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The May 16, 2015 cover story for Economist is “Tax-free debt: The great distortion.” The article advocates one of my personal pet ideas: eliminate tax deductions for home mortgage interest (see “Most perverse things about the U.S. tax code?” for example), though not for all of the reasons that I am against subsidizing home ownership, e.g., that it makes the labor market more rigid and exposes consumers to risks such as Detroit or Chicago becoming insolvent. The Economist goes farther, however, and suggests eliminating deductions for business interest. Could that work? Consider an equipment leasing company. After depreciation, interest would presumably be its largest expense. At current U.S. corporate income tax rates the enterprise would owe more in taxes than its actual cash earnings. Thus leasing companies couldn’t exist in their present form or with anything like their existing rates.

I can’t quite figure out if this makes sense as an economic policy. If interest is not deductible, doesn’t that favor the largest enterprises that can borrow at the lowest costs? So if you’re a mid-sized business trying to compete with General Electric, you’re now at a further disadvantage because GE can borrow at much lower cost than you and then offer favorable lease rates for its products, an effect magnified by the lack of deductibility for your higher payments. If interest is not deductible then incumbent companies with large capital bases will be further advantaged compared to startups? Supposedly there are economists at the Economist but I can’t figure out why interest, a necessary expenses for many types of businesses, should be treated differently than other types of business expense. (The home mortgage situation is different, I think, because that’s a personal expense and generally personal expenses are not deductible.)

[Separately, the research behind the article is a little suspect for saying “America’s debt subsidies cost the federal government over 2% of GDP—as much as it spends on all its policies to help the poor.” To the extent that you believe elaborate medical interventions “help the poor,” this is wrong. Federal Medicaid spending alone is close to 2% of GDP (gao.gov; this is not the total spent on Medicaid, I don’t think, because it excludes what states spend). How could the editors have missed the fact that the U.S. is a country with tens of millions of working-age residents who don’t work and yet who don’t lack for the essentials (housing, food, health care) and that this could not be consistent with only a few percent of GDP captured by the poverty industry?]

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Back in 2003 I wrote a much-derided posting about how high school students should learn math, science, and engineering by building a bicycle. The latest issue of New Yorker contains “D.I.Y. School”, an article about a school in Malibu Canyon, Califronia where James Cameron‘s 11-year-old son built a motorcycle.

 

 

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I can’t figure out why Uber is so valuable. Someone who wants to find out what are the nearest available pizza vendors can open up Apple or Google Maps and see. If Uber/Lyft/et al. develop profits that are significant by Apple/Google standards what stops Apple and Google from adding “nearest available transportation providers” to their respective maps applications? Then they establish a commission for that service that effectively takes all of the profit out of Uber/Lyft/et al. Why should I have two Maps applications on my smartphone, one that shows 50,000 different types of businesses (Apple Maps, e.g.) and one that shows just one type of business? (Uber, e.g.)

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The world of photography is a poorer place as of yesterday due to the death of Mary Ellen Mark (age 75), one of America’s most effective artists in the book medium. A Google Image search will show some of her range but I would encourage readers unfamiliar with Mark’s work to get hold of some of her books. Most of her pictures were designed to be part of a series.

Sad.

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Eight of us went to Carnegie Hall on May 24 to hear the Verdi Requiem performed by more than 400 young singers (including my favorite Stuyvesant student!). The concert was organized by DCINY and featured an excellent orchestra. One of us is a fairly serious musician prone to critical comments, e.g., “What a pathetic joke” (Jean-Pierre Rampal concert in Boston Symphony Hall), and “Any guy who would sit down and write 106 symphonies, most of them bad, has just got to be an asshole” (after seeing Haydn on a program). Even he was won over by Claudia Chapa, mezzo-soprano. It is not easy for a young singer to work in that size venue but she handled it like someone accustomed to the Met’s gargantuan space. Baritone Christopher Job and tenor John Pickle also managed to fill the hall.

