Year: 2021

Allison Schrager has a conversation with Luigi Zingales on the subject “Break Up Big Tech? A conversation about the future of the industry” (City Journal website, September 21, 2021). Zingales makes a number of interesting points, but here’s one of them:

I think the problem is that we treat Big Tech as one big issue, and we say we need to break them up. Rather, what we should do depends on what we want to accomplish, and what sector in the industry we’re taking about. Let’s start with social media. I think the government should have tried to stop Facebook’s acquisition of Instagram and WhatsApp, but I am not sure that breaking them up now would make a difference in the long term. If there are big network externalities, separating Facebook from Instagram would be just a temporary measure, because eventually only one of the two will prevail. …

[T]here is one thing I’d love to see. Why can’t I have software that monitors both Signal and WhatsApp and can receive and send data to both at the same time? In 2008, a company called Power Ventures did just that, but Facebook sued the hell out of it and established a principle in U.S. courts that if I give you my Facebook log-in credentials and you download data with my consent, then you are committing a federal crime and should go to jail. I think this is crazy, and it’s one of many legal issues making solutions difficult. …

We should separate the two key functions Facebook performs: sharing of information and editing of information. Facebook and Twitter allow me to share a photo with everyone who follows me. Yet, Facebook also decides whether all my followers will see the picture at the top of their feed, at the bottom, or not at all, if their feed is clogged with other posts. Facebook can also decide whether to promote my picture to lots of people I don’t know. …

First, we should separate the editorial role from the sharing role. In the editorial role, where there are no network externalities, we can have competition. I can have a University of Chicago editor, and another person could have Jacobin as editor. Newspapers can redefine their role as editors. I could subscribe to the Wall Street Journal editorial-selection services: the Wall Street Journal would edit and select from the web the articles or tweets I want to read. For example, I hate it when people talk about their lives on Twitter; other people love that. There should be free competition on curating these information feeds.

By contrast, the sharing function (which benefits from network externalities) should be considered a common carrier, with the restrictions typical of a common carrier, including universal service. Everyone should be allowed to post on Facebook, unless she violates the law. In the same way, the sharing function of Facebook should retain protection from legal liability, while the editorial function should not. …

Consider a phone company. Do you know how many crimes are committed over the phone? Are phone companies responsible for those? You could wiretap every conversation, but no one would even consider that possibility. Unlike phone companies, Facebook, Twitter, and YouTube promote the content posted on their networks. Recently, I wanted to watch a YouTube video of Noam Chomsky, and I immediately got all these recommendations for this strange TV channel. When I started to investigate, I discovered that it came from Venezuela. Venezuela has a very radical, left-wing channel that broadcasts in English for the American market. YouTube promotes the channel, and makes money off promoting it, because it wants to keep viewers like me attached to their service as much as it can. And the way to keep us engaged is to give us more and more radical stuff that stimulates us more and more. The problem isn’t social media; it’s the business model, which is to get people addicted to platforms.

I am not fully confident about the Zingales claim that sharing in social media has implications for network externalities, while editorial choices about what to promote does not. There is also a degree of irony here in that a previous round of complaints against social media was that it cannibalized newspaper and other journalism, by passing along their content without paying the original publishers for it. Now, the proposal is that social media sites should be required to let others curate and pass along their content?

But I do think it’s useful to think in specific terms about what we’re trying to accomplish by applying antitrust regulation to social media. Just saying “sic ’em” is not a worthy motivation for public policy. For example, is the goal is to have a more competitive market for online advertising? Or to protect privacy of individual data? Or are there issues in how these firms choose what content to promote, and how to promote it, that raise anticompetitive or other policy issues? What part of a social media firm is more like a phone conversation, just passing along what someone says, and what part involves strategy and choices by the firm?

Economic sanctions is an attempt to carry out foreign policy using economic terms. It is a deliberately broad term. It includes decisions about not trading certain products with certain countries or companies, or seeking to freeze the bank accounts of countries, companies, or individuals. In political terms, one main attraction of economic sanctions is that it addresses a demand to “do something” in foreign policy in a way that doesn’t involve ordering soldiers into harms or imposing large budgetary costs. Thus, it’s no surprise that sanctions are quite popular. What’s less clear is whether they are effective.

Daniel W. Drezner makes a case for a degree of skepticism in an essay in the latest issue of Foreign Affairs, “The United States of Sanctions: The Use and Abuse of Economic Coercion” (September/October 2021). He writes:

Sanctions—measures taken by one country to disrupt economic exchange with another—have become the go-to solution for nearly every foreign policy problem. During President Barack Obama’s first term, the United States designated an average of 500 entities for sanctions per year for reasons ranging from human rights abuses to nuclear proliferation to violations of territorial sovereignty. That figure nearly doubled over the course of Donald Trump’s presidency. President Joe Biden, in his first few months in office, imposed new sanctions against Myanmar (for its coup), Nicaragua (for its crackdown), and Russia (for its hacking). He has not fundamentally altered any of the Trump administration’s sanctions programs beyond lifting those against the International Criminal Court. To punish Saudi Arabia for the murder of the dissident Jamal Khashoggi, the Biden administration sanctioned certain Saudi officials, and yet human rights activists wanted more. Activists have also clamored for sanctions on China for its persecution of the Uyghurs, on Hungary for its democratic backsliding, and on Israel for its treatment of the Palestinians. 

We don’t know much about how well these sanctions actually achieve a foreign goal. The limited studies on the subject suggest they are effective less than half the time. Moreover, the government actors who impose sanctions often don’t seem to pay much attention to whether they work or not. Drezner writes:

A 2019 Government Accountability Office study concluded that not even the federal government was necessarily aware when sanctions were working. Officials at the Treasury, State, and Commerce Departments, the report noted, “stated they do not conduct agency assessments of the effectiveness of sanctions in achieving broader U.S. policy goals.” 

