Adam Aldeen: The US Should Attack the Root Cause of Companies Relabeling Themselves as Foreign by Ending Its Taxation of Income Earned Overseas

Link to Adam Aldeen’s LinkedIn homepage

I am pleased to host another student guest post, this time by Adam Aldeen. This is the 13th student guest post this semester. You can see all the student guest posts from my “Monetary and Financial Theory” class at this link. 

On Thursday, the US Treasury Department revealed new rules to prevent U.S. companies from doing corporate tax inversions to reduce their tax bills. The rules aim to make it harder for any American company to avoid paying taxes by relocating to another country. I think this is an unwise decision because it fails to address the underlying issue that causes firms to leave in the first place.

The American tax code is unnecessarily complex, and recent merger and acquisition activity has been high as companies have rushed to take advantage of lower tax jurisdictions. Right wing critics contend that the solution is to lower corporate tax rates, while those on the left tend to want to make it more difficult to leave in the first place. Evidence suggests, that although the U.S. has one of the highest marginal corporate tax rates in the world—at 35 percent—high corporate tax rates are not the driving factor in a firm’s decision to locate overseas. Indeed, because of tax holes in the U.S. tax code, American firms pay an average of 20.3 percent on domestic profits. The real issue is that companies have to pay U.S. tax rates on income earned abroad but can avoid paying taxes on that income until they repatriate it. The end result is companies having stashed  $2.1 trillion of earnings with their foreign addresses. This is a problem because it erodes the US tax base and we should instead be thinking about how to encourage companies to stay here and pay a guaranteed minimum tax.  

The tax on income earned abroad makes US firms less competitive than foreign counterparts because most nations only tax domestically earned profits. Therefore, a foreign owned firm identical to a US firm pays less in overall taxes than an American corporation. This is just a shame because it means that companies are incentivized to not pay American taxes and contributes to a massive loss of tax revenue to the government. Indeed, the OECD estimates that cash hoarding and inversions cost the government nearly $90 billion a year in lost tax revenue.  

A potential solution would be to stop taxing that income earned abroad. After all, almost every other country in the world does not tax its firms on income earned abroad, and doing so would dissolve the major reason firms leave in the first place. An article from the Economist explains that “Making it hard for American firms to invert does precisely nothing to alter the comparative tax advantages of changing domicile; it just makes it more likely that foreign firms will acquire American ones.” I completely agree with this; instead of indirectly addressing this issue, let’s just get at the heart of it and let companies retain their earnings earned abroad while ensuring some sort of minimum tax in the US through a territorial tax system. Moving to a territorial system, explains the Economist, would result in trapped foreign earnings coming back to America and would stem the flow of jobs overseas because American firms would be buying foreign firms instead of foreign firms buying American firms. This would increase the US tax base, and would be a driving force in stimulating an economy in recovery.

Update: There are some interesting comments on Miles’s Facebook page on this post.

Illusion of Choice, Illusion of Consent: The Bite of Apple

Which choice is the default choice can make a big difference for a software companies profits. When Apple notified me it was going to charge me $11.99 a year for iCloud services I didn’t need and never asked for, it was quite annoying that I had to research how to undo things to avoid being charged. I thought they were giving me a lesser of two evils choice of pay $11.99 a year or pay in trouble and bother and time. But it turned out to be worse. I unchecked backup for my iPhone photos–something I had never asked for and didn’t realize was happening. Then I went through the procedure to downgrade (not a well-displayed option at all) and got to the window you can see at the top of this post. I have the “free option” checked, but the “Done” button is grayed out and does not function. So there is no way to save my choice, and as far as I know I am still slated to be charged $11.99 on December 21. 

Note how it says that I am using less than 1 gigabyte, so it wasn’t a problem of lagged recognition of unchecking the photo backup on my iphone. 

I suspect there is a way to fix this by going to my local Apple Store or calling up customer service. But that isn’t fair at all! That is definitely charging me more than $11.99 in time and bother to avoid a $11.99 charge. And maybe if I were more of an expert, I would know what to do, but I am fairly confident that many, many people would have the same problem I had and give up–which means paying up. This is bad enough I think it could easily constitute an anti-trust violation.

This is how well displayed the free option is. The free option is hidden behind the “downgrade options” button. As far as I know, this screen is the only path to the free option.

This is how well displayed the free option is. The free option is hidden behind the “downgrade options” button. As far as I know, this screen is the only path to the free option.

Christian Kimball: Anger [1], Marriage [2], and the Mormon Church [3]

I am angry about what the Mormon Church is doing to its gay members and those who care about them. I expressed my views gently in “The Mormon Church Decides to Treat Gay Marriage as Rebellion on a Par with Polygamy” because the policy is so harsh that I actually have some hope that top Mormon leaders will modify and blunt it when it becomes apparent how many members whose loyalty is unquestioned by the top Mormon leaders are distressed by it and I wanted to encourage such a result. But I remain angry. So when I saw some of what my brother Chris had written about the Mormon Church’s harsh new policy, I asked if he would write a guest post about it, so that I could ride the coattails of his anger. Here is Chris:

The Mormon Church recently promulgated a policy that considers a person in a marriage with another person of the same sex to be apostate, subject to a mandatory ‘disciplinary council’ [4].  This is where people are excommunicated; lesser forms of discipline are possible, but excommunication is the norm in a case of apostasy. A separate policy segregates children of a person who is in a same-sex relationship, married or not. In certain circumstances, such children cannot be given a name and blessing (analogous to a christening, shortly after birth), be baptized (otherwise normal at age eight), or otherwise participate in ordinances or sacraments, until they are 18 and make independent decisions, decisions which include disavowing their gay parent’s lifestyle [5].

The response among Mormons has been varied, including cries of hoax, quick rationalizations, dissociation (detachment), disassociation (including resignations in significant numbers), despair, depression, risk [6] of suicide, and anger.

Anger

Why anger? When a church does something hurtful, I expect four reactions:

➢ Pain (and anger) from those directly affected.

➢ Disassociation, including resignation, from a few for whom (typically) this is the last straw in a long line of complaints.

➢ Rationalization—“it’s all ok, they know what they’re doing”—from a few.

➢ Relative quiet from most, the many who are not directly affected and busy with the rest of their lives. (Not that they are uncaring or unknowing, but that they worry about other things.)

In the present situation I experience, and see and hear anger, and it is affecting the fourth class, the otherwise quiet or busy elsewhere.

Essential Conflict

The obvious source of anger is the children: How can this possibly make sense for the children!?

