Paying for the Wars in Iraq & Afghanistan

Comments

1. Mike Kole says

   January 17, 2007 at 12:10 -05006

   Credit card spending by the average American is frightening. It points to a fundamental expectation that we can have things whether or not we have the money in the bank to cover the cost. It also points to a fundamental lack of understanding that we take out high interest loans for lunches, gasoline, and so many other little expenses that would be more wisely budgeted for… Which points to our fundamental failure to budget, at home and in our governments.

   It’s really no surprise, sadly.

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2. Branden Robinson says

   January 17, 2007 at 14:14 -05006

   Mike Kole,

   I find it disappointing that you point the finger of moral reproach at the individual household, and at the government, but omit any observation on the staggeringly common pheomenon of debt financing of corporations.

   Economic libertarians will not cease to lack credibility with me until they get into the habit of paying at least perfunctory attention to the practices of the market actors for whom they give nearly all the credit for America’s progress and prosperity — the corporations.

   And economic libertarians will not be able to build upon credibility with persuasive arguments until they are willing to demonstrate that they have thought critically about decision-making in corporations, and the consequences thereof.

   Here are some quotes I found interesting from an article entitled Corporate Debt, by Annette Poulsen:

   The eighties were the decade of corporate debt. Tremendous changes in corporate financing occurred. The phenomenal growth in the use of junk bonds, the onslaught of debt-financed hostile takeovers and leveraged buyouts, and massive corporate restructuring dominated news stories and discussions about U.S. business. [Remember, these were the “good old days” of Reaganomics. — BR]

   In 1963 Modigliani and Miller modified their discussion of corporate debt to specifically recognize corporate taxes. Under current tax regulations, interest payments made to bondholders are deducted from corporate income before computation of taxes owed. In a real sense, therefore, the government subsidizes those interest payments. If the corporate tax rate is 34 percent, for every dollar paid in interest payments, 34 cents in corporate taxes is avoided, though those receiving the interest must pay taxes on it. In contrast, if income is paid out as dividends to shareholders, that income is taxed twice—once at the corporate level and once at the personal level. The implication, well-known to students of corporate finance, is that every corporation should minimize its taxes and maximize the cash available to bond- and stockholders by financing its investments with close to 100 percent debt.

   The important thrust of Miller’s argument is that one must look at the interaction of both corporate and personal taxes to determine the optimal level of corporate debt. Miller showed that because of this interaction, there is an optimal level of debt (less than 100 percent) for the economy as a whole. That said, however, he also showed that, for any given firm within the economy, the level of debt is again irrelevant as long as the economy-wide average is at the optimal level.

   The shareholders, through the managers, have the right to make most decisions about how to run the firm. The firm owes the bondholders fixed payments equal to the amount of money loaned to the firm and the interest payments going along with those payments. Shareholders may adopt policies that benefit themselves at the expense of the bondholders. The possibility for such self-serving behavior is strongest when it is not clear that the firm will have sufficient cash flow to cover its interest and principal loan payments.

   The most obvious action shareholders might take to benefit themselves is to pay out all of the firm’s assets as dividends to themselves, leaving an empty shell for the bondholders to claim when the firm is then unable to repay its debt.

   How does this relate to shareholders and bondholders? If it looks as if the firm will not be able to cover its obligations and thus the equity claim is worthless, shareholders may throw the bomb, i.e., take on risky projects that have big payoffs but high probability of failure. If the project does fail, bondholders lose, but the shareholders are no worse off since their claims were worthless anyway. But if the project succeeds, the shareholders will be the major beneficiaries.