Drezner argues that the promiscuous overuse of sanctions by the United States results from two factors: weakness and lack of imagination, which seem interrelated. The weakness is is that US dominance in world economic and military affairs is diminishing. For a number of foreign policy priorities, we want to do more than just give a speech, but less than order a military sortie. We settle on economic sanctions because we lack an ability to envision how foreign policy goals might be pursued in other ways.

There seem to be several conditions for economic sanctions to be effective: precise targeting, a realistic goal, and a degree of international cooperation. As an example, Drezner points out: “In 2005, when the United States designated the Macao-based bank Banco Delta Asia as a money-laundering concern working on behalf of North Korea, even Chinese banks responded with alacrity to limit their exposure.” Some of the efforts to limit flows of funds to terrorist groups seem to have been effective, at least over the short- and medium-mterm.

But when the US, standing mostly alone, imposes sanctions for general purposes on large economies, the main effect is often to cause suffering to the people of the country, rather than actually to achieve a foreign policy goal. The international sanctions against South Africa may be the best example of a success story in assisting regime change. But economic sanctions that require a country to dismantle its existing political/economic arrangements are not likely to work well.

The United States has imposed decades-long sanctions on Belarus, Cuba, Russia, Syria, and Zimbabwe with little to show in the way of tangible results. The Trump administration ratcheted up U.S. economic pressure against Iran, North Korea, and Venezuela as part of its “maximum pressure” campaigns to block even minor evasions of economic restrictions. The efforts also relied on what are known as “secondary sanctions,” whereby third-party countries and companies are threatened with economic coercion if they do not agree to participate in sanctioning the initial target. In every case, the target suffered severe economic costs yet made no concessions. Not even Venezuela, a bankrupt socialist state experiencing hyperinflation in the United States’ backyard, acquiesced.

The Trump administration was quite aggressive in using economic sanctions to pressure China for economic and foreign policy goals. That policy does not seem to have been effective.

Similarly, the myriad tariffs and other restrictive measures that the Trump administration imposed on China in 2018 failed to generate any concessions of substance. A trade war launched to transform China’s economy from state capitalism to a more market-friendly model wound up yielding something much less exciting: a quantitative purchasing agreement for U.S. agricultural goods that China has failed to honor. If anything, the sanctions backfired, harming the United States’ agricultural and high-tech sectors. According to Moody’s Investors Service, just eight percent of the added costs of the tariffs were borne by China; 93 percent were paid for by U.S. importers and ultimately passed on to consumers in the form of higher prices.

Indeed, it seems to me that we have often developed an odd vocabulary in talking about economic sanctions, where we refer to them as “success” when they cause disruption or stress, not when they actually succeed in accomplishing the foreign policy goal that they were purportedly enacted to address.

I’m reluctant to opine much on foreign policy. It’s not my area of expertise. But even I understand that building and projecting America’s interests needs to be a broad-based project that involves more than just imposing economic and military costs on others, but also includes building connections and offering carrots. Thus, foreign policy can work with economic policy on issues of building trade relations, encouraging investment flows, and providing loans or aid. Building the connections between nations that offer a degree of leverage in foreign policy can also use other tools: cultural exchanges, travel between countries, communication and consultation between governments, helping with training and expertise, and a range of treaty alliances on smaller issues. Individually, many of these are small steps. But together, they build up a reservoir of understanding and connectedness, so that when the tougher and bigger issues come up, US foriegn policy goals have a greater chance to succeed.

Drezner reports that Treasury Secretary Janet Yellen has promised to carry out a review of the US use of economic sanctions, which seems overdue. Acting as if economic sanctions are an appropriate part of almost every foreign policy goal, and then watching as other countries do the same in pursuit of all of their own foreign policy goals, doesn’t seem like a pathway to make the world a safer or more flourishing place.

The World Bank announced that it is discontinuing its its biennial Doing Business Report. The reason is that World Bank insiders, under pressure from national government, leaned on the researchers charged with compiling the report to change their findings–which they did. Details are available in a report: “Investigation of Data Irregularities in Doing Business 2018 and Doing Business 2020 – Investigation Findings and Report to the Board of Executive Directors” (September 15, 2021).

Before sketching what happened within the World Bank–a topic admittedly of interest mainly to a small number of insiders–it’s perhaps useful to describe how the Doing Business reports came into existence and what they were trying to do. At least for now you can check out the website of the 2020 Doing Business report for yourself.

Simeon Djankov described the origins of the Doing Business reports in the Winter 2016 issue of the Journal of Economic Perspectives (where I work as Managing Editor). Djankov wrote:

The Doing Business report was first published in 2003 with five sets of indicators for 133 economies. However, the team that created Doing Business had been formed three years earlier, during the writing of the World Development Report 2002: Building Institutions for Markets (World Bank 2001). The focus on the importance of institutions in development was chosen by Joseph Stiglitz, who at the time was the World Bank’s Chief Economist. As a member of the team, I was tasked with authoring the chapters on institutions and firms. At the time, the work by Rafael La Porta, Florencio Lopez de Silanes, Andrei Shleifer, and Robert Vishny on legal origins and various aspects of institutional evolution was generating a great deal of interest. I turned to Shleifer with a request to collaborate on several background papers for the World Development Report. He agreed, on the condition that we used this work as an opportunity to gather and analyze new cross-country datasets on institutions. This is how Doing Business started.

By 2020, the Doing Business report included data for 190 countries on 10 categories: “the processes
for business incorporation, getting a building permit, obtaining an electricity connection, transferring property, getting access to credit, protecting minority investors, paying taxes, engaging in international trade, enforcing contracts, and resolving insolvency.” There was also data collected on regulation of employment and contracting with government, although this data was not an official part of the Doing Business Index–and the idea of an index is perhaps where the trouble starts.