But as I try to make sense of this, I think there are deeper roots of the anger as an outward expression of irreconcilable conflict.

On the one hand, Mormonism wants to be universal. The Church teaches the Plan of Happiness. This is not (or not only) a marketing slogan. Mormons really believe:

[C]onsider on the blessed and happy state of those that keep the commandments of God. For behold, they are blessed in all things, both temporal and spiritual; and if they hold out faithful to the end they are received into heaven, that thereby they may dwell with God in a state of never-ending happiness. (Mosiah 2:41, Book of Mormon)

Mormons believe that the ordinances or sacraments–including baptism and marriage and more—are necessary to this state of never-ending happiness. And that these sacraments are only available in the Mormon church performed by proper authority in the authorized manner. So much so that Mormons devote significant time and resources to genealogy and proxy work (in Mormon temples) performing the saving ordinances in the names of and on behalf of the dead.

It takes a cruel and uncaring mind to hold in one place Happy and Necessary and Exclusive and then kick people out. Mormons are not cruel and uncaring. Mormons can make sense of people excluding themselves by choice … by sin, in religious jargon … but to exclude people by the color of their eyes or an accident of birth or their sexual orientation feels wrong.  

On the other hand, marriage of same-sex couples is like a perfect storm of trouble for Mormonism.

Consider that in the Mormon imagination god is an anthropomorphic, embodied Heavenly Father [7] paired with a Heavenly Mother about whom nothing is known except gender.

Consider that the self or spirit or soul is very long to infinite in duration, individual and self-aware, generally anthropomorphic, and in particular gender specific, i.e., male or female.

In this Mormon imagination there is no place for essential homosexuality, i.e., gay (and straight and in-between) as essential characteristics of the person. The Mormon imagination could make sense of choice, i.e., homosexuality as an alternate life-style choice which a person could opt in or out of. The Mormon imagination could make sense of disorder, i.e., homosexuality as a disorder or disability that can be cured in this life or the next. However, Mormon imagination has no room, no place, no rationalization, that includes homosexuality as an essential characteristic.

And yet society in general, with Mormons along for the ride, is moving or has moved to an essentialist understanding of homosexuality [8].  Different stories could be told, but in my view  social acceptance began with gay people coming out in sufficient numbers that gay is (no longer) ‘other’ but ‘us’, i.e., my sister, my cousin, my friend, my neighbor. When that happened it became obvious—obvious because we’re talking about real known human beings, not abstractions—that they/we are not choosing and are not sick. That they/we are really truly gay (or straight, or bi-, or whatever). In my simple view, again, social acceptance has culminated in marriage. Any number of equal protection, equal treatment, anti-discrimination measures might have been that culmination, but marriage is what happened and marriage is extraordinarily powerful both symbolically and in practical reality, in recognizing gay people as the real thing, not transitory, not choosing, not disordered, not counterfeit, but really truly essentially gay.

Finally, consider that Mormons understand marriage to be the ultimate and forever state of being. Marriage is ideally “for time and all eternity” and in that form marriage is a condition for exaltation or the highest degree of glory [9].  

For Mormons it is no small matter that social acceptance culminates in marriage. For Mormons, considering the state of marriage as eternal, patterned by God, and necessary to exaltation, marriage is the single most challenging, threatening, impossible-to-conceptualize way to recognize gay people as essential and real.

Thus the battle for hearts and minds is engaged:

➢ Mormonism wants to be universal.

➢ Mormonism and a Mormon heaven and Mormon happiness requires permanent dimorphic pairing—“male and female created he them.“

➢ Mormonism has no room, on earth or in heaven, in concept or practicality, for homosexuality as an essential characteristic and same-sex couples as married.

The 2015 Mormon answer is to expel same-sex couples. Exclude them from the community. For same-sex couples the state of marriage is so antithetical to the Mormon imagination that it is apostate by definition, apostate not for belief or teaching or action, but apostate by simply being. Although the church would never say in so many words, I think it is no exaggeration to say that for the Mormon Church a married same-sex couple is a living contradiction, an embodied offense [10].  

And yet they are my brother, my uncle, my friend, my neighbor. They are me, in every way that matters. How can we possibly square this with the command “You shall love your neighbor as yourself”? (Matthew 22:29, RSV)

So I am angry [11].

Then there’s the children.

The situation for my married gay friends makes me cry. And then there’s the children. Children of gay parents are denied saving ordinances. For no fault of their own, in a church that believes it is one’s own sins that count. This is very difficult to rationalize, to make sense of, to feel anything but despair or anger about. In the first few days after the new policies became known, with regard to the parents, the same-sex couples, I heard a lot of anger but also despair and resigned acceptance, a reluctant “to be expected” reaction. About the children, I heard rage.

The official explanation regarding children is that the ordinances are not denied but only delayed (“there is time for that”, “nothing is lost in the end”), and that separation from the Church in their minority is for the benefit of the children, to minimize conflict, to protect them.

Many observers, Mormon and non-Mormon, conservative and liberal, advocates and critics alike, find the “benefit of the children” explanation unpersuasive or at least incomplete. There are many family situations, including divorce and remarriage (male-female marriage), member/non-member/part-member parents, believers and unbelievers, even excommunicated (for other reasons) parent or parents, where Church policies take no notice in determining how children are respected and included. All this even though the “benefit of the children” rationale would ring just the same. There are only two situations where children are affected by their parents’ status: children of polygamous parents and children of same-sex parents. Both involve marriage that is forbidden by or antithetical to the (current) Mormon church. In both the children are treated differently because of their parents’ status. The disease rationale, the sense of the Church avoiding infection, comes all too easily to mind.

How is this possible, in light of Jesus’ words: “Let the children come to me, and do not hinder them; for to such belongs the kingdom of heaven”? (Matthew 19:14, RSV)

What to do about it?

What should the church do? My first thought is that nothing I say or write will make the least bit of difference. The end.

My second thought (logically inconsistent with the first) is to address the Church: “Please don’t.” “Please stop.” “Please change.”  

My third attempt is to look for something that could really happen in the near term. And there I really do have an incrementalist prescription.

First, with respect to the children, let it go, if necessary by indirection. It may be too difficult as an institutional matter to explicitly reverse ground. The Church seldom apologizes or changes tack quickly. Acknowledged change happens, but at the pace not of months or years, but of generations. However, quiet change happens routinely, sometimes just by changing emphasis. With respect to the children of gay parents, this has already started by way of a November 13 letter from the First Presidency that limited the scope of limitations on children and allowed for local discretion in some circumstances. With modest modifications, smart training, selective emphasis, and local discretion, it is very possible to get to a point where the offending language remains as official policy but instances of actual offense are rare and reversible.

