“I’m so bored. I hate my life.” - Britney Spears

Das Langweilige ist interessant geworden, weil das Interessante angefangen hat langweilig zu werden. – Thomas Mann

"Never for money/always for love" - The Talking Heads

Saturday, January 18, 2003

Notes

We have been researching our ever more Moby Dick like essay on James F. Stephen, which is the reason we could be seen, Thursday, in a down town coffee house reading the seemingly dry as toast political history of Great Britain, The British Revolution, 1880-1939, by Tory historian Robert Rhodes James. The book, published some time in the 70s, turns out to be quite unexpectedly readable. It is rather depressing that Rhodes, who from his author picture is the typical dried up prune of a nerdy Tory, has such ease as a writer -- it implies a whole background acquaintance with English prose that just isn't there anymore. It has disappeared in our lifetime. The environmental disaster of extinction has gotten prolonged and constant exposure in the news for the last thirty years; but the cultural disaster of the extinction of a prose capable of subtly incorporating the whole range of English literature, the repertoire, in its easy narrative of facts, is not exposed at all in the press. In fact, the press is one of the toxins that has killed this particular talent off. It is all quite startling. It is like a whole generation of piano players losing their knowledge of scales.

Anyway, James provides a number of really good quotes from Victorian and Edwardian worthies. Here's Lord Roseberry, briefly prime minister after Gladstone and a key architect of the latter phase of British imperial expansion, describing Northcote, Disraeli's successor, for a brief time, as the head of the Conservatives:

"Where he failed was in manner. His voice, his diction, his delivery, were all inadequate. With real ability, great knowledge, genial kindness, and a sympathetic nature -- all the qualities, indeed, which evoke regard and esteem -- he had not the spice of the devil which is necessary to rouse an Opposition to zeal and elation.... When Northcote warmed there was, or seemed to be, a note of apology in his voice..."

Isn't this a perfect description of Daschle? And, cutting out the sentence that begins "with real ability," isn't this Lieberman? Indeed, it is the spice of the devil that is missing from the entire Democratic leadership.



Celebrators of the imperial process

Niall Ferguson, the Tory answer to � well, to whom? To Ferdinand Braudel? Anyway, Niall Ferguson is the news in Britain this Sunday. He has a BBC series on Empire, and a book, named Empire, too, to go along with it. Now, we find Ferguson a fascinating figure. We disagree with his cases - for instance, his case against Keynes book, the Consequences of the Peace - but we think his willingness to adventure counter-factually through the conventional wisdom of historians is bracing. The Times is all about Ferguson this week. Sunday, the Times published a number of reviews of the book and the series. Andrew Roberts, who compares Ferguson, rather nonsensically, to Errol Flynn, states Ferguson's case like this:

"AS THE subtitle of this book suggests, Niall Ferguson makes big claims for the British Empire. Not only did these small rainy offshore islands turn the world capitalist, he argues, but they also made huge tracts of it speak English, play team sports and adopt our land-tenure system and common law. Moreover, what he calls "Anglobalizsation" was a Good Thing, and was achieved with far less blood being shed than would have been done by our Spanish, French, Dutch, Russian or - God forbid- German competitors."

The benignity of Empire is the theme of the season. We think it is a deeply pernicious and misleading theme. Another review of the book, this time by FELIPE FERNANDEZ-ARMESTO, strikes a discordant note - in fact, seems to be about another book entirely:


"In Niall Ferguson�s view, one of his well-selected pictures seems fairly to sum up the British Empire: a German caricature of 1904, in which Britons cheerfully torture a black man. A capitalist forces whisky down the victim�s throat, while the rack, manipulated by a soldier, extrudes gold from his rectum. Nearby, a churchman sermonises myopically. The empire, Ferguson explains in his book written to accompany the Channel 4 series which started last Thursday, originated in piracy, unrolled in slavery, practised outrages and atrocities and struggled to �play the role of world policeman with a straight face�. The �civilising mission� was a sham: empire induced savagery in its servants. The British came to India, for example, as predatory conquistadors � barbaric exploiters of a society more prosperous and, by many standards, more impressive than their own.