After all, researchers all over the world, both in international institutions like the World Bank or the IMF, as well as in academia and think tanks, do research on these kinds of topics all the time. But the idea of the Doing Business Index was to come up with concrete ways of measuring these 10 categories. Obvious questions arise. For example, say the task is to measure the costs of obtaining, say, an electricity connection in a given country. One cost will just be the cost of the electricity itself, but what about the time and the number of permits required? Doesn’t the reliability of the electricity supply need to be taken into account? Isn’t there likely to be a big difference in a given country between urban and rural areas? Maybe the process and costs will be different by industry, too.

The Doing Business project, to its credit, wanted to be scrupulous about exactly what was being measured. In the case of getting electricity, the 2020 report spells out:

Doing Business records all procedures required for a business to obtain a permanent electricity connection and supply for a standardized warehouse … These procedures include applications and contracts with electricity utilities, all necessary inspections and clearances from the distribution utility as well as from other agencies, and the external and final connection works between the building and the electricity grid. The process of getting an electricity connection is divided into distinct procedures and the study records data for the time and cost to complete each procedure. In addition, Doing Business measures the reliability of supply and transparency of tariffs index … and the price of electricity …

The data for measure all of these dimensions of “getting electricity” was based on survey evidence from local industry experts. As the report notes: “The data on getting electricity is collected through a questionnaire completed by experts in the electricity sector, including electrical engineers, electricians, electrical installation firms, as well as representatives from utility companies and energy regulators, and other public officials involved in this sector. To make the data comparable across economies, several assumptions about the business, the warehouse and the electricity connection are used.”

I hope this brief description of one category of the Doing Business report gives a sense of the ambition and scope of the project. Surveys were going out to multiple industry experts in 190 countries, across these 10 categories. Then the survey answers were being compiled and combined into a single index number for “getting electricity,” and the single index numbers for all 10 categories were being combined into an overall Doing Business index number for every country.

For those putting together the reports, and for those like me reading the reports, it was obvious that the index numbers and ranking were in some sense very broadly informative. However, what was really interesting about the report was that you could drill down into the underlying questions and get a more detailed and granular sense of what was causing a given score to be high or low. You could point out what seemed to be strengths and weaknesses in the business climate of countries. And if you disagreed with a given score, the methodology was clear enough that you could often pinpoint your precise area of disagreement. In other words, Doing Business was trying to take the ideas of “business climate” or “institutions that interact with private business” and make them specific, rather than ethereal and rhetorical.

But for national governments, the overall Doing Business scores felt like a judgement. Governments around the world, including India, Russia, Peru, and others, announced as a policy goal that they would perform better in the Doing Business rankings. Of course, all countries prefer to be above average in their business climate. National governments quarreled with the Doing Business methods and findings.

As one of many issues, the Doing Business rankings often looked at the actual formal rules and regulations. But many companies in practice found ways to circumvent those rules, perhaps with political pull or bribes. A system that functions based on such favoritism may not be a good thing–but if you focus on the formal rules, you may not be capturing how the system actually operates. For an overview of the issues and controversies surrounding the Doing Business indicators, a useful starting point is the two-paper symposium in the Spring 2015 issue on Doing Business in the Journal of Economic Perspectives:

• “Law, Regulation, and the Business Climate: The Nature and Influence of the World Bank Doing Business Project, by Timothy Besley
• “How Business Is Done in the Developing World: Deals versus Rules,” by Mary Hallward-Driemeier and Lant Pritchett

For the 2018 Doing Business report, the focus of the outside report is on China. There was deep concern at the World Bank that China might reduce its financial commitments to the Bank, with phrases like could be in “very deep trouble” being tossed around. Overall, China had been ranked #78 in the previous Doing Business report, and China’s government was complaining to the top leaders at the bank that this ranking was too low, and didn’t reflect progress China had made. The underlying data did show that China had made substantial progress–but it also showed that a number of other countries ranked near China had also made even more substantial progress. Thus, in terms of rankings, China was scheduled to drop.

Shenanigans followed. The 2018 report was about to be published, with China having a ranking of #85. Top leadership of the Bank then pulled the report just before publication, and starting asking for some way of recalculating China’s numbers. The report documents in painful detail how the pressure was exerted, how options were proposed and then discarded (like, say, using data for Macao to measure business conditions in China), and eventually, how China got its #78 ranking back.

For the next cycle of the Doing Business report scheduled for 2020, a similar cycle occurred, this time with Saudi Arabia as the protagonist. For example, early data ranked Jordan higher than Saudi Arabia as a reformer in the Middle East region. Again, political pressure was brought to bear on the researchers doing the work. Again, the numbers got altered. A similar pattern also happened for Azerbaijan.

One finishes the outside report wondering how many other national government were negotiating with the World Bank over their scores. Once such doubts are not just rumors, but backed by outside investigators, there may not have been much choice but to end the report, at least for a time. One might also argue that given the imperfections of the report–the difficulties and idiosyncracies of how it defined terms, gathered information, and combined that information into rankings–perhaps the loss is not an enormous one.

On the side, the demise of Doing Business seems unfortunate to me, but then, I’m a person for whom more data is pretty much always better. Yes, the rankings were imperfect, but having no one attempting to systematically measure and compare across these categories, so that there is no information at all, doesn’t seem to me an overall gain. More troubling, the saga of the Doing Business report reveals how national governments will push back against research findings and statistics they don’t like. This story shows how researchers were pressured to knuckle under, and did. When that happens, it casts a shadow over research not just at the World Bank, but everywhere.

Two years ago in September 2019, before COVID was on everyone’s lips, the White House Council of Economic Advisers published a report called “Mitigating the Impact of Pandemic Influenza through Vaccine Innovation.” Even committed readers of government reports like me skipped over the report at the time. After all, I’d written about reports that discussed pandemic risks from time to time in the past (for example, here and here). Back in fall 2019, there didn’t feel like any pressing need to revisit the subject? But Alex Tabarrok referred back to the 2019 report in a recent post at the always-useful Marginal Revolution website. and given where we are today, it’s interesting to read the report again.

