Tag Archives: politics

Do dividends solve inflation?  Yes in theory, who knows in practice.

Congress just passed the CHIPS act giving billions of dollars to Intel, who turned around and cut their fab investments to hand money to investors as dividends.  One of the benefits of CHIPS was supposed to be reducing inflation by increasing the supply of microchips from companies building more fabs.  That obviously won’t be the case if companies follow Intel’s lead in handing the subsidies to their investors as a dividend.  But it made me think of how neoliberal economics believes that inflation is supposed to be self-correcting.

When demand for a particular product outstrips supply, prices will of course rise.  But what are the consequences of a rise in price?  First it means the consumers of the product will have higher costs, but that will incentivize consumers to use less of the product (reducing their demand and thus costs).  If those consumers are companies, then this can act as a market force driving efficiency, companies that can produce the same number or quality of output products while using less of the pricier input products will have an advantage over those who are more hamstrung.  In some ways we are seeing this with car companies offering cars that don’t have the full range of interior knick knacks due to the chip shortage.  If they can still produce a car while using less computer chips, then they will have an advantage over companies that cannot.  This means that the more efficient companies should remain competitive while the less efficient ones get removed from the market, thereby decreasing demand for the chips overall thanks to these efficiency gains.

For producers of the product however, when prices rise the company makes more money.  Now not all that money will be reinvested in the company, a lot of it will be handed back to the shareholders in the form of dividends.  But to neoliberals that isn’t a problem, that’s the solution.  When the company hands big dividends to its shareholders, the price of the company’s stock will rise greatly.  Everyone and their mother will realize that holding that company’s stock will net you a passive dividend income, and will rush to buy up the shares, driving share price up.  As I noted before companies like having a high share price because it gives them a source of money that they control.  They can use that share price to compensate employees and invest in large capital projects, both of which can theoretically lead to higher production either through higher quality/more motivated employees or through more factories or whatever.  And not only that, the return on investment for dividends should cause more money to flow into new companies as well that want to enter the market, because no one can resist those sweet sweet profits.  This higher production means supply increases and the cost of the good goes back down, thus massive dividends from profitable products are supposed to act as a reward mechanism that entices more investors to invest in that sector of the economy.

This paradigm, by the way, is why some neoliberal economists will oppose market interventions to alleviate shortages.  Price controls or rationing of good are supposed to mess up both the demand and supply side of the equation.  If price is controlled then the supplying company can’t make a higher profit, meaning they can’t expand supply and new companies won’t enter the market.  Likewise price controls mean that there isn’t as much gain from being an efficient demand-side company.  Rationing works much the same way as price controls, artificially keeping the price low by constraining demand.

So according to this theory of economics, supply-induced inflation should always be self-correcting.  The high price of chips should have pushed demand-side companies to buy less of them, and supply-side companies to sell more of them, both of which push the price down.  The question is whether any of this works in the real world, and the bigger question is whether the CHIPS act will sufficiently spur investment in fabs considering the money has basically no strings attached.  We’ll have to wait and see if every company decides to act like Intel.

The president of El Salvador is playing a dangerous game

El Salvador became internet famous about a year ago first when President Bukele declared that they would be the world’s first country with Bitcoin as a legal tender and second when their president began having his government buy Bitcoin as a “sovereign wealth fund.”  But flirtations with the Bitcoin ponzi are not even El Salvador’s biggest problem.  El Salvador owes billions of dollars in sovereign debt, and due to a large government deficit and little hope of improving economic conditions, the debt is currently at junk status.  The status of debt is basically how people express the risk of the debt not being paid back in full, and for El Salvador that risk is very high.  The money markets that have lent money to El Salvador believe it to be somewhat likely that El Salvador will default on its debt, leaving them with either nothing or less than the full amount that they lent, and because of that the debt is considered to be junk status.

What is a default?  A default is basically where a country declares it won’t pay back its debt.  It may be a partial default (we won’t pay back specific bonds) or a “haircut” (we’ll pay back only a certain percentage of what we owe) or a total default (we won’t pay back anything).  But a default leaves the lenders with less than the face value of the debt they lent to the country, and it in turn makes other lenders way less likely to lend money to that country.  Think about it, if you lend a buddy 100$ and he never pays you back, will you lend him another 100$ next time?

Now even junk debt isn’t worthless.  It may be *likely* that El Salvador defaults but it is not *certain*.  So if you hold an IOU from El Salvador, you can still try to make money off of it.  Let’s say you own El Salvador government debt worth 100$.  You think it unlikely that you’ll get back the full 100$ but someone else will buy the debt from you for 20$.  You’re taking a loss by selling the debt instead of waiting for El Salvador to pay up, but the 20$ they will give you is more than the 0$ you think El Salvador will give you, so you go ahead and sell it.  This sort of debt market happens all the time as institutions sell and buy debt based on their expectations of how likely the debt is to be paid back.  As economic conditions improve, the likelihood of being paid back increases and the price of the debt can rise, while worsening economic conditions would make it fall.