All this candour is surprising after an introduction that promises a robust defence of the morality of empire. Eventually, the author wrenches his rabbit from the hat. The British Empire may have been bad in some respects; but for the world of the late 19th century and much of the 20th, the alternatives were worse: German or Russian or Japanese hegemony. The balance of investment and exploitation favoured the exploiters only a little. By espousing free trade and repudiating slavery the British enriched the world and enhanced humanity. Their legacy includes liberal capitalism, parliamentary democracy, and �finally, there is the English language itself�.

As a case for the defence, it is disappointingly predictable: the vaunted legacy surely owes more, in any case, to America�s empire than to Britain�s."

Well, which version of Ferguson's version of Empire is right? And what kind of justification is it that, in the event, the Brits were better than the Spanish or the Germans?

It seems to us that the question is being posed in such a manner as to skew the issue. The question of the British effect on India is not a matter of whether the Portugese would have been better for India, but whether the Moghuls would have. Also, there is a problem with the penchant for historical battles, and turning points, etc. The turning point in India, to use the great British colony once again, was not decided at the end of the seven years war. It was decided every year after the seven years war. It was decided, with bloodshed and mythology, at the end of the Sepoy mutiny, in 1859. Whether India, like Russia, could have governed itself, imported technology, created a framework within which to palliate the great famines of the latter half of the 19th century is something we will never know. But it definitely loads the dice to make this question turn on the alternative between the Brits and the Germans, or the Japanese, or the French.

The European edition of Time magazine casts a surprisingly skeptical eye on Ferguson's empire nostalgia. This graf seems to make the case, although with an example that seems, really, to trivialize the record, disparate as it is, concentrated in thousands of separate records, of atrocity:


"But Ferguson's Empire balance sheets show some creative accounting. Though he dutifully frowns on the horrors of slavery or, say, the Battle of Omdurman, Sudan, in 1898 (in which 10,000 Muslims were annihilated in five hours by Lord Kitchener's Maxim guns), few such moments make it into the debit column. "The question is not whether British imperialism was without blemish," Ferguson writes. "It was not. The question is whether there could have been a less bloody path to modernity." There might have been, he admits, but he clearly doubts it."

Finally, this is Peter Conrad weighing in in the Guardian on one of Ferguson's nuttier claims:

"Ferguson presents the loss of Empire as an act of supreme altruism, 'authentically noble'. Britain bankrupted itself in a war against alternative Empires - German, Japanese, Italian - whose treatment of their subject populations was manifestly less humane. 'Did not that sacrifice,' he asks, 'alone expunge all the Empire's other sins?' I am not sure that he establishes the moral superiority of the home team. Of course, Christianity put a hypocritical, cozening gloss on imperial venality by claiming that the Empire had a redemptive, civilising mission.But despite this piety, British colonies depended on slavery; no wonder the nabobs were offended when the Japanese, after the fall of Singapore, enslaved British soldiers and put them to work building a railway through the jungle. Hitler admired the Empire and offered to let the British keep it if they smiled on his own imperial ambitions in eastern Europe."

Thursday, January 16, 2003

Remora

LI hopes the last post wasn't too obscure. We were simply speculating, in our dillantantish way, about what a cut in dividend taxes would mean in terms of changing the landscape of investment. The NYT carries a column on just that subject today, by Hal Varian. Varian starts out poorly, with the wrong set of figures:

"First, we really have become a nation of shareholders. According to "The Rise of the Equity Culture," a paper by the M.I.T. economist James Poterba, the number of individuals owning corporate stock has increased by nearly 60 percent in a decade, with about half of American households now owning stock, either directly or indirectly."