The CEA report states the risk quite clearly:

Every year, millions of Americans suffer from seasonal influenza, commonly known as “the flu,” which is caused by influenza viruses. A new vaccine is formulated annually to decrease infections resulting from the small genetic changes that continually occur in the most prevalent viruses and make them less recognizable to the human immune system. There is, however, a 4 percent annual probability of pandemic influenza resulting from large and unpredictable genetic changes leading to an easily transmissible influenza virus for which much of the population would lack the residual immunity that results from prior virus exposures and vaccinations. … [I]n a pandemic year, depending on the transmission efficiency and virulence of the particular pandemic virus, the economic damage would range from $413 billion to $3.79 trillion. Fatalities in the most serious scenario would exceed half a million people in the United States. Millions more would be sick, with between approximately 670,000 to 4.3 million requiring hospitalization. In a severe pandemic, healthy people might avoid work and normal social interactions in an attempt to avert illness by limiting contact with sick persons

The CEA discussion is framed in terms of the annual flu season. Thus, the question is whether, if a new and virulent type of flu appeared, how quickly could we get the appropriate flu vaccine shot in place? Thus, the 2019 report notes:

Large-scale, immediate immunization is the most effective way to control the spread of influenza, but the predominant, currently licensed, vaccine manufacturing technology would not provide sufficient doses rapidly enough to mitigate a pandemic. Current influenza vaccine production focuses on providing vaccines for the seasonal flu and primarily relies on growing viruses in chicken eggs. Egg-based production can take six months or more to deliver substantial amounts of vaccines after a pathogenic, influenza virus is identified—too slowly to stave off the rapid spread of infections if an unexpected and highly contagious pandemic virus emerges. …

Newer technologies, like cell-based or recombinant vaccines, have the potential to cut production times and improve efficacy compared with egg-based vaccines and are currently priced below the expected per capita value of improved production speeds for pandemic vaccines. But these existing technologies have not yet been adopted on a large scale. Besides improving pandemic preparedness, new vaccine technologies may have an additional benefit of potentially improving vaccine efficacy for seasonal influenza. We estimate the economic benefits that these new technologies could generate for each seasonal influenza vaccine recipient, and find that the benefits are particularly compelling for older adults (65+) who are at high risk of influenza complications and death.

In retrospect, this emphasis on production speed still seems relevant, but it also seems to skip past some other issues: For example, how quickly can we learn about a new flu strain? How can we accelerate the regulatory process? What about steps that we might want to take immediately in the case of a severe future outbreak, to buy time until the vaccine is available? For example, what could we do to have an oversupply of masks, ventilators, and testing kits rapidly available? Under what circumstances does it make sense to start widespread contact tracing? Under what circumstances do lockdowns, travel restrictions, or quarantines make sense?

What is perhaps ironic, or tragic, is that we did manage to pull off COVIC vaccinations. Back in spring 2020, it wasn’t clear that it would be possible to develop a COVID vaccine quickly, or perhaps at all. But thanks in part to being able to build on earlier research, like efforts to find a vaccine for HIV, the vaccine arrived faster than many had predicted.

The 2019 report is quite correct that it’s worth laying the groundwork in advance for developing a vaccine. Development and production of vaccines is also a case where speed matters a great deal. If you need a couple of years to get a new vaccine into production, the losses in health and economic production will be enormous–and the benefits of vaccinating those who haven’t already gotten the illness after that delay will be correspondingly small. The CEA report notes that in the much smaller and milder 2009 “swine flu” pandemic, of 2009, the first cases in humans were identified in April 2009, and the national flu vaccination campaign started six months later in October 2009. The COVID vaccine was admittedly a tougher case, because COVID was less familiar than just another variant of flu, but it took roughly a year from the first human cases to the vaccine becoming available–and well over a year until enough doses were readily available to all.

The $18 billion spent on Operation Warp Speed may already have highest benefit-cost ratio of any government spending program that has ever existed. The benefits will only expand as vaccines are rolled out around the world and when you take into account that lessons from COVID vaccines may enable better vaccines in the future, too.

But it also feels to me as if, in our current social controversies about vaccinations, mask-wearing, social distancing, hand-washing, and all the rest, we have not done much to learn the other lessons of the pandemic. We don’t have an early-warning system for a future pandemic, which could be implemented as part of existing medical tests–or some think could be implemented with a high degree of anonymity by doing tests at sewage treatment plants. We don’t have a system for accelerating the development of cheap and widespread tests for a new pandemic, or for a system of contact tracing, either. The next pandemic will arrive on its own schedule. Right now, it feels to me as if we are sleepwalking into that next pandemic with the same set of lousy policy options: that is, stop-and-start lockdowns under ever-changing rules in the short-term, hoping to develop and produce a vaccine, and then hoping that the public health apparatus can do a better job of persuading people to get the vaccine.

There have been news stories in the last month or two about broad-based support across 130 countries for a minimum corporate global tax rate of 15%. The common assertion is that a minimum tax rate will be a powerful discouragement for companies that are trying to use accounting methods to shift their profits to low-tax countries. But the problem of international corporate taxation is considerably harder than agreeing on a minimum tax rate.

Ruud de Mooij, Alexander Klemm, and Victoria Perry have edited a collection of essays that lays out the issues in Corporate Income Taxes Under Pressure: Why Reform is Needed and How it Could be Designed (IMF, 2021).

Imagine a hypothetical of a multinational company. It’s a US-based firm with management and headquarters in the US. However, the company owns subsidiary firms in a dozen other countries that support its global production chain, and it sells its products backed by a substantial advertising/marketing in several dozen other countries. When all is said and done, the firm makes a profit. But was the profit generated by the US-based management of the country? By the production units in other countries? By some combination of these two? What about the countries where the actual sales take place?

It’s easy to make this example a little more complex. What if the multinational company also owns a management consulting arm, based in non-US country #1, an insurance arm based in non-US country #2, and a research and development facility based in non-US country #3. Again, these different branches happen within the single firm, but all their services to the firm are provided digitally–without any physical product that ships across national borders. The firm will need to make decisions about what it is reasonable to pay each of these parts of the firm–and to decide what part of its overall profits (if any) are attributable to each arm of the company.

