Don Boudreaux is one of the authors of Cafe Hayek, a fantastic, long-running newsletter on economics. If you aren’t reading it, you should. Below is his short and marvelous analogy, “Trade is a Technology.” I have reproduced it below.
“You ask: “What is the shortest best way to prove the case for trade freedom?”
I’m afraid that no such proof is possible. Ultimately the decision to support or oppose free trade rests on a value judgment. That free trade is the best, or even an acceptable, policy cannot be established in the same way that we can establish the truth of the Pythagorean theorem. There are, however, arguments to be made that reveal surprising, attractive powers of free trade – arguments that, when presented amicably, are effective in opening people’s eyes to important and beautiful aspects of trade. I encourage you to read carefully Frédéric Bastiat’s Economic Sophisms; in it you’ll find unmatched brilliance at exposing fallacies that infect the case for protectionism. Read also Russell Roberts’s The Choice, Doug Irwin’s Free Trade Under Fire, Dan Griswold’s Mad About Trade, and Pierre Lemieux’s What’s Wrong With Protectionism?
But let me offer one argument for trade that satisfies at least your criterion for ‘short.’ It’s this: trade is a technology that enables human beings to transform almost anything into almost anything else. You produce whatever you choose to produce and then exchange that output for whatever it is you wish to acquire. You can today produce outputs different from those that you produced yesterday and still acquire today the same things that you acquired yesterday. Or you can produce today the same things that you produced yesterday, yet transform those outputs today into things different from those that you acquired yesterday.
Trade truly is a marvelous technology! If trade were an actual, physical machine it would be hailed as one of the greatest inventions of all time. And so when government restricts your ability to transform what you produce into outputs produced by foreigners, government artificially restricts the operation of this technology. Protectionism is akin to sabotaging a machine. (In fact, at work here are real machines: cargo ships, which are effectively sabotaged by protectionism.) We recognize that such sabotage is destructive when done to the likes of factories, tractors, trucks, and computers. We should recognize also that it’s destructive when done to trade.”
Sincerely, Donald J. Boudreaux Professor of Economics
Though the head of JP Morgan Chase feels that the economy is still doing okay, he foresees a recession in 6-9 months. This is due in part to “the impact of runaway inflation, interest rates going up more than expected, the unknown effects of quantitative tightening and Russia’s war in Ukraine.” He further implored that the Fed “waited too long and did too little” as inflation increased to its highest rate in 40 years. Though they are aggressively raising rates now to curb inflation, raising them too much too fast can also cause problems. The Fed is widely expected to raise the rate another 3/4 point at its next meeting in a few weeks.
Have you ever heard any progressive who claims that the wealthy are not paying their “fair share” actually say what fair share is? Neither have I. It is probably because the wealthy in the US already pay a far higher percentage of income taxes than in any other developed country. Therefore, anyone who says the wealthy are not paying their fair share is either being a hypocrite or lying.
However, there is a group that is absolutely not paying their fair share. These are the vast number of the taxpayers who actually pay nothing. The Tax Policy Center’s newest report released in August 2021 found that in 2020, about 60.6 percent of households did not pay income tax, up from 43.6 percent of households in 2019; This closely mirrors the IRS preliminary estimate of 61.1 percent of households not paying income tax in 2020. It should be noted that much of the 2020 increase was due to pandemic-related factors, but the growing share of households paying no income tax should be kept in mind when evaluating the progressivity of the federal income tax system and proposed tax hikes on higher earners. There is virtually no other developed country in the world where this is the case.
This scenario reminds me of a true story from many years ago. When I was getting divorced, I was making about 75% of the money that my ex and I earned together. As part of our agreement, I asked her to pay 10% of the costs when our two kids went to college. At first she agreed; later on, however, she began to protest on the premise that if she got remarried and stopped working, she didn’t want to have to be responsible for having to pay the 10%! The fact that my ex had a responsibility to contribute toward college costs for her own children was totally lost on her. That’s what’s going on here. If the lower income earners don’t have any skin in the game, how can they be a responsible member of society? When they vote for new programs are they assuming that they have no obligation to pay any part of it?
The wealthy already pay a disproportionately high proportion of taxes. And yet Congress wants to fleece them more. They just assume that gullible taxpayers (I mean constituents) will just continue to vote for free stuff that others will pay for.
Gamestop stock may be fundamentally worth $10, or maybe even $20 if there is some hidden value in intangibles or some future prospects. But not $400. The only question is whether those buying at $400 truly had reason to believe that it was worth that amount (which is probably unlikely). Or were they just buying in the hope that the price would go up more irrationally, allowing them to make a profit before the stock tanked?
