Man Without Qualities

Thursday, February 27, 2003

You Can't Always Get What You Want (Satisfaction)

Brad DeLong complains about the economists' letter supporting the Bush Administration's budget proposals. His complaint has landed him in some hot water.

Professor DeLong comments on this criticism in a post bearing the curiously appropriate style and grammar of a Valley Girl rant:

Wow! Gee! Especially since my major complaint was a "process" one: my major objection was not that they had signed a letter in support of the Bush plan, but that they hadn't drafted their own economist-type letter--they'd just signed something very short drafted by some clueless dweeb associated with White House media affairs.

Professor DeLong's original post quite clearly states his three reasons for objecting to the letter. But - contrary to what he says in his "explanation" - it is untrue that his "major objection was not that they had signed a letter in support of the Bush plan, but that they hadn't drafted their own economist-type letter..." In fact, Professor DeLong's major objection was that the letter did not say what he wanted it to say:

And--here is ... the reason I was most disappointed--exercising their muscles would have materially improved the chances that Bush Administration economic policy would move in a positive direction. ... The chance of establishing the dum metuant point, that good substantive economic policies are worth having, if only because otherwise one's stable of economists won't cooperate, has been lost.

Professor DeLong objected to the letter because he objects to the substantive economic policies the letter supports. Could a reasonable person believe otherwise? He did criticize the economists for signing the letter rather than drafting another, but only because their signing the letter increased the likelihood that those substantive economic policies would become reality. Professor DeLong would have objected every bit as much as he did if the economists had drafted their own letter in favor of the same substantive economic policies. In short, it is untrue that his major complaint was a "process" one.

Another criticism he offers up:

If you have an opportunity as a professional economist to gain some media attention, you have a duty to use that opportunity to raise the level of the media debate over economic policy. This letter doesn't. It doesn't tell anyone who reads it why cutting dividend taxes would (if the appropriate adjustments are made to hold the right other things constant) be a good idea.

His assertion that this matter involved a failure of "duty" is fatuous. From where does this "duty" come? It is perfectly fine for an economist to seek economic progress solely through his or her academic writings - and turn down every, single "opportunity as a professional economist to gain some media attention." One's academic writings have to be of high quality to take that route and actually be effective. In short, there is no such "duty" to grandstand. Of course, some good economists do, and more mediocre economists must, resort to manipulating the media and the government/academic revolving door for influence.

And what about his complaint that "[t]his letter doesn't... tell anyone who reads it why cutting dividend taxes would (if the appropriate adjustments are made to hold the right other things constant) be a good idea?" If this is a valid criticism of this letter, then it applies equally to the letter signed by 450 economists opposing the Administration's plans (which Professor DeLong did not sign). That letter states, without explanation:

The permanent dividend tax cut, in particular, is not credible as a short-term stimulus. As tax reform, the dividend tax cut is misdirected in that it targets individuals rather than corporations, is overly complex, and could be, but is not, part of a revenue-neutral tax reform effort.

So all of the 450 economists signing the opposing letter and the 250 economists signing the letter of support signed letters to which Professor DeLong's objection applies. Maybe the reason for this is that each of these letters was crafted to fit in a newspaper ad. It wouldn't have mattered who wrote them, there is no way they could have contained any coherent explanation of "why cutting dividend taxes would (if the appropriate adjustments are made to hold the right other things constant) be a good idea." Maybe these 700 economists thought that because they were respected in their field they could "raise the level of the media debate over economic policy" just by signing a letter with some general conclusion which did not read like an economics encyclopedia - and they were right. All of those 700 economists seem to understand these simple facts that Professor DeLong says he cannot grasp.

Professor DeLong also complains that the letter supporting the Administration "doesn't tell anyone who reads it why it would improve corporate accountability (a thing that nobody has explained to me to my satisfaction)." Now a lot of people have tried to explain this issue, and Professor DeLong says that none of those explanations is to his satisfaction. So how could a letter designed to fit in a newspaper ad possibly include an explanation? He is again dissembling. In any event, maybe this will help:

One consequence of the corporate income tax, which came into being in 1909, is that it has lessened shareholder control over corporate assets. A key way shareholders exercised control in the pre-corporate tax era was by demanding that firms pay out a large percentage of their profits in the form of cash dividends. Among other things, this helped guarantee that corporate earnings were "real" and not based on creative accounting. At this time, it was common for companies to have a dividend-price ratios of about 5 percent.

Eventually, companies and shareholders figured out that it was mutually beneficial either to retain corporate profits, thereby raising the value of company assets, or use those profits to buy back shares on the open market. The effect of both strategies is to raise stock prices. Thus, shareholders get their earnings in the form of capital gains, rather than dividends. Not only are capital gains more lightly taxed than ordinary income, but shareholders themselves decide when to pay the tax, since capital gains taxes are assessed only when shares are sold.

The flexibility afforded by receiving one's profits as capital gains allowed sophisticated investors effectively to pay nothing except the corporate tax. They could eliminate even the capital gains tax on their shares by realizing gains only when they had offsetting losses, or by borrowing against their shares.

As a consequence, there has been a steady decline in the number of companies issuing dividends and the amount of such pay-outs. According to economists Eugene Fama and Kenneth French, the percentage of large companies paying dividends in a given year has fallen from 68.5 percent in 1978 to 21.3 percent in 1998. Over this same period, the dividend yield fell from 5.28 percent to just 1.49 percent. In effect, most shareholders are now getting virtually all of their investment returns from capital gains rather than dividends.

Unfortunately, in the process, investors lost an important source of control over the assets they ultimately own. Freed from the need to come up with hard cash to pay quarterly dividends, corporate managers had much more flexibility in how to present a company's performance to shareholders. Although Securities and Exchange Commission rules and accounting conventions theoretically kept them honest, inevitably there were gray areas that could be exploited by aggressive managers.

Or perhaps Professor DeLong would prefer to read about how the taxation of corporations encourages corporate management to acquire other companies rather than concentrate on what performance management can extract from the corporate assets they already control - thereby avoiding full accountability for their past performance. In that case, he could study this paper by Nobelist Myron Scholes and others.

And there's lots more out there if he cares to look. But, then, the whole question is whether the explanations are to the Good Professor's personal satisfaction. And that is a matter that requires competence, intellectual honesty and open mindedness.

But for now it is enough to contemplate how much confusion he exhibits, and how many not-very-hard concepts and considerations he misses or misunderstands, in connection with just one short letter. It terrifies me to imagine what it is like to be his student.

Has he had accomplished students?

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