Italian Lawmakers Are Not Stupid

Say what you want about the Italian Government and their proposal for a “Google tax”, but I find it very unlikely that they are stupid.Google Italia

I recently read an article on the Forbes website entitled “Italy Proposes an Entirely Illegal Google Tax”. Normally, I wouldn’t have thought twice about legislative malfeasance in Italy, but this was from Forbes, the corporate cheerleading, Europe bashing publication that manages to survive only because of its silly annual list of rich people. As suspected, the story of the Google tax is a bit more complicated.

Italy, like many other European countries, are trying to figure out a way to collect taxes from large companies that operate in one European country but do business in the others. As the article points out, there is a problem with this in that the direct collection of taxes violates the single market principle. This is why some articles refer to this revenue collection as a “tax” with quotations.

Companies like Google have found a way to avoid paying national taxes by setting up subsidiaries and shell corporations wherever the taxes are the lowest while at the same having access to the large European market. Many consider this a tax loophole, so Italy’s Partito Democratico is proposing a loophole of its own. In order to advertise in Italy, a company must go through a registered Italian ad agency. The Italian companies would therefore see an increase in revenue which would increase the amount taxed by the government.

Can this work? Probably not. Is it legal? Probably not. So then the Forbes article is right? Absolutely not.

Italy does not exist in a vacuum. It is not the only country upset about the tax loopholes exploited by tech companies. France, which is where the idea of the Google tax was born, is calling for a Europe-wide Google tax. Surely this would satisfy critics who claim that national Google taxes are illegal. The point is, even if the law gets passed, and eventually struck down, it can have an effect on public sentiment throughout the continent.

The proposed Italian law is said to be able to raise €1 billion in tax revenue. This is nothing – about one tenth of one percent of the government’s budget. In other words, Italian lawmakers are testing out the waters and seeing how much leeway they have within the existing European structure.

Criticizing continental European economic policies is a favorite pastime for American and British conservatives who wish to parody that which they disagree with. But to say that Italian lawmakers don’t understand their basic laws is ludicrous. Which explanation seems more plausible?

  1. Italians are stupid and don’t understand their own laws.
  2. Italian lawmakers understand that they are in a difficult situation in terms of national interests and regional law and are pushing the envelope so as to establish new precedents and/or provide exposure for a new regional tax policy.

To call Italian lawmakers stupid is lazy and teaches us nothing about the situation.

But Austerity Perseveres

R&R did not create austerity – discrediting them will not kill it.

If you’ve been reading about the Rogoff and Reinhart incident this week, most everyone outside of the right wing press is claiming that the austerity argument has now been proven false. If only it were that simple. When Paul Krugman (probably the fiercest critic of austerity on this side of the Atlantic) wrote about R&R last week, he closed his column by saying the following:

“So will toppling Reinhart-Rogoff from its pedestal change anything? I’d like to think so. But I predict that the usual suspects will just find another dubious piece of economic analysis to canonize, and the depression will go on and on.”

Essentially, if it wasn’t R&R, proponents of austerity would have found some other paper by some other economist to back their claims. And most folks on the right are admitting that Excel error or not, debt kills economic growth (just a lot less than we thought it would).

Bob Samuelson committed probably one of the most egregious false equivalences in recent years in his column by referring to the fall-out over the paper a “dispute”, in which one side says X and the other says Y – as though X had not already been proven to be factually inaccurate and misleading.

So what now? For once, we seem to have a good set of economic data that millions of people around the world are familiar with. When debt approaches GDP, growth slows down to about 2%. That’s not great, but borrowing money is always painful. Taking a mortgage prevents you from accessing liquid capital in the short-run, but it is often a sound long-term investment.

Peggy Noonan made the mistake in the Wall Street Journal this week of basically making Obama’ argument for him, by claiming that the jobs crisis is much worse than the debt crisis. The Republican Party will likely pivot soon and start blaming the President for not doing enough for jobs, months and years after they blocked any and all legislative efforts to do something about jobs.

This is the Republican game – don’t let facts get in the way of your agenda. Excel errors do not matter. There are scores of other economists who are willing to stand in for R&R and defend the merits of austerity. While it’s true that Herndon’s work at UMass has exposed bad research and briefly given progressives, and Keynesians, and basically everyone other than right wing fiscal conservatives something to cheer about, I’d be surprised if politicians remember this a month from now. I’m a bit surprised that the coverage over an Excel error in an academic paper has lasted a week already.

Austerity Stumbles

It’s not often that an academic paper makes the headlines. Researchers and professors typically write on obscure topics that are read, if they’re lucky, years later, by a handful of graduate students who are working on their own obscure and imminent-to-be-ignored academic works. Ken Rogoff and Carmen Reinhart were superstars in this respect.

The Rogoff-Reinhart paper, entitled “Growth in a Time of Debt”, was the stuff of legend. Policymakers around the world referenced it when making the case for budget cuts and austerity measures, arguing that running budget deficits would cripple economic growth. In particular, they claimed that when debt crosses the threshold of 90% of GDP, national economies would begin to shrink.

The United States has already crossed that threshold (we’re beyond 100% actually), but our economy continues to grow. It’s growing at a flimsy rate and in a way that does not benefit the country as a whole, but grow it does.