Those that were just blindly following the crowd simply deserve what will happen to them. If they are being induced to go along with a wrongheaded purchase by some forces merely trying to manipulate the market and/or squeeze out the short sale, there may be (I’m not an attorney) illegality going on.
Anyone with any trading acumen should have been able to see through the hype that billionaire venture capitalist Chamath Palihapitiya was peddling. He surely knows that when hedge funds do momentum trading and shorting, and when other hedge funds follow those funds, they are keenly aware of the prices of their trades related to the fundamentals of the underlying security. I can only think that his intimating that anybody could have been doing research that could validate such a price level is less than honest.
The outrage expressed by some that the broker of choice in this mania, Robinhood, was acting to support the short-selling hedge funds also has no basis. That Robinhood restricted trading in Gamestop is purely to be expected in a situation when the volume of transactions shoots the moon. The fact that they needed an immediate capital infusion of over $3 billion proves this.
At last look, the stock is selling in the $52 area. Many of the people induced to buy the stock at much higher levels have suffered severe losses, and my guess is that some pretty sophisticated investors are shorting the stock at present levels.
The lessons to be learned from this:
1) understand the real underlying value of a company before you follow the mania and buy, and
2) before you become a big short seller, remember that old adage – “the market can remain irrational for longer than you can remain solvent”
Stakeholder capitalism is all the rage these days, with Elizabeth Warren and Bernie Sanders at the forefront of the movement. Their participation is just another example of their economic ignorance.
The concept of stakeholder capitalism is itself a contradiction in terms; it would be more correct to call it “stakeholderism.” Just like crony capitalism (it is really just “cronyism”) isn’t real, as the terms are opposites of one another, the same with stakeholder capitalism. You cannot have both. It’s like saying libertarian statists. You can put the words together but they lose their meaning.
Stakeholder capitalism is a concept that suggests corporations should balance the needs of all the “stakeholders” who comprise the business, from shareholders to executives to employees to customers to suppliers and even to more nebulous stakeholders such as the environment or community. This is in contrast to traditional capitalism, which earns profit for the company owners and investors, the ones who put forth the risk capital to get and keep the company going. It earns this profit by providing products and/or services that their customers voluntarily pay for.
Stakeholder capitalism sounds good and looks altruistic but in fact are composed of different competing interests and goals. These various factors ultimately take away from the most singular purpose of a business: create a product or service for which another person or company sees value in that product or service and exchanges money (or goods or services) for it. If the finished product is good and has value, it will be consumed by another person or business for amounts in excess of the cost of resources to create the goods (profit). If the finished product is not good, then the cost of resources exceeds the perceived value and there will be a loss. It is only by focusing on this single-minded purpose that one can tell if the product/service has merit and should be continued. A company must be able to return a profit to its investors to induce them to invest more money for the company to increase its production of other valuable products and services.
Stakeholder capitalism seeks to undermine the traditional measure of profit and loss by insisting that various interests all mutually derive benefit. But this is not why a company exists nor should it. It misallocates resources and value and creates competing outside interests (that will not agree on how important each one is), all in the name of being socially beneficial. No company can sustain itself with that end result in mind, which ultimately hurts the very society stakeholder that capitalism would otherwise help.
It is undeniable that people are hurting from COVID. It is also untenable that one of the continued solutions is an ongoing moratorium on evictions. Such a policy would seem to be blatantly unconstitutional.
A national moratorium on evictions picks winners and losers by government fiat by preferring one population (renters) over another population (landlords). The moratorium continues to allow people to live in their spaces without paying what they are contractually obligated to pay, putting the landlord at a loss. Would the same people championing this policy support the government letting people take food from a grocery store without paying for the food? How about taking clothing from a store without paying for it? It is the same thing. Those who argue that there is a moral right to housing would be hard pressed not to agree that this is also a moral right to food and clothing as well. Put it another way, the moratorium allows renters to consume their rental space for free that they would otherwise be purchasing through the payment of rent. What gives the government the right, therefore, to tell people they are allowed to consume their product — be it food, clothes, or rental property — without just compensation?
Originally, the moratorium was declared as a hedge against a perceived health hazard, namely that if people are evicted, they could contribute to the spread of COVID, and from this line of thinking was the flimsiest constitutional justification for the policy. If therefore, the government wants to assume the responsibility for avoiding an even bigger health emergency, it is only just that the government should cover the cost of the loss or rent to the landlord or guarantee that the rent is paid. You can’t have it both ways. The current policy is utterly ludicrous and puts many landlords at financial risk and ruin.