Well, if half of American households own some stock "directly or indirectly" -- indirect ownership, presumably, means that somebody bought it for them and is waiting until a major holiday to give it to them -- or maybe it means that the stock was bought whilst the homeowner was in a somnabulistic fugue -- in any case, these are not the important figures for the potential change to be wrought by the tax cut. While it is possible that small individual portfolios will shift towards stocks that pay dividends, the key stimulus to change for these individuals will continue to be stock price. The gain accrued by the increase of equity value will far exceed any gain from a dividend benefit. The question is, will the two coincide. And that question is not going to be answered by finding out whether Martha and George X , secretary and shoe salesman, are going to shift their one hundred shares of Home Depot stock to fifty of Sears for the nice dividend. No, the real question is whether those who hold a significant amount of stock -- that much smaller percent of stockholders who hold the gross majority of equity -- will also shift from non-dividend paying stocks to dividend paying stocks.

One way of understanding the difference in the figures is to use the difference in the payout from the dividend tax cut to map the concentrations of stockholding. The Brookings Institute has a nice little pdf paper up on the tax cut. Here's a quote from it, concerning ways of measuring the effect of the cut across income percentiles:

"A second measure is the distribution of the tax cut
across income classes. Table 1 shows that households
with income above $200,000 receive more than one third
of the entire tax cut in 2003. A third measure
reports the tax cuts in dollar terms, and is often the
most striking. Returns with income above $1 million
would receive an average tax cut of almost $89,000.
Those with income below $40,000 would receive an
average tax cut of $125 and those with income between
$40,000 and $75,000 receive an average tax cut of $703.
As the program becomes permanent, middle-class households would
lose much of their share of the tax cut with the resources
transferred to high-income groups."

Now, we admit that this is not a roadmap to market-maker heaven. To break up the stockholders into income percentile ignores the aggregation of stockholding effected by mutual funds. It ignores institutional investors. Etc. All those things that make up "indirect" holding. Still, we get better numbers by understanding that most of the holders of equity can be safely ignored. They are merely numerous. This isn't a one man, one vote proposition.

Varian is more up to speed when he considers the effect of the dividend cut on the total financial market. He points out that the cut would undercut the rationale for holding tax exempt government bonds:

"What about municipal bonds? Odds are we would see their prices fall, since dividend-paying stocks would be pretty close substitutes under the Bush proposal. This means the cost of borrowing for state and local governments will be driven up � particularly bad news given their precarious economic position.

"One way to estimate the likelihood of the Bush plan's passing is to watch the prices of municipal bonds over the next few months: the more likely the plan is to pass, the lower those prices are likely to go."

Great. LI hasn't gone into this at any length yet -- oh, the meat and texture of the Bush fiasco! -- but the spending part of the potential Bush budget -- especially the lack of any plan to help states coping with huge budget shortfalls -- is going to bite him in the ass, to use the vernacular.

But we want to concentrate on dividends themselves, right now. In the next post, let's talk about why companies pay out dividends at all.

Wednesday, January 15, 2003

Remora

Drumbeat of war (on the bottom 60 percentile of incomes)

The Center for Budget and Policy Priorities has a nice little skewering of the new Bush tax giveaway. Andrew Lee and Isaac Shapiro begin with Bush's defense of the giveback:




In response to criticism that his tax cut plan is skewed towards upper-income taxpayers, President Bush noted in a speech on January 9 that, under his proposal, a family of four making $40,000 would see its taxes fall 96 percent in 2003, from $1,178 to $45. This represents a tax cut of $1,133

Lee and Shapiro point out that
"the tax cuts that would benefit this family constitute less than one-quarter of the overall cost of the bill. In other words, more than three-quarters of the package could be jettisoned and the $40,000 family mentioned by President Bush � as well as most other middle-class families � would receive just as much help."


