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Tax debate spin control

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Brad DeLong takes out the scalpel and fillets Sen. Chuck Grassley’s letter to the editor of the New York Times defending the fairness of the Bush tax cuts (the first sentences below are Grassley; italics is DeLong reading the mind of the letter-writer):

  Some observers claim that 40 percent of last year’s tax cuts went to the top 1 percent of taxpayers. The Joint Committee on Taxation, Congress’s official, unbiased source, says the top 1 percent will receive 27 percent of the income tax cuts [see how I snuck “income tax” into this sentence? All but the most alert one percent of readers will believe that I am claiming that the 40 percent number is flat-out wrong. *Snort*!]

$40 billion, but nothing for the shareholders

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Dan Gillmor posts about Microsoft’s latest financials, pointing out that the company is now sitting on a $40 billion cash hoard. What most companies do when they are making as much money as Microsoft does these days is distribute some of those profits to shareholders in the form of dividends. But like most technology companies, Microsoft has never much believed in dividends. (Technology companies typically see themselves as “growth” companies that need to reinvest all their profits in the business.)

Gillmor says this is because Gates and other key Microsoft owners don’t want to deal with the tax implications of dividends given the size of their holdings. Maybe — I can’t say I’m an expert on tax management for billionaires, never having had such worries.

But I also think the Microsoft hoarding instinct is a weird function of the company’s ingrained, perpetual paranoia. As numerous insider accounts and much testimony at the antritrust trial have shown, Microsoft’s culture imbues employees with the sense that disaster is always around the corner — if they make one misstep, the competition will eat their lunch. This paranoia is a sort of management tool, to be sure, but it’s also an attitude that emanates directly from the company’s leadership. Microsoft is hanging on to its $40 billion because, hey, who knows how much money it might need when the next big seismic shift in the technological landscape threatens to unseat its monopoly? Think of that $40 billion as one big Windows replacement fund.

Enron and Thomas White, cont’d

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Paul Krugman’s column for Tuesday takes former Enron honcho and current army secretary Thomas White to task, referring to Jason Leopold’s groundbreaking reporting in Salon about White’s dubious-at-best role in padding Enron’s profits at a critical time in the company’s downward spiral.

Choice quote:

  Mr. Cheney supposedly chose Thomas White for his business expertise. But when it became apparent that the Enron division he ran was a money-losing fraud, the story changed. We were told that Mr. White was an amiable guy who had no idea what was actually going on, that his colleagues referred to him behind his back as “Mr. Magoo.” Just the man to run the Army in a two-front Middle Eastern war, right?

Or, as I put it in July, “Army secretary Thomas White is a former Enron official who either (A) knew what was happening at that company and therefore shares responsibility in its ignominy or (B) was completely in the dark about Enron’s escapades. A he’s a crook, B he’s a boob…”

Rational markets? What rational markets?

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Market theory tells us that the stock market is a near-perfect gauge of the collected knowledge of participants. Now, everyone under the sun knows that we are approaching the anniversary of 9/11 and that there’s a heightened likelihood of a terrorist attack of some kind. This is not exactly a secret.

The market, you’d think, has taken this information into account, right? Wrong. Stocks, which were showing modest gains this morning, dropped suddenly after the government announced a heightened “orange” alert. Shouldn’t this have been a “duh, of course” moment? Are there really hordes of investors sitting there saying, “Ohmigod, I had no idea there was an anniversary of a terrorist attack coming up! Thanks, government, for warning me — excuse me while I put in my sell order.”

Not exactly. Instead, what today’s gyration indicates is that markets — in the sort term, certainly — are amazingly irrational. People buy and sell based on emotion, hunch, hearsay — even the color of a government terror warning that tells us what we already know.

Blowing bubbles

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Over in that Slate e-mail thing between Andrew Sullivan and Kurt Andersen, which has gotten a little more interesting, Andersen, the erstwhile mogul of the late Inside.com, writes:

  If we had put the capital we raised into Treasury bills, we’d have had $1.5 million a year in income, with which we could’ve employed and published our best dozen reporter-commentators forever.

