I read this book because I think there are problems with the US economy which need to be addressed. Specifically, I think the divide between middle class and CEO pay, the ratio of which has expanded exponentially over the years. I feel that the work of middle class needs to be valued and their pay needs to be raised, though as shown throughout history, taxation of the rich does not make the poor more wealthy. I read this book with the hopes on some fresh ideas on how to rebalance the earnings of all Americans.
This however was not the case.My enthusiasm for the book started declining early with some of the authors claims. Specifically, he made the comparison that the switching costs for the digital economy and the manufacturing sector were similar. Having marketed and sold products to industrial customers for over a decade, I found this assertion ludicrous. There was a reference to this claim; however, it was from a paper titled “Information Rules” written in 1999, about the same time Myspace was dominating the social platforms.
This cased me to question the sincerity and accuracy of the book, and to examine more of the authors claims and (even the ones with which I agreed) more closely.
What I found was the book would identify legitimate problems, but the solutions were either incomplete, inaccurate or incomprehensible. I was disappointed, too, as there were several problems he identified in which I completely agree (such as corporate short term thinking and problems with the US tax code).
Overall I found the book disappointing at best.
Incomplete claims:
The book begins with a lot of claims, many of which will cause anger and indignation. I felt that way, too, when I read passages; however, I noticed the indignation would cause me not too look critically at the text, or the substance behind these claims at first. But on further examination, there were mistakes. Some examples I noted are below.
He sites several examples to highlight the struggles of the working class. On page 37, he notes that globalization has caused the a “tilt [in] the balance against workers.” The author has looked at this problem totally in terms of top line wages. Missing from this analysis is the reduced costs of goods and increases to disposable income. This may, or may not offset the lack of wage growth, but it is certainly a benefit to be considered which is ignored throughout the book.
I agreed with his assessment of Intellectual Property rules: they do not work or serve their purposes as well as it should. Some of his claims, however, make me not want to agree with his overall assessment. On page 104 he writes:“Rather, the real intent of these provisions [Intellectual Property] is to impede health, environmental, consumer safety and even financial regulations meant to protect the public interest…”. No footnote is given nor are there any cases provided to support such a claim. To make such a damning statement with no evidence to support it makes me question its validity and his intentions.
Inaccurate solutions:
The author writes about the importance of growth, but his only answers are to unionize workers and increase taxes.
His section on Capital Gains taxes I found interesting and illuminating, but at the end of the day, his only rule was to increase them. Taxes do not produce growth. This would be his pat answer to every problem. This and unionization.
He bemoans the lack of unionized employees, and he waxes nostalgically over the glory days in the 1950s and 60s. Only mentioned once, in passing, is the racist and sexist history of these organizations during the same time frame, as they reserved jobs for only white men. Despite their history of discrimination, he believes they will be the cure to all our ills (though no evidence is provided they will). Ironically, he notes the unprecedented growth in US productivity between 1990-2011 (page 91), a period that corresponds to the rapid decline of union membership (page 71). The positive impacts of the decline of unions is ignored through the book. One particularly poignant example was with the teachers union in New Orleans, which were all fired post Katrina. The results and improvements since then have been impressive.
http://www.economist.com/news/united-states/21636077-revolution-and-innovation-some-americas-toughest-neighbourhoods-big-not-easy
Even when there were parts I agreed with, such as his assessment on banks Too Big to Fail, his solutions were often off and would result in greater problems. Dodd-Frank he felt was the right direction, but as any observer to the finance industry is well aware, there are many conflicting parts of Dodd-Frank, making it impossible for any institution to be in compliance with all parts (see article below). He proposed adding a “risk surcharge” to financial institutions, but based on the challenges just to get banks operations in order, how and who could reasonably be expected to monitor and assess the proper surcharges?
http://www.economist.com/node/21547784
Incomprehensible:
“Congress should pass a financial transaction tax designed to encourage productive investment”, page 123. No further explanation is given. I am still trying to figure out how a tax, which prevents or delays a transaction, could be used to encourage investment.
Executive compensation: yes, I agree it is too high, and can promote short term thinking. He writes, “And there needs to be better, more transparent reporting of the full value of the the executive compensation for each corporation”. It is already part of the SEC filings. It is required for publicly listed companies in their 10-K.
He argues for the need of a “Fair Tax” [his quotes]. He writes on page 127, “those at the top pay less than ordinary Americans”. No data is provided for this claim and for a very good reason: It is not true. Outside of the top 0.1%, which pay less than the top 1% but more than all other Americans,that is not the case at all. http://www.fool.com/investing/general/2015/01/31/the-average-american-pays-this-much-in-income-taxe.aspx
In all the all the talk of tax reform, no discussion given on consumption taxes which are shown to place higher burdens on higher incomes and do not have loophole provisions. As shown in Europe, a higher VAT has the effect of being less burdensome on the poor, and more difficult to avoid for the rich. This however, was not part of the discussion.
Page 165 he finally mentions Social Security, however, only to express his view it needs to be expanded. No mention was given to how, when it was created the average lifespan was only 62, with benefits coming at age 65. He discussed the financial shortfalls brewing for the program; all though it was not mentioned, I am assuming his reasoning for the shortfall would be that workers are no longer unionized, not that people are living longer.
Naiveté:
There were parts of the book which really made me question his qualifications. Some items of note include:
He proposes a Global Corporate Tax on all US companies overseas operations, or 10-15%. As we have already seen with Medtronic and others, raising the US tax rate will encourage more companies to leave, shrinking the tax base, and the higher taxes will cause new companies to incorporate somewhere else, outside the realm of the US taxman. His proposal will tax innovation out of the country.
Infrastructure investment leads to innovation (page 137). Infrastructure is critical for growth and a functioning economy, and its absence can seriously undermine activity. The US infrastructure is in bad shape and needs improvement, though we have had our economic boom due to infrastructure. Investing in new sewer lines does not spur technical innovations.
On page 65, the author sarcastically refers to the “monetary policy set by the nation’s ‘independent’ [author’s quotes] central bank”. Such juvenile insults, with no supporting claims, and no point, other than to smear congressmen he believes are beholden to the banks have no place in a book with supposedly noble goals.
On page 70 he claims “the right to freely associate and bargain collectively is universally recognized as a basic human right”. As a current case before the Supreme Court might decide, individuals have the right to say who can, and can not, speak or negotiate on their behalf. http://www.economist.com/news/united-states/21688405-justices-are-poised-deliver-blow-public-sector-unions-labour-pains
On page 145 he claims“We must dismantle legal structures that explicitly prevent people of color from equally competing in the workforce”. No example or footnote is given. To impugn the US justice system, one would hope they would have evidence.
On page 77, in his defense of labor, he claims that changes to the labor standards have resulted in workers being “excluded from coverage under worker’s compensation laws, Social Security, Occupational Safety and Health Administration regulations, and the National Labor Relations Act”. Unlike other areas, he does provide a footnote; however, it was for an entire book, David Weil’s “The Fissured Workplace” a 424 page work. While the claims may be true, I feel it is unprofessional and sloppy writing to cite an entire book, and not specific portions that substantiate his claims.
Conclusion
I had higher hopes for this book, and that it would take a fresh look at the very real problems facing the US economy. While at time the author identify problems, the evidence to support I found lacking or incomplete. Instead of dynamic new ideas, the author waxes nostalgically about labor unions and high taxes. In my opinion, those are naive panaceas for the problems facing our economy today.
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