Cisco CEO Chuck Robbins an Idiot or a Liar, You Decide…

So today on CNBC Cisco CEO, Chuck Robbins explained that if they were to repatriate their offshore cash back to the US he would use the money to reward shareholders through buybacks and dividends and then do some M&A.  He claims cash distribution to shareholders in lieu of actual economic stimulating investments creates jobs by way of mutual funds, which make the soon to be out of work Americans from his M&A activity feel good about their income….

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I mean where does one even begin picking apart this absurdity of logic??  It probably is not even worthy of a detailed response.  But I wanted to note, on record, that these are the type of moronic and asinine thought processes coming out of corporate America that are killing the American middle class and will destroy even most on top unless the bottom 80% are handed a stipend to go out and buy products produced by corporations.  If Chuck truly believes what he says, well he is an idiot.  If he has even a shred of economic acumen then he is a liar.  I’ll leave it to you to decide.

But before you decide let me show you a few charts.  First chart below depicts real total wages and salaries (i.e. labor income) as a multiple of real corporate dividends paid.  You will notice the multiple peaks at 24x in 1975, averages 20x from1950 through 1990 and bottoms today at 8x.

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But remember cash distributions don’t just reallocate capital from labor income they also reallocate away from domestic private investment.  So let’s take a look at the multiple of domestic private business investment to corporate dividends as well.

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Clearly we see a pattern of forsaking economically stimulative investments for cash payouts of which 85% get reinvested into secondary financial markets that have zero economic stimulative effect i.e. never hit a corporate balance sheet or income statement.

Now Cisco CEO Chuck Robbins suggests that this phenomenon of shifting capex and labor income to dividends is actually a positive thing for the economy.  So let’s have a look.  The next chart depicts a 5 year moving average of per capita real GDP growth over the same period.

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What we find is that average real economic growth per capita (this is an important measure of individual prosperity) has fallen by more than 50% over the same time period.

Over the past 6 months I have provided a library of research proving that reallocating capital from domestic private investment and labor income in favor of cash distributions has not only resulted in massive deterioration of economic growth but has necessarily relied on private and public debt to fund the deteriorating growth that remains.  I’ve had several prominent PhD experts call me names but I’ve had none of them challenge my research and argument.  I challenge any and all economists to attack my assertion that this secular trend of reallocating capex and labor income to profit (which is the most economically inefficient use of capital) is destroying the long term US economy.  I’m sincerely looking to receive the strongest arguments as this only helps us at the Institute for Sensible Economics refine our research.

 

A Lesson for George Mason Economics Chair, Boudreaux As He Attempts to School Dilbert Creator, Scott Adams

Today Donald J. Boudreaux, who is Professor of Economics and Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center at George Mason University, wrote an open letter to Dilbert creator Scott Adams.  The letter was a rebuttal to Scott disagreeing with Michigan Rep Justin Amash about Trump’s trade policy.

Justin Amash had tweeted out that tariffs will hurt the consumer in higher prices.  Scott retorted that the tariffs will not be applied because the threat of applying a tariff on firms who chase cheap foreign labor but then sell that production back to the US consumer they just laid off will disincentivize the firms from leaving in the first place.  It was then that Mr. Boudreaux jumped in, stating unequivocally that Scott is wrong and Justin is right.

Boudreaux argues that while he agrees the tariff would actually not be applied it would stifle competition and thus consumers would pay a higher price.  Boudreaux seems to imply that low consumer prices are a top priority of trade policy.  Below is the main argument within Boudreaux’s open letter to Scott Adams.

Rep. Amash is right and you are wrong.  Although no formal tax collection is triggered if Mr. Trump’s threats prevent all offshoring, Trump’s tariff – by restricting competition – would artificially reduce outputs and raise prices.  American consumers would pay unnecessarily higher prices, an outcome inseparable from the very purpose of the tariff.  That consumers pay these extra, unnecessary amounts to domestic producers rather than to domestic customs agents is irrelevant: the tariff forces all consumers of these products to pay extra, unnecessary amounts to some small group of fellow Americans who, rather than earn these higher payments, extract them using threats of state coercion.

Let me explain the logical fallacies that Mr. Boudreaux fails to recognize in his chivalrous attempt to defend Rep Amash and our existing international trade agreements (note there is nothing free trade about these agreements).

