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Request from Two JMU Professors for Help with a Research Project

Tue, 11/17/2015 - 11:36

By James Kwak 

I received the following this morning and thought it was interesting.

We are writing to ask your help in bringing some empirical measurement to the long-standing question: On matters of economic policy, do liberals understand conservatives better than conservatives understand liberals, or is the reverse true?  In response to Krugman’s claim that liberals have the edge in understanding rival views (http://fivebooks.com/interviews/paul-krugman-on-inspiration-liberal-economist), Caplan disagreed and suggested a type of ideological Turing test to measure the ability of individuals to “state opposing views as clearly and persuasively as their proponents” (http://econlog.econlib.org/archives/2011/06/the_ideological.html).  Specifically, could it be determined whether one is conservative or liberal through an online question-and-answer exchange?

Although we are unable to conduct the ideal test, we have developed a multiple-choice version of this Turing-like economic policy test. At http://econturingtest.com, we have posted a ten-question economic policy test. Respondents will take the test and then anonymously report some information about themselves. With the statistical results, we hope we can shed some light on this research question.

We have received approval from our Institutional Review Board (approval No. 16-016) to offer this online survey. Now all we need is traffic to the website, and that’s why we’re appealing to you now. We are asking the top 30 economics blogs in 2012 and 2013 according to the Onalytica rankings to post a note for us. When our study is complete, we will be providing results to all who ask and seeking appropriate publication outlets.

Thanks in advance for any help you may be able to offer. If you have questions, please let us know.

William Wood and Angela Smith
James Madison University-Economics

Voice: 540 568-3243
http://cob.jmu.edu/woodwc My thoughts after taking it are after the break …

I thought some of the questions were poorly written, most often because multiple possible answers said almost the same thing. But I believe in the methodology they are using that doesn’t matter, because they are trying to see how well side A’s perception of side B’s beliefs matches side B’s actual beliefs. That said, they would have to make sure that the “conservative” and “liberal” questions are equally vague, which is probably not the case—or find some way to correct for that bias. Also, if the study works the way I think it does, I’m not sure it addresses Krugman’s claim. Krugman’s claim was about how well one side understand’s the other’s position. By that I think he means its underlying economic logic. The study is about people’s motivations, which are something else. A given economic argument could map to more than one motivation. So I’m not actually optimistic that this will teach us anything, but who knows.

Talking About Inequality …

Thu, 11/12/2015 - 13:57

By James Kwak

How about this?

In Georgia, you can get a life sentence for a second or succeeding drug offense.

Right now, there are 375 people serving those life sentences. 369 of them—more than 98%—are African-American.

There’s no population base rate that can explain that discrepancy. One justice on the Georgia Supreme Court found that an African-American with two or more drug priors is 28 times as likely to get a life sentence than a white person with the same record.

Or this?

On Monday last week, the United States Supreme Court heard oral arguments in Foster v. Chatman. In that case—a death penalty case—the prosecution struck every black member of the jury pool. The law says that you can’t strike a potential juror because of race, so the prosecution came up with facially race-neutral reasons for all of their strikes. Their notes, however, showed that they highlighted the names of the black jurors, marked them with a “B,” identified one of them as the best “if it comes down to having to pick one of the black jurors,” and put the five black jurors at the top of their list of definite strikes—ahead of a white person who said she opposed the death penalty on principle. The all-white jury sentenced the African-American defendant to death. Even after the evidence came to light, the Georgia Supreme Court refused to overturn the verdict.

My favorite professor, Steve Bright, argued the case last week. Some of you may have heard him on NPR.

Or this?

Adel Edwards pled guilty to burning leaves in his yard without a permit. He couldn’t pay the $500 fine, so he was sentenced to a year of probation. His probation was “supervised” by a private company—that piled its own fees on top of the original fine. A year later, he owed more than $1,000, mainly to the probation company, and he was sent to jail immediately.

If you want to do something about injustice and inequality, please consider making a donation to the Southern Center for Human Rights—today. The Southern Center, based in Atlanta, is one of the best organizations fighting inequality in the justice system by challenging unsafe prison conditions, the criminalization of poverty, unequal access to justice for poor people, abusive practices by for-profit companies, and the racially biased imposition of the death penalty. I am a board member of the Southern Center and its attorneys and staff are the some of the most talented, hard-working, dedicated, and selfless people I know.

The reason to give now is that today is Georgia Gives Day, and one of our foundation supporters will match any gifts from new donors and any increased gifts from existing donors. So if this is an issue you care about,now is the time to do something.

Thanks for listening.

Also posted on Medium.