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Could it be that the $15 per hour minimum wage adopted by Los Angeles results in some serious cash being earned… by lawyers?

Within a few years it will be illegal for anyone whose skills are worth less than $15 per hour to have a job in Los Angeles. On the other hand, not everyone is eligible for welfare. Especially for adults who cannot obtain possession of a minor child it can take a long time to get on SSDI, work their way through the public housing bureaucracy, etc. Humans don’t want to starve and markets tend to clear despite government prohibitions against people entering into agreements. (Recent example that I learned about talking to a Swede: “There are a lot of apartments in central Stockholm that are owned by the government,” he noted, “and the rents are set very low. But none are ever available unless you pay a large amount of cash to the current occupant. If you stay 5 or 10 years it works out to be roughly the same as the monthly cost of a private apartment.”)

How could the labor market clear for people that employers don’t want to hire at $15 per hour? Contracting! There is no minimum wage for an Uber driver. If it turns out that he or she earns less than the minimum wage the government will still permit him or her to continue to operate the 1099 business.

What would it look like in a restaurant? Instead of hiring people to clear tables and clean at an hourly wage the restaurant could hire a person to be responsible for one bathroom, a portion of the kitchen, and five tables at a fixed monthly rate. The person would bring his or her own cleaning supplies and work the hours of his or her choice, as long as the cleaning got done. The restaurant could spin off the waitstaff as well. Perhaps a waiter rents ten tables from the restaurant much as a cab driver will rent a taxi from a medallion (value up to $1 million in the pre-Uber era thanks to government regulation!) owner. Customers pay the restaurant for the food and the waiter for providing the service.

Note that some employers that don’t want to have low-wage employees are already doing this, albeit typically through a contractor that does hire W2s. See “Costco’s Second-Class Citizens” (Bloomberg 2013) for example or any big company that hires a cleaning service rather than employing janitors.

Here’s where the lawyers come in. If lawyers can persuade a judge that Joe Contractor should have been a W2 employee and that Joe Contractor earned less than $15 per hour then the judge can order a company to pay years of back pay, a potentially good deal for Joe Contractor and a great deal for his attorney. As the factors that separate a 1099 from a W2 employee are subjective this could be a very fertile area for lawyers.

What do readers think? Is this the frontier that finally enables all of those extra law school graduates to get jobs?

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Having loved The Queen we went with enthusiasm to The Audience (Broadway). Same writer (Peter Morgan). Same actress (Helen Mirren). The results, however, were disappointing.

The movie presents the Queen with a challenge: what to do about Diana’s death. The Queen’s dignified and protocol-bound demeanor makes a strong contrast with the maudlin public.

The play concerns a series of meetings, more or less weekly, between the Queen and various prime ministers. The Queen is required to back up whatever the prime minister has decided to do so there isn’t truly a problem to solve. Wikipedia says “Since Elizabeth rarely gives interviews, little is known of her personal feelings. As a constitutional monarch, she has not expressed her own political opinions in a public forum.” Thus everything in the play is made up and the dialog doesn’t seem very plausible, e.g., when the prime ministers reveal their weaknesses and fears.

The prime ministers are portrayed sympathetically, with the exception of Margaret Thatcher, played by Judith Ivey with a strong Southern accent(!). Thatcher’s Reagan-like transformation of British society is ignored; Thatcher’s support of the white South African government (the U.S. also supported them!) and her son‘s sketchy dealings are the only topics that come up between Thatcher and the Queen.

We learn from the script that the Queen, despite her outward appearance as a rich German-English noblewoman, is actually a socialist who supports labor unions, expanded welfare state benefits, higher taxes, etc. She is also a pacifist who opposes any kind of military action. Peter Morgan doesn’t supply any motivation for how she got to be this way, though. A rich American might come to this place after attending a university where it was socially unacceptable to support a smaller role in society for government (see The Crimson for how 96 percent of Harvard College faculty supported Democrats). But we learn from watching the play that the Queen was educated at home. Would the Queen adopt liberal attitudes in order to fit in? If so, to fit in with whom and why would she care? Would the Queen support a more generous welfare state because she felt badly for Britons who did not work? If so, we do not hear of the Queen ever meeting any working-age adult without a job.

