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(Mostly) Excellent Piece on Why Henry Blodget is Wrong

By JLP | August 27, 2012

A friend posted a link to this interesting piece by Diana Furchtgott-Roth on Why Henry Blodget is Dead Wrong when it comes to fixing the economy.

Blodget thinks spending is the problem and so his solution is for companies to increase wages and all will be good. From the piece:

Your conclusion is a call for employers to take “a few percentage points of your record profits and use it to hire more employees and pay your existing employees more.” That way, you say, employees will spend more money and corporations will have higher revenues and profits.

Obviously, Blodget has little economics training. Even I know that a company’s goal is not to hire employees UNLESS there is a need to hire them. But, I expect this from Blodget who seems to be taking the populist approach these days. I’m wondering why Blodget didn’t hire a bunch of people back when he was making the big bucks as a securities analyst.

Anyway, this piece takes on Blodget and does it really well. Her work sounds a lot like Thomas Sowell. It’s also what I have been saying here on AFM. For instance:

Some increase in perceived inequality since the 1980s is due to the Tax Reform Act of 1986, which lowered top individual income-tax rates from 50 percent to 28 percent. This led to more income being reported on the individual, rather than corporate, tax schedules.

And this:

In addition, the composition of households has changed over the past 30 years. Women have moved into the workforce in record numbers, and there are more two-earner couples at the top of the income scale and more one-person households at the bottom, including students and retirees.

When two individuals get married, if both have worked and continue to work, they comprise a household with higher earnings—and the measured distribution of income in society widens. There are more such households now than in the 1980s. In 2010, 58 percent of married couples were in the top two quintiles, and only 7 percent of married-couple families were in the lowest quintile.

Finally, I LOVE this point:

If you want to reduce inequality, Mr. Blodget, the simplest way would be to allow only one member of the household to work. It’s two-earner couples who are pumping up the incomes of the top fifth of the distribution. The CEOs and the star athletes are just a tiny fraction, outliers on a massive bell curve. The real culprits are two-earner couples.

Now, I do disagree with Ms. Roth on one point at the beginning of her piece where she talks about the effects of welfare (food stamps, rent supplements, Medicaid-funded health care, subsidized school lunches, and other social programs) on spending. She writes:

…those at the bottom are doing better than they did 25 years ago because they have greater spending power, after adjusting for inflation. This is important for the bottom fifth—economically, socially, psychologically.

Spending is vital because it is the principal determinant of standard of living. It influences confidence in the future.

I disagree that spending derived from welfare is good for people psychologically. Why? Because, in the back of their minds they always have to be worried about the government taking it away from them (a card consistently played by politicians. “So-and-so will CUT YOUR BENEFITS if he’s elected.”).

Spending derived from income that is EARNED is what helps people psychologically.

Other than that, I agree with everything else Ms. Roth said in her piece. I think she effectively schooled Blodget on his economic idea.

Thoughts?

Topics: Economics, Politics | 18 Comments »


18 Responses to “(Mostly) Excellent Piece on Why Henry Blodget is Wrong”

  1. Retiredat40 Says:
    August 27th, 2012 at 11:07 am

    Blodget thinks that the average person making more money is going to help the economy? Where do people get this stuff? Good thing we’ve got people like Roth and JLP to keep us straight. Less is more.

  2. JLP Says:
    August 27th, 2012 at 11:18 am

    WHOOOOSH!!!!!!

    That was the sound of my point sailing right over Retired’s head.

  3. Retiredat40 Says:
    August 27th, 2012 at 11:19 am

    Yes. The brilliance went right over my head.

  4. Steve Says:
    August 27th, 2012 at 8:10 pm

    The problem is Blodget’s theory might work if it were a closed system with no leakage, but the reality is that the people with the new jobs would take the money and buy cheap chinese goods and the company doing the hiring wouldn’t be able to compete due to extra costs.

    It’s going to take some painful deleveraging and deflation before things balance out on their own because of the disparity between where the Chinese and American economies were when the market was opened wide to free/one-way (depending on your opinion) trade.

  5. Miguel Says:
    August 28th, 2012 at 6:12 am

    Have to agree with Steve – Blodget fails to account for the global interconnectedness of our economies. How does he propose American business keep more jobs in the U.S., pay American workers more, and maintain their global competitiveness at the same time. He also fails to account for the productivity increases created by technology and capital investment – if the jobs weren’t being offshored to cheaper labor, they might still disappear due to technology investment. Been inside a hyper-modern manufacturing plant lately? Not too many humans in sight.

  6. Jack Says:
    August 28th, 2012 at 10:08 am

    It is the technology improvements that drive increases in the standard of living. If we simply doubled everyone’s income, all the prices would double, too.

  7. Valkyrie Frost Says:
    August 28th, 2012 at 10:55 am

    On the one hand, Blosget’s simple solution is dead on correct using his limited analysis. Raising salaries worked one-hundred years ago for Henry Ford and for America as other industries had to complete for labor and also because the US had trade barriers that protected America’s industries from global competition.