I would find that embarrassing, but in a realpolitik sense it may be the best we can do.

With respect to gay members who marry, I have two directions to suggest. First, in the near term, apostasy usually but not always ends in excommunication. Emphasis on the “not always.” It is possible to reason that excommunication should be used only when the couple is causing trouble, which arguably is only when the couple is noisy, actively teaching or speaking against the Church. And not when they are simply being themselves. I have no doubt that many local congregations and bishops feel that way already. On a day-by-day, life in the pew, love thy neighbor sense, Mormons (as also most religious people) have a lot of experience and are pretty good at welcoming all kinds of quiet radicals.

Second, in the middle term (and short of revelatory change in doctrine) the Church could make good use of its general approach to exceptions and variety. The Mormon imagination I outline above doesn’t really have room for single adults. It doesn’t really have room for divorce. It doesn’t really have room for complicated patterns of marriage-divorce-remarriage where a child might find herself with several sets of parents. And yet we find a way. A dash of humility, a pinch of “God will provide,” a sprinkling of “it will work out in the end,” a heaping spoonful of grace, and life goes on. There is no slippery slope. No rush to general application. Notwithstanding the headline news of 2015, marriages of same-sex couples will forever be extraordinary—very small in numbers and vitally important for the few. Just the right situation for quiet exceptions, even if never fully rationalized.

In sum, what I would do is celebrate marriage and don’t ask too many questions. Worship a God who encompasses all of creation in all of its endless variety.

Footnotes

  1. Anger is mine. This entire essay is personal—an “as I view it” and “why I am angry” essay. I am not channeling anybody else.
  2. I try to use "marriage” consistently, not “same-sex marriage” or “gay marriage.” Significant litigation and legislation has occurred around the idea of same sex couples being allowed to marry and regarded as married under the law. It is important that “marriage” is not a separate or second class, but marriage the same for everyone. “Same-sex marriage” does not exist in any jurisdiction that I know about. Only marriage. Also, to use the SSM phrase, in some hands, is a political gesture, an attempt to re-argue cases that have been decided, or treat them as still open questions.
  3.  In discussing Mormonism I am using an “in the pew" version of Mormonism—call it Mormon “talk” as opposed to Mormon “doctrine.” I am no expert in Mormon doctrine. I do claim 60 years (personally) and five generations (family history) of Mormon experience and about as much expertise as anybody in how Mormons talk.   
  4. See Grant Hardy’s “Rifts in the Mormon Family: What Just Happened?” for an excellent description of what happened and how people reacted, posted on the University of Chicago Divinity School web site, by Grant Hardy.   
  5. The policy with respect to children is complicated, has already been revised once, and is subject to discretion and case-by-case judgment at several critical points. These variations are important and a proper subject for a much longer piece.   
  6. I am not aware of any suicide linked to the new policies, but it has been reported that calls to suicide prevention hotlines spiked and people in the know are keeping watch and worrying.
  7. I can’t afford to stop at every point where my beliefs are different, but I have to break out in a few places and this is one of them. I think this is a seriously deficient view of god, and in its limitations even as metaphor is a source of misunderstanding, disagreement, and trouble for Mormonism. But my opinion here is definitely not “in the pew” Mormonism. 
  8.  I cannot time this very well. My own thoughts and understanding date to 40 years ago in a relatively unexamined 'this is the truth about my gay friends’ sense, and to 20 years ago in a more carefully examined 'this is the way the world works’ sense. By contrast, it is only in the past couple of years that I have heard gay Mormons say things like 'my sexuality is part of my identity, and I expect to be gay in the resurrection’, and have heard straight conservative Mormons expressly react to and resist such thoughts.  
  9. With apologies to my never married or not-now-married Mormon friends. I know there is more to this, but I don’t have a softer version at the “in the pew” level of Mormon talk.
  10.  It literally makes me nauseous to write these words. My wife describes me this way:
  11. And my husband
  12. Curls and cries,
  13. Grief in his beard,
  14. With groans
  15. too deep for words.
  16. What I’m going to do about it is the subject of thought and prayer, but not here.  
  17. My anger has been festering for 20 years now, since the mid-1990s when I started to see all of this coming at least in broad outline. Unfortunately, the current state of affairs is worse than my worst fears (the children!).

Note: Every other week this blog has a religion post. You can see them all in the “Religion, Philosophy, Humanities and Science” sub-blog.

Alex Rosenberg Interviews Miles Kimball on the Responsiveness of Monetary Policy to New Information

Link to Alex Rosenberg’s “Beyond the first hike: Fed’s pace is unknown”

CNBC’s Alex Rosenberg interviewed me on the phone last week about how the Fed should approach its moves beyond the first interest rate hike. In advance of our conversation, I pointed him to my tweet saying

Fed should not raise rates until it explicitly commits to reverse course quickly if needed.

and my post Larry Summers: The Fed Looks Set to Make a Dangerous Mistake by Raising Rates this Year where I wrote:

In addition to Larry Summers’ arguments for holding off on raising rates, I have a conceptually quite distinct argument: the Fed can afford to wait to raise rates, because it can always raise rates very fast if it needs to later on.

Contrary to what optimal control models suggest, monetary policy committees around the world tend to believe the fallacy that (although events can sometimes overrule this) it is a good thing to raise and lower rates slowly. This belief shows up as policy rate movements being predictably in one direction for a long time, with small steps along the way. Optimal control models suggest that instead a policy rate should look a lot more like a random walk modified by some drift and mean reversion. That means that optimal monetary policy should have lots of reversals and dramatic movements in the interest rate when there has been relatively big news since the last meeting.

Let me address one myth: that Mike Woodford has shown that interest-rate smoothing makes sense. I would be glad to be corrected, but I think this myth arises because Mike talked about the Fed carrying about affecting the bond markets (and more generally macroeconomic) expectations of future rates. Just as backward-looking state variables have forward-looking costate variables, bond market expectations are like a forward-looking state variable for the Fed; those bond market expectations have a corresponding backward-looking costate variable.

As an analogy, in working toward my dissertation, I did an unpublished efficiency-wage model (which you can see and freely download here) in which, to motivate workers with an expectation of future pay making a job valuable, there is a backward-looking costate variable that can be interpreted as “seniority.”

