Economists’ Next Big Idea: The “Invisible Foot” (?!?)

http://blogs.reuters.com/reihan-salam/2013/03/01/to-create-growth-unleash-the-invisible-foot/#comment-330

This is the 21st century.  An unmanned vehicle roams the Martian terrain, beaming back analyses of soil samples.  The human genome has been mapped, opening the door to incredible medical advances.  Human organs can be reproduced on a 3-D printer with ink of living stem cells.  We carry incredible computing and communication technology in our shirt pockets.  Physicists work on nano-structures and discover ever-smaller particles while unlocking the mysteries of the universe. 

Then there’s the pseudo-science of economics.  As central banks feverishly shovel money into the economy in a clumsy effort to fend off global economic collapse, economists grope in the dark to find explanations that fit their gilded 19th century theories.  The above-linked article by Reuters columnist and economist Reihan Salam reports on economists’ latest and greatest answer – the “Invisible Foot” – apparently the long-ignored but newly rediscovered and dusted-off counterpart to Adam Smith’s “invisible hand.” 

Can you believe this?  Here we are, in the 21st century, with the global economy collapsing all around us, and we’re talking about invisible hands and feet.  This is the best that the progeny of our best economics universities can come up with?  Invisible hands and feet?  It seems more suited to a Harry Potter movie than 21st century economic reality.  (Not that I’ve ever seen a Harry Potter move.)

The idea goes something like this:  as opposed to Adam Smith’s “invisible hand” of consumption driving economic growth, the “invisible foot” (brainchild of mid-20th century economist Joseph Berliner) aims to give productivity a swift kick in the pants.  Here’s how the author of the article explains it:

… This invisible foot of new competition is what drives incumbent firms to either step up their games ‑ a process that often involves burning through stockpiles of cash and shrinking profits ‑ or go out of business.

… Unfortunately, this reallocation of resources ‑ from inefficient incumbents to innovative upstarts and the incumbents that manage to keep up with them ‑ stops when incumbent firms succeed in erecting regulatory and legal barriers to shield themselves against competitors, which is why regulatory reform and patent reform are so important. It is also why we ought to take care not to give large incumbents any undue advantages in our tax code.

… the tax-deductibility of interest expenses and not dividends gives the entrenched corporate Goliaths that have the option to borrow a big boost, while doing nothing for the would-be corporate Davids eager to take them on.

… With this in mind, Robert Pozen of the Brookings Institution and Harvard Business School and his research associate, Lucas Goodman, have devised an ingenious plan to level the playing field.  First, they call for cutting the corporate tax rate from 35 percent to 25 percent. … To finance this substantial cut, Pozen and Goodman propose a modest 60 percent to 85 percent cap on the amount of interest companies can deduct from their tax bills, sharply reducing debt bias and keeping the proposal revenue-neutral. … The end result could be an entrepreneurial renaissance, as lumbering corporate dinosaurs that had used cheap credit to scare off competitors are forced to reckon with innovative new rivals.

The following is the comment I posted in response to this article (which you can find by scrolling down to about the 7th comment), repeated here for your convenience:

There seems to be no limit to the goofy places that economists’ tortured logic will take them. The “Invisible Foot?” Here we are in the 21st century and this is what we get from the field of economics – the “Invisible Foot?”

The real problem has, for many decades now, been economists’ inability to distinguish true, healthy economic growth from macroeconomic growth, a large component of the latter being a malignant growth fed by nothing more than population growth. If the macroeconomy grows by 1%, but the population has grown by the same amount, no one is better off. In fact, all are worse off.

Because of their self-imposed blindness to the economic ramifications of population growth (no self-respecting economist dares risk being labeled a “Malthusian”) the field of economics is blind to the very real inverse relationship between population density and per capita consumption, and its implications for worsening unemployment, poverty and global trade imbalances. Economists can’t see that, beyond some critical population density, while population growth continues to stoke total sales volumes and corporate bottom lines, the cost of dealing with rising poverty while maintaining an illusion of prosperity through deficit spending is bankrupting local and national governments across the globe.

Instead, the field of economics maintains its “see no evil” posture and dreams up things like the “Invisible Foot,” an idea that might have played well during the dawn of economics in the 18th century. Are we really to believe that a revenue-neutral reshuffling of the tax code will spawn some sort of economic renaissance? Has no one noticed that the economies of those countries with lower corporate tax rates are still dominated by the same global mega-corporations as the U.S.? Are we to believe that these corporations grew as they did by being sloppy and inefficient, instead of mercilessly boosting productivity by cannibalizing the competition and slashing redundant workers?

The cowardly refusal of the pseudo-science called “economics” to even consider the most dominant factor driving economic trends today makes it the laughing stock of the 21st century. This nutty idea is just one more example of why.

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