Finally, remember that each country along the production chain has two goals: it wants to encourage economic activity to happen within its own borders, and it wants some share of corporate tax revenues for itself. Some countries will put a stronger emphasis on attracting economic activity; others will put a stronger emphasis on collecting revenue. Some countries may reason that if they attract economic activity with low corporate taxes, they can instead collect tax revenue with value-added taxes or payroll taxes as production happens. Each country will write its own corporate tax rules, perhaps following the same general pattern, but also with its own favoritisms and politics built in. For example, countries may impose a certain corporate tax rate, then also have other provisions in the tax code, or other agreements about what kinds of public services will be provided to the firm, which make the effective corporate tax rates lower. Moreover, it is a general rule of international corporate taxation that a company should not be taxed more than once on the same earnings.

In thinking about the appropriate tax rules for multinational corporations, generalized statements of support for a 15% minimum rate (even if that support holds up when tested in the fiery furnace of practica politics) doesn’t begin to address the issues at hand. The question is not so much the tax rate (15% or another level), but which governments have the right to tax what parts of the production chain.

In Chapter 3 of the book, Narine Nersesyan lays out these issues in “The Current International Tax
Architecture: A Short Primer.” She writes (citations and footnotes omitted):

When a business activity crosses national borders, the question arises as to where the profits resulting from that activity should be taxed. In principle, there are at least three possibilities for assigning a taxing right:

• Source: the countries where production takes place
• Residence: the countries where a company is deemed to reside
• Destination: the countries where sales take place

The generally applied tax architecture for determining where profits are taxed is now nearly 100 years old—designed for a world in which most trade was in physical goods, trade made a less significant contribution to world GDP, and global value chains were not particularly complex. … The current international tax framework is based on the so-called “1920’s compromise”. In very basic outline, under the “compromise” the primary right to tax active business income is assigned where the activity takes place—in the “source” country—while the right to tax passive income, such as dividends, royalties and interest, is given up to the “residence” country—where the entity or person that receives and ultimately owns the profit resides. The system has, however, evolved in ways that considerably deviate from this historic “compromise,” and international tax arrangements currently rest on a fragile and contentious balance of taxing rights between residence and source countries. …

While domestic laws of each individual country set out the rules … the international taxation system is—very importantly—overlain with a network of more than 3,000 bilateral double-taxation treaties. These typically add (among other functions) a layer of definitions and income allocation rules that try to bring into alignment, and therefore can alter, the rules imposed by the individual signatories. … The key role of the international tax architecture is to govern the allocation of taxing rights between the potential tax-claiming jurisdictions to avoid both excessive taxation of a single activity and a nontaxation of a business activity.

The problem of how to allocate the profits of a multinational company across the different activities that it carries out in a range of countries is a genuinely sticky one, as each country grabs for a slice of the pie. But there are now companies that are incorporated in one country, with management and control operations in another country, and assets and jobs and still other countries.

Different chapters in the volume look at possible policies for taxation for multinational companies, including source-based taxation (although figuring out “the source” of profits is going to be tricky); residence-based taxation (although figuring out the real residence (or residences?) of multinational firm is going to be tricky); destination-based taxation (which would allocate the worldwide profits of a multinational according to where sales ultimately occur–and you can just imagine how a country with big exporters who sell elsewhere like that idea); or a formulary approach (which attempts to resolve all of these issues through a formula that includes all of these elements).

I don’t mean to offer nothing here but the counsel of despair. I’m sure there are steps that can be taken to discourage companies from booking a large share of their profits in jurisdictions where almost none of their actual operation takes place. But rethinking the roots of multinational corporate taxation in a way that would be acceptable to politicians in most countries is a genuinely herculean task.

Each year in September, the US Census Bureau releases a report on income and poverty measures for the previous year. Thus, Income and Poverty in the United States: 2020, by Emily A. Shrider, Melissa Kollar, Frances Chen, and Jessica Semega (September 2021) looks at changes for 2020. As one would expect, given the pandemic, the poverty rate in 2020 rose.

This figure shows the poverty rate in the top graph and the number of people in poverty in the bottom graph.

This figure shows the ongoing pattern of poverty by age: the elderly have the lowest poverty rate, and it didn’t budge much in 2020. The poverty rates for children and working-age adults both rose.

But an obvious question arises here. In an attempt to offer protection against the economic costs of the pandemic, the federal government ran a budget deficit of more than $3 trillion in 2020, equal to about 15% of GDP. How does that amount show up in these numbers? The short answer is that it doesn’t.

The poverty line is a measure of “money income.” Thus, it does include cash payments like Social Security or welfare and unemployment payments. However, it does not include a value for non-cash benefits like food stamps or Medicaid and Medicaid. It also does not include the value of payments made to the poor via tax credits, like the Earned Income Tax Credit. And what about the stimulus payments made to individuals in 2020 under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and the Coronavirus Response and Relief Supplemental Appropriations Act (CRRSA Act)? They aren’t included in the poverty rate calculations either, because they were implemented a tax credits

There’s one really good reason not to adjust the poverty line for non-cash and tax credit support, which is that it’s always been done this way. Thus, continuing to do it in the same way allows poverty rates from one year to be compared easily to rates from the past–if what was included in the poverty rate changed each year, then such comparisons would be harder.

However, there are also obvious reasons to use a more inclusive measure of income to take a clearer picture of poverty. Thus, about a decade ago the Census Bureau developed the “Supplemental Poverty Measure,” and along with the poverty rate report, it also published The Supplemental Poverty Rate, 2020, by Liana Fox and Kalee Burns (September 2021). As this figure from the report shows, the “supplemental poverty rate” fell even though the official poverty rate rose.