Such backward-looking costate variables giving guidance about doing the right thing in relation to bond-market expectations contribute additional drift terms to the optimal policy rate, but it still seems to me that over a six-week span of time between FOMC meetings, the variance of news is sufficient that the effect of news should typically be substantially larger than the sum of all drift terms on the policy rate. Hence the metaphor of a muddy random walk.

In our conversation, I emphasized that the responsiveness of the Fed’s interest rate target to news–“data dependence”–should go in both directions. I can easily imagine both events that would indicate the target rate should be raised fast, and events that would indicate that the target rate should be cut significantly–whatever direction the Fed had gone at the last meeting. (As an example of why the Fed might need to cut rates, I pointed to the possibility that a big cut in the European Central Bank’s target rate–which would be the right thing for the European Central Bank to do–might cause a significant appreciation in the US dollar, reducing the contribution of net exports to US aggregate demand.) 

I explicitly criticized the inhibition by many central banks against reversing direction, even if incoming data calls for doing so. I also suggested that, overall, being willing to make larger, faster moves in the target rate would make it possible to close output gaps quicker–whether the output gap is negative or positive.  

I recommend that you read the whole article for context, but here is how Alex boiled down our conversation (I corrected the spelling of the adjective “dependent”):

For University of Michigan economist Miles Kimball, the fact that hawks and doves have become divided on the question of data dependency — with the former swearing their allegiance to the data, and the latter emphasizing the psychology of market participants — is unfortunate.

“You do want to be data-dependent, but you want to be data-dependent in both directions,” Kimball said in a Friday interview with CNBC. “No one is mentioning the possibility that if the economy ends up doing worse, that the Fed can reverse course.”

In other words, the Fed has the flexibility to cut rates after it has raised them (or in a reverse situation, raise after it has cut them). That would be in stark contrast to the “path” model currently in force, under which the first rate hike begins a one-way path to further hikes, with the only real question being the pace of such hikes.

“The nature of news is that news is bad about as often as it is good. If you’re really and truly data-dependent, it shouldn’t be a shocking thing if you make your target rate go up by a quarter point and then at the next meeting, if bad news comes, cut it back down,” Kimball said. “We’d have better policy if we made interest rates more sensitive to data.”

It looks as if Alex talked to Robert Murphy after he talked to me. Robert said 

… there is a view that it’s not the movement in the rate today that really matters; it’s the long-term path for where we see rates going.

Here it is quite important to point out that models that have only nondurables give the misleading impression that only medium-to-long-term rates matters for aggregate demand. Once investment goods and consumer durables are brought in, the short-term interest rate has a separate effect. The reason is that an optimizing decision to buy a durable or investment good must pass two tests:

  1. The net present value test, which depends on an interest rate over the life of the durable or investment good.
  2. The Dale Jorgenson delay condition test–“Would it be better to wait to buy the durable or investment good later?”–which depends on the short-term interest rate. (I discuss the importance of this condition in “The Medium-Run Natural Interest Rate and the Short-Run Natural Interest Rate” and “On the Great Recession.”

Because of the delay condition, the current level of the short-term rate is more important than economists whose intuition has been formed by models of optimal monetary policy with only nondurable consumption might realize. 

“It is beyond serious doubt that conscious experience is wholly a matter of brain activity, but this doesn’t show us that we don’t know what consciousness is. It shows us that we don’t know what matter is. The hard problem is the problem of matter. Matter is even more extraordinary than we thought, as physicists have been demonstrating for a long time.”

– Galen Strawson in a letter to the Economist, October 3, 2015, p. 20. Note: You can see my interest in this topic in my sermon “The Mystery of Consciousness."

US Law for the Tussle Between Different Modes of Payment

Customer choices between different modes of payment (paper currency, check, credit card, debit card, etc).–and what retailers do in relation to those choices– are important for understanding the effects of paper currency policies intended to enable deep negative interest rates when deep negative interest rates are called for. So it is worth knowing the law that applies to merchants trying to influence the mode of payment a customer uses among the modes of payment the merchant accepts. 

In part because my wife only recently retired as a massage therapist, our household received many copies of a notice from American Express, dated October 7, 2015 saying something quite interesting. I quote:

A federal court has ruled that American Express violated the law by prohibiting merchants from influencing the payment form that their customers use. As a result of that ruling, you may now favor any credit card brand that you wish, by, for example, communicating to customers which credit card brand you would prefer that they use, telling customers which credit card grands are the most or least expensive for you, or offering discounts or incentives to customers to use the credit card grand you prefer. Consistent with the federal court’s ruling, you may not, however, disparage or mischaracterize the American Express brand or impose a surcharge (as opposed to a discount) on customers who use an American Express credit card. 

To influence the credit card that a customer uses, you may employ any of the practices listed in Secton III.A of the court’s order, including:

  • Offering a discount or rebate, including an immediate discount or rebate at the point of sale;
  • Offering a free or discounted product;
  • Offering a free or discounted service;
  • Offering an incentive, encouragement, or benefit;
  • Expressing a preference for a particular brand or type of card;
  • Promoting a particular brand or type of card through posted information, through the size, prominence, or sequencing of payment choices, or through other communications to the customer; 
  • Engaging in any other practices substantially equivalent to these.

To review all of the applicable terms and conditions, please refer to the court’s order, a copy of which may be found at [this link]. …

If you choose to attempt to influence a customer’s choice of credit or charge card, you must reasonably indicate that you accept American Express Cards by posting signage, either at the point of sale (including online or on mobile services) or at the store entry, or by communicating orally that you accept the American Express Card prior to the request for authorization of the transaction. For example, you may satisfy this requirement by displaying a sticker at the point of sale or at the store entrance indicating all brands you accept that includes the American Express log. …

To the extent that your Card acceptance contract, or other agreement that governs your acceptance of American Express Cards, contains provisions that are inconsistent with the federal court’s ruling, American Express will not enforce those provisions. 

American Express is presently appealing the federal court’s ruling. If the federal court’s ruling is reversed or modified as a result of the appeal, American Express reserves all rights to cancel or revise these modifications.

How and Why to Expand the Nonprofit Sector as a Partial Alternative to Government: A Reader’s Guide

The unavoidable urgency of a campaign to eliminate the zero lower bound that I wrote about in my 3d anniversary post “Beacons” has taken me away from campaigning for another proposal that is closer to the heart of what it means to be a Supply-Side Liberal: my proposal of a “public contribution program.” Once the campaign to eliminate the zero lower bound is won, I hope to devote more energy to campaigning for a public contribution program. 