We were reading Peter Bernstein's wonderful Against the Gods: The story of risk yesterday. We were struck by Bernstein's description of "regret theory." This theory stems from work in behaviorial economics which was summarized in an influential article by Loomes and Sugden in 1982 -- hey, LI is in a scholarly mood this morning. L and S discovered that people have a tendency to over-react to disappointing outcomes of investment decisions. This goes along with a consistent finding among behavior economists, which is that negative factors have a stronger impact on determining the weighting of probabilities than gain. We've talked about Kahneman and Tversky before on this site, who are the most prominent economists associated with studies that buttress this statement. What this means is that the content of the options available to a decisionmaker are so framed by recent patterns that there is a tendency to ignore regression to the mean, in favor of compensating for past mistakes by a retrospective "punishment" of bad decisions. For instance, you invest in a company that makes some innovative x product, and the company goes bankrupt. So you take the rest of your money out of the sector which is concerned with the species of innovative products that the bankrupt company was affiliated with and you invest it in something safe. Well, this decision sounds rational, but it actually overweights the signal given by the bankruptcy, spreading it over the whole sector.

This is the kind of thing signified by the popular wisdom that generals in the current war are always fighting the last war. This theory helps explain a puzzling feature of Bush's dividend tax. The precipitous decline in equity value over the last three years has had little to do with dividends. Studies have even shown -- often shown -- that dividends are an irrational form of outlay -- companies that give dividends often borrow money for the costs of operation and expansion that are equal to the dividend outlay. Now, there is a countercurrent that claims that, just as leveraged buyouts, by burdening a firm with debt, encourage more efficient management, so, too, dispensing dividends takes tempting money out of the hands of a management group that would otherwise invest it unwisely in unprofitable acquisitions. There might be something to this -- but still, the fact remains that the Bush plan seems to pander to the disappointment of investors in the bursting of the tech sector bubble, in a classic bit of regret behavior that has nothing to do with rational scenarios for future economic growth. In fact, it will encourage disinvestment by corporations -- corporations will be advantaged by producing dividends instead of investing in new plant or R & D. The idea that this effect will be countered by the return of investors to the market is doubtful -- investors return to markets, fundamentally, when earnings are good. That is completely unaddressed by the dividend giveaway.

Not, of course, that any of this is going to get in the way of the Bush bulldozer.

Tuesday, January 14, 2003

Remora

Back in the bad old days of the last election, LI opposed Al Gore for a number of reasons. One of them was purely political. The line of descent from Clinton to Gore pointed to one thing: by electing a rightwing Democrat, the party would naturally go even more to the right, thus ensuring the nomination of an even more rightwing Democrat after Gore. Once the bridge starts falling in the river, you can't hold it up from one side -- to put it as enigmatically as possible.

Well, Gore was elected -- although, as we know, the election was stolen from him. And, showing how much we know, the unelected Prez swung to the left. Gore's statements for the last year have been music to our ears.

However, our fundamental claim still stands -- and Lieberman is proof of it. The editor of Tom Paine, Robert Bosage, takes an acidic look at the man he calls Bush-lite -- although Bush himself could more appropriately be labeled Bush-lite. Perhaps we should label Lieberman Bush-ultra-lite. There isn't an issue on which Lieberman is any good. Oh, except of course his staunch support for the one thing rightwing Dems still stand for -- the right for middle class women on the East and West coast to abort. In the stretches of America where there is nary a doctor to perform the abortion, this right is a mockery. Never mind that. Never mind that there may just be other medical care issues out there -- how about the right of a woman to get decent health care subvented by the state? and the right of a man to get the same thing? No, that isn't going to play in this script.

The long list of Lieberman's idiocies is covered by Bosage. We have a particular dislike for Lieberman based on his longterm defense of the Ceo-accounting biz complex. After all, Lieberman was the guy who threatened to punish the SEC if they made a stink about accounting practices during the boom years in the 90s. In the hullabaloo about corporate looting last year, Lieberman contributed an editorial to the NYT defending the eccentric status of stock options -- that is, defending that accounting procedure which allows not expensing them. His defense of encouraging stock options was pretty comic -- it was that they were a crucial incentive and spur to the average worker. Oh yeah. Bosage does a nice number on Lieberman's general economic policy positions:

"Similarly, Bush�s economic policy -- tax cuts for the wealthy, favors for the Fortune 500 crowd, cutbacks in domestic public investment and corporate-centered trade accords -- is undermining America�s economic prospects. His initiatives are simply out of step with what the country needs as it struggles with global stagnation, growing inequality, an unprecendented corporate crime wave, an unsustainable trade deficit and massive foreign debt.