   [Concluding sentence.] If there has been an “overleveraging” of corporate America and investors come to believe that corporate debt is too high, they will demand higher and higher interest rates until corporations can no longer afford to issue debt. In this way any overleveraging in an unregulated market will be self-correcting. [Question for those playing along at home — how effective have the Federal Reserve and institutional banks been at controlling debt levels via interest rates in any sector of the economy? — BR]

   Finally, I must acknowledge that activist libertarians don’t deserve all the blame — the professional intellectuals have not come up with much grist to offer the mill. From A longitudinal study of borrowing by large American corporations by Mark S. Mizruchi and Linda Brewster Stearns:

   Among the most important decisions that managers make are those involving the firm’s financing and capital structure. As Barton and Gordon (1987: 67) noted, “The question of how to finance the firm . . . represents a fundamental functional (financial) decision which should support and be consistent with the long-term strategy of the firm.” Yet, with the exception of two studies by Donaldson (1961, 1969), there has been virtually no work on this topic among organizational researchers.

   Mizruchi and Stearns go on to explain that one reason so little study of corporate financing strategies has been done is because the work is difficult. Yet cancer research, HIV research, modern physics’s quest for measurable gravitons, and (we are assured) pharmaceutical research are difficult, too. Yet many papers are published on these subjects every year.

   Whither corporate financing decisions? It pays to keep in mind that most academic research these days is funded through private grants, and most of that money comes from for-profit corporations. Could it be that the leading lights of our capitalist society would rather not fund the enlightenment of their own activities?

   It is no wonder that laissez-faire capitalists ascribe magical powers to The Market and The Firm; the scientific and critical tools that humans have developed since the Renaissance have scarely been trained upon them.

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3. Lou says

   January 18, 2007 at 5:55 -05006

   It has long irked me that poorer people,like most of my extended family, are encouraged to run up credit card debts with low monthy payments on relatively huge debts,and also allowing an individudal to be deliquent up to a point where it’s impossible to cover even the monthy debt obligation out of the assets available. Why must the indiviudal be more responsible than the corporation? My sister was paying off a $1500+ credit card debt at $20 a month( and this is ‘chicken feed’ compared to many others) .Debt becomes a hopeless situation at a certain point,and that’s probably the same point where it buys yachts for others. Her credit should have been cancelled long before.
   Thank you, Branden, for your detailed explanations thats sets us to thinking…
   Im so sick and tired of the ‘personal responsibilty speeches’ coming from the corporate greed set and from the personal responsibilty type economic conservatives.Throw the people overboard to save the ship.

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4. Mike Kole says

   January 20, 2007 at 19:22 -05006

   Wow, that’s what I get for making a tangential comment, eh?

   Branden, I’m not in opposition at all to the points you make regarding corporations. Let’s not lose sight that a corporation is merely an institution that is operated by people. People make the mistake of debt overload whether at home or with their businesses, and it certainly isn’t limited to the poor.

   I was just making a 20%-on-topic comment. If I had narrower shoulders, I would begin to think you have it in for me!

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5. Branden Robinson says

   January 21, 2007 at 1:47 -05006

   Mike Kole,

   I make tangential comments too, but I think it’s incumbent on me to be prepared for whatever they provoke. :)

   I’m fully aware that corporations are “merely” institutions, or, rather, organizations. An essential characteristic of any effective organization is that it is a force multiplier — groups of individuals working in concert can achieve what a lone person cannot, whether in terms of speed, complexity of operation, magnitude of effort, or imagination.

   Those who direct the activities of an organization, be it a government, a labor union, or a corporation, cannot fall back on their meek individual status to obscure the greater damage they can do to a society, any more than a person who assaults another with a rocket-propelled grenade can plausibly argue that his act was equivalent to an assault with his fist.
   I found it noteworthy that even in an offhanded remark, when presented with the concept of “entities with debt”, you spoke of governments and individuals, not corporations. My suspicion, having run in anarcho-capitalist circles in the past, is that this is less an oversight than a structural philosophical defect. (Whether it’s a minor one is not a point I care to argue in this thread.)

   I don’t assert that LP libertarians can’t or won’t reason cogently about corporate conduct when presented with relevant facts — what bugs me is that they so seldom seem to look.

   I want to hear a critique of American business from the right-libertarian perspective. Knowing the stated principles of laissez-faire capitalism and the major features of the U.S. economy, I am certain one is possible — and it goes far beyond the notion of “tax relief”.

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