    However, as Steve points out, Blodget did not take into account the global labor market of the 21st Century and America’s (often one-sided) trade agreements with nations like China. Therefore, Corp America will quickly rejected Blodget’s advice out of both “fiduciary duty (lol)” and thier own profit motives. In other words, Corp America CEO’s and BoD’s have zero incentive to apply Blodget’s advice and $Billions in incentives to reject it.

    Now, Furchtgott-Roth has her take on the subject. First, she has a resume as a GOP political insider, so her response will certainly be colored by her political connections and aspirations. Ergo, take her opinions and analysis with a large grain of salt and keep an eye out for cherry picking statistics used to make her case.

    I’m not going to debate her point for point as it will take too long. Simply put, her analysis is specifically narrowed so that she can contradict Blodget’s points. By carefully cherry picking the data starting with 1980 in some cases and 1985 in another, she seeks to discredit Blodget’s points without allowing the data to discrediting her own arguments. Yet, by directly comparing her article’s arguments with the charts provided in Blodget’s original article, an astute reader (that’s you) will see her points do not hold much water and completely miss the mark in some cases.

    She focuses on some curious statistics like purchasing power per person economic inequality since 1980, dual income households since 1985, individual income tax liability of the top 5% and top 1% since 1980, and finally “employees’ total compensation” beginning in 1981. I say these are curious because, even though they appear to be useful in countering Blodget’s points, they are actually more important in allowing Furchtgott-Roth to make some interesting subliminal conservative talking points completely outside the topic of “fixing the economy”. Let’s me illustrate my meaning by pointing out some messages and the talking points used by Furchtgott-Roth to relay that message.

    These subliminal messages are:
    1: Women are to blame (conservative traditionalist believe the man should be the sole bread winner in a family)
    - the composition of households has changed over the past 30 years. Women have moved into the workforce in record numbers
    – there are more two-earner couples at the top of the income scale and more one-person households at the bottom

    2: Marriage is good for America – if women must work, they should do it married
    - 58 percent of married couples were in the top 40%
    – only 7 percent of married-couple families were in the lowest 20%
    – two-earner couples who are pumping up the incomes of the top 20%

    3: Divorce is bad – if women must work, they should do it married
    - higher divorce rates resulted in more being in the bottom 20%.
    – greater share of babies born to unwed mothers resulted in more being in the bottom 20%.
    – This is a cultural tragedy

    4: Corp America is not taking an unfair share of income from average working citizens
    - CEOs and the star athletes are just a tiny fraction, outliers on a massive bell curve.

    My point: Furchtgott-Roth article is written by a GOP insider for consumption by conservatives. JLP, a smart guy, ate it up – hook, line, and sinker. Although he did not agree with the welfare/psycho connection in the beginning of the article, many conservative will eat that up, too.
    This article is just what he and all conservatives wanted to read to counter Blodget’s article.

    A few facts remain unaddressed:
    – individual purchasing power has declined from my parents generation to mine
    – dual incomes are required today to maintain parity with the purchasing power of my parent’s generation in families with children
    – most of the income gains in the past 30 years have gone to the top 10%
    – the economy has never recovered from the Dot Com Crash when taking into account inflation and employment percentages
    – my comment also offers no solutions to the root problems of our economy :-)

    Blodget does have one key truth: worker purchasing power is the key to a prosperous economy; that’s why we call it a consumer driven economy. Without productive and prosperous workers (derived from the personal profit incentive to work and work well), there can be no sustainable prosperous economy.

    My point: Blodget’s article offers one possible solution to start the conversation. Although Furchtgott-Roth may have furthered her own career with this article, she has done nothing in the way of offering counter a solution or promoting the discussion. I argue her article does not only say “Blodget is Wrong,” but that it is designed to actually stop the conversation.

  8. BG Says:
    August 28th, 2012 at 6:05 pm

    Couple of points about why companies don’t hire USA workers, which in the end, is the real issue:

    1) Regulations in the USA prevent the type of manufacturing that goes on in China (ie; pollution controls, etc).

    2) Tax incentives are backwards: US tax code is setup in such a way that it is simply cheaper for a company to manufacture goods overseas, and import into the US (from a purely taxation point of view).

    Fixes:

    1) Don’t allow imports of goods into the US that are manufactured in ways that would be considered illegal in the US. Either allow the goods to be manufactured in the USA the same way, or prevent the goods from entering the USA at all.

    2) VAT-tax on the border to level the tax playing field. Imported goods sold in the US should have the same ‘tax-burden’ embedded in the price as would a locally manufactured item. Note: this is NOT protectionism, it is all about removing any ‘tax’ considerations from being used by corporate decision makers.

  9. Valkyrie Frost Says:
    August 28th, 2012 at 6:52 pm

    BG, I agree on both points.

    I’d also like to see the removal of all income taxes and credits from corporations. It is paid for by customers and it is an *excuse* used by CEO’s and BoD’s not to pay dividends to share holders.

    If I get unlimited wishes… I’d like to see public owned corporations have to pay dividends to share holders like my REITs do every quarter.

  10. Jack Says:
    August 29th, 2012 at 10:53 am

    They are simply FACTS, Val, not “subliminal messages.”

