Paying more for less



Between the controversies at Disney, Bud Light, and Target, I think we need a return to shareholder primacy.

In 2019, many of the biggest American CEOs signed a manifesto declaring the end of shareholder primacy and embracing a new stakeholder model. With shareholder primacy, the main objective of a corporation is to maximize profits, both long- and short-term profits, because that is what boosts share prices and dividends, and shareholders like that. With the stakeholder model, a corporation has many other objectives: worker well-being, the environment, and the good of society. That may sound nice, but often, these stakeholders have competing objectives, and choosing who gets priority is a question of values.

When Milton Friedman argued for shareholder primacy, he said that a CEO should not forgo profits to exercise his personal values. It is not his money to spend, and not everyone shares his values, nor should they. And worse, I blame the multi-stakeholder model  for making everything feel more political.

Now, I realize even before 2019, companies were getting more political, but it got ramped up several notches in 2020. And now, everything you buy feels like a political statement. And even innocuous well-intentioned marketing campaigns that aim to give visibility to marginalized groups are taken as an explicit endorsement of a more divisive political agenda. I think shooting Bud Light cans in protest is stupid. But I get that people feel frustrated that everything is political and often not their politics.

And even if corporations mostly did pursue profits after 2019, and the stakeholder manifesto was a cynical ploy to appease young workers, get ESG capital, or avoid regulation, rhetoric matters. Before 2019, people could shrug at corporate pandering because it all seemed like a marketing ploy, and who can argue with selling lawn chairs and beer to the trans community? It is a growing demographic.

But in the context of announcing that you are doing it to make the world a better place, it strikes a different tone. And since stakeholder capitalism is about choosing between competing values, it is political. And now everything is worse for profits and society, since it adds to division and rancor.

Milton Friedman was right; shareholder primacy is better for corporations and society.

If CEOs really want to save the world, they should do the brave thing: announce an end to stakeholder capitalism and go back to just worrying about profits.

Author(s): Allison Schrager

Publication Date: 5 Jun 2023

Publication Site: Known Unknowns at substack

Ensuring Tax Rates Don’t Rise with Inflation




With record inflation now squeezing American household budgets, you can thank our Senior Fellow Emeritus Steve Entin for shielding U.S. workers from being pushed into higher tax brackets. If ever there was a paycheck protection program, defending people from bracket creep may be the most important one ever designed.

It all started some 40 years ago. After Ronald Reagan was elected President, Steve Entin, who had previously served as a staff economist on the Joint Economic Committee and studied under notable professors like Milton Friedman at the University of Chicago, was invited to work at the Department of the Treasury as Deputy Assistant Secretary for Economic Policy.

As many at the Tax Foundation can attest, Steve’s stories about his time in the Reagan administration are legendary, but one stands out. Steve did something that every household in America should be grateful for—he convinced President Reagan to call for indexing the tax code to inflation.

At the time, American taxpayers were subject to bracket creep, which occurs when inflation pushes taxpayers into higher income tax brackets or reduces the value of credits, deductions, and exemptions. The bracket thresholds failed to keep pace with inflation, resulting in an increase in income taxes without an increase in real income.

Indeed, President Reagan used the chart that Steve drew for him during a televised address asking Americans to call their members of Congress and demand they index the tax code. People did. And it worked.

Author(s): Scott A. Hodge

Publication Date: 12 Sept 2022

Publication Site: Tax Foundation

Inflation: Return of a Plague



Experience has once again verified Friedman’s and Lucas’s theories, reducing to nothing the naïve propositions of Modern Monetary Theory, a recent delusion of the American Left. According to this unscientific, ahistorical theory, legislatures can control the production of money and distribute it in a way that satisfies all needs, with no destructive consequences from expanding the money supply. The question of reimbursing a gigantic public debt is not supposed to arise, because no one can force the government to pay what it owes. But this magical solution, adopted in part by Joe Biden, ignores the fact that public debt produces inflation and that a debt that is not repaid, as in the case of Argentina, eventually ruins the currency. All this was well known, at least by economists, so it is surprising that governments in America and Europe had not taken it into account of late. They have short memories. From the 1980s until recently, inflation had been constrained thanks to public policies inspired by Friedman—but policymakers had forgotten its threatening presence, as if it belonged only to the past. We can liken inflation with pathogens: smallpox has disappeared, but vaccination is what made it disappear; stop vaccinating, and the evil can return. In the 1980s, central banks helmed by Friedman’s disciples, such as Paul Volcker in the United States or Jean-Claude Trichet in Europe, raised interest rates and defeated inflation by reducing the money supply. Today, economic policymakers will need to apply the same remedy as in 1980. Central banks are working on this, but their conversion comes late; they have waited for inflation to establish itself before responding, a delay that will make the remedy more painful.

Author(s): Guy Sorman

Publication Date: 14 Jun 2022

Publication Site: City Journal

Don’t Mistake Accounting for Economics



There’s one mistake that’s particularly common and damaging. Too many observers try to derive economic principles from accounting principles. This is flat-out wrong. The reason is simple: Economics is not accounting. Economists try to understand the causal relationships in commerce and government. Accountants document stocks and flows in an orderly fashion. Economics obviously makes use of accounting, and accounting can be improved through knowledge of economics, but they’re not the same thing.

The most egregious abuses of economics that we see today start with an accounting identity — a true statement or equation — but end with an absurd economic claim. Importantly, an identity is true by construction. Based on the definitions of the variables, the formulation must be so. But it doesn’t say anything about the real world. It certainly doesn’t capture the causal relationships among those variables.

Author(s): Alexander William Salter

Publication Date: 9 April 2021

Publication Site: National Review