Star Wars and Economics

Is The Last Jedi actually the capitalist utopia?

**POTENTIAL SPOILERS AHEAD**

I've had arguments with people over economics and politics before. But never have I properly thrown my hat into the ring of popular culture. Well here goes.

THE STORY

One of Luke Skywalker's most significant lines in the new Star Wars movie, The Last Jedi, is "it's time for the Jedi to end".

I interpreted his reasoning to be that the force must remain in balance. Like all good stories, there's a balance between good and evil, chaos and control, light and dark. Superman has Lex Luthor, Thor has Loki, and the Jedi have the dark side.

Unfortunately, this 'balance' in the Star Wars universe involves a lot of war and a lot of casualties.

Maybe Luke had finally realised that the Jedi were part of the problem. The more powerful they became, the more the force had to balance them out with an equally powerful counterpart:

·         The Jedi Council at its peak gave rise to the Sith;

·         The Sith, after eliminating the Jedi and creating the Empire, gave rise to Luke and Leia and the Rebellion;

·         Luke, upon destroying the Empire and creating his own Jedi Academy, gave rise to Kylo Ren and the First Order; and

·         Kylo Ren, having been trained as a Jedi to become far more powerful than just some kid with the force, required the force to more greatly empower Rey.

Rey herself says "something inside me has always been there, but now it's awake", i.e. her power "awakening" was the force's response to Kylo Ren and his destruction of Luke's Academy. Even Snoke seemed to know of this balance, at one point saying “darkness rises and light to meet it. I warned my young apprentice that as he grew stronger, his equal in the light would rise”.

Every time one side grows, the force gives greater power to the other side to balance things out. But the mantra of both the Jedi and the Sith essentially seems to be "peace through superior firepower" (yes, that's a quote from Point Break), so it keeps resulting in war, not peace.

Whereas if there were no Jedi Academy, the force would have given both Kylo and Rey only moderate abilities that wouldn't create galactic war.

Which means the Jedi – the ones we thought were the good guys – were actually part of the problem. Luke says “to say that if the Jedi die, the light dies, is vanity”. So if the Jedi were to disappear, the light and dark side would still exist, but they would remain in balance at a much smaller scale. Individuals would undertake their own personal battles with light and dark but it would never escalate to galactic war – the force wouldn't allow it (until one side attempted to tip the scales by starting their own Council or Empire or Academy or Order).

And even though Luke ends with the line “I will not be the last Jedi”, I think this was just a reference to the fact that he wouldn’t be the last to wield the force for the light (otherwise he’s kinda contradicting his whole preceding message). But he would be the last one to attempt to institutionalise the force for the light. Consequently, it'll just be individuals wielding the force, not institutions. Because any attempt by the Jedi to 'regulate' the force actually made things worse.

THE ECONOMICS

You can see where I'm going with this ... 'big government' on either side creates more problems than it solves.

Is this not a capitalist's dream? Get rid of big government and let the magic of the force (the free market) create balance and fairness.

In the real world, this doesn’t seem to work. Whatever powerful force you believe exists, you have to concede it doesn't intervene well enough to ensure balance and fairness in human affairs. Without at least some regulation, there would be chaos, or at the very least, the inequality between the powerful and the powerless would be infinitely worse. Hence the need for government.

But in the Star Wars universe, there is an all-powerful force that actively intervenes in the galaxy to ensure balance is achieved. So any attempts by the Jedi/dark side to control that force end up failing.

Yes, the Star Wars prequels, especially Revenge of the Sith, are arguably a huge commentary on the Bush-era USA PATRIOT Act and seizing power through fear. So that side of politics is unambiguously portrayed as bad. But even the prequels seemed to suggest the Jedi were overly cold and dogmatic too.

So now the new trilogy seems to be suggesting the galaxy would be better off without any of them.

Ayn Rand would be so proud.

Merry Christmas, rebel scum!

How do you achieve a government that is both big and efficient?

Without the government.

Politicians should get wings clipped on infrastructure

I think this idea has merit. An independent fiscal authority to complement the Reserve Bank - Infrastructure Australia if you will, but with teeth. This will improve the quality of chosen infrastructure projects, basing them on economic value, not political convenience. It could also encourage fiscal stimulus during a downturn when monetary policy approaches its limits. Not only is this something over which monetary authorities have been pleading with government since the GFC, but by helping monetary policy normalise faster, it can also help avoid unintended consequences such as housing and stock market bubbles.