The problem is that President Bukele saw this debt market, and he hatched a scheme.  The debt markets think that El Salvador is unlikely to pay back its debt, and so 100$ of debt can be bought for 20$.  Well, thought the president, what if El Salvador just buys back the debt itself?  Now we can wipe away 100$ of debt for just 20$, genius!  Except not really, the debt is trading cheaply on the expectation that it won’t be paid back in full.  Buying it at this discount is an admittance that El Salvador won’t pay it back in full, they won’t pay back 100$ for 100$ worth of debt, they’ll pay back 20$.  In some ways that is a de facto default, and in the future when El Salvador wants to take out a loan (and remember they need loans to cover their deficit), banks will be very leery of giving a loan to a country that basically entered a partial default.  Secondly, President Bukele announced this scheme on twitter, and with this public announcement the price of El Salvador’s debt went way way up.  Obviously a lot of people holding El Salvador’s debt expected to get nothing, so with the public announcement of a buyback they now expect to get something and will raise their prices accordingly.  If the president thought he could buy back all the debt on the cheap, he’s very likely to be mistaken.

I don’t know who advises the president of El Salvador, but it seems like he does financial policy without much understanding of the effects.  By the way, this entire article is written using dollar denomination because El Salvador’s debt is denominated in dollars and dollars are an official currency (alongside Bitcoin). It’s probably one of the reasons El Salvador doesn’t have many economic levers to pull, they don’t control their own money supply.

First Past the Post vs Proportional Representation

This one’s going to be controversial so I’ll post it while my blog is still small

One thing I’ve read a lot of is the differences between First Past the Post (FPTP) voting and Proportional Representation (PR) voting. Among most places that debate this PR is seen as infinitely better than FPTP with zero downsides. I’m lukewarm towards both, but for the sake of contrarianism I’d like to discuss one of the few benefits of FPTP.

First of all what are these? FPTP is the voting system in America and most of Britain. Each election has some number of candidates, whichever candidate gets more votes than the others wins. Importantly, simple FPTP does not require a candidate to get the *majority* of all votes cast, they only have to get more than any other individual candidate (what’s called a plurality). In the 1992 election, Bill Clinton did not get a majority in almost any state. Take Ohio, for instance where he only won 40% of the vote, but this was enough to win because George HW Bush got 38% and Ross Perot 20%.

In PR however, this is different. A very abridged version of the German system is that in 2021 the SPD of Germany got about 25% of all the votes, and therefore got 25% of all the seats in Parliament. How very proportional.

Now, naturally PR doesn’t make much sense when electing a single entity. In the 1992 election we couldn’t have a result where Bill Clinton got 40% of the presidency, George HW Bush got 38% and Ross Perot got 20%, that just doesn’t make sense for a singular position. But this is also why people think we should be parliamentary instead of presidential so whatevs. Instead I’d like to point towards the one benefit of FPTP that I think is underappreciated and deserves mention, and that’s the ability to Vote the Bastards Out.

Vote the Bastards Out is something I would define as when a single candidate is so terrible that they themselves are the object of the voters’ disdain, more-so than their party. In this case while the voters might not object to a substitute candidate from the same party, they would very much object to this particular candidate. In this case the voters can express their disagreement by voting against the candidate this election, but in the next election they can still show their preference for the candidate’s party by voting for a replacement candidate. This is important I feel because in PR systems I’ve seen, the candidates who go to parliament are controlled by the party themselves. Don’t like this particular candidate? Tough, they’re top of the list and will get in so long as the national party meets its threshold.  This allows for a system where party politics can insulate high ranking members from voters’ disdain.

If party politics can insulate members from the voters in this way, then the voters’ choices can become constrained.  They may prefer to vote for a certain party due to sharing values, but not want to reward the Bastard who is a high ranking member of that party and will be first on the list to get a seat in parliament.  If time after time the Bastard remains at the top of the list, then time after time the voters face this choice between their values and their personal disdain.  With FPTP this choice hopefully only comes up once, once the Bastard is voted out they resign in disgrace.  With PR, as long as the Bastard is a high ranking member who will retain their seat, then this choice keeps coming up again and again, there is no way for voters to punish only the Bastard without also punishing the party as a whole.

That’s overall my feeling, I don’t want party politics to be able to insulate any candidate from the voters.  I think every candidate should be personally responsible to the voters as much as possible rather than being able to ride in on a party wave.  Now of course in FPTP in America there is strong party ideology, many people will vote for a party regardless of candidate.  But I think recent elections have shown that there is still an amount of candidate preference.  The best example I can think of is the 2016 election in which Donald Trump received less votes than Hillary Clinton (Trump  63 million, Clinton 66 million), meanwhile GOP House members received more votes than Democratic house members (GOP: 63 million, Democrats 62 million).  Donald Trump was clearly seen as the Bastard in that election and the amount of voters who voted Hillary but did not vote for a Democratic congressman seems to prove that.  It was only because of ANOTHER vulgarity of American elections (the Electoral College) that Trump squeaked by, he should not have won based on the popular vote.  However if the American electorate had gotten a true FPTP result they would have had President Hillary and a GOP house of representatives.  But if America had a parliamentary PR system, in which the executive is chosen by the legislature, then we would have had a GOP majority in the House and they could have chosen Trump as their Prime minister even though he was toxic to the electorate.

Now we got Trump anyway, but that was the fault of the Electoral college.  I would much rather have a national popular vote based on FPTP, and I don’t think PR is the antidote to this that advocates think it is.