MacroScan - Murdoch's Last Laffer

The Wall Street Journal is to many a venerable institution, reflecting all that is best in American capitalism. So much so that many are concerned about the implications for the paper's integrity of Rupert Murdoch-owned Newscorp's bid to acquire Dow Jones, which owns the Journal. Murdoch's $5 billion take-over offer involved a price of $60-a-share. Since that implied a 65 per cent premium on the then prevailing share price and amounted to 40 per cent of earnings for a company losing revenues, the offer seemed too good to refuse.

But, given the purported conflict between the Journal's well-cultivated image of journalistic integrity and Murdoch's reputation for sacrificing professionalism at the altar of profits, speculation was rife that the Bancroft family, which controls 64 per cent of the stake through myriad trusts controlled by as many as 35 family members, would reject the offer. But sections of the Bancroft's relented, after an initial refusal to sell in May this year, and are now trying to push through the sale. At the time of writing, when final discussions among Bancroft family members are under way, indications are that Mr. Murdoch would have the last laugh.

What is surprising is not Murdoch's generous offer, for the likes of which he is now famous. It is the ability to paint a picture that the Wall Street Journal is too pristine an institution to be owned by a tycoon like him. In fact, to bolster that image, the newspaper's management had launched on a major editorial restructuring aimed at aligning better its print and internet editions before and during discussions on the offer, which was taken to imply that it did not need support from Mr. Murdoch.

But is all the piety, displayed by those who have focused on Murdoch's suitability as owner of the paper rather than the price he has to offer, justified? After all, the Journal has promoted the changes in American capitalism that have paved the way, inter alia, for the merger and acquisitions wave that has come to dominate the dynamic of the system. One consequence of that trend has been the conversion of media empires into typical corporations that are as much the targets of take-over and seekers of financial gain as any other. Another recent financial media mega merger was the 8.7 billion pounds sterling acquisition of Reuters by Thomson Financial.

The corporate-led, profit-driven dynamic underlying this trend, promoted vigorously by the media itself, is not without implications for questions of integrity, especially of the financial media across the world. Media businesses, with some notable exceptions, are now as keen on State policies that cushion and increase profits and permit flexibility in ownership and operations that promote private gains at the expense of the public interest. One consequence has been the sharp increase in inequalities that underlie contemporary economic growth. The media have become the means to manufacture consent in favour of such policies, often based on the manipulation of selectively chosen information rather than the impartial dissemination of the news as it is. This has made the media the principal instrument for promoting such policies with an obvious conflict between the media's role as a pillar of democracy geared to informing and even educating the citizen and its role as an agency that serves to shift the distribution of the gains of growth in favour of capitalists and the rich.

One striking example of the kind of policies favoured by the corporate media in its new financial avatar, is the concerted effort to get governments to substantially reduce taxes on profits or offer concessions or leave loopholes that have the same effective result. A typical example of the use of wrong theory and empirical manipulation to realize this end is the promotion of the idea of the "Laffer curve". The idea of such a curve with particular characteristics has been used since the mid 1970s to promote tax cuts for the rich, on the ground that this would result in an increase in tax revenues for the government. The curve reflects the view that when tax rates rise, initially revenues gained from such rates would rise, but beyond some maximal point any further increase in taxes would in fact reduce revenues either because individuals would work less rather than earn more and have it taxed away or because they would find ingenious ways of avoiding tax payments. In sum, any country which is to the right of the maximum would gain by reducing tax rates either because it would have the supply side effect of encouraging more work and output and therefore generating more taxes or would ensure greater tax compliance and therefore increase tax revenues.

In practice a whole host of factors including a nation's per capita income, the extent of income inequality, perceptions of what the government does with tax revenues, the nature and efficacy of the tax administration and the justice implicit in the tax system go to determine the revenue (relative to GDP) generated by a given structure of taxes. This implies that what is the optimal maximum tax rate is impossible to specify, unless a lot of variables are taken as given and their effects are presumed to be understood. Yet, sections of the rich who have always believed that any prevailing tax rate is too high have pushed this view consistently, even if not through the medium of a formal curve. Economists inclined to advance that view have also used the notion in various ways.