The difference is because of what is included in the two measures. As the report notes:

Income used for estimating the official poverty measure includes cash benefits from the government(e.g., Social Security, unemployment insurance benefits, public assistance benefits, and workers’ compensation benefits), but does not take into account taxes or noncash benefits aimed
at improving the economic situation of the population. The SPM [supplemental poverty measure] incorporates all of these elements, adding cash benefits, noncash transfers, and stimulus payments, while subtracting necessary expenses such as taxes, medical expenses, and expenses related to work.

According to this report, the economic impact/stimulus payments reduced the number of people who would otherwise have fallen below the poverty line by 11.7 million. At least by this measure, the poor as a group did not suffer disproportionate economic losses in 2020 during the pandemic recession and its aftermath.

One great thing about society’s reservoir of expertise that is housed in universities and colleges is that when an important new subject turns up, at least some of these experts will be able to respond to the crisis with research and insight. But this process of pivoting to the hot topic has a downside, too. For an especially hot topic, like the COVID pandemic, those who are experts in something altogether different may suddenly start delve into a new area–and the results will not always be pretty.

One vivid example of this dynamic that has stuck in my mind happened when I was based out at Stanford University in the early 1990s and Mikhail Gorbachev came to visit. Gorbachev was president of the Soviet Union at the time, and he was following a policy of “glasnost” in which the USSR would encourage greater openness and transparency, including criticism of the government. My memory is that prominent economists were practically jousting in the hallways for the possibility of sitting at a table with Gorbachev, so that they could give him their invaluable feedback. Of course, many of these economists had made their reputations in other areas, and as far as I could tell knew essentially nothing about the realities of the Soviet economy or political system.

The COVID pandemic has enticed a wave of experts to enter the public health arena. John P.A. Ioannidis describes the results in “How the Pandemic Is Changing the Norms of Science,” with the subtitle “Imperatives like skepticism and disinterestedness are being junked to fuel political warfare that has nothing in common with scientific methodology (Tablet magazine, September 8, 2021). For those who don’t know author’s name, the bio line in the article says: “John P.A. Ioannidis is Professor of Medicine and Professor of Epidemiology and Population Health, as well as Professor (by courtesy) of Biomedical Science and Statistics, at Stanford University.” He writes:

The pandemic led seemingly overnight to a scary new form of scientific universalism. Everyone did COVID-19 science or commented on it. By August 2021, 330,000 scientific papers were published on COVID-19, involving roughly a million different authors. An analysis showed that scientists from every single one of the 174 disciplines that comprise what we know as science has published on COVID-19. By the end of 2020, only automobile engineering didn’t have scientists publishing on COVID-19. By early 2021, the automobile engineers had their say, too.

At first sight, this was an unprecedented mobilization of interdisciplinary talent. However, most of this work was of low quality, often wrong, and sometimes highly misleading. Many people without subject-matter technical expertise became experts overnight, emphatically saving the world. As these spurious experts multiplied, evidence-based approaches—like randomized trials and collection of more accurate, unbiased data—were frequently dismissed as inappropriate, too slow, and harmful. The disdain for reliable study designs was even celebrated.

Many amazing scientists have worked on COVID-19. I admire their work. Their contributions have taught us so much. My gratitude extends to the many extremely talented and well-trained young investigators who rejuvenate our aging scientific workforce. However, alongside thousands of solid scientists came freshly minted experts with questionable, irrelevant, or nonexistent credentials and questionable, irrelevant, or nonexistent data. Social and mainstream media have helped to manufacture this new breed of experts. 

Ioannides is pointing here to a recent working paper, “The rapid, massive growth of COVID-19 authors in the scientific literature,” which he co-authored with Maia Salholz-Hillel, Kevin W. Boyack, and Jeroen Baas (posted at the bioRxiv archive on August 21, 2021). The abstract reads (in part):

The growth of COVID-19 authors was far more rapid and massive compared with cohorts of authors historically publishing on H1N1, Zika, Ebola, HIV/AIDS and tuberculosis. All 174 scientific subfields had some specialists who had published on COVID-19. In 109 of the 174 subfields of science, at least one in ten active, influential (top-2% composite citation indicator) authors in the subfield had authored something on COVID-19. 52 hyper-prolific authors had already at least 60 (and up to 227) COVID-19 publications each.

In the Tablet essay, Ioannides recites the recognized fundamental norms of scientific inquiry: “communalism, universalism, disinterestedness, and organized skepticism.” In contrast, he argues, the process of scientific inquiry during the pandemic has often been polluted (not just in the US but around the world) by unwillingness to share data, or to be systematically skeptical and disinterested. One result is to injure public health efforts: “Politics dressed up as public health not only injured science. It also shot down participatory public health where people are empowered, rather than obligated and humiliated.”

It’s a great thing that so many academics have wanted to apply their expertise to the COVID pandemic. But I also find myself wondering if the world might have been a better place if some of those academics had stuck with their previous tasks, sharpening their expertise for a time and topic when it would apply more directly.

For-profit companies are formally responsible to their shareholders–that is, to those who own stock in the company. I emphasize “formally,” because the influence of shareholders is wielded through a board of directors whose members are often nominated by corporate management itself, and there is a long-standing question of just how this supervision process works.

However, formal responsibility to shareholders via a board of directors is quite different from saying that businesses should be responsible to all “stakeholders” affected by their actions, which is a broader group that would include shareholders but also employees, customers, suppliers, as well broader issues and groups like environmental concerns, and the community in which the firm operates.

There is sometimes a tendency to argue that if a company acts with stakeholders in mind, then its shareholders will also benefit, and surely one can some up with some specific cases in which that’s probably true. But if a focus on stakeholders always or usually benefited shareholders, then there would be no reason to argue for a focus on stakeholders. Thus, one can reasonably assume that those who advocate a focus on “stakeholders” believe that such actions would make shareholders worse off, but that this social tradeoff is worthwhile.

