Category Archives: Regulations

updates from Chicago Booth

Why it’s so hard to simplify the tax code
By Dee Gill – Simplifying the tax code ostensibly has bipartisan backing. Both the Bush and Obama administrations advocated for simplification, in reports, as have House Speaker Paul Ryan (Republican of Wisconsin) and Senator Elizabeth Warren (Democrat of Massachusetts). But when the Senate passed a tax bill this past December, there was no postcard.

What happened? The same thing that always does, suggest researchers. While simplicity is a stated goal, complexity wins the day. Hence companies and individuals will hire accountants to wade through the latest bill, interpret the new rules, offer guidance, and help work through the inevitable corrections and amendments.

And this comes at an economic cost. Research by James Mahon and Chicago Booth’s Eric Zwick, and others, collectively indicates that the complexity leads individuals and companies to fail to take advantage of billions of dollars in offered breaks, many of them presumably intended to stimulate the economy. In this way, complexity undermines what tax incentives are purported to accomplish. more>

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Why a trade war with China would hurt the U.S. and its allies, too

By David Dollar and Zhi Wang – Two-thirds of world trade now occurs through global value chains that cross at least one border during the production process, and often many borders. As a result, the typical “Chinese product” that the United States imports has a lot of value-added from countries other than China.

Furthermore, in computers and electronics, more than half of China’s exports come from multinational firms operating in China.

U.S. firms are also involved in production chains. Thirty-seven percent of U.S. imports from China are intermediate products used by American firms to make themselves more competitive. Putting tariffs on intermediate products is shooting oneself in the foot. The list of targeted products posted by the United States includes some intermediates, such as aircraft propellers.

Many of the targeted products are consumer goods such as televisions and dishwashers.

What all this means is that tariffs are a very poor instrument for punishing China for any unfair trading practices. Some of the cost will be borne by American consumers; some by American firms that either produce in China or use intermediate products from China; some by firms in countries (mostly U.S. allies) that supply China; and some by Chinese firms (mostly private ones). more>

Creating Shared Value (CSV)

Operationalizing CSV Beyond The Firm

BOOK REVIEW

How to Fix Capitalism and Unleash a New Wave of Growth, Authors: Michael E. Porter, Mark Kramer.

By Henning Meyer – Under the CSV concept, firms participate in different markets to create social and economic value but Porter and Kramer do not analyse the nature of markets nor do they provide any explanation for how the creation of social value via market mechanisms is necessarily rooted in the social nature of markets themselves.

The standard neoclassical model of transactional markets that are driven by purely rational players is an ideal type in Max Weber’s sense, i.e. an abstract model not to be found in this pure form. Any approach assuming the creation of social value by market mechanisms, however, should provide a deeper understanding of the social nature of markets themselves. This is a crucial backdrop to defining, creating and measuring social value: it is dependent on this context.

On this basis, in a further step, it is vital to develop an understanding of public policy and the government’s role in markets. Public policy’s character is not limited to basic regulation and market-fixing where market mechanisms left to themselves would produce externalities.

Government policy, moreover, aims at market creation and incentive shaping. Understanding the interplay between companies and governments in markets that themselves are social in nature is therefore fundamentally important to understand social value and to move beyond the narrow organzational focus of Porter and Kramer. On this basis, in addition to the three operational dimensions within firms that Porter and Kramer describe, CSV can be more broadly operationalized using a corporate diplomacy approach and the tools of non-market strategy to provide a more holistic and comprehensive view of the CSV process.

There has been significant criticism undermining the academic credibility
of CSV and the way in which Porter and Kramer present their work. In essence, these criticisms refer to the originality of CSV as well as the concept being superficial about a company’s role in society and naïve about the trade-offs between social and economic goals and business compliance.

There is also a question about shared value itself. It is clear what the economic value part of shared value is: a better bottom line for corporations. But beyond the obvious win-win situations, what is social value and how does one define and measure it?

What are the trade-offs involved? (pdf) more>

Utopia is a dangerous ideal: we should aim for ‘protopia’

BOOK REVIEW

Heavens on Earth: The Scientific Search for the Afterlife, Immortality, and Utopia, Author: Michael Shermer.
The Moral Arc, Author: Michael Shermer.

By Michael Shermer – Utopias are idealized visions of a perfect society. Utopianisms are those ideas put into practice. This is where the trouble begins.

Most of these 19th-century utopian experiments were relatively harmless because, without large numbers of members, they lacked political and economic power.

But add those factors, and utopian dreamers can turn into dystopian murderers. People act on their beliefs, and if you believe that the only thing preventing you and/or your family, clan, tribe, race or religion from going to heaven (or achieving heaven on Earth) is someone else or some other group, then actions know no bounds. From homicide to genocide, the murder of others in the name of some religious or ideological belief accounts for the high body counts in history’s conflicts, from the Crusades, Inquisition, witch crazes and religious wars of centuries gone to the religious cults, world wars, pogroms and genocides of the past century.

We can see that calculus behind the utopian logic in the now famous ‘trolley problem’ in which most people say they would be willing to kill one person in order to save five. more>

Updates from Chicago Booth

Why fake news is bad for business
By Rose Jacobs – Many social-media websites struggle to maximize user engagement while minimizing the amount of misinformation shared and re-shared. The stakes are high for Facebook, Twitter, and their rivals, which generate most of their revenue from advertising. Viral content leads to higher user engagement, which in turn leads to more advertising revenue.