A company will try to use its available funds to best improve its business, such as by expanding its operations, hiring additional workers, opening new factories and offices, research & development including creating new products, paying down debt, or acquiring new companies. But when it decides that it has more money than it could put to good use in its business, it can use the money in various ways. It could pay dividends. But another option is to buy back some of its shares on the open market. But progressives somehow believe that they know better about a company than the company itself and want to dictate what a company can choose to do with its own cash, especially with regard to buybacks.
What seems like a rather mundane topic for the average person is actually very important, particularly because several progressive Democrats such as Chuck Schumer and Bernie Sanders are threatening to prevent buybacks and will soon be in a strong position to influence policy. Unfortunately, because they are so economically ignorant, their policies could have a negative impact on the broader economy.
In a widely-publicized NYTimes Op-Ed last year, Schumer and Sanders penned a missive against buybacks, calling them “corporate self-indulgence.” Their solution is a bill to forbid buybacks unless and until companies first do things such as “paying all workers at least $15 an hour, providing seven days of paid sick leave, and offering decent pensions and more reliable health benefits.” In other words, Schumer and Sanders openly demand these preconditions to be met before a company can even engage in a buyback program. They have decided that they know better about a company’s needs more than the companies themselves. The hubris here is astounding.
A company has a duty to use its money in the most responsible and productive way possible. Getting the most out of available resources creates the best possible outcome for the economy, the company, and its workers. For instance, if the best use of money is to expand and increase R&D in its industry or build more shops or hire more workers, they will do it. But if this option is not worthwhile, that is, will not produce an adequate return on investment – for reasons such as a lack of growth in the industry or excessive government regulation – then the best option may be to buyback shares or pay dividends. In doing so, they are taking cash out of the company to give to the shareholders who will look for better opportunities. Sometimes this option is absolutely necessary in order to make the company stay both relevant and solvent for the sake of the company and its workers.
Freedom is at stake here, both philosophically and economically. Not only should a company have the freedom to do what it wants with its own money, but it won’t have the freedom to grow if the government is interfering, rather than allowing the free market figure out where to go. This is the worst of both worlds. Buybacks are an important tool despite those who wish to restrict buybacks under some progessive bloviations not rooted in economic reality.
One of the most overlooked yet troubling aspects of Biden’s plan is his doubling of the Global Intangible Low-Taxed Income (GILTI) tax. GILTI taxes items that generate foreign income and profits owned by American companies with foreign affiliates. This is troubling, because GILTI taxes American companies on income that has virtually nothing to do with anything in the United States. It’s bad enough that the current tax rate is 10.5%; Biden wants to raise this to 21%.
The tax laws of every developed country – except the US – provide that their companies do not pay tax on earnings from outside their country. Thus a German company earning money from activities in China or the UK pay taxes only to that jurisdiction – not to Germany. The US always taxed US companies on earnings from abroad, as soon as that money was returned to the US. That created a pretty stupid situation, encouraging these companies to leave this money outside of the US, and invest it in foreign, non US ventures.
The GILTI tax was created as part of the Tax Cuts and Jobs Act (“TCJA”) of 2017 as part of the attempt to fix this situation. What the TCJA did was require that all companies with foreign operations have to pay a penalty tax on all the money accumulated abroad, going back to the ‘80s; this rate was low and spread over 8 years. In exchange for it, the idea was that US companies would now be on par with other countries, in a territorial formation. In other words, pay a low tax on the money the US company never repatriated, repatriate it, and then in the future, you don’t pay tax on it, thereby discouraging profit shifting.
But Congress lied. In addition to paying the upfront tax at a low rate and thereby getting a tax for the future, they couldn’t help themselves. They added the GILTI tax, so now it’s taxed whether it’s repatriated or not. And this is bad. Congress reneged a little bit, because the GILTI is a relatively low tax but because it is worldwide, and now they have to pay tax every year on these foreign profits. So companies paid upfront and now they have to pay this tax every year — albeit at a low rate — so now it’s worse.
Now what Biden is suggesting with the GILTI tax is basically fraudulent. People paid that upfront fee so not to have to pay taxes — and now with this proposed 21% rate — is like fraud against American international companies. The 2017 tax act required an upfront benefit that got future benefits, now Biden wants to take away the future benefits.
GILTI puts American companies operating abroad at a competitive disadvantage. The foreign affiliates already have to pay a penalty tax just to be on equivalent footing with other companies abroad (companies that don’t have to pay the GILTI tax here, mind you). GILTI then tacked on a 10.5% tax and now Biden wants to double it — when it should be ZERO.