A public contribution program requires donations to charity in place of higher taxes–or if what needed to be done were less expensive–allowed tax reductions accompanied by required donations. The basic logic is that, in areas where it is possible, public goods should be provided by the nonprofit sector rather than government, with government’s role in those areas being pared back to making sure that people direct enough resources toward that provision of public goods by the nonprofit sector. Or as I wrote in The Red Banker on Supply-Side Liberalism:

… my central proposal for keeping the burden of taxation down while providing abundant public goods: a public contribution system that raises taxes rates, but lets people avoid 100% of the extra taxes by making charitable donations focused on doing things the government might otherwise have to do. …

In my book, it isn’t Supply-Side Liberalism without a serious effort to lower the burden of taxation for any given level of revenue, using everything we know about human nature.

For some time, I have hoped to have a post like this, parallel to my post “How and Why to Eliminate the Zero Lower Bound: A Reader’s Guide.” What finally helped me get this done was coming across a passage from John Stuart Mill’s On Liberty discussing the nonprofit sector. That passage is the grand finale of this post. 

I can think of six basic arguments for preferring nonprofit sector action to government action in many areas:

  1. Because the nonprofit sector is more decentralized, it involves a more diverse body of key decision-makers and so can be more creative than government.

  2. In the nonprofit sector, it is easier to sunset programs that don’t work well than in government; people can stop donating to them.

  3. Nonprofit sector provision of public goods tends to be cheaper since wages in the nonprofit sector tend to be lower than in the private for-profit sector, while (except for the high-end of those qualified to be highly-skilled professionals) typical government wages tend to be higher than in the private for-profit sector. 

  4. Even if giving to some charity is required, giving to a charity of one’s choice is much more fun than forking over taxes to the government. Therefore, people will distort their behavior less to avoid required charitable donations than they would to avoid taxes.

  5. Through cognitive dissonance, many who are required to give to charities will end up thinking of themselves as more altruistic and end up actually becoming more altruistic (including for many donating time as well as money to a charity). This tendency will be reinforced by discussing with friends what charity to give to. And children will be brought up surrounded by a culture of giving. 

  6. Thinking about which charity to give to will help educate people about the issues surrounding public good provision.  

John Stuart Mill argues especially for 1 and 6. I would be glad to hear any other arguments. In all of this, it is important to recognize that the nonprofit sector is far from perfect. But fortunately, we have a lot of experience with government regulation of the nonprofit sector to keep things from going too far off track.  

The most common argument against I have run into is that the priorities set by a democratic process are (a) better and (b) more legitimate than the priorities individuals would choose if required to give to a charitable purpose.

On the quality of priorities set by these two democratic vs. democratic mechanisms, I think the story is complex. A public contribution program is likely to increase support for scientific research and foreign aid compared to democratic decisions in the US. On the other hand, I think democratic decisions in the US now do a better job of putting the appropriate priority on national defense and aid to disadvantaged minorities. Both democratic decisions and a public contribution program would put a high priority on taking care of senior citizens. Continuing to have a substantial government budget as now plus a public contribution programs seems likely to do the best job at taking care of the full range of key public goods. Remember also that the details of regulation for the public contribution program can incorporate input from democratic decision-making. For example, perhaps opera houses that mostly serve the rich should not be eligible for public contributions. This decision of eligibility of opera houses for public contributions would be made by the usual imperfect democratic processes. 

On legitimacy, I don't see why a mixed system involving some collective decision-making and some individual choice should be inherently less legitimate than a system that relies more heavily on collective decision-making. 

The Core Argument

The core argument for public contribution program can be found in these three posts:

Additional Arguments

Video

Twitter Discussions

Brief Appeals for Relying More Heavily on the Nonprofit Sector Relative to Government, Short Enough to Copy Out Here

The quotation from John Stuart Mill is the grand finale here. The others are from me. I give the name and link to the post they are drawn from first, then the quotation.

Speaking of decentralization, some government functions (such as taking care of the poor) might be better served if they could be decentralized to nonprofit organizations. In particular, such decentralization allows a trial and error process to work its magic as donations shift away from the least effective nonprofits to more effective nonprofits. Because people love freedom, such decentralization of certain government functions has other advantages as well, as I argue in my post “No Tax Increase Without Recompense.” In that post, I propose a way to make sure such nonprofit efforts are adequately funded.

Growing up, I was often told “You love those whom you serve.”  That is a true principle of psychology. If you help someone out without too much of an ulterior motive, parts of your brain outside the localized glow of consciousness start trying to make sense of why you are being so nice. A handy explanation for your subconscious to turn to is that whoever it is means something to you. And this process of what in economists’ jargon would be called “developing a new altruistic link” works even if you know full well that it is happening. I remember when bargaining with the head of my department over the terms on which I would serve (a now completed term) as director of our Masters of Applied Economics program knowing that I had to be ready for a situation in which I would come to care about those students, even though I didn’t know them yet.

Community and religious organizations that get people involved in helping others—especially when they get people involved in helping others who are in especially bad situations—do a lot to help generate new altruistic links that make the world a fairer, more benevolent place in ways that come easily to us, psychologically, after getting over the initial hump of dealing with someone new. Strangers become friends. And our friends’ problems become our own.

Even government policy can help. Paying taxes does very little toward making us care about those who are helped from those tax revenues. But if, instead of raising taxes, we insisted that those who are comfortable contribute a substantial amount to a charity of their choice, as I advocated in my column “Yes, there is an alternative to austerity versus spending: Reinvigorate America’s nonprofits,” we would care more. And caring more, we would be likely to volunteer our time as well as giving money. And best of all, our children would see us helping other people’s children, and learn early on that loving others—even beyond our own families—is what brings us to the highest level of our own humanity.

One key to sustainably getting resources for helping the poor is to do it in a way that causes the fewest economic distortions. In addition to focusing on the right kinds of taxes, to the extent that there must be taxes, I believe that there is great potential in the kind of public contribution system that I talk about in the links in my post “The Red Banker on Supply-Side Liberalism.“ People often hate taxes, so they try to avoid them. Those efforts at tax avoidance are a social waste. So it makes sense to get many of the resources for helping the poor from public contributions that people won’t want to avoid as much as taxes, and that allow those contributing to be creative in making the world a better place. The creativity and flexibility fostered by a public contribution system are also bound to lead to technological progress in ways to help the poor.

For the record, my proposal for dealing with the long-run budget issues that are the heart of the disagreements between Republicans and Democrats is the system of “public contributions” laid out in my post “No Tax Increase Without Recompense.” This public contribution system would help make sure that the poor and afflicted are taken care of while reducing the footprint of the government in society.