Enter UMass Amhert economics grad student, Thomas Herndon, who did what nobody else did (yeah – the paper was not peer reviewed) and looked over the numbers used by Rogoff and Reinhart (check out the interview between Herndon and Stephen Colbert). It seems R&R forgot to include 5 countries (Australia, Austria, Belgium, Canada, and Denmark) in their final analysis. If you include these countries, economic growth crawls along at about 2%, which is to say that they somehow omitted the countries that maintained high growth in spite of high debt. It turns out the R&R committed a simple Excel spreadsheet error (visual approximation below). Unfortunately, this error led to the false conclusions that were used as ammunition to sell austerity measures all over the world! RandR Excel error

This is all very embarrassing for R&R and those who cited their paper, but if you think this means much in term of policy, think again. John Maynard Keynes once wrote:

“The ideas of economists and political philosophers, both when they are right and when they are wrong are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.”

Although I respect Keynes, I think we’d disagree on the extent to which economists and their ideas are pawns of politicians. I’ll tell you why tomorrow.

The Backlash Against Google

More good April fool’s pranks, but the pesky bad press surrounding Google’s decision to discontinue Reader refuses to go away. 

Google’s unofficial corporate motto is “don’t be evil”. And since the company’s founding 15 years ago, it has managed to maintain a public image of being an anti-establishment good-guy. Given its success it was only a matter of time before the company became too big and was considered an out of touch one-trick behemoth pony – much like Microsoft.

The reaction to Google’s famous string of April fool’s pranks closely mirrors the public’s (dis)contentment with the company. In years past, we all marveled and laughed at the company’s fake new products which included the likes of Gmail Motion.

And 8-bit Google Maps for Nintendo. 

This year, although the pranks themselves weren’t all that different, the reactions were. Continue reading “The Backlash Against Google”

Republicans’ Groundhog Budget

If you want to understand the new GOP budget, read the old one. Give money to Republican voters and cut everybody else out.

Old habits die hard. Paul Ryan and the House Republicans have offered up a budget that is almost identical to the one proposed last year – the one that was roundly rejected by voters in November 2012. The most revealing aspect of the proposed budget is that the GOP cares about cutting government spending only when the beneficiaries of said spending do not vote Republican.

The following graph from The Atlantic breaks down the cuts according to major federal expenditures.Ryan Budget Breakdown

Which programs are left alone? Continue reading “Republicans’ Groundhog Budget”

Minimum Wage and its Discontents

What you get for an hour
What you get for an hour

President Obama recently said in his State of the Union that Congress should do whatever it takes to increase the federal minimum wage to $9/hour. This caught a lot of folks on both sides of the aisle off guard because the stated priority of both parties is currently job creation. And the conventional economic wisdom states that if you increase the wage that employers have to pay their workers, they will simply hire fewer workers. Increasing the minimum wage leads to an increase in unemployment.

The counterargument to this is that increasing the minimum wage would give low-income workers more purchasing power, serving as an indirect economic stimulus without government spending. The increases in unemployment take effect only if the minimum wage is drastically increased – modest increases have little if any effect on employment.

As Paul Krugman pointed out last Sunday in the NY Times, setting minimum wage at “$20 an hour would create a lot of problems. But that’s not what’s on the table. And there are strong reasons to believe that the kind of minimum wage increase the president is proposing would have overwhelmingly positive effects.”

Employment is not the only factor at play. Continue reading “Minimum Wage and its Discontents”

What Is Middle Class?

When I was growing up, I had a very different idea of what it meant to be wealthy than most Americans. There were many things that I considered luxuries that I often take for granted today. It took a decade or so before my family had enough capital to purchase a home. I even got my own room, which for me was the truest sign of becoming a regular American kid. When the family’s Nissan Sentra broke down, we upgraded to an Altima – yet another sign of moving on up. When I went to college (thanks in large part to needs-based grants), it was the first time in my life that I had a television in my room – we even had cable! The list of upward mobility acquisitions and activities goes on; they include but are not limited to: Walkmans, Nintendos, family vacation, summer camp, eating out in restaurants and playing tennis (as opposed to basketball or something god-forsakenly ghetto like handball).

At one point, this is what I considered rich
At one point, this is what I considered rich

It’s interesting for me to look back at a time when owning a home, having my own room (with cable TV) and attending college were all considered aspects of being rich. Reading the news today about the middle class reminds me of those times when I had an idea of middle class that was outside of the mainstream. During the recent presidential campaign and the current fiscal cliff negotiation, both parties have been positioning themselves as the defenders of the middle class. In both scenarios, the antagonists are portrayed as part of some moocher class, whether they be welfare recipients or Wall Street financiers.

On the surface, the main partisan disagreement is over whether or not to let the Bush tax cuts expire for families earning more than $250,000. Republicans will lose this battle – even prominent conservatives have admitted that raising taxes a little bit on the wealthy is either necessary, or only slightly bad. So it seems middle class families – those earning less than $250,000 – are in the clear.

Wait a second…$250,000? A family earning more than $200,000 is middle class? Let’s take a look at the numbers. According the the US census, the median family income from 2007-2011 was $52,762.  Only two percent of Americans earn more than $250,000. Households earning more than $150,000 are still in the top 5% of income.

A recent New Yorker article argues that those families earning between $100,000 and $250,000 should not be considered middle class – that they are really the “hautes” – almost rich, and certainly better off than true middle class families.

In a country like the US, everyone likes to consider themselves part of the middle class, to the point that it obscures what the term actually means. As the New Yorker article states, using the $250,000 threshold “enables relatively prosperous citizens to ignore their good fortune and pretend they’re just as put-upon as everyone else. When that happens, the real middle class—not to mention the poor—becomes invisible”.

My idea of middle class has changed considerably since childhood, but not to the extent that it includes families earning over $200,000.