But this is still a democracy, after all. So to keep these independent bodies accountable to the public, elected officials can still determine the bodies' objectives. In the case of the RBA, the government determined in the Reserve Bank Act 1959 that their 'charter' should be to maintain a stable currency, full employment, and the economic prosperity and welfare of the people of Australia. The Act also requires them to maintain the stability - and manage the risks - of the financial system. But achieving those objectives must be within the scope, power and authority of the body itself, with minimal interference from government, in order to maintain their credibility.

Many people want the government to do more for society, but don't trust it to do it properly. Well this is one way to achieve big government - without the government.

Critics of globalisation revisited.

I came across an interesting passage in the New York Times by Dani Rodrik recently. His point was to draw attention to Donald Trump’s fake populism – his posing as a supporter of the common man, but his actions on trade, tax and health policies that would do the exact opposite, supporting special interests rather than workers.

But Rodrik was also very much in line with my writings about the need to make globalisation work through effective tax policy, not by unwinding globalisation itself (as Trump seems to want to do with, among other things, his attempts to renegotiate NAFTA).

The whole article is worth a read, but here is a snippet:

 “… A truly fairer globalisation would start at home, with a reconstruction of the social compact that binds the corporate elite and the wealthy to labour and the middle class. Every society that opens itself up to the world economy needs social transfers, labour-training programs and regional policies that take care of the adversely affected workers and communities. Our domestic approach, over-reliant on underfunded and ineffective trade-adjustment assistance policies, has not worked and needs to be replaced by more extensive safety nets.

These must be complemented with more progressive income taxation, employment-generating policies such as infrastructure investment and political reforms that reduce the role of money in politics. Mr. Trump and the Republicans want to take us in exactly the opposite direction, with a tax reform that will benefit the wealthy first and foremost.

The problem with Mr. Trump’s economic nationalism is not his avowed belief that trade should serve the national interest. When we economists teach the theory of trade, we emphasise that free trade is desirable because it expands the domestic economic pie — not because it confers gains to other nations. The problem is that he is deeply averse to the domestic policies that would allow American workers a piece of the added pie.

… Mr. Trump’s failure to distance himself from special-interest globalisation is perhaps not surprising. But it exposes the vacuity of his brand of populism. Despite all his talk about fairness and the need to stand up for ordinary working people, he has little to offer his core constituency. He will exacerbate, rather than mend, the grievances that made his presidency possible.”

Corporate taxes revisited.

Trump is either exaggerating, ignorant or lying.

Corporate tax cuts won’t cause a foreign investment boom, especially not in the US. They will blow out the budget and worsen inequality, thereby actually hindering economic growth. The only gains will be higher corporate profits, not wages.

But even if it did drive foreign investment, most of the returns would accrue to foreigners, and it would still blow out the budget and/or hurt manufacturers – the very people Trump promised to help.

THE HISTORY OF TAX CHANGES IS HARDLY FAVOURABLE TO REPUBLICANS

Paul Krugman has written extensively on the current Trump/Republican tax plan to cut corporate taxes in the US. I wrote a couple of blogs about the general idea too (here and here).

The supposed justification for cutting corporate taxes that the Republicans are using (as well as Australia and the UK, who are also pushing for cuts) is that it will lead to a big increase in foreign investment, spurring economic growth, wage growth and tax revenue, thereby paying for themselves.

Republicans have liked claiming these supposed benefits of tax cuts for a long time – at least since Ronald Reagan. But a simple comparison of how tax changes have affected growth in the past makes this reasoning debateable:

·         The notion that Reagan’s tax cuts were the driving force behind the 3%+ p.a. growth over his tenure is debateable, given the role that Paul Volcker and the Federal Reserve also had in both the recession and subsequent recovery. Also, the government deficit got worse, not better, in the face of these tax cuts;

·         Clinton increased taxes amid panic from the other side that it would cripple the economy – Clinton actually presided over a boom larger than Reagan (not entirely his doing, but it does suggest tax decreases aren’t necessary or sufficient for economic growth);

·         Bush Jr cut taxes and presided over only lacklustre economic performance (which ended in the GFC, though I’m not entirely blaming him for that);

·         Obama increased taxes on the rich in 2013, but the economic recovery following the GFC still continued;

·         Sam Brownback slashed taxes in Kansas, creating a fiscal crisis and no discernible broad economic benefits; and

·         Jerry Brown raised taxes in California, but the economy boomed.

