suit for elected officials, who spin untruths with the same gusto young Abraham Lincoln supposedly split logs.

You can’t bring about change by wishing upon a star. You can run with that.

 Originally Published: January 6, 2019

A high-stakes contest for technological supremacy

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Meng Wanzhou, chief financial officer of privately owned Huawei Technologies Corp., was arrested by Canadian police at the behest of American law enforcement authorities seeking extradition as she changed planes at Vancouver International Airport. Wanzhou is the daughter of the company’s founder, a former military engineer with China’s People’s Liberation Army.

She has been charged with conspiracy to defraud banks in connection with alleged violations of American sanctions on Iran. The December 1 arrest occurred on the same day that President Trump and Chinese President Xi Jinping agreed to a cease fire in the escalating trade war between the world’s two largest economies.

Huawei, China’s smartphone and telecommunications giant, has long been at the center of drama between the United States and China. The U.S. has pressured allies to limit use of Huawei products and technology.

Huawei may not be a familiar name to Americans, but it is a global telecom behemoth, with about $93 billion in revenue 2017, almost on par with Microsoft.

Based in Shenzhen, near Hong Kong, it has the biggest research and development budget of any Chinese company. The firm has benefitted from Chinese government subsidies, contracts, and financing from the state-owned China Development Bank. These subsidies give Huawei a huge advantage over its competitors.

The company is the world’s second largest maker of smartphones, behind only Samsung. It is the world’s largest provider of telecom equipment, including switches, routers, cell tower gear, cloud computing and cybersecurity. It also sells personal computers and a wide array of wireless devices like smart watches.

Huawei is seen as a global leader in 5G, the ultra-fast wireless technology that will soon allow all the objects around us to be connected. That is good for China and bad for the United States. The U.S. worries that if Huawei wins the race to develop 5G technology, Americans may someday be buying their equipment to connect factories, vehicles, homes, utility grids and more.

Huawei is also seen as a cyber-security threat. Washington has accused it of being a potential conduit for Chinese spying and cyber theft. The Justice Department, intelligence agencies, and regulators have long believed the firm has violated American sanctions against Iran, that it works primarily for Chinese government interests and that its equipment contains back doors that allow that government to spy on customers.

In 2012, the House Intelligence Committee released a report that tagged Huawei’s products a potential security threat, accused them of engaging in intellectual property theft and recommended a ban on the company’s equipment. As early as 2003, Cisco Systems accused Huawei of infringing on Cisco’s patents and illegally copying source codes used in its routers and switches. Other accusations have also surfaced. Motorola named the firm as a co-defendant in a lawsuit and T-Mobile alleged that Huawei stole technology form its headquarters.

The Committee on Foreign Investment in the United States, an inter-agency committee of the federal government, has blocked deals involving Huawei on grounds that it had possible ties to the Chinese government and that the strategic nature of the telecommunications industry made such deals potential threats to national security. This August a defense policy bill prohibited the federal government from using Huawei equipment.

President Trump is considering an executive order that would bar American companies from using telecommunication equipment made by Huawei and other Chinese telecom companies because the equipment poses serious national security risks. Of course, the company strongly denies stealing intellectual property or enabling Chinese espionage.

It is unclear how the arrest of Meng Wanzhou will influence ongoing trade talks between the United States and China. One possibility is that the U.S. government will allow trade to trump national security concerns, as the president has suggested he would intervene on the Huawei issue if it would help secure an agreement.

Americans best stay tuned as this high-stakes contest for technological supremacy unfolds.

Originally Published: January 4, 2019