But content-management algorithms designed to maximize user engagement may inadvertently promote content of dubious quality—including fake news.

The researchers’ models assume platform operators can tell the difference between factual and fictitious posts. They demonstrate that engagement levels fall when users aren’t warned of posts that contain misinformation—to levels lower than when users are discouraged from clicking on the dubious material.

A limitation of the research is the models’ assumption that the people using social networks and the algorithms running them know whether posts are true, false, or shaded somewhere in between. more>

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Negotiating With Power?

By Santosh Desai – In most cases, the nature of the intervention was either to ensure that the rules that already existed were followed, or to step in and help break the rules using one’s privileged position.

The legislative and administrative systems in India are subservient to the social ecosystem, and work within its ambit. Power thus becomes a social instrument that needs to be brokered keeping the dominant interests in mind.

The disinterested application of the law is not possible in a context where these interests take priority. Hierarchies are respected, networks are nurtured, money speaks loudly, and settlements are negotiated.

The idea of the ‘settlement’ which finds a measure of mutual self-interest being catered to is only thinly related to abstract notions of justice. The poor and weak ‘accept’ an unfair resolution because the alternative is much worse.

What are otherwise their rights become favors that they seek from the powerful for a price. The powerful build constituencies by creating a cumbersome system and then offering a way to navigate the same.

The ability to negotiate a solution to mutual advantage is a mark of a functioning social system, but when the same occurs under the threat of the use of power, it serves often to perpetuate a skewed and unjust arrangement.

A system of governance must provide instruments of continuity and change. Currently, there is too much of the former and too little of the latter. more>

Monopoly Now Wants You to Cheat—Just Like Real Capitalists

BOOK REVIEW

Cornered: The New Monopoly Capitalism & The Economics of Destruction, Author: Barry Lynn.

By Nick Cassella – The year was 1904, and Lizzie Maggie wanted to create a board game that acted as “a harsh criticism of wealth disparity.” Upset by the the inequality around her, Maggie aspired to ridicule and condemn the dire outcomes of unbridled capitalism. So she constructed the Landlord’s Game, which intended to educate players on the rules and regulations of realty and taxation. Eventually, it ended up being the precursor to the game-which-nobody-ever-finishes, Monopoly.

A long time has passed since then and it’s safe to say that Maggie’s hope has not been realized. Monopoly’s creator would look at today’s economic landscape and be disheartened.

It appears as if Hasbro is trying to draw attention to Monopoly’s original purpose by releasing a new “cheaters edition” this autumn.

The cheaters edition follows the rules of classic Monopoly, except this version encourages players to break them…They encourage players to cheat in various ways, from collecting rent on another player’s property or stealing money from the bank.

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Updates from Chicago Booth

Google and Facebook have an effective duopoly on online advertising. For the average person, why is that a problem? Prices haven’t gone up. Why should we care?
By Luigi Zingales, Tyler Cowen – Most people don’t perceive that as a problem. The perceived price [for using Google or Facebook] is zero. It’s not really zero, because we are giving up our data in exchange. Google and Facebook’s market power in advertising increases the cost of advertising, which eventually will be reflected in the price of goods.

Antitrust in Europe is much more effective. Look at the price of cell phones and cell-phone services. They are a fraction of the price in the US, with better services. The EU is at the front end of enforcement of competition, while the US has become complacent. In the EU, they have a new directive requiring every bank to give customers access to their data at the customer’s request. That transfer creates competition because it reduces the friction and creates more opportunity for new entry. The monopoly that Facebook and Google have of our data, number one, prevents entry, and number two, gives them tremendous power. more>

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The high cost of budgetary paralysis

By Alice M. Rivlin – It is both frightening and embarrassing that the world’s most experienced democracy is currently unable to carry out even the basic responsibility of funding the services that Americans are expecting from their government in the current fiscal year.

Limping from one short-term continuing resolution to another, combining individual appropriations bills into unwieldy omnibus bills that no one is able to study or even read, and threatening to close the government (or default on the debt) if certain conditions are not met are all symptoms of a deeply broken decision-making process.

The costs of budgetary dysfunction are high and rising, although not easy to quantify. Federal agencies, including the Department of Defense, cannot make plans that enable them to spend money efficiently.

The most worrisome cost of the Congress’s seemingly-endless wrangling over near-term federal funding is that it crowds out serious discussions of the daunting longer-term challenges that face the nation’s economy. more>

Post-Davos Depression

By Joseph E. Stiglitz – I’ve been attending the World Economic Forum’s annual conference in Davos, Switzerland – where the so-called global elite convenes to discuss the world’s problems – since 1995. Never have I come away more dispirited than I have this year.

The world is plagued by almost intractable problems. Inequality is surging, especially in the advanced economies. The digital revolution, despite its potential, also carries serious risks for privacy, security, jobs, and democracy – challenges that are compounded by the rising monopoly power of a few American and Chinese data giants, including Facebook and Google. Climate change amounts to an existential threat to the entire global economy as we know it.

Perhaps more disheartening than such problems, however, are the responses.

But, by the end of their speeches this year, any remaining illusion about the values motivating Davos CEOs was shattered. The risk that these CEOs seemed most concerned about is the populist backlash against the kind of globalization that they have shaped – and from which they have benefited immensely.

They may lack the candor of Michael Douglas’s character in the 1987 movie Wall Street, but the message hasn’t changed: “Greed is good.” What depresses me is that, though the message is obviously false, so many in power believe it to be true. more>