The idea of a curve with theoretical and empirical substance gained currency during the Reaganite years of indiscriminate tax cuts, with the idea reportedly attributed by Wall Street Journal correspondent Jude Wanniski to Arthur Laffer, a subsequent member of Reagan's Economic Policy Advisory Board, who is supposed to have drawn the curve for her education on a napkin. Popularity, of course, invites attention. And innumerable economists have spent time and energy to show that the concept is theoretically hollow and empirically unsubstantiated. This seems to have influenced even the US Congress with the US Congressional Budget Office questioning it validity in a 2005 paper.

But given the interest behind promoting the idea and the support of influential media of the kind that the Wall Street Journal represents, the idea has just not gone away. Since the rise of the Laffer curve idea in the 1970s taxes have been cut many times over across the world. Yet it is routinely invoked to justify further cuts in taxes. The point is that even today influential newspapers like the Wall Street Journal promote the idea, based on obviously mistaken reasoning.

Consider for example a recent report in the Wall Street Journal titled "We're Number One, Alas" (13 July, 2007). Lamenting that the US is not among the 25 developed nations that have opted for "Reaganite corporate tax cuts" since 2001, the newspaper provides two reasons why the US government should follow the path adopted by these countries and others such as Vietnam. First, it makes the country a more attractive site for foreign investment. This, however, is unlikely to attract a country which without much effort draws on the world's capital to finance its huge trade and current account deficit. But there is a second reason, according to the Journal: "Lower corporate tax rates with fewer loopholes can lead to more, not less, tax revenue from business. … Tax receipts tend to fall below their optimum potential when corporate tax rates are so high that they lead to the creation of loopholes and the incentive to move income to countries with a lower tax rate."

Note the subtle shift in argument. Reduce corporate tax rates to prevent incomes from moving out of the country in search of relative tax havens. If every country begins to do this, the race to the bottom can take corporate tax rates to near zero. The call is not for international agreements that prevent such tax evasion, but to reduce taxes on fat corporate profits in a world where intra-country inequality is clearly rising. What is shocking is that this line of reasoning is backed up with the accompanying graph that ostensible delivers a smooth Laffer-type curve from cross-country data. To any student with simple, school-level graphing skills it should be clear that using the low tax UAE and a median-tax outlier like Norway to draw the curve is a basic error, since all other points do not match its trajectory.

Yet using that graph the Journal approvingly quotes an "expert", Kevin Hassett, an economist at the American Enterprise Institute whose view as expected is that the U.S. "appears to be a nation on the wrong side of the Laffer Curve: We could collect more revenues with a lower corporate tax rate."
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Reports of this kind, precisely at a time when the Journal's take-over is being discussed, make nonsense of the counterposition of the Journal's integrity with Murdoch's greed. From a social point of view they reflect the same disturbing trend in today's world.

Democracy presumes accountability. But not all its pillars are as accountable as the others, if at all. An area of concern has been the media, owned privately most often and zealously guarding its independence on the basis of the fundamental right of freedom of expression. Media monopoly, reflected in cross-media ownership across concentrated media markets, combined with corporate interests outside of the media business, have long been seen as a dangerous blend. Especially since there is no adequate countervailing power against such corporate influence in modern democracies. For long this aspect of the media, while much analyzed, was underplayed, because of a focus on the dangers of a state controlled media, as opposed to a competitive private media environment, where the battle for eyes and ears was expected to ensure a high degree of integrity.

More recently the danger of the misuse of media power has increased because of two tendencies. First, the direct entry of media moguls into the political arena, illustrated by Silvio Berlusconi in Italy and Thaksin Shinwatra in Thailand. This allows political power to be pursued by utilizing the power of a media protected by the democratic commitment to freedom of expression. The second, and more pervasive, is the coalescence of corporate and financial interests with media interests. One reason is that the competitive media business often warrants concentration, on the one hand, and mobilizing funds for expansion and modernization from the capital markets, on the other. What is happening to the Wall Street Journal is just a reflection of this trend. We may grieve for democracy. But that is not the same as grieving for the Journal.