Thursday, October 20, 2011

Matt Taibbi: Bad Economist.

If by "people powered", Rolling Stone meant
"Goldman Sachs people" powered... Sure.
It's obviously fairly predictable that a guy who writes for Rolling Stone magazine wouldn't be the greatest economist in the world, but hey... I'm just a musician, and I turned my media production skills towards advocating on behalf of sound economics, right? Just saying, you never know.

However, recently a progressive guy I interact with from time to time on Twitter suggested that I read a Matt Taibbi article titled "My Advice to the Occupy Wall Street Protesters"... He starts off nicely by asserting that:
"The protesters picked the right target and, through their refusal to disband after just one day, the right tactic".
I beg to differ, Matt.

The protesters picked exactly the wrong target, actually. And their tactic of refusing to disband, as far as I can tell, has way more to do with the protesters desire to have a big 60's come-back party than any sane attempt at initiating real, systemic change.

Taibbi really gives up any hope of making sense by admitting:
"No matter what, I'll be supporting Occupy Wall Street. And I think the movement's basic strategy – to build numbers and stay in the fight, rather than tying itself to any particular set of principles – makes a lot of sense early on."
Here's the difference between me and guys like Taibbi. If the Wall Street protesters had occupied, say, the Federal Reserve, I'd more or less support their mission. I'd still be mocking them for being ridiculously privileged people - certainly by world standards, but even quite often by American standards - whining about how "poor" they are. I'd still be mocking the stupid signs, and confusion... but of course, in the alternate timeline where they're "Occupying" the Federal Reserve or the United States Congress, I have a feeling the signs wouldn't be quite so dumb.

Because... They'd have picked the right target.

The key here is, I wouldn't - and don't - support anyone "no matter what". The nice thing about being independent and focusing on critical thinking is that I get to support people based on the quality of their ideas and actions, so if their ideas and actions aren't good, I'm not emotionally tied to supporting the team when they're wrong. I've read a lot of Taibbi over the years, and while he's not the worst on some of these topics, he's stuck himself with team-thinking way too often, and here's a prime example.

In any case, he gives 5 pieces of advice, and each piece needs to be addressed individually... not only because I promised to do so via Twitter, but also because it really demonstrates why it's so important to think through ideas more clearly. At the very beginning of Frederic Bastiat's seminal essay, "What is Seen and What is Not Seen", he writes:
"There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil."
Taibbi - and let's be honest, most people - really doesn't think through his solutions. I think this is in part because he's emotionally invested in being angry at Wall Street, and in part because he's just not good at economic thinking. Let's go through his suggestions.
1. Break up the monopolies. The so-called "Too Big to Fail" financial companies – now sometimes called by the more accurate term "Systemically Dangerous Institutions" – are a direct threat to national security. They are above the law and above market consequence, making them more dangerous and unaccountable than a thousand mafias combined. There are about 20 such firms in America, and they need to be dismantled; a good start would be to repeal the Gramm-Leach-Bliley Act and mandate the separation of insurance companies, investment banks and commercial banks.
Ok... Let's set aside the fact that Taibbi asserts that 20 competing firms somehow is the equivalent of a monopoly. I agree with him that the limited market dominated by a handful of giant firms is a bad thing for everyone. It is a threat to our national financial security to be sure (virtually all centralized control is... that's a major theme of this blog time and time again), and while it's a bit hyperbolic, I think it's pretty fair to say that most of the big Wall Street titans are more dangerous than "a thousand mafias".

So I agree with Taibbi about the scale of the problem.

But Taibbi doesn't actually accurately understand where the problem comes from, and thus entirely misunderstands how to solve it. He claims they're "above the law and above market consequence"... But how did they get that way? Taibbi fails to address this, and therefore he makes innacurate conclusions about how to handle it.

First, he seems to think that simply re-instituting a separation of commercial and investment banking would solve the problem, but alas, Lehman Brothers & AIG for instance never had commercial divisions - yet they were instrumental to the collapse. So... How exactly is bringing back the Glass-Steagall Act going to fix that problem? It would not have prevented the financial meltdown in 2007 in the slightest, and there's plenty of documentation to prove that - not to mention pretty basic logic. If AIG wasn't subject to Glass-Steagall rules, and it was one of the chief direct recipients of bailout funds (and was used as a major argument for why we needed to bail out banks), then that by itself is enough to know why that argument is silly.

Also, simply having the government "dismantle" companies because we don't like them omits that the government and every single action it takes is politically directed.

So you always have to say; "Who decides"? In this case, who decides which banks get dismantled and why? The absurd utopian dream that guys like Taibbi are effectively supporting is that we'll just have some impartial, all-knowing, all-benevolent group of banking experts who will be able to determine which banks are ok and which aren't, and at what point the government should "dismantle" them.