There’s a group called the Business Roundtable that represents chief executive officers of large companies. About two years ago in August 2019, 181 of these CEOs signed a pledge that they would lead their companies in the interests of all stakeholders, not just shareholders. These CEOs did not ask their boards of directors for approval before doing this. When a top corporate executive pledges fidelity to “stakeholders” rather than “shareholders,” what does that promise really mean? Here are some possibilities:

• The executive will in the future actually manage the company in a way that will benefit stakeholders, even when it sometimes means lower returns for shareholders.
• The executive is theoretically open to the idea of managing the company in the future in a way that benefits stakeholders, but when push comes to shove and tradeoffs emerge, the executive will revert to focusing on the stock price and shareholders.
• The executive dislikes being responsible to shareholders, who have a tendency to moan and complain about the corporations performance and to blame top executives. By shifting the focus to a support of stakeholders, the executive hopes to get those pesky shareholders to shut up–or at least tone down their criticisms.
• The executive is concerned that government may be thinking about imposing additional laws or rules. Perhaps it will be on worker-related issues like sick leave, family leave layoffs, job training, and other areas. Whatever it is, the executive hopes that promising to support stakeholders will reduce the momentum for these new rules.
• The executive has no intention of actually doing anything different, but it seems like a good public relations move now and then to profess fealty to stakeholders.

Well, it’s been two years since the big promise. What has changed? Lucian A. Bebchuk and Roberto Tallarita follow up and ask the question, “Will Corporations Deliver Value to All Stakeholders?” in an essay forthcoming in the May 2022 issue of the Vanderbilt Law Review, but now available on SSRN. They collected corporate documents, like annual reports to shareholders, that companies have published since signing the Business Roundtable (BRT) stakeholder pledge. Here’s a summary of their findings:

First, examining the almost one-hundred BRT Companies that updated their corporate governance guidelines in the sixteen-month period between the release of the BRT Statement and the end of 2020, we find that they generally did not add any language that improves the status of stakeholders and, indeed, most of them chose to retain in their guidelines a commitment to shareholder primacy;

Second, reviewing all the corporate governance guidelines of BRT Companies that were in place as of the end of 2020, we find that most of them reflected a shareholder primacy approach, and an even larger majority did not include any mention of stakeholders in their discussion of corporate purpose;

Third, examining the over forty shareholder proposals regarding the implementation of the BRT Statement that were submitted to BRT Companies during the 2020 or 2021 proxy season, and the subsequent reactions of these companies, we find that none of these companies accepted that the BRT Statement required any changes to how they treat stakeholders, and most of them explicitly stated that their joining the BRT Statement did not require any such changes.

Fourth, reviewing all the corporate bylaws of the BRT Companies, we find that they generally reflect a shareholder-centered view;

Fifth, reviewing the 2020 proxy statements of the BRT Companies, we find that the great majority of these companies did not even mention their signing of the BRT Statement, and among the minority of companies that did mention it, none indicated that their endorsement required or was expected to result in any changes in the treatment of stakeholders;

Sixth, we find that the BRT Companies continued to pay directors compensation that strongly aligns their interests with shareholder value. Furthermore, we document that the corporate governance guidelines of BRT Companies as of the end of 2020 commonly required such alignment of director compensation with stockholder value and generally avoided any support for linking such compensation to stakeholder interests.

Whether you are a big supporter or a big opponent of a focus on stakeholder rights, the overall message of what has actually happened since the ballyhooed 2019 pledge seems pretty clear. As Bebchuk and Tallarita write: “Overall, our findings support the view that the BRT Statement was mostly for show and that BRT Companies joining it did not intend or expect it to bring about any material changes in how they treat stakeholders.”

For myself, I’m not a fan of the idea that companies should broaden their focus to a somewhat nebulous group of “stakeholders.” Organizations have purposes. We don’t ask, say, the K-12 school system or the public libraries to start new companies. We don’t ask hospitals to collect taxes or fix the environment. We don’t ask universities to carry out defense spending. Companies have a purpose, which is ultimately about providing goods and services that customers want to buy. That goals is not synonymous with pursuing social welfare. But it’s what they are set up to do.

When I hear discussions of how corporations should have a much broader social focus, I tsometimes feel as if the discussants are in the grip of a category confusion, like someone who rinses their vegetables in the shower and then tries to bathe in the kitchen sink. Here’s the confusion as expressed in an October 1990 opinion column by Donald Kaul, who was a prominent op-ed columnist, mainly with the Des Moines Register, from the 1970s through the 1990s. Kaul wrote: 

We have come to rely upon capitalism for justice and the government for economic stimulation, precisely the opposite of what reason would suggest. Capitalism does not produce justice, any more than knife fights do. It produces winners and energy and growth. It is the job of government to channel that energy and growth into socially useful avenues, without stifling what it seeks to channel. That’s the basic problem of our form of government: how to achieve a balance between economic vitality and justice. It is a problem that we increasingly ignore.

When a politician says that corporations should pursue “stakeholder value,” my immediate reaction is that the person should get out of politics–and make room for someone who is interested in actually writing laws rather than giving high-sounding speeches. When I hear corporation executives talk about pursing “stakeholder value,” my immediate reaction is to disbelieve that they actually mean it.

There’s a sort of paradox in the current US labor market. By a standard measure, there is strong demand by employers to hire more workers. By a standard measure, there is strong supply of workers willing to take these jobs. But even with at first glance appears to be strong demand and supply for labor, the number of jobs remains well below pre-pandemic levels. There’s a simple explanation for this which I’m sure is part of the truth, and a more complex explanation that I suspect is a bigger part of the answer.

A standard measure of demand for labor is the number of job openings. Here’s what it looks like based on data from the Job Openings and Labor Turnover Survey done by the Bureau of Labor Statistics.

Here’s a figure from the latest JOLTS data, showing the ratio of unemployed workers to job openings. In the latest data, the ratio is 0.8–that is, there are more job openings than unemployed workers.

