What Is Wrong with American Financial Policy?
Two interesting articles in the NYT point out some ideas that contradict the conventional wisdom about the US economy. Robert Shiller writes that the stock market looks overvalued according to a stock index that he developed. The CAPE index is at 25, a level it has reached only three times since 1881, each of those three just before a steep market drop. Shiller looks for reason to say, “This time is different,” and says the answer could be low interest rates on bonds. But he doesn’t entirely buy his own explanation. He thinks the real reason may be psychology and what the common perception of the market is, rather than an economic explanation.
I think another reason may be the disappearance of traditional company provided retirement plans. People are under the gun to amass their own nest egg to support them during retirement. To do this they are almost forced into risker, higher yielding investments. In the old days, when interest rates were higher, companies would probably have invested in bonds. Today there is a huge influx of money into the markets to pay for IRAs, 401(k)s, etc. This new money is going to drive up stock prices. But as Shiller says, if the psychology changes and people perceive that their stock investments are too risky, they may pull their money out. You can lose money in the stock market; you won’t lose it if you hide it in your mattress, in government bonds, or some other very safe investment. That happened to some extend after the 2008 Great Recession.
The other article with an unconventional twist is AndrewSorkin’s reporting that actual corporate tax rates paid by US companies are not uncompetitive with corporate taxes levied by foreign countries. Although the maximum tax rate is 35%, almost no company pays that rate. There are so many loopholes and special tax breaks that the actual tax raid paid is about 12%, which is lower than the maximum rate that companies say are so appealing overseas. Sorkin says the real reason for tax “inversions” in which companies reincorporate overseas is the piles of cash American companies are holding overseas that which they do not what to repatriate. In any case, the screams of corporate CEOs about the high corporate tax rates are insincere and not based on facts. Corporate CEOs love money and don’t care about America. They are unwilling to pay taxes to support the military troops, the police, the firemen, or pave roads. They just want their New York City penthouses, their Hamptons beach houses, and their Aspen ski chalets.