    Yes, marriage is good and divorce is bad. But what’s that got to do with “if women must work, they should do it married”?

    Yes, when more workers come into the labor pool, the price of labor falls. That’s Econ 101. So two-worker households will be the beneficiaries of that changing dynamic at the expense of single-worker households.

    Mow let me address #4: “Corp America is not taking an unfair share of income from average working citizens”

    No, it is not taking an unfair share. Corporations only gets what people willingly give to them in exchange for their products and services. Corporations that charge too much are underpriced by others and put out of business. If you think the price of a product is too high, don’t buy it.

    Now your “unaddressed points”:
    – individual purchasing power has declined from my parents generation to mine

    An interesting assertion, but one I cannot find data to support or refute. Most information seems to be on household income, not individual income. Certainly, houses are larger now than a generation ago. Cars are better, too. Personal computers were new, and far more expensive and less powerful then.

    – dual incomes are required today to maintain parity with the purchasing power of my parent’s generation in families with children

    Well, when there is more income in a household, that household can bid up the prices on household items. That is what happened in the 1970’s w/ housing prices, after a lawsuit that required banks to consider the wife’s income in mortgage lending.

    – most of the income gains in the past 30 years have gone to the top 10%

    Sure. They are the ones making the technological innovations and taking the entrepreneurial risks.

    – the economy has never recovered from the Dot Com Crash when taking into account inflation and employment percentages

    Employment was doing just fine until 2007.

    – my comment also offers no solutions to the root problems of our economy

    Well, I can:

    1) Eliminate the Minimum Wage
    2) Eliminate Corporate Income Taxes
    3) Replace personal income taxes with sales taxes.

  11. Valkyrie Frost Says:
    August 30th, 2012 at 8:08 am

    Jack, you miss the point in my post. The article is a feel good piece for the GOP. Blodget’s simple solution is totally unacceptable to Corporate America and this piece by Furchtgott-Roth is the results and justification for that rejection.

    As for your three starter solutions… I agree with the first two. However, I would prefer to use a VAT instead of a national sales tax for many, many reasons. I also support flat taxation to replace our current system. A negative income tax system would be even better if we could use it to replace our welfare and entitlement systems. Even M. Friedman tried to push this one 40 odd years ago.

    I would also like to see a “level playing field” tariff applied to goods made in other nations and imported to the US where they fail to meet US standards for environmental conservation. Yes, an environmental based tariff. Before you go “beserko”, No, I do not support a carbon tax.

  12. Jack Says:
    August 30th, 2012 at 11:36 am

    Blodget’s solution simply won’t work.

    If we put such a tariff on foreign goods, you will kill third-world economies, and many of those people will starve.

    Is that really what you want?

  13. Valkyrie Frost Says:
    August 30th, 2012 at 5:29 pm

    I agree that Blodget’s solution will not work for many reasons, but none of them were presented in Furchtgott-Roth counter article.

    As for the 3rd world, it has survived without the US economy for thousands of years. They will not starve, they will adapt and move on without us. Indeed, that will happen as we devalue the dollar to zero. But spoiled US consumers would certainly complain about having to pay more for those cheap Chinese made products.

    It’s one thing to have to compete with a Chinese worker making $10/day. It’s another when US Steel has to compete with a Chinese state owned and run steel company that is subsidized by the govt and allowed to dump toxic by-products into the Yellow River turning it red and green with pollution. That’s bad for American jobs, it bad for US steel companies and it’s bad for the Chinese people.

  14. Jack Says:
    August 31st, 2012 at 1:53 pm

    You’re kidding, right, Val? How many famines have there been in Africa? Even this year: http://www.dailymail.co.uk/news/article-2133992/West-Africa-famine-threatening-kill-23million-starvation.html

    A state-run government is no silver bullet. Those subsidies have to come from somewhere. If the product costs $3 to make, sells for $2 in the U.S. with the rest subsidized by the Chinese taxpayers, then WE come out a dollar ahead on the transaction. Just say, “Thank you, China!”

  15. BG Says:
    September 2nd, 2012 at 10:36 am

    Jack) And once foreign competition has been eliminated due to chinese subsidies, what is going to prevent price increases?

    What you describe is “dumping”, a type of predatory pricing. The US has specific tariffs on imports that have been found to be dumping.

    Though those tariffs are still not enough because of the tax advantages of foreign produced goods sold in the US. All imports should be subjected to a VAT-like import tax to offset the predatory pricing enjoyed by foreign manufacturers due to our illogical tax code.

  16. Jack Says:
    September 2nd, 2012 at 8:44 pm

    It’s not as though factories cannot re-open and new factories cannot be built.

    Rather than imposing taxes on imports (which triggered the Great Depression, BTW), how ’bout we just fix the illogical tax code that is the root of the problem?

  17. BG Says:
    September 3rd, 2012 at 8:27 am

    The illogical part of the tax code us that we are the only nation on the planet that does not tax imports.

    Build it in the USA: high taxes.
    Build it in China and import into USA: no taxes.

  18. Jack Says:
    September 3rd, 2012 at 9:07 am

    It is illogical to tax corporate income at all.

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