A standard measure of the willingness of workers to supply labor, perhaps counterintuitively, is to look at the rate at which workers are quitting their jobs. The pattern here is that when jobs are scarce, workers tend to hang on to their existing jobs; when jobs seem plentiful, workers are more likely to quit an existing job because they are headed for a different job. As the figure shows, the number of quits has also been soaring.

The unemployment rate in August was down to 5.2%, which by conventional standards is pretty good. But to be counted as unemployed, you need to be both out of work and also out looking for a job. This definition has its own logic: after all, it wouldn’t make intuitive sense to say that retired adults or adults who are voluntarily staying home looking after children are “unemployed.” But on the other hand, it raises the possibility that there are people who are out of the labor force, in the sense that they are not looking for work, but who were in the labor force not that long ago and might be willing to be in the labor force again. To see the issue, consider the total number of jobs, which despite what looks like lots of job openings and lots of willingness to take those jobs, has not yet recovered to pre-pandemic levels.

For a vivid illustration of how this combination of patterns represents a break with past labor market patterns, consider what’s called the “Beveridge curve,” which plots the unemployment rate on the horizontal axis and the job openings rate on the vertical axis. The job openings rate is calculated as by dividing the number of job openings by the sum of employment and job openings and multiplying that quotient by 100.

There are two ways to characterize the expected pattern here. One is that it will tend to have a downward slope: that is, more job openings will tend to be associated with lower unemployment, and vice versa. The other pattern is that the Beveridge curve will form a loop over time: in a recession, job openings fall and unemployment rises, so the points in the Beveridge curve tend to move down to the right. Then as the economy expands, job opening start rising and the unemployment rate falls, so the month-by-month data moves back up and to the left. (For a couple of previous explanations of the Beveridge curve, see this and this.)

Here’s the most recent Beveridge curve from the JOLTS data. You can see in the pre-pandemic data the generally downward-sloping shape and the loop, as expected. You can also see how the short, sharp two-month pandemic recession just destroyed these patterns. First unemployment shot up up with very little change in job openings. Since then, the job openings rate has been climbing to very high levels, and while unemployment has declined, the job openings rate is far higher that at other times when the unemployment rate has been in the range of 5.2%.

What’s going on here? Some explanations are fairly obvious. One is that the stimulus of the US economy through fiscal and monetary policy has been plenty strong to encourage employers to hire, as one can see by the level of job openings. Another is that lots of workers received unemployment payments that did not just replace their earlier earnings, but were substantially above their earlier earnings. These high payments are just now phasing out, but while they lasted, people’s incentives to find and accept a job that would pay less than their benefits was surely muted.

But along with these factors, I suspect something bigger is happening, too. Every recession involves a reorganization and restructuring of the economy. In a standard recession, this involves a larger-than-usual number of companies going broke, and workers needing to scramble for different jobs. But the restructuring in the pandemic recession–and in continuing restructuring in the pandemic that has continued even though the pandemic recession ended back in April 2020–is of a different sort. There are new dividing lines across the labor force like who can work from home, and what sectors of the economy have been more affected by the pandemic on an ongoing basis, and whether parents can rely on sending their children physically off to school. There are concerns about what working environments are more or less safe.

These issues are playing out in different ways across major employment sectors of the economy: health care, education, retail sales, manufacturing. entertainment, tourism, and others. The strange mixture of conditions in the labor market has occurred as millions of potential workers hold their collective breath, and decide when or if they are willing to jump back into the labor market.

The US economy has lots of jobs, but many people are looking for something that might be a career–and that’s harder to find. Here’s Claudia Goldin on the difference:

Career is achieved over time, as the etymology of the word — meaning to run a race — would imply. A career generally involves advancement and persistence and is a long-lasting, sought-after employment, the type of work — writer, teacher, doctor, accountant, religious leader — which often shapes one’s identity. A career needn’t begin right after the highest educational degree; it can emerge later in life. A career is different from a job. Jobs generally do not become part of one’s identity or life’s purpose. They are often solely taken for generating income and generally do not have a clear set of milestones..

Goldin’s comment comes in the midst of her lecture “Journey Across a Century of Women” (NBER Reporter, October 2020). I recommend the talk. As she describes it: “My talk will take us on a Journey across a Century of Women — a 120-year odyssey of generations of college-graduate women from a time when they were only able to have either a family or a career (sometimes a job), to now, when they anticipate having both a family and a career. More women than ever before are within striking distance of these goals.”

But on this Labor Day, the broader force of Goldin’s distinction between career and job resonated with me. Some people just want a steady reliable job that pays the bills, offers benefits like vacation and health insurance, and leaves them free to pursue other interests in non-work hours. But for a lot of us, that work-like activity consumes more than 40 hours each week of brain-space. Maybe the best description I know of the human heart of this interaction of self and work is from the poet Marge Piercy, in her 1973 poem “To be of use.” I’ve quoted it once or twice before on Labor Day, but on this year after so many work lives have been disrupted by the pandemic and the related recession, it seems worth quoting again.

“To be of use”

The people I love the best
jump into work head first
without dallying in the shallows
and swim off with sure strokes almost out of sight.
They seem to become natives of that element,
the black sleek heads of seals
bouncing like half submerged balls.

I love people who harness themselves, an ox to a heavy cart,
who pull like water buffalo, with massive patience,
who strain in the mud and the muck to move things forward,
who do what has to be done, again and again.

I want to be with people who submerge
in the task, who go into the fields to harvest
and work in a row and pass the bags along,
who stand in the line and haul in their places,
who are not parlor generals and field deserters
but move in a common rhythm
when the food must come in or the fire be put out.

The work of the world is common as mud.
Botched, it smears the hands, crumbles to dust.
But the thing worth doing well done
has a shape that satisfies, clean and evident.
Greek amphoras for wine or oil,
Hopi vases that held corn, are put in museums
but you know they were made to be used.
The pitcher cries for water to carry
and a person for work that is real.

Marge Piercy (1973)