Today’s Thoughts

Krugman on corporation tax

Krugman writes an explanation of why the Trump corporation tax cuts failed so badly. I hope this is not paywalled. DM me @francismansell to complain. Krugman explains that most US corporate profits are really monopoly profits, so changing marginal tax rates doesn’t make much difference to investment decisions. There’s a lot more, but this is my takeaway, which of course strongly confirms my bias that the US economy is dominated by oligopolistic firms.

Not all taxes are equally effective in reducing inflation

After reading the Krugman piece, I came across this:

The Inflation debate rages on and will dominate the market narrative this year and beyond. Question: if the stimulus in the US is fully funded through taxes does this remove inflationary pressures as demand simply migrates from Personal/Corporate sphere to Government spending? Sanford Bernstein thinks not.

“Firstly there is still the question of the very sizable blip in inflation over the next 12 months – and with the degree of fiscal support plus very constrained supply it means that price increases over that time horizon are almost mechanical. Longer term tax can have some effect at offsetting it, but higher taxes are aimed at the upper end of income distribution where there is less propensity to spend marginal extra dollar anyway. In addition the ability to provide on-going fiscal support and maintain high debt levels creates an asymmetry around inflation risks which is different compared to recent years. Also bear in mind that whilst the Trump tax cut was meant to get companies investing and hiring, a lot of it just went to buybacks. Now it looks like we’ll get more direct spending, specific areas/projects and hopefully much more direct impact on new jobs”

The conventional (and the MMT) narrative about inflation is that if it starts to run ahead you can just turn up the tax dial to damp it down. Not all taxes are equivalent, as this quote makes clear (via The Market Ear). Part of the reason that we’ve seem muted inflation is that the money in the economy went largely to the 1%, and that which didn’t was barely enough for the 99% to cover increases in costs which are under-counted in inflation stats (health, education, housing). The Trump cuts were aimed at corporates and the rich. The recent changes will be different.

Why your living room has a pile of remotes

Why Logitech Just Killed the Universal Remote Control Industry. I love articles like this, that lift the lid on hidden monopolies. You’ve never heard of Harmony, but they were very, very big in remotes. I always thought that Logitech (a Swiss co.) were good, but actually they are terrible at software, as the article points out.

Wrap

The market seems to be directionless. The 10Y yield seems stuck at about 1.67%, other assets diffusing around this. Economic news was all fairly predictable: very large deficits in the USA and the UK, with the BoE buying record quantities of gilts. Everyone saying that uptick in some inflation measures is an artifact of the artificial drop in prices a year ago. Well, some central bankers are saying this. Well, one central banker is saying this, James Bullard.

Reflection

Economics likes to create simple models. Countries with one or two goods produced, an economy where there is a single, homogeneous factor of production (e.g. labour), supply and demand schedules which when plotted form a smooth curve with almost no curvature. It’s good to help our intuitive understanding that we use models like this. A bottom up model, with millions of people the insane variety of goods and services in the real economy would be computationally, and operationally impossible.

One simplification is the idea of autonomous agents, who possess some sort of utility function, linked to their consumption of all possible goods and services. But many of the things we consume are consumed for the benefit of others. Nobody buys life insurance for himself, only for his dependents, and those who lend him money. Most people do not make a buying decision about products like healthcare based on any in-the-moment calculation of the benefits of a treatment. Education is consumed by people who have (almost exclusively) not the faintest idea of whether it will have any economic or other value.

It’s not that we should not study these things. It’s that we probably will never understand economics as well as we understood physics a hundred years ago.