But I wish for once some progressives would get serious about how government actually operates and about understanding the limits of knowledge that prevent their fantasy ideas from ever actually working.

In reality what happens is this. Whatever "czar" or board, or panel, or whatever you want to call it that ends up with the power to decide which banks survive intact and which don't will be staffed by real live human beings. These humans will have political affiliations, and in all likelihood, they will be closely tied with both the current politicians in power and with the very Wall Street firms they're about to oversee.

News flash: This is exactly why the SEC sucks.

So all of these insiders - and of course they must be insiders, because those who haven't worked on Wall Street or have ties to it won't be capable of understanding the systems they're trying to regulate in the first place - will be relatively easily manipulated by the biggest firms at the expense of weaker firms. So whatever "dismantling" occurs, we can be virtually assured that it will happen according to political will, and according to the wishes of the most well-connected players on Wall Street - not according to which banks "need" to be dismantled.

That means that - just like we've seen throughout the last 3 years of bailouts and exploding financial regulation - the big, well-connected firms will only get bigger and more powerful, and their smaller competitors who failed to successfully influence the regulations and regulators will die off.

This is seriously "Regulatory Capture 101".

It also gets to the heart of George Will's quote that I was recently made aware of more clearly expressing the Occupy Wall Street protester's bizarro logic: "Washington is grotesquely corrupt and insufficiently powerful."

If premise 1 is: Wall Street banks own the government, then there's no world in which it makes any rational sense to believe that you will somehow overwrite that ownership in passing new legislation when the political system and all the people operating it are the same.
2. Pay for your own bailouts. A tax of 0.1 percent on all trades of stocks and bonds and a 0.01 percent tax on all trades of derivatives would generate enough revenue to pay us back for the bailouts, and still have plenty left over to fight the deficits the banks claim to be so worried about. It would also deter the endless chase for instant profits through computerized insider-trading schemes like High Frequency Trading, and force Wall Street to go back to the job it's supposed to be doing, i.e., making sober investments in job-creating businesses and watching them grow.
There are a lot of assertions here that are simply absurd, the first of which being the idea that levying a tax on all stock trades is going to generate revenue for the government, period, not to mention enough revenue to cover the effectively $16 Trillion the Fed has dropped on the banking system over the last couple years. At some point, I'd really like for progressives to understand that taxation, especially on non-human entities like businesses - simply isn't a viable solution to most revenue related problems, because the tax is always either passed off onto consumers of products, or depresses transactions to a point where any gains in revenue you've made by raising rates you've lost (and then some!) by decreasing the number of transactions being taxed overall.

The point is, Taibbi is thinking essentially of only the best-case scenario where he's smarter about tax-law & finance than the collective intelligence of bankers at all of these giant financial institutions combined. I'm gonna go out on a limb here and bet that's a pretty poor assumption. These guys tend to live and breathe money-making and the finer points of arbitrage, and Matt Taibbi is a journalist. Ish.

Translation: The real consequence of such a tax would very likely be that transactions get funneled into some other area of banking that is - in all likelihood - more risky and more dangerous to the average investers 401k; perhaps through reducing the number of transactions per day and instead pursuing bigger individual transactions. Additionally, these kinds of taxes would mean the complete and utter destruction of businesses like eTrade which allow ordinary investors more control over their accounts.

If I had to bet, the end result would be a world where big banks had more consolidated power over people's investments, and the taxes themselves would be passed off in some way to consumers. See also: Bank of America's brand new debit card fees.

The more hilariously obnoxious side of all this is that it was all of the free market economists and their supporters like myself, who explicity warned the government NOT to bail out the damn banks in the first place!
Remember this?
...cause I do.
If the government had just stayed out of this mess in the first place, it wouldn't have rewarded banks for bad behavior, thus creating even more moral hazard and screwing over the tax payers of the United States and Matt Taibbi nor the "Occupiers" would have anything to complain about. Bad banks would have gone under, their assets bought by solvent banks or written off via a bankruptcy process and the market could have recalibrated based on a more accurate understanding of real market value.

But nope... Why listen to good economists when you can listen to idiots, screw everything up and then write even worse laws when it becomes clear your policies have just created tons of problems?

And by the way, most of the banks did pay for their own bailouts - most, actually, didn't want to get bailout funds in the first place because there were so many strings attached, and thus they paid back the loans they were forced to take as quickly as possible. But anyway...
3. No public money for private lobbying. A company that receives a public bailout should not be allowed to use the taxpayer's own money to lobby against him. You can either suck on the public teat or influence the next presidential race, but you can't do both. Butt out for once and let the people choose the next president and Congress.
Yet another issue that wouldn't exist without the state intervening in the economy in the first place, but whatever, what's done is done... So let's talk about the logic here, shall we?