So this idea that tax cuts will drive growth (much less pay for themselves) is at best, very debateable.

AN ACCOUNTING CERTAINTY – THE TRADE DEFICIT WILL EXPAND

However, regardless of these debates on tax cuts, if cutting corporate taxes drives foreign investment, it will also appreciate the US dollar, squeezing exporters (including manufacturers – you know, the group Trump so passionately promised to help) and stimulating imports, thereby expanding the trade deficit. Specifically, Krugman estimates 2.5m out of the US’s 12.5m manufacturing jobs would be lost, blowing out the trade deficit by $6.5t (yes, trillion) over the coming decade. There would be other jobs created elsewhere, just not the jobs Trump promised to deliver.

Furthermore, as Krugman humorously put it, “foreigners aren’t investing in America for their health”. All that foreign investment[1] would imply returns paid to foreigners, not Americans. So any gains that do come from foreign investment will mostly go to foreigners.

This is not just some abstract economic hypothesis – it’s a mathematical and accounting certainty. In economic terms, a country’s Capital Account must precisely offset its Current Account. When foreign capital flows into a country, this represents a Capital Account Surplus. And it is precisely offset by a consequent Current Account Deficit – a combination of more imports/less exports due to a higher local currency (a trade deficit) and/or increasing interest payments to foreigners for the investments they make in the country. It simply must balance.

And this isn’t even to mention the impact these cuts are expected to have on the budget deficit – an estimated $1.4t over the decade. And given the amount of US assets already owned by foreigners, about $500b (35%) of that will be returns to those existing foreign investors.

The benefits to the US (if any) would be that these new investments (as a result of lower taxes) may initiate a construction boom, stimulating the economy in the short term, and drive economic productivity more broadly over the longer term.

But this is all assuming that lowering corporate taxes would indeed spur foreign investment – as I discuss below, that is actually doubtful.

THERE WON’T BE A FOREIGN INVESTMENT BOOM

Specifically – and particularly hurtful to the US case for corporate tax cuts – the US is not a ‘small open economy’. Trump’s argument actually makes more sense for a country like Australia, not a country like the US that is large enough to affect world markets. In Australia, we are small enough that us dropping corporate taxes wouldn’t affect global rates of return. So after-tax rates of return in Australia would rise relative to the rest of the world, thereby attracting foreign investment until pre-tax rates of return in Australia fall enough to offset the benefits of lower corporate tax rates.

But the US is so large that lowering corporate taxes there wouldn’t just raise their rates of return – it would raise global rates of return too. So it wouldn’t take that much foreign investment flows to bring US and global rates of return back into equilibrium. Moreover, not all goods and services in the US are tradeable internationally. So the rest of the world’s inability to benefit from everything that could be produced because of the capital flowing into the US means US corporate tax cuts won’t even cause capital inflows to the full extent in the first place (except maybe in the very long term – decades). So much for the idea of a foreign investment ‘boom’. This might be good in terms of not causing too much pain to exporters, but it won’t lead to a foreign investment boom or higher wages, and will still blow out the budget.

CEOS DON’T EVEN WANT THE MONEY!

I can see only one scenario right now were corporate tax cuts – even if they damaged exports and the budget – could be justified. If business and industry wanted to make significant productive investments – more productive than the government would do – but couldn’t as a result of overly burdensome tax rates. But this is not the case. At a panel discussion, US CEOs themselves – in front of White House Economic Policy Adviser Gary Cohn – said they probably wouldn’t use corporate tax cuts to increase investment. And in Australia, Treasurer Scott Morrison has even had to encourage CEOs to publicly support their proposed corporate tax cuts – something he surely wouldn’t have to do if they really needed tax cuts. And as I mentioned in my previous blog, according to RBA Governor Philip Lowe, corporate taxes are not the most significant determinant of investment decisions in Australia either. So any foreign investment that is attracted by cutting corporate taxes in Australia may not deliver much in the way of economic benefit either if local companies don’t have any greater desire to invest just because taxes fell.

The Tax Policy Centre supports this notion that there will be virtually no economic growth benefits and a worsening of the budget, as do the economists of a recent survey:

“Of the 42 ideologically diverse economists surveyed by the University of Chicago on the impact of Republican tax plans, only one agreed that they would lead to substantial economic growth, while none disagreed with the proposition that they would substantially increase US debt.”