One of the interesting things about The Queen movie is that it shows that someone who has lived nearly her whole life as a royal sovereign doesn’t think like the rest of us. In The Audience, on the other hand, the royal sovereign turns out to be Jane Average who happens to have access to some fancy houses and a yacht. At a minimum it would be nice to know how she got to be average!

Related:

• “How rich countries die” (Mansur Olson’s study of how political stability in Great Britain led to its decline relative to, e.g., Germany)
• “Margaret Thatcher: the economic achievements and legacy of Thatcherism” (Telegraph 2013)
• “Margaret Thatcher: why is she still so demonised?” (Telegraph 2013)

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“Quality, Not Just Quantity, of Infrastructure Needs Attention” (Wall Street Journal, May 20, 2015) has some interesting data. The U.S. has spent, adjusted for deprecation, 52 percent of GDP on “public capital stock” (infrastructure such as roads, bridges, train tracks, etc.) while the Germans have spent just 35 percent of GDP. What results have been achieved? “global executives” rated the German infrastructure superior to that of the U.S.

In other words the Germans are getting substantially better value for each public dollar invested.

Why the constant calls by Americans to put more money into public infrastructure if it turns out this is not one of the things that we can do competitively?

Related:

• article comparing the inefficiency of New York’s Tappan Zee construction to a much more complex and longer bridge/tunnel between Denmark and Sweden (the original Tappan Zee bridge cost about $500 million in today’s dollars (source) while the new one will cost roughly 10 times that amount)
• previous posting on 4X cost increase between building the Longfellow Bridge in Boston and renovating it
• high-speed rail costs in China versus U.S.

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I was chatting with a litigator about Real World Divorce and politics. The subject of the Clintons’ roughly $22 million/year in earnings came up and the litigator noted “Monica Lewinsky could have done pretty well for herself if she hadn’t left the white gold on her blue dress.” What did she mean? It turns out that if Monica had stayed in the District of Columbia with Bill Clinton’s child she would have been entitled to roughly $2 million per year for 21 years, i.e., about $42 million total in tax-free profit.

What about the fact that some of the money was earned by Hillary? “A judge could use discretion to award child support based on the combined income in a variety of ways,” she explained. “One is by awarding a higher percentage of Bill’s income with the explanation that Hillary’s earnings can replace those lost to a child support plaintiff. Another is by accepting the argument that Hillary wouldn’t be earning any of her speaking fees but for her relationship with Bill and being part of the couple. A third way of getting a child support award based on the full $22 million would be to argue that much of the Clinton Foundation spending, e.g., on travel or parties, should be considered income to Bill and Hillary. Adding in a judge-determined amount from the Foundation to Bill’s income would bring his income for child support calculation up to $22 million per year.”

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Employees at five banks colluded to earn supranormal profits in rigged markets (nytimes). Presumably they were rewarded by their employers with correspondingly huge bonuses. Those bonuses by now have been turned into beach houses, Gulfstreams, etc. The government comes along more recently and fines “the banks” $5.6 billion. But it seems to me that this fine has to be paid by the shareholders of the banks, not past, present, or future employees. If we assume a labor market the employees of banks are paid a competitive wage. So the banks that have been fined can’t reduce salaries or their better people will jump ship. Thus it will be shareholders who pay. But public company shareholders, due to SEC regulations that prevent them from directly nominating board members, exercise virtually no control over what actions bank employees might take. How then can this fine reduce the likelihood of similar behavior in the future? Wouldn’t a rational current bank employee still seek to collude with counterparts at other banks, rig a market, make huge profits for a while, take home and keep huge bonuses, etc. Why does the employee care if at some future date a shareholder will have to pay a fine because of his or her behavior?

 

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