Setting aside the reality that this kind of a law would be a grotesque violation of the 1st Amendment which guarantees the right of everyone, including those who work for and run banks and other corporations, the right to petition their government and engage in any type of speech they wish to advocate ideas - including policies - that they agree with... I'd be a hell of a lot more ok with this kind of a rule if it was evenly applied across the board.

If you get money from the government, or even if you are simply a "net recipient" of government money, you don't get to vote and you don't get to lobby.


Know what this means? Public sector workers, and especially public sector unions... You're out. No more lobbying from the AFL-CIO, the SEIU, the AFSCME. No more lobbying from the Teachers, Firefighters, or Police Officers Unions... Actually, this is sounding pretty good.

Let's carry it out further. Something like 47% of Americans pay no income taxes at all. The bottom quintile of Americans actually are net tax-recipients, through all of our various welfare programs. So, according to Matt Taibbi logic, those groups have now lost the right to lobby or petition the government in any way. In fact, the only people remaining who get a say in how the government works are people who are both tax-payers and who do not get subsidized.

That means no farmers, no ethanol producers, no solar panel companies, no oil companies.... Definitely can't have any military contractors of government consultants. Absolutely no major auto companies. Hell, I don't even think that Tesla would make the cut.

It's a nice bit of populist nonsense by Taibbi to single out the bankers, but if his argument was even slightly consistently applied, he'd realize that he's just disenfranchised millions upon millions of people - many of whom he probably would be appalled to see losing the power to lobby.

Fail, Taibbi. Fail.
4. Tax hedge-fund gamblers. For starters, we need an immediate repeal of the preposterous and indefensible carried-interest tax break, which allows hedge-fund titans like Stevie Cohen and John Paulson to pay taxes of only 15 percent on their billions in gambling income, while ordinary Americans pay twice that for teaching kids and putting out fires. I defy any politician to stand up and defend that loophole during an election year.
I wonder sometimes if people like Taibbi are actively just retarded when it comes to understanding the tax system, not to mention basic finance - quite apart from their epic failure to understand economics generally.

There are a bunch of interesting points to be made here that I'd like to cover in the briefest time possible.

First of all, everyone who has a retirement account is subject to that 15% tax, not just billionaire hedge-fund managers. I had to pay that same tax on my silver bar that I sold last year, because it is counted by the Federal government as investment income and capital gains. If you raise that tax, or "close the loophole" (is a simple tax rate a "loophole"? Really?) as Taibbi puts it, you're not raising the tax on Warren Buffett. You're raising that tax on millions of Americans who are counting on obtaining a reasonable amount of capital gains in returns to literally fund their retirement.

Secondly, on every conceivable front, taxing people on capital gains is already double taxation... although this is apparently a hard concept to grasp.

Let me try to simplify it, and explain how this works with an example...

10 people, including you and me decide to start a company. We each put in $100. The company has $1,000 and we are each 10% stakeholders.


Our company does ok, and... Great news!... We're profitable. We not only break even and recoup our initial investment, but after all the overhead has been paid, vendors and employees paid, we make $1,000. Now for the bad news... The government taxes corporate profits at 35%, one of the highest rates in world. Boo!

We're a small business, and not best buddies, Jeffrey Immelt of General Electric, so we don't get any special subsidies or really anything else that would knock that rate down so we've gotta pay it. Now our $1,000 profit is actually just a $650 profit. Kinda sucks.

Now we pay dividends based on stock ownership from those profits.

Each of us had 10% of the company, so each of us gets $65. Except, no... We don't. After taking 35% of the total just moments ago, the government takes yet another 15% the minute the money leaves the accounting books of the corporation - that we own!  - and into our own personal bank accounts. So I don't get $65, and neither do you.

We get $55.25.

All combined, you might note that the total tax rate applied to profits incurred from successfully providing a product or a service that benefited other people's lives at least enough that they were willing to pay us for it, is actually 44.75%.
So fine, Taibbi.

Claim that a mere 15% on capital gains is not enough. But take a step back and realize that it isn't 15%. It's nearly 45%! The stockholders of a company are the owners of that company, and the vast majority of people who own stock in businesses around the world are not big wealthy tycoons. They are ordinary people with a little extra cash that they put into a 401k.

