Private Equity Firm Taxes

The Bush administration warned lawmakers not to raise the tax rate of private equity and hedge funds or their managers, maintaining that it would injure the economy and discourage risk-taking. Appearing before the Senate Finance Committee, July 11, Eric Solomon, assistant Treasury secretary for tax policy cautioned against changes. Sen. Charles E. Schumer has long been critical of growing wage disparities and of Bush administration tax policies that he says favor the wealthy over the middle class. Still he has reservations about change because tax policies “provide incentives for risk-taking and entrepreneurship, because new ideas and new businesses create good jobs.”
Let's leave the slogans behind and consider the facts. Most of the risk taking we see is in financial manipulation, not in creating new products and business. These firms such as Blackstone, the Carlyle Group, and Bain Capital seldom contribute to management, except to lay off workers, reduce benefits, and sell assets. They increase the debt of acquired firms to pay themselves rather than to build new plants. The typical practice of “quick flips,” relisting the companies within a year or two of taking them private, with more leverage, but few if any operational improvements is a “contribution to the economy that we can do without and need not reward.

Iraq Civil War

Bush claims that we cannot exit Iraq or it will erupt in civil war. And what does he call the daily bombings occuring now?

Oil Refinery Capacity

"Biofuels Push Causes Oil Industry To Cut Refinery Plans" read the headline in the Lansing State Journal last week and probably other papers. Wouldn't you think that some reporter would ask the refiners' spokesperson why we should believe the industry ever planned to build new refineries when they have not built any for 30 years, and are using their huge profits to buy back their own stock rather than invest in new plants? This is where our newspapers are failing the public. As long as papers just print press releases without investigation and background, the public is not well served.

Health Care Spending--A Social Problem?

“There is widespread concern, though to a considerable extent politically generated, with the total amount of money spent on health care in the United States. To the extent that the money is spent by individuals or firms without any public subsidy, there is no economic problem. If people want to spend more of their money on medical care and less on food or housing because they greatly value good health and longevity, that is their free, legitimate, and authentic choice. It is a sign of affluence that the nation can afford to devote so high a percentage of national income to medical care.”
From Richard Posner, Becker-Posner Blog of January, 2007

This argument supposes that individual demand is not a social phenomenon. Other people’s consumption affects the demand of an individual. Robert Frank and Daniel Kahneman have it right—our attempts to keep up with others can result in a hedonic treadmill effect. It is hard to resist the availability of an expensive heart operation for a loved one even if it will only extend life for a few months. If other people are doing it, to deny the operation is to appear niggardly and mean spirited. If a whole culture says, “enough is enough, we just do not spend astronomical sums on marginal improvements in health,” one person’s refusal to spend would not stand out for social disapproval and guilt.
Posner is correct in saying that total medical spending is driven by technology. But, it is technology plus social expectations. Preferences are socially learned and changeable.

Environmental Sticks or Carrots

The buzz in environmental circles is the movement from governmental regulations to voluntary environmental improvements by business and industry. The controlling metaphor is moving from sticks to carrots. The emphasis is on the word voluntary as opposed to controls and regulation. Sounds good, we all like freedom. The metaphor misses the fact that regulation and ownership are functional equivalents. If I (or a group) own an opportunity, we can deny it to others and they therefore have a cost of doing without or buying it from me. Some have opportunities by private ownership and some have it by being the beneficiary of a regulation that keeps others from using the resource in question. The main difference between a regulation and ownership is that the beneficiary can’t sell it. It is a use value only. But, note that a group private ownership is much the same, an individual must get the agreement of all others and not just sell on their own.
So, what are the examples of so-called carrots that are motivating business and industry to be green? One, consumers are more loyal to green firms (and in some cases are willing to pay more for their products than the same product produced by a brown firm (I just made up that term). Firms selling to consumers have always responded to consumer preferences, be it speed and mileage in an automobile or the fact that it was produced in a green building with grass on the top (true of a new Ford plant for example). Is the promise of increased firm profits in response to consumer demand a stick or a carrot. The metaphor breaks down on closer examination. On the one hand the promise of greater profits looks like a carrot, but the promise of consumer exit from purchasing the brown product is punishment much like a stick.
One of the most famous contemporary consumer boycotts was of grapes organized by people wanting better wages and working conditions for migrant farm workers. The vineyard owners probably regarded the resulting lower sales as a stick. Of course, we know from behavioral economics that a dollar coded as a loss is psychologically larger than a dollar coded as a gain. When the vineyard owners gave in and paid higher wages, it was not voluntary.
A more significant boycott (or an equivalent sit-in) was that of Blacks who sat at lunch counters demanding to be served. There purchase might be called a carrot, but it was not seen as such by the store owners. It was coded as a stick and one that was resisted strenuously with the help of the police in some cities. When the store owners finally gave in, it was hardly voluntary.
A second example of a claimed carrot is when a firm improves its present environmental impact in anticipation of a future governmental regulation. It is hard to see this as fundamentally voluntary.
A third example is the trading of carbon units. This is advertised as a market solution to environmental problems. Most everyone regards market actions as voluntary and the results as desirable. But, why do these units have value? Either there is a cap on emissions in place and the firm does not already own enough units, or the firms expect caps to soon be in place. A cap is a form of ownership right. Any use of the environment for waste beyond the cap is owned by the public (make that the environmental interests within the broader pubic). The public may choose to sell some its allocation, but that depends on the rules for group action and those with high values don’t want to sell. To own is to have a stick that prevents non-owners from using the resource. The big issue that has not had enough attention is why the public accepted such a low cap allowing polluters to own a great deal of the resource. This question somehow gets lost in the celebration of voluntary market solutions. There is no market without a prior allocation of ownership sticks. In the words of Warren Samuels, a market is an arena of mutual coercion.
A fourth example are the subsidies available for some kinds of environmental practices and energy conservation such as those for hybrid cars and ethanol. This is truly a carrot, but one financed by taxpayers. And not all are willing participants—some prefer lower taxes to environmental improvement—some much for complete voluntary action.
Another example of voluntary carrots is the preference of the owners and CEOs of corporations. Some just spend the firm’s money on environmental improvement because they think it is the right thing to do—even if it did not bring new or more loyal customers. This is truly deserving of the term “voluntary.” It may be the same thing as when the CEO spends the firm’s money on the local symphony orchestra because a spouse likes classical music. This may explain the U.S. Postal Service sponsoring a team in the Tour de France—hardly the best return on its advertising dollar. Some of the stockholders of these beneficent CEO’s may not be volunteering their support, but merely going along with the separation of ownership and control in big corporations.
What is the point? It would be a mistake for environmentalists to be taken in by the myth of markets and voluntarism. The need for a well funded and authorized EPA will not disappear any time soon. I doubt that the big carbon emitters such as the coal burning electric utilities are going to volunteer to reduce emissions. I have not seen them pressuring the government to endorse the Kyoto Protocol. I read the other day that the State of North Carolina was suing the TVA because its coal burning generating plants were dumping into air reaching North Carolina. Maybe TVA customers will want to pay more for electricity and pressure TVA management to reduce emissions for the health of North Carolinians. None of us should hold their breath.
This is not to take anything away from firms such as the Interface Carpet Corporation and its CEO (and owner) Ray Anderson who has reduced its emissions of harmful chemical. Or of the pizza shop owner who has redirected the heat of its ovens to heat water.