Biden’s plan to double GILTI goes hand-in-hand with his overall plan to tax U.S. businesses (he also wants to raise the corporate tax rate to 28% and add a 15% minimum tax based on profit reported on financial statements.) Going after businesses is already bad policy and his desire to double GILTI shows his ignorance and his willingness to further erode American competitiveness.
The amount of money Biden’s plan will raise is relatively insignificant (roughly $300 billion over the next ten years) but his attack on businesses is mean-spirited; it hurts our country by making our domestic companies less able to compete abroad in foreign markets. Nevermind that foreign income shouldn’t even be taxed at all! How can Biden justify raising taxes in a way that will make the United States less competitive and will reduce jobs? Increased taxes are a disincentive towards investing and job creation and will only hurt our economy.
Now that Biden has been elected President, it’s important to take stock of what tax changes are likely to be coming. Merrill Lynch did a good job putting together a side-by-side comparison of current tax law in four areas: income, estate, social security, and corporate, and then possible changes in those areas according to Biden’s campaign tax plans. The summary is below.
It is notable that in just about every instance, there will be a tax increase under Biden’s plans. How this will impact the economy, jobs, wages, and investments remains to be seen.
Earlier this year, California passed AB5, a measure that would require companies to reclassify independent contractors as employees. The problem is that the government is yet again intruding on employer-employee relationships under the guise of worker protections. Furthermore, it’s an attempt to put unions even more in charge of things in California while also purporting to provide more revenue to a nearly-bankrupt state, all doomed to failure because of its economic ignorance.
AB5 affects those workers who belong to the gig economy. “Gig economy” is the catchphrase for the portion of the economy made up of freelancers and independent consultants. It’s estimated that 1 in 3 workers now, about 55 million, fall into this category. The gig economy has grown to be very good because it provides much-needed work flexibility and independence that many workers prioritize.
The mechanism by which freelance workers are deemed employees is the “ABC test.” This is the court created formula that companies must apply in order to determine if workers are contractors instead of employees, and it puts the burden of proof on employers. A worker is a contractor if he meets the following three criteria:
1) The worker is free from the control and direction of the hiring entity in connection with the work’s performance, both under the contract for the performance of the work and in fact.
2) The worker performs work that is outside the usual course of the hiring entity’s business.
3) The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed
There is no economic or business rationale to these tests – they were created solely to destroy the concept of independent contractor by making virtually all relationships that of employer/employee. The IRS, on the other hand, has established criteria for what constitutes a real employee based on behavioral control, financial control and relationship of the parties. It should also be noted that if the IRS follows the AB5 definition of employee for Californians, the employees will be devastated! That is because under IRS tax rules, employees may not deduct any business expenses, which is a critical tax benefit to the independent contractor relationship.
It is particularly frustrating that advocates of AB5 purposefully ignore the fact that the gig economy arose during the weak Obama economy, which was littered with ever-increasing government regulations and crushing legislation such as Obamacare. This combination made it difficult to become a business or stay in business. It was certainly no wonder that businesses sought alternative forms of employer-employee relationships, which is their inherent right to do so. AB5 now undermines those relationships.
Furthermore, AB5 essentially picks winners and losers; large swaths of independent contractors are exempt, while others have restrictions, and still others are not exempt at all. Among those exempt include: “insurance brokers, doctors, dentists, lawyers, architects, engineers, private investigators, accountants, investment agents, salespeople, commercial fishermen, and real estate agents.” Among those partially exempt include journalists and freelance media-makers such as photographers, but they are now limited in their number of contributions to 35 items per year. Those industries not exempt at all include Uber and Lyft, companies who successfully arose as alternative transportation options during the rise of the gig economy.
And yet, there are really no winners here. Certain industries are exempt, but there’s no justification to do that from a logical point of view. The sole reason why some have an exemption is because they have too strong of a lobby or union presence — which is an irrational justification. There will also be a never-ending succession of lawsuits, as workers try to avoid being treated as an employee. The only winners will be the lawyers.
The gig economy has proven to be a resourceful alternative for workers who seek a myriad of benefits, including work independence, flexible schedules, side money, and increased quality of work-life balance. Now that the economy has recovered from the anemic and over-regulated Obama years, governments such as California are happy to cash in on its success while strangling its workers and businesses with unnecessary, burdensome measures. AB5 will ultimately weaken the economy and destroy some businesses in its wake.