We need corporate profits to facilitate the retirement accounts and pensions that need to be paid, insurance benefits that need to be funded, (barely) interest-generating savings & checking accounts, and everything else... So right now, that's 44.75% on the high end (without tax-breaks) that is going to the state rather than to ordinary people.

Yes, it's also 44.75% that isn't going back to the tiny fraction of Americans who are super-rich... But so what?

Lastly, I want to note that complaining about tax-rates in this way is a great bit of populist class-warfare, and I suppose it's convincing to the people who haven't thought this stuff through any more than Taibbi. An Obama supporter I filmed last week at the OccupyDC/Code Pink rally at Freedom Plaza asked; "Whatever happened to Progressive Taxation!?" and complained that it just "didn't seem fair" that... to be quite honest... he had to pay any taxes at all when there were rich people out there.

But I mean... What happened to Progressive Taxation? It's the defining feature of the American tax code! You literally do not get more progressive than the US tax system. Even the OECD says so. The Top 1% of income earners covers, what, 34% of our Federal tax revenues now? How's that for "fairness"?

Personally, I'd flatten the hell out of the tax system and just make it one rate for everybody. No loopholes, no breaks, no subsidies. People focus so much on tax rates without bothering to focus on what you're actually collecting nominally from people.

If I make $25,000 in a year, and pay taxes at a standard 10% rate, I pay $2,500. If you make $250,000 in a year, you pay $25,000. If you make $25,000,000... well, then you pay $2.5 Million in taxes.

I struggle to see how that by itself is not "progressive", especially considering the fact that the guy paying $2,500,000 a year (say a professional athlete) in taxes isn't using the roads or any of the other crap Elizabeth Warren believes justifies radically increasing the amount of theft in society any more than the guy who's paying $2,500 in taxes. And in a lot of cases, assuming the multimillionaire sends his kids to private schools, built a private road and plumbing system, etc. to his house and everything else that rich people like to do, he's using the tax-funded infrastructure a hell of a lot less.
5. Change the way bankers get paid. We need new laws preventing Wall Street executives from getting bonuses upfront for deals that might blow up in all of our faces later. It should be: You make a deal today, you get company stock you can redeem two or three years from now. That forces everyone to be invested in his own company's long-term health – no more Joe Cassanos pocketing multimillion-dollar bonuses for destroying the AIGs of the world.
I feel like just mocking this outright. Taibbi's solution is to have the state start deciding what, when and how employers pay their employees? Really?

Cause that always works out so well.

Look... The more substantial issue here is that Taibbi's comment here completely ignores how we got to a point where there are these giant "too big to fail" firms in the first place. The simpleton's answer is usually "greed", but for the millionth time, greed is just a human characteristic found in every person on the planet at all times throughout history.

Wall Street didn't just randomly get way more greedy between 2002-2007. Note: If you believe that that's what happened, you're probably pretty much hopeless.

Greed exists at all times.

The issue is what are the systemic incentives that either reward or punish greedy people for acting irrationally. The free market - contrary to Matt Taibbi and the OWS crowd's understanding - is the one type of system that exists that actually punishes greedy people when they behave badly. A government controlled and highly regulated market - as we have in the United States - actually rewards the greediest and most weasely among us. I know this is counter-intuitive, but it's simply reality.

Here's why:

Government can and always needs to be defined as the one entity which maintains a socially accepted monopoly on the use of force in human society. It is funded via forced taxation, and all political decrees are backed - at the end of the day - with guns and violence. There is no other socially accepted institution that you can say this about.

Government is unique in all of human institutions purely because it is perpetuated through legitimized violence.

Please note that I'm not making any arguments for or against government here. I'm simply trying to break down the institution to its most essential characteristics and properly define it. Government is violence. Deal with it, come to terms with it, and please understand what exactly that means.

...and if the government didn't dominate most of your economic
decisions in one way or another, you wouldn't need one.
Also understand that the more violence is used to control people's actions, the more politically determined economic outcomes become and the more necessary it always becomes for individuals and companies to make attempts at influencing those outcomes.

On a small scale, everyone understands how this works.

Imagine if your high school class president had the power to choose 10 people to go on a fun class trip to Cancun, how many bribes, favors, or other demonstrations of social capital do you think that class president would receive from people who wanted to go on that trip? I'm betting quite a few... Especially from people who felt like they had a reasonable chance at succeeding. The rest of the lumpen proletariat who understood they had no chance what-so-ever might be inclined to just give up...

Everyone seems to be able to understand all this, but apparently the lesson is not learned when the class president becomes US President.

Now... This might appear like I'm saying that all powerful people are inherently corrupt and always take bribes. I'm a little cynical in that I bet most do, but certainly some don't. But even still... If you have the power to give special benefits to on one hand, or kill on the other a business or industry, how do you decide how to use that power? Do you listen to your constituents, or an economics textbook?