[The] public contribution program will do a lot more to take care of the poor and the sick and to honor the elderly than we do now. [We] just need to be careful not to cut back on direct government programs until we are really confident that the decentralized efforts from the public contribution program are taking care of things in specific areas. 

We should start preparing for a day, maybe 10 or 20 years in the future, when inequality may be much worse. We don't yet know whether it's going to be worse. We should have a contingency plan now. ...

Q: So we'd have a tax increase on wealthier people that would go into effect if some measure of inequality reached a certain point?

A: Yes. If billionaires turn into multi-billionaires, we don't let that happen. If you want to make $10 billion and spend it on yourself, we won't let you. We will take a good fraction of it, and you'll still be a billionaire, so what?

The other side of it is I think we should expand the charitable deduction, so if you make $10 billion and you want to give 90 percent of it away, you can give it away with your name on it so it enhances your prestige, but give it away and you should be able to deduct it.

Q: So we would more aggressively redistribute income from the top?

A: From selfish people at the top who don't want to give it away. You could turn into Bill Gates or an Andrew Carnegie. I think that's OK. Instead of just taxing people—saying, "We're just taking the money, and you'll go to jail if you don't turn it over"—we can find a better way.

I have reserved for the last place a large class of questions respecting the limits of government interference, which, though closely connected with the subject of this Essay, do not, in strictness, belong to it. These are cases in which the reasons against interference do not turn upon the principle of liberty: the question is not about restraining the actions of individuals, but about helping them: it is asked whether the government should do, or cause to be done, something for their benefit, instead of leaving it to be done by themselves, individually, or in voluntary combination.

The objections to government interference, when it is not such as to involve infringement of liberty, may be of three kinds.

The first is, when the thing to be done is likely to be better done by individuals than by the government. Speaking generally, there is no one so fit to conduct any business, or to determine how or by whom it shall be conducted, as those who are personally interested in it. This principle condemns the interferences, once so common, of the legislature, or the officers of government, with the ordinary processes of industry. But this part of the subject has been sufficiently enlarged upon by political economists, and is not particularly related to the principles of this Essay.

The second objection is more nearly allied to our subject. In many cases, though individuals may not do the particular thing so well, on the average, as the officers of government, it is nevertheless desirable that it should be done by them, rather than by the government, as a means to their own mental education—a mode of strengthening their active faculties, exercising their judgment, and giving them a familiar knowledge of the subjects with which they are thus left to deal. This is a principal, though not the sole, recommendation of jury trial (in cases not political); of free and popular local and municipal institutions; of the conduct of industrial and philanthropic enterprises by voluntary associations. These are not questions of liberty, and are connected with that subject only by remote tendencies; but they are questions of development. It belongs to a different occasion from the present to dwell on these things as parts of national education; as being, in truth, the peculiar training of a citizen, the practical part of the political education of a free people, taking them out of the narrow circle of personal and family selfishness, and accustoming them to the comprehension of joint interests, the management of joint concerns—habituating them to act from public or semi-public motives, and guide their conduct by aims which unite instead of isolating them from one another. Without these habits and powers, a free constitution can neither be worked nor preserved; as is exemplified by the too-often transitory nature of political freedom in countries where it does not rest upon a sufficient basis of local liberties. The management of purely local business by the localities, and of the great enterprises of industry by the union of those who voluntarily supply the pecuniary means, is further recommended by all the advantages which have been set forth in this Essay as belonging to individuality of development, and diversity of modes of action. Government operations tend to be everywhere alike. With individuals and voluntary associations, on the contrary, there are varied experiments, and endless diversity of experience. What the State can usefully do, is to make itself a central depository, and active circulator and diffuser, of the experience resulting from many trials. Its business is to enable each experimentalist to benefit by the experiments of others; instead of tolerating no experiments but its own.

Update: This post engendered a lively Facebook discussion, which you can see here. 

Cass Sunstein on the Rule of Law

In the Obama administration, Cass Sunstein tried with mixed success to restrain the overgrowth of administrative law–an overgrowth that has long since seriously violated “rule of law” principles. In his Bloomberg View column “The Rule of Law Wins One for Tom Brady,” Cass explains what the “rule of law” means, with an application to football’s “Deflategate.” Here is the key paragraph, with numbering added to Cass’s words:

“Many people think that the concept has to do with democracy or liberty, or that it requires free markets. But it’s much narrower than that. Reduced to its essentials, the rule of law has just two components.

1. First, the law involved has to be clear and comprehensible, so that people can know, in advance, on what grounds they might be punished.
2. Second, people generally have a right to be heard, and that requires notice of the charges against them, and a fair opportunity to rebut those charges before an unbiased tribunal.”

Mike Bird on Negative Interest Rate Policy | Business Insider

Link to the article on Business Insider

Despite an inflammatory picture and title, Mike Bird’s November 4, 2015 Business Insider article “This is how a central bank could kill off cash and bring in negative interest rates on your savings” is an excellent treatment of negative interest rate policy. Mike discusses at length my new paper “Negative Interest Rate Policy as Conventional Monetary Policy,” and provides helpful context.

Here are the two passages giving Mike’s assessment of the future for negative interest rate policy:

Since the financial crisis, the world’s understanding of economics has been undergoing a lot of rapid change.

Ideas that would have been considered crazy just a decade ago are now seen as much more likely.

One of those ideas is that central banks could bring in negative interest rates. 

However uncomfortable you are with the idea, you’d better get used to it. What HSBC chief economist Stephen King called the world economy’s “Titanic” problem is going to put governments around the world in a massive bind whenever the next recession hits.

Every lever of economic policy is pretty much tapped out, either for economic or political reasons: Finance departments and heads of government seem strongly against fiscal stimulus. Quantitative easing has been fairly unpopular, and its reputation among academics and economists is mixed at best.

In short, the world’s economy is an ocean liner, and there aren’t enough lifeboats. Despite objections, it may well be that negative interest rates are the path of least resistance.

Paul Taylor and Balazs Koranyi: ECB Rate Setters Converge on December Deposit Rate Cut →

Here is the most interesting quotation from this Reuters article:

Another Governing Council member also argued for a bigger deposit rate cut, saying it could go from -0.20 percent to -0.50 percent or even -0.70 percent after the Danish and Swiss examples.

The rate setter said that “zero lower bound”, a term meaning the bottom for interest rates, either “no longer exists, or if it does it is well below zero”.