Lieberman won�t pose a fundamental challenge here, either. As leader of the pro-business DLC, he has championed capital gains tax cuts, corporate trade and domestic austerity. As chair of the committee investigating Enron and the corporate scandals, he won notoriety mostly for defending off-the books stock options while warning Democrats not to engage in �economic class conflict.� In the mid-'90s, Lieberman helped fend off Clinton regulators who wanted companies to account for stock options that gave executives enormous incentives to cook the books, boost short-term stock prices and plunder their own companies. Yet when it became apparent that many were doing just that, Lieberman continued to argue that stock option plans were a way of sharing corporate growth with workers. He did a slight retraction when admitted that it was "disappointing" to learn that the vast bulk were lavished on the top floor, not on the shop floor. His long-standing staunch defense of privilege may have cemented his fund-raising appeal with the $1000-a-plate dinner crowd but it did nothing to help the country deal with the corporate crime wave."

With schools overcrowded, vital public services like sewers, water systems and highways aging and in disrepair, health care costs soaring, and basic public health capacities ailing, Bush�s cuts in vital public investments must be opposed. But Lieberman is a Coolidge Democrat who champions domestic austerity. He would roll back Bush�s tax cuts not to invest in vital needs, but to return the budget to surplus. This leaves Bush arguing for tax cuts and growth and Lieberman arguing for austerity. That�s both bad policy and bad politics.

Monday, January 13, 2003

Remora

Envy and Greed

Let's begin with a little Adam Smith, shall we?

Upon this disposition of mankind, to go along with all the passions of the rich and the powerful, is founded the distinction of ranks, and the order of society. Our obsequiousness to our superiors more frequently arises from our admiration for the advantages of their situation, than from any private expectations of benefit from their good-will. Their benefits can extend but to a few, but their fortunes interest almost every body. We are eager to assist them in completing a system of happiness that approaches so near to perfection; and we desire to serve them for their own sake, without any other recompense but the vanity or the honour of obliging them. Neither is our deference to their inclinations founded chiefly, or altogether, upon a regard to the utility of such submission, and to the order of society, which is best supported by it. Even when the order of society seems to require that we should oppose them, we can hardly bring ourselves to do it. -- The theory of moral sentiments


The proto-capitalist writers, from Bernard Mandeville to Adam Smith, are famed, in part, for showing that individual vices can contribute to social virtues. In particular, self-interest, in the guise of avarice, can spur the us to those enterprises which produce a social good larger than could be predicted from the mere viciousness of its original motives. Smith, most people who read him are agreed, was a more sophisticated thinker than Mandeville, and realized that the sublimation of greed in social action could operate upon the original motive to soften it. We've seen that this is no necessary statement of the case -- and we've seen this long before Ken Lay came along. One has only to look at the great English nabobs, looting India during Smith's lifetime, to find evidence that avarice can produce wholly negative results, far outbalancing the goods distributed in the course of the lifestyles of those for whom avarice was successfully assuaged by wealth and grandeur. Still, Mandeville's paradox retains a kernel of truth. In his Fable of the Bees, Mandeville imagines, under the figure of a hive of bees, a society much like that of eighteenth century England. After cataloging the acts of the robber, the gross habits of the vain, etc., etc., Mandeville writes:

Their Crimes conspired to make 'em Great;
And Vertue, who from Politicks
Had learn'd a Thousand cunning Tricks,
Was, by their happy Influence,
Made Friends with Vice: And ever since
The worst of all the Multitude
Did something for the common Good.