The point is, it's all political all the time. And the more power political officials have over the economy, the higher the stakes get... Unfortunately, there's not that many people who can handle high-stakes games.

The people who can tend to be rich, established and well-connected. People like Jeffrey Immelt, who I mentioned earlier. It should never be a surprise that corporations have influence over policy as long as policy has influence over corporations. Without a strict separation of business and the state, this trend will just continue, grow and get more problematic.

Any honest assessment of American history should have shown Taibbi that we've done exactly what he wants a dozen times over the last century, and the result has been more corporate influence in politics, and more consolidated, risky banking decisions than ever.

So again, it's a cause & effect problem.

No... It  really didn't.
People like Taibbi mistakenly believe that the government is horrendously corrupt and beholden to big corporate interests, and that - in defiance of absolutely all common sense - the way to solve this problem is by giving the government even more power while simultaneously trying to regulate the people that (now more powerful) government benefits the most. It is utterly insane. And what's more, even if you did manage to pass legislation that somehow made lobbying or anything like that illegal, all you'd be doing is pushing the bribery into a seedy black market which wouldn't be tracked by sites like

Taibbi's ideas on how to fix banking are not unlike Dodd-Frank. They are simplistic solutions to complex problems made by people who arrogantly think they're smarter than people who actually do banking for a living. But Taibbi isn't smarter in the realm of finance than the whole of Wall Street, much less probably even its worst day-trader. I know I'm not and it would be horrendously hubristic of me to think that I could predict the unintended consequences of a whole host of new government powers to dictate how and when the state bails out private companies.

I can tell you this though... Whatever the unintended consequences are, they're pretty much guaranteed to be uniformly abysmal for ordinary people.

And seriously? For Taibbi it's just a forgone conclusion that the state will bail out failing companies. What?? Isn't that the problem in the first place?

The actual solution here is to take away the incentives for banks and other major corporations to lobby the political system, by removing the power of government to give the benefits that those corporations are seeking at the tax-payers' expense. Get rid of the loan guarantee programs like the FDIC, Fannie, Freddie, etc., completely remove Congress' power to give bailouts, and for godsake, end the Federal Reserve!

I've already explained the Fed at length a million times, but if you don't understand why it is the central planning of interest-rates (thus grossly distorting market behavior and time-preference) and the ability of that organization to inflate the currency that produces an environment where greed wins over risk of loss in a way that simply cannot happen in the freed market, you're just not up to speed.

Once you understand that, it will be come crystal clear why Occupy Wall Street is filled with fools who will - if they succeed at all - only create more of the problems they are currently protesting.

Until the ideas change, Occupy Wall Street is a disastrous movement.

So here's my advice to Occupiers... Learn economics. First, you need a solid grasp of the basics, and this needs to come not from the guys like Paul Krugman or Joe Stiglitz, who actively called for the intervention into the economy that sparked the housing bubble, then just 3 years ago supported massive bailouts of the very financial institution you're occupying, but rather from guys who predicted the crash and exposed the bubble early on.

These men & women would be nearly 100% of the Austrian School of Economics persuasion. Look it up if you're unfamiliar. The Austrians, you'll be happy to know, have been focused on Human Action as opposed to government action or econometrics measured with numbers that coincidentally make inflation look like the solution to everything - and they've been doing that from the beginning.

So I'd start with reading the following:
  1. Human Action by Ludwig von Mises
  2. Economics in One Lesson by Henry Hazlitt
  3. The Use of Knowledge in Society by Frederich August von Hayek (this one is going to be hard, but once you understand it, you will find that it will become instantly clear why Paul Krugman and other Keynesians - apart from being hypocritical douchebags - are wrong from their initial premises on down)
  4. What is Seen and What is Not Seen by Frederic Bastiat
  5. Also, read the book, but simply take a few hours and watch Free to Choose by/with Milton Friedman
Once the Occupiers have completed that small survey, I hope they'll also pop over and read up on Public Choice Economics and familiarize themselves with the work of Nobel Prize winner James M. Buchanan. Dr. Buchanan pioneered the study of employing the tools of economics to view how different incentives effect the agents of the state.

Turns out, incentives matter for politicians too, and we can learn lessons about who will ultimately always have the lion's share of control over any regulatory agency when they get more power. That'll be giant, well-connected corporations typically at the expense of their lesser competitors - and ultimately, at the expense of consumers.

All combined, I hope this sets the Taibbis of the world straight.


Nathan P said...

Great post. I will send a link to friends.

Nathan P said...

Great post, I will send a link to friends.