Patrick Goodney: Peak Car is Near, But Not Yet

Despite some contemporary discussion, the U.S. car industry hasn’t reached its peak yet, but it’s not too far out from doing so either.

I am pleased to host another student guest post, this time by Patrick Goodney. This is the 12th student guest post this semester. You can see all the student guest posts from my “Monetary and Financial Theory” class at this link. This is the second student guest post by Patrick. His first was “The Fed Should Raise Its Target Rate Before the End of 2015.” I was impressed with how judicious both that post and this one are. 

Has the traditional car industry already reached its peak? In July, futurist Thomas Frey argued the U.S. had indeed already reached “peak car”—writing that vehicle ownership, driving and sales are all growing at slower and slower rates.

Frey says the turning point for the car industry was a major shift in American lifestyles spurred by “the perfect storm” of “economic collapse, digital revolution, and major shifts in urban lifestyles.” Ride-sharing startups like Uber and Lyft, as well as the emergence of electric cars and the promise of driverless cars are all leading a shift in consumer’s preferences—and Frey says this is represented in data by the deceleration of auto sales and of driving. Frey says America is already at “peak car,” at that the rest of the world is only a few years away. But are these projections reasonable?

Mark Mills argued in The Wall Street Journal in early October that Frey’s prediction is miscalculated (in a piece aptly titled “We’re a Long Way From ‘Peak Car’”). Mills says of Frey’s theory: “The idea may seem plausible given recent history: tepid new-car sales, fewer miles driven per capita and shrinking gasoline use. In reality, it’s poppycock: The car habits of young adults ages 18–33 simply reflected a lack of jobs and money.”

Mills says millennials are moving to the suburbs, and indeed, are “the fastest growing class of car buyers.” As well, Mills points to the fact that sales of electric cars are down one fifth to help illustrate the uncertain promise of future vehicles. Whereas Frey sees car ownership in the future as “relegated to the hobbyist, luxury market, much like owning airplanes or horses today,” Mills does not see the individual need for car ownership ever fading. Driverless cars will see as much demand as human-driven cars, he says, writing “whether a human or an algorithm is driving, it’s still a car.” He sees the expanded appeal of driverless cars among traditionally excluded groups like the elderly and young as evidence that the industry will continue to grow with technology, not retract.

I, somewhat boringly, view the future of the car industry as a blend of both projections: we are not quite yet at peak car, but we are very much on our way.

I think it very premature for Frey to declare the car industry as peaked; although it is facing competition in the future from the proliferation of ride-sharing and autonomous cars, the technology and its adoption is still too far out for us to already be trending down.

Frey is arguing that we are at peak car because the rate at which car ownership is growing is decreasing; this is not to say that car ownership is decreasing yet. Until we’ve reached that point, I’ll remain skeptical to the claim that the car is fading. Lower rates of ownership growth can be due to many things besides shifts to alternative transportation, anyways (lower birth rates among them).

As far as ride-sharing businesses like Uber and Lyft go, they still have a ways to go before disrupting the car industry. The businesses are young so far. It’s naïve to think many people are swapping car ownership or planned car ownership for ride-sharing at this point in time. If you live in a market where Uber is available and popular, you may think that Uber is more successful than it is. But, you can only use Uber in just over 300 cities worldwide so far (in 64 countries). So, ride-sharing is nowhere near a ubiquitous part of American life yet. There’s no coverage for most of the US. Ride-sharing’s market is very niche, but should continue to grow with time, if legal hurdles do not prove too overwhelming. (Lawmakers are consistently looking to put snags in ride-sharing’s rise.)

Perhaps the most credible threat for disrupting the auto industry is electric self-driving cars. According to a piece in The Economist, “An OECD study modelling the use of self-driving cars in Lisbon found that shared “taxibots” could reduce the number of cars needed by 80-90%… one extra car in a car-sharing service typically takes 9–13 cars off the road.” The huge reduction in the number of cars on the road promised by autonomous vehicles will surely be the undoing of the modern car industry. But still, the technology (and the road to legality) is quite a bit away from 2015.

I feel Frey’s views that driverless technology and ride-sharing will reduce the need for car ownership in the future is spot-on; however, his timeframe seems a little off. he new technologies are too far out yet to say cars have peaked today. Ride-sharing and the distant promise of driverless technology is not affecting today’s demand for cars in any meaningful way—Mills is wise in blaming the temporary decline to millennials’ lack of access to jobs and money. When future technology actually catches up with consumer demand, we will finally have reached “peak car.” I would say that we’re still at least five years out yet.

Ride-sharing’s impact will only snowball over the next five years. I imagine ride-sharing programs will be available in many, many more cities by 2020 and perhaps there will be ideas we haven’t seen yet born from the tech industry for transportation. Self-driving cars have a lot of promise for slowing down the consumption of cars and are increasingly attracting investment, so I see no reason not to think people will start believing in them as a viable alternative to traditional driving in around five years. Companies such as Apple are shooting for 2019 for releasing self-driving electric cars, according to The Wall Street Journal, so seeing car-buying trends change in around 2020 seems like a reasonable prediction. Between ride-sharing and autonomous cars, the traditional auto industry is bound to slow down in the next five to ten years.

The Mormon Church Decides to Treat Gay Marriage as Rebellion on a Par with Polygamy

I had relatives on both sides of the struggle over whether to continue polygamy within Mormonism. My grandfather, Spencer Woolley Kimball, was the head of the Mormon Church from 1973-1985. One of his first cousins was Lorin Calvin Woolley, who said he had been set apart by the 3d President of the Mormon Church, John Taylor, to keep plural marriage alive if ever the Mormon Church had to distance itself from polygamy. Lorin died in 1934. J. Reuben Clark, the son of Mary Louisa Woolley Clark, was another cousin. In 1934, J. Reuben Clark was called to serve in the First Presidency of the Mormon Church (the top 3 leaders) until his death in 1961. J. Reuben Clark pushed for strict measures against those who wanted to continue plural marriage despite official Mormon Church policy to the contrary.

Mormon policies to root out polygamy have now been extended to cover gay marriage as well. Laurie Goldstein explains the new policy in the November 6, 2015 New York Times article “Mormon Church Bars Same-Sex Couples and Their Children”:

Children of same-sex couples will not be able to join the Mormon Church until they turn 18 — and only if they move out of their parents’ homes, disavow all same-sex relationships and receive approval from the church’s top leadership as part of a new policy adopted by the Church of Jesus Christ of Latter-day Saints.

In addition, Mormons in same-sex marriages will be considered apostates and subject to excommunication, a more rigid approach than the church has taken in the past.