  1. Boudreaux’s entire argument is based on an unsubstantiated notion that offsetting the labor cost savings from cheap foreign labor with a tariff somehow limits competition.  This is equivalent to saying American production limits competition.    There are currently 28.5 million private firms producing in the US, more than ever before.  I’ve never seen any data to substantiate that American production limits competition. In fact, I find it quite an absurd proposition.  Unless Boudreaux can substantiate that claim, it simply cannot be accepted.  And if the basis of his argument is unsound then the rest of it is invalid.
  2. Secondly is the implication that US firms chase cheap foreign labor so that they can pass those cost savings onto the consumer.  Price models are a function of what the market will bear, not cost.  The point of the cost savings is to drive profits, profits which over the past 5 years are paid directly to shareholders.  Dividends have almost no money multiplier effect.  And so reallocating labor income, which has the highest money multiplier effect, to profit is a net economic value destroyer not creator.
  3. Even if consumers paid a higher price as a result of the tariff, which we know isn’t true based on points 1 & 2 above, the offset of that is they would be paying a higher price with labor income earned as opposed to credit or welfare.  Meaning if I can keep my job, I’m ok paying a slightly higher price because while I might be able to buy less things I can still support my family without private or public debt.  And so to suggest the top objective of trade or any economic policy should be getting the lowest possible price is another absurd proposition.
  4. Boudreaux suggests the tariff is state coercion yet fails to recognize the tariff is a reaction to a state intervention of free markets i.e. international trade agreements that allow labor cost arbitrage to exist without the naturally higher risks of the undeveloped nations that offer the cheaper labor (the cheap labor and higher risk being a function of the same underdeveloped societal infrastructure).  Higher return means higher risk.  Lower labor cost means higher ROI.  Higher ROI means higher risk.  But through state coercion, the higher risk is negated leaving just the higher ROI.  This is not free market.  This is state intervention.  The tariff is being used to level the playing field so to speak.

Mr. Boudreaux, while I appreciate your zeal for trade agreements, I am slightly surprised as to the naivety of your argument.  You haven’t given the readers enough credit.  Something you PhD economists are going to be facing much more of in the coming years.  There is a movement to educate and draw in the American public to such economic discussions.  We will be better prepared to understand your theoretical, applicable and logical fallacies.  You should take note, and be better prepared next time.

Starring: Paul Krugman as The Idiot & Justin Wolfers as The Hack

Well this election certainly clarified a few things for the people of the world.  Most notably is that the experts are clueless.  Paul Krugman, notable ‘expert’ on all things economic has almost 2 million followers on Twitter and an op-ed with the NY Times.  This means he has a platform of great influence.  And yet, time and time again, he does well to prove he’s an idiot.  The following piece posted on election night.

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Well “Never” or by noon.  So he overshot by eternity.  None of us are perfect eh?  Now I shouldn’t single out Mr. Krugman as almost every market pro and economist on Earth has predicted that a Trump victory results in complete financial and human obliteration.  At least that was the message leading up to the election.

In a piece by Justin Wolfers, for the NY Times, titled “The Markets Are Afraid of Donald Trump“, written just over a month ago the message is clear from his conclusion.

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So while over the past 130 years markets tend to react well to Republicans, Justin concludes it will be different with Trump, in fact, worse than the market reaction to the greatest tragedy ever to take place on American soil.

Now if you get a chance to read the full article you’ll see that Justin gives you a glimpse at the fancy math economists use to extrapolate predictions.  It’s just enough to make you believe, “Wow this guy really knows some fancy math, he must know what he’s talking about”.   But this is the very reason economists like Justin have tragic forecasting records.   Now don’t get me wrong the math has its limited place and I’ve sat through all the same fancy math classes as Justin.   But the difference between most economists and most good economic and market analysts is understanding that markets and economics have almost nothing to do with math.

Economics and markets are studies about human behaviour and societal constructs, that is the bilateral relationships between humans and the logistic economic and financial environments.  And if you don’t understand that there is no math in the world that will help your forecasting.  Just look at Justin and Krugman.

Now I write this piece obviously in reaction to the massive clusterf*ck that occurred when Trump’s victory failed to ignite financial Armageddon as all the PhD’s predicted it would.  I can’t tell you how many calls I received yesterday from risk managers, traders, money managers, etc. trying to figure out why the market wasn’t collapsing.  And frankly, I expected it might simply as a self fulling prophecy.  That is, because everyone had been told it would so it would.  But the market, while giving a short head fake, decided that low corporate tax rates, improved breadwinner job market in the US and a bit of fiscal stimulus may be good for the economy.  Go figure.

I guess my point is that guys like Krugman and Justin are false authorities yet are major players in setting and selling economic policy.  This phenomenon of appointing idiots and hacks to roles of policy setting is a true mystery.  Until we begin to replace the policy  making industry (and it is an industry) with people who actually understand the subjects for which they are setting policy we will continue to find ourselves waking up wondering what in the hell went wrong.