The praise of greed, or the more moderate praise of enlightened self interest, is paralleled, among the capitalist writers of the nineteenth century, by the dispraise of another vice: envy. James Fitzjames Stephen, in his essay on equality in Liberty Equality Fraternity, sounds the usual conservative commonplace; the desire for a more equal distribution of wealth is "nothing more than a vague expression of envy on the part of those who have not against those who have." There have been infinite recyclings of this theme. See, for instance, this article, entitled Envy, on the Acton website, Religion and Liberty, by John Williams. Williams compresses the insights of Joseph Schumpeter in Capitalism, Socialism and Democracy into a mini-dissertation on the undermining of the fruits of capitalism by the envy of the new class. Intellectuals, who can see their peers, in business, getting rich, are filled with envy, and propose anti-capitalist measures in order to bring businessmen down.

Alas, while greed has its heroes, envy has none. Envy is Thersites, beaten by Ajax, mocking Achilles; Greed is J.P. Morgan creating U.S. Steel. So the mythology goes. The usual response to this moral analysis is to deny it. This makes sense: the actual motivation, here, is usually a heightened moral sensibility that baulks at injustice. Such sensibilities are not Nietzschian, and so averse to arguments that defend private vices as the unconscious assistants of public good. Thus, the argument is lost from the beginning. However, using the logic of the capitalist apology, it is unclear why we are to envy, in itself, disqualifies distributive justice -- unless, of course, the social good is invariably aligned with the investment portfolios of the wealthiest. We'd guess that envy, simply by fixing the attention of the embittered intellectuals -- among whom we'd include the average working class reader of newspapers and hearer of tv news -- upon disparities in wealth and the system that preserves and promotes them, is doing us all a service. This is especially true of the Bush dividend tax cut. Here is how conservative ideologues are framing the defense of that cut. This is a news release from Club for Growth:


"Let the class warfare Democrats embrace small and impotent
policy changes-changes that increasingly sophisticated investor
class voters will immediately identify as fraudulent. The
obstructionist Democrats have announced that they intend to fight
against President Bush's genuine GOP growth package and to wage all
out class envy warfare. President Bush has 90 million investor
class Americans on his side who realize that tax rate cuts mean
higher stock values and greater retirement security. "Republicans must not shrink from the battle. Bring on the fight," said Moore.

The Club for Growth, founded by investment banker Richard
Gilder, National Review Publisher Thomas L. "Dusty" Rhodes and
economist Stephen Moore, is a political organization dedicated to
pro-growth economic policies such as cutting taxes, eliminating
wasteful government spending and supporting personal accounts for
Social Security."

LI realizes that the official opposition to Bush -- the Democrats -- are an intellectually crippled bunch. They are paralyzed by rhetoric about envy, and reply with boilerplate about greed. This is a losing strategy, and has lost for them consistently over the last twenty years. What should they do? They should robustly defend the self -- interest -- propounded by envy -- of the have-nots. The have nots, in this case, are being told that 300 billion dollars can be taken out of the system and given, largely, to the wealthiest ten percent. They are not told what this 300 billion dollars -- potentially twice this much, really -- buys. The Democratic reply to the Bush proposal is, pathetically, about the deficit that will ensue if this Saturnalia for the investor takes hold. What the Democrats should do is emphasize that taking money out of the system takes it from somewhere. And they should emphasize that it creates a dead loss, in services, for the have-nots, in a world created by the investment opportunities of the haves -- a world that is not friendly to the working class. There are two options, here: either create the infrastructure to support the social goods necessary to support a prosperous lifestyle for the have-nots -- an infrastructure that would nourish education, health, and income support -- or let the have-nots tough it out in a world increasingly inimical to their interests. The Democrats think that they can take money from people whose agenda is the latter in order to support the former. Well, a house divided will not stand, as the great opponent of the Democratic compromise of 1850 once said.