Also, incredibly, for gays, sex within marriage is effectively considered a worse sin than sex outside of marriage (which is a sin for all Mormons). As Laurie Goldstein explains it:

The handbook had already explained that a disciplinary council “may be necessary” for Mormons who engaged in “homosexual relations.” The new policy said a disciplinary council was “mandatory” for Mormons in “same-gender” marriages and “may be necessary” for same-sex couples who are cohabiting but not married.

My interpretation is that gay marriage is seen as rebellion–a challenge to the institution of the Church itself. Calling married Mormon gays “apostates” is consistent with that interpretation. 

This treatment of married Mormon gays is similar to the Mormon Church’s treatment of polygamists. I am not the only one to make that connection. Matt Canham, in his November 6, 2015 Salt Lake Tribune article “New Mormon policy on gay families is dividing even the faithful; church clarifies stance” quotes a former public relations employee of the Mormon Church, Stuart Reid as follows:

“These are the times when people in the church are confronted with the choice of being politically correct or being prophetically correct,” he said Friday. “In other words, they have to choose where they stand and what they are going to support going forward.”

Reid, a former Utah lawmaker, has been an outspoken opponent of same-sex marriage and any movement toward the faith’s acceptance of these now-legal unions. He supports LDS leaders equating gay marriage with apostasy, an offense triggering disciplinary hearings and possible excommunications, and sees it as a step toward consistency.

“They are treating this,” he said, “exactly like they are treating polygamist marriages and the children from polygamist marriages.”

As a nonsupernaturalist outsider to the Mormon Church, with much affection for the Church and its members given my Mormon past–including the gay members who will suffer pain because of this tightening of policy–let me freely give my own advice to Mormon Church leaders–or if God exists and speaks to Mormon Church leaders, let me plead with God as Abraham and Moses pleaded with God on many occasions.

Because plural marriage was so important in 19th century Mormonism, those who strove to continue plural marriage after the main Mormon Church based in Salt Lake City renounced it really were a serious challenge to the Mormon Church as an institution. Rooting out polygamists, while not pretty, may have been necessary for the Church institutionally given the lingering attraction of plural marriage to many Mormons who have been taught that it was God’s will in the 19th century and only discontinued because it was illegal. 

By contrast, gay marriage is not something likely to have any personal appeal or special theological attraction to non-gay members of the Mormon Church. Gay marriage is not a threat to the Church as an institution. Because the Mormon Church already distinguishes so carefully between marriage in a Mormon temple and civil marriage, the Mormon Church could simply say that gay marriage had no religious significance, and that the church would disregard any gay marriage as if it hadn’t happened. Of course, in practice, this would allow local bishops–at their discretion–to treat sex within a gay civil marriage more leniently than sex outside of any marriage.  

There is one other issue I need to address. To have enough vigor to attract new converts and grow fast, a religion needs some sacrifice or stigma to set apart those within the religion from those outside. So if not hardcore opposition to gay marriage, what can the sacrifice be (beyond avoidance of alcohol and coffee and volunteer church service) to create a big difference between Mormons and non-Mormons? Sadly, the answer is easy: a reemphasis on strict and full honesty in all one’s speech and actions can set Mormons apart. 

Such a reemphasis on full and complete honesty by the Mormon Church could fulfill the prophecy that Mormon elders will save the Constitution of the United States when it is hanging by a thread (see 1 and 2). I worry that the fabric of our republic is being frayed by those who twist facts for partisan advantage of one kind or another. If no one can be trusted to tell the truth, how can we make things work? Mormons wouldn’t be the only ones who would tell the truth, but things may come to such a pass that if the Mormon Church reemphasizes total and full honesty in all circumstances, Mormons might at some point represent a shockingly high fraction of those who can be trusted to tell the truth, regardless of partisan advantage or disadvantage.

Mehul Gaur: India Should Follow Guatemala’s Lead in Getting International Help to Fight Corruption

I am delighted to host another student guest post, this time by Mehul Gaur. This is the 11th student guest post of this semester. You can see all the student guest posts from my “Monetary and Financial Theory” class at this link. This is the second student guest post by Mehul. His first was “Bernie Sanders’s Financial Transactions Tax is a Bad Idea.”

One of my parents’ favorite pastimes is to sit around and discuss how to fix the widespread (to say the least) corruption problem in India. They begin by discussing some recent corruption-related news story and invariably conclude that is impossible to solve because of how much corruption is integrated with daily life. The problem is so endemic in India that a study in 2013 by Transparency International found that 62% of Indian households reported paying a bribe to the police and 36% reported paying a bribe to the judiciary in the last 12 months. How can one expect a country to clean up its corruption, if the primary means of enforcement can be bought? Some might say that the change can be initiated by the top government officials, but political parties are considered the most corrupt organizations in India with 86% of respondents to the 2013 Transparency International study saying that political parties are corrupt/extremely corrupt. It’s a real issue and one that has recently come into the spotlight because of the slowing Indian economy. Much like my parents, I always thought that there was no solution, with the exception of total revolution.

This all changed when I read a recent Wall Street Journal article regarding Guatemala’s efforts against corruption. 8 years ago, the government of Guatemala gave a UN-sponsored organization powers to launch criminal investigations, few believed it would be successful. Now, this organization has provided key evidence to put the president of the country, Otto Perez Molina, behind bars.

I believe India can follow Guatemala’s lead and implement a similar system to help cleanse itself of corruption. By introducing a third-party, India will be able to circumvent its corrupt police force and its corrupt judiciary system. Obviously, there are some major issues with this idea. First and foremost, if the government is actually as corrupt as it is believed to be, then they will not support the creation of this agency. That being said, I believe that there is enough public outcry against corruption that it would be political suicide to oppose such an agency. Next, there is the issue of how to prevent the agency from becoming corrupt. This is where the real genius behind Guatemala’s agency lies. Guatemala’s agency has experience staff that comes from different countries around the world. This makes influencing/corrupting them very difficult, as they have no ties to the country they are fighting corruption. Without this very important trait, the agency essentially is no different from the existing police or judiciary. Another potential issue that needs to be addressed is to not grant this third-party agency too much power. Although it should hold enough power to prosecute members of the government, it should not begin to replace the government. I believe the solution is to continuously evaluate the state of corruption in the country and increase/reduce the agency’s power accordingly. By having an agency that has no ties and is truly intent on solving the corruption issue, India can remove the massive capital outflows that occur as a result and develop with a much stronger economy.