This is why in my previous blog I preferred government infrastructure investment as an economic kick-starter, rather than corporate tax cuts. Corporate tax cuts were only a second-best alternative in my mind, because I saw them worsening income inequality as larger companies would be less likely to invest from the windfall[2], and more likely to just pocket it[3] (somewhat undermining the whole ‘stimulating worker wages’ argument). Governments would also have less tax revenue for income redistribution. And in the US, their corporate tax cuts were at least somewhat dependent on withdrawing funding from Obamacare[4], which no doubt would worsen economic inequality.

And this is even more true when you factor in the notion that income tax cuts proposed for the middle classes expire by 2027 and actually become tax increases (as is required by Senate rules to show that it won’t worsen the budget deficit after a decade), leaving only the wealthy with enduring tax cuts. And even if you believed Republican claims that Congress would eventually extend these middle-class tax cuts beyond 2027, that would imply additional revenue needed from elsewhere to balance the budget. And knowing Republicans, this is more likely to come from further cuts to health care and social security than from tax increases on the wealthy. How can inequality not worsen under these plans?

Furthermore, given that the US and Australia probably won’t be the only countries to lower their corporate tax rates, it will at best prevent a country from losing their international share of the pie, not necessarily help grow the pie.

INFRASTRUCTURE, NOT TAX CUTS

There is no shortage however, of productive government infrastructure investment opportunities in the US, or in Australia for that matter (some transport projects are already underway or in the pipeline). And while these too may require foreign investment, drive up the local currency, and hurt manufacturers and other exporters, we would actually know that these investments were happening (unlike corporate tax cuts which could just end up in company profits and executive bonuses), so they would have a greater chance than corporate tax cuts of raising wages and reducing inequality, thereby stimulating growth and helping the government budget.

TRUMP IS EXAGGERATING, IGNORANT OR LYING

So lowering corporate taxes won’t likely stimulate foreign investment that much, if at all, in Australia, much less the US. It’ll just be pocketed by companies in the form of profits not wages, punch a hole in the government budget, and worsen economic inequality, thereby actually worsening economic growth.

And even if it did cause a foreign investment boom, the benefits to America would be far less than Trump indicates. And  many of his supporters – manufacturers and other exporters – would actually suffer.

When it comes to the benefits of corporate tax cuts, Trump – and the Republicans – are either exaggerating, ignorant or lying.

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[1] It would have to be foreign investment, because there is nothing in Republican plans that would cause Americans to consume less and save more. In fact, a decrease in domestic savings is actually more likely.

[2] One of the arguments Krugman uses to this extent is that lowering corporate taxes on large companies with significant market power (e.g. Google, Apple) doesn’t cause them to invest and hire more workers/pay higher wages, because they’re not under that much of a competition threat. So lowering taxes on them is just a revenue loss for the government, a profit gain for the company, and a worsening of inequality, not a gain for workers or the broader economy. So maintaining corporate taxes in industries of concentrated market power is actually more important than ever.

Maybe there is potential to just offer corporate tax cuts for small businesses (like Australia has), because (among other things) small businesses, unlike big ones, arguably have a harder time obtaining private sector finance, even for worthy investments, because they have fewer assets that can be used as collateral. This makes them a riskier loan prospect for a bank. So a little government tax break may actually go a long way to facilitating productive investments for small businesses (and consequent broad economic benefits), rather than big businesses that should be able to obtain the finance other ways.

Alternatively, government could offer tax concessions only for desirable investments/activities. However, this could involve a lot of bureaucracy in terms of administration and enforcement, and opens up the potential for loopholes where undesirable activities (not genuine investments) are able to exploit these tax concessions, and/or distorting other activities that aren’t eligible for these tax concessions. Furthermore, if the government really wants to control how tax cuts/concessions are invested, why not just choose their own infrastructure projects? But there are certainly other options worthy of debate.

[3] These profits may benefit shareholders too, but 80% of all shares in the US are owned by the wealthiest 10% of people (40% by the wealthiest 1%) – so this will still worsen inequality.

[4] While outright repeal didn’t work, Republicans are still working to repeal the individual mandate that requires people to sign up. This will result in premiums increasing an estimated 10% per year over the next decade, and about 13 million people losing health insurance, saving the government money on subsides that they can then use for corporate tax cuts.