ON ZERO-SUM FALLACIES

GLASS HALF FULL

Rich Karlgaard, the publisher of Forbes has a timely op-ed piece in this week's issue titled "Zero-Sum Fallacies".  It starts out pretty strong:

"The mood in America regarding stocks and the economy turned sour this summer. Blackstone's IPO let loose the dogs of resentment.

Republicans and Democrats raced to the nearest microphone to express outrage. Chuck Grassley (Republican-- Iowa) accused Blackstone of "screwing the middle-income taxpayer" because the firm paid the capital gains tax rate on sweat-equity profits, as entitled by the federal tax code. What's new about that?

Every private equity and venture capital firm in the U.S. has paid that rate since 1978, when it was lowered from 49% to 28%.

That's why the rate was lowered, Chuck! To stimulate innovation!

Has private money screwed America? Not at all. During the 1979--2007 period risk capital flowed into virgin fields and America recovered its entrepreneurial chops. Think of Apple, Sun Microsystems, Microsoft, Dell, Oracle, Cisco, Palm, Yahoo and Google. All started little and have grown mighty. All were backed by private money, "screwing the middle-income taxpayer."

The rest of the piece is well-worth reading.  But for me it gets particularly interesting when he lays out the concept of zero-sum fallacies:

"At the dawn of the U.S. economic boom in 1980 MIT economist Lester C. Thurow looked backward into the dark night. He called his sad new book The Zero-Sum Society: Distribution and the Possibilities for Economic Change..."

"...It was a horrible book and a crimped way of looking at economics and the human spirit. President Ronald Reagan neglected to read it. One assumes the founders and backers of Apple, Sun Microsystems, Microsoft, Dell, Oracle, Cisco, Palm, Yahoo and Google passed on it, too.

Zero-sum implies no net progress in human affairs. The facts scream otherwise. Global production in 2006 amounted to $66 tril-lion, or $10,200 per person. Two hundred years ago per capita income was about $300. Five thousand years ago it was equivalent to $200. For the mass of mankind there was no detectable economic progress for 4,800 years. Then came the Industrial Revolution with its hockey-stick curve in income and life span.

Yet the zero-sum myth lives on. Like a retrovirus it burrows and hides and waits."

He then goes on to lay out other popular zero-sum fallacies:

"Yet the zero-sum virus lives! You can find it today lurking inside these political canards: Energy is running out.
Earth is burning up.
Immigrants take American jobs.
Imports wreck American industries.
Taxes must go up to balance the budget.
Americans spend too much on health care."

Pretty good list.  But then again, I've been an avid Forbes reader since I was a teenager.  So he's preaching to the choir.

Comments

[Alex Tolley]

"Yet the zero-sum virus lives! You can find it today lurking inside these political canards: Energy is running out. Earth is burning up. Immigrants take American jobs. Imports wreck American industries. Taxes must go up to balance the budget. Americans spend too much on health care."

Fossil fuels are finite, so when they are used up, they are gone.

Global warming is not a myth, however much Forbes wants to stick its head in the sand. Warmer global temperatures will have -ve consequences, certainly rising sea levels will reduce land area - surely a zero sum game?

Taxes and budgets. Every respectable economist I know, including the CBO says that tax cuts cannot be replaced by economic growth. Choices have to be made. In our case, the US net debt has risen substantially due the tax cuts of the last 6 years. Forbes readership would gain by further tax cut reductions, the rest of us just get squeezed as the government tries to escape from its obligations.

There is a lot of self serving drivel written to justify the rising inequality in the US.

Check out Bill Gross' latest investment outlook commentary at PIMCO.