Well, sure. The problem is, the money Andersen raised at the height of the Internet investment bubble — just like that raised by every other dot-com, of course including (before you start flinging e-mails my way) Salon — wasn’t invested to be put into T-bills. It was invested because the people who chose to invest it had the notion, however hard to fathom from 2002 hindsight, that said investment was going to pay off big — that it would be used by energetic entrepreneurs to build profitable businesses. The people who sought that investment believed it too, right, Kurt? If you told the investors, “Gee, guys, now that you’ve given us your money we’ve decided, come to think of it, that we’re not actually going to make any money from this Internet thing — instead we’re going to take your cash and set up a journalistic trust fund,” you’d be looking at a boardroom civil war, if not an outright lawsuit.

Don’t miss…

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…the new Salon cover story, which provides a fascinatingly detailed account of exactly how Thomas White — Bush’s secretary of the Army — inflated the dubious profit claims of his division at Enron in spring 2001, immediately before leaving for government service. White has said he was operating his division of Enron as a separate fiefdom, and that he shouldn’t be tarred with the same brush as Enron’s rogue’s gallery of corporate scoundrels. But if you read Jason Leopold’s story you will have a hard time believing that. Is anyone in Congress listening? Why is this man still serving in what is presumably a highly important position during wartime?

Dowd scores

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After criticizing Maureen Dowd for her column on indie film, it’s only fair for me to note that her tone of short-attention-span mockery was the perfect fit for Bush’s Potemkin-Village-style “economic summit.” Choice description:

  He managed to last for 20 minutes each in four economic seminars at Baylor University. He dutifully scribbled some notes as participants talked, looking as happy as a high school kid in trig class, and bounded out of his chair when Treasury Secretary Paul O’Neill told him he could be excused.

“Yes, well,” a visibly relieved Mr. Bush said, jumping up after an exhausting 18 minutes in “Economic Recovery and Job Creation,” “that’s the life of the president. Always has to go.”

Kicking Cisco

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I generally find New York Times op-ed economist Paul Krugman to be reliable and incisive in his dogged criticism of Bushonomics. But I think he missed the boat today in his comparison of Cisco with Enron. Cisco CEO John Chambers is participating in Bush’s wacky Waco shindig, and Krugman strains to suggest that, somehow, Cisco is like Enron. But the only complaint he musters — aside from noting Chambers’ overly handsome compensation, which puts him in the same boat as a gazillion other overpaid CEOs — is feeble: “The company’s specialty was using its own overvalued stock as currency — paying its employees with stock options, acquiring other companies by issuing more stock.” But as Krugman admits, that’s entirely legal; it’s also plain good business — when the market boosts your stock through the roof, it’s telling you to do something with that value.

Sure, Cisco’s stock, like that of the disgraced flagships of fraudulent accounting, was a darling of the bubble that is now way off its highs. But unlike Enron, Cisco is a company that makes stuff. Without its routers sitting in front of every industrial-strength Internet installation, you wouldn’t be able to read these words, or nearly any others online. Where Enron was engaged in building a phantom new-economy business in “energy trading,” and booking the sum total of transactions that it brokered as revenue (nice business if you can get it), Cisco builds and sells boxes full of electronics. I hold no brief for Chambers or his company, and if anyone can ever show evidence that they have engaged in anything Enronesque I will join the chorus of outrage. In the meantime, I’m glad their routers work well enough that most of us don’t even have to think about them.

Worldcom’s “operational shambles”

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Thursday’s New York Times features this jaw-dropping account of Worldcom’s rise and fall by Kurt Eichenwald. Worldcom grew by acquisition, gobbling up big Internet backbone providers like UUNet and big long-distance providers like MCI into one humongous telecommunications combine that wowed investors for years. In a company that grows by acquisitions, what’s the most important skill? Operations — the ability to take different organizational entities, business structures and technological systems and merge them into a cohesive, and profitable, whole.

Guess what area it seems Worldcom was utterly clueless about? That’s right — operations. From Eichenwald’s piece:

  Leading it all was Mr. Ebbers, a man who insiders and analysts said was out of his league in the rough and tumble world of telecommunications.

“WorldCom wasn’t operated at all, it was just on auto pilot, using bubble gum and Band-Aids as solutions to its problems,” said Susan Kalla, an analyst at Friedman, Billings & Ramsey. “Bernie was endearing, but he didn’t even have a working knowledge of the business.”

“Endearing” but “out of his league,” lacking even a “working knowledge” of his own business — this is the guy who was hailed as harboring the visionary future of telecom in the flecks of his beard. What I want to know is, where were analysts like Kalla when investors could have made use of such trenchant analysis?