60% of Ted Cruz‘s Tax Cut Goes to the Top 1%

Wed, 11/04/2015 - 15:09

By James Kwak

I haven’t been commenting on Republican tax plans this season because, well, it takes a lot to impress me when it comes to absurd tax cut proposals. Ted Cruz has done it.

The major components of Cruz’s plan amount to this:

  • A flat 10% tax on individual income (labor and investments)—down from top rates today of 43.4% on labor and 23.8% on capital gains and dividends
  • No payroll taxes (15.3% for most people today), corporate income tax (average rate about 13% today), or estate tax
  • A 19% value-added tax (16% of gross business receipts, including the tax)

There are two big things that are crazy about this plan.

The first is that it eliminates an enormous amount of tax revenue: $3.6 trillion over ten years, according to the right-wing Tax Foundation’s “static” analysis—that is, before the growth fairy waves her magic wand. To put that in context, that’s more than we plan to spend on the military over the next ten years.

The second is the astonishingly naked handout to the very rich:

60% of the tax cut goes to the top 1%.

That leaves only 40% for everyone else.

This number is so embarrassing that you won’t find it in the Tax Foundation’s analysis. Unlike the Tax Policy Center, which typically shows how the dollar impact of a tax proposal is distributed across the population, the Tax Foundation only provided the percentage impact of Cruz’s plan on the after-tax income of each income group. What they tell us is that the tax cut will increase after-tax income by 1.2% to 1.5% for households between the 40th and 60th percentiles; by 29.6% for households above the 99th percentile; and by 9.2% for all households on average. But with a little arithmetic we can figure out the missing number.

Thanks to the World Top Incomes Database, we know that the top 1% receive about 21% of all income, including capital gains. The average total federal tax rate today is 19.8%; the average rate for the top 1% is about 30%, and the average rate for everyone else is about 17%. So for every $100 of pre-tax income, the 1% get $21 and the 99% get $79; after taxes, the 1% get $15 and the 99% get $65, for a total of $80. Since after-tax income goes up by 9.2% on average, total after-tax income goes up by about $7.40 in Ted Cruz’s world. But for the 1%, after-tax income goes up by about $4.40—just under 60% of the total.

Why this is should be obvious. A value-added tax is a tax on consumption. So if you’re in the middle class and need all your income for living expenses, you pay a 10% tax rate on money as you earn it (after the standard deduction and personal exemptions) and another 16% on money as you spend it.

The claim that a family of four pays no tax on its first $36,000 of income is basically a lie, since they will pay 16% when they spend the money.

If you’re a gazillionaire and can’t possibly spend all your money (real estate counts as investment, not consumption), you only pay 10% once—and you can defer most of your income by not taking capital gains. This makes Cruz’s tax system “flat” in name only; it’s actually highly regressive. This is also why any serious advocate of a value-added tax, and there are many, favors some provision for restoring progressivity.

What about the loophole fairy? Cruz, like most tax reformers, claims that he will eliminate those loopholes that big corporations and rich people benefit from. The problem is that he keeps all the big, distortion-creating loopholes: the deduction for charitable donations, the mortgage interest deduction, the exclusion for pension contributions, and the exclusion for employer-provided health care. Everything else is small potatoes.

Finally, what about that growth fairy? According to Cruz, lower tax rates will spur economic growth because of stronger incentives to work and save. It’s Economics 101, after all. But first, there’s less here than meets the eye, even on paper. The true marginal tax rate for most people will be 26%, not 10%; if you don’t save, and most people don’t, a consumption tax is virtually identical to a tax on labor income. Second, the growth fairy just doesn’t exist. Most empirical studies find very small or nonexistent effects of tax rates on labor force participation or on the propensity to save. Third, the Tax Foundation’s rosy economic projections assume that the tax cuts will be “appropriately financed”—which can only mean that government spending will be reduced to completely offset the losses of tax revenues. Yet at the same time, Cruz proposes to guarantee funding for Social Security and Medicare.

This is taking puppies and rainbows to 11.

Of course, none of this should be any surprise. Republican tax proposals became completely divorced from reality long ago. More importantly, the Republican nomination lies in the hands of a handful of donors who are in the 0.001%, so the rational thing for any candidate to do is pander to them as enthusiastically as possible.

The only policies we have that limit the transmission of wealth from generation to generation are the estate tax and taxes on investment income. Eliminating one and slashing the other, as Ted Cruz proposes, is the single biggest step we can take toward becoming an aristocracy of inherited wealth. As a member of the 1%, that would be good for my grandchildren—but it would be bad for the country.

Also posted at Medium.

Hillary Clinton’s Lame Wall Street “Reform” “Plan”

Fri, 10/09/2015 - 12:55

By James Kwak

Hillary Clinton is competing for the nomination of a party whose progressive base thinks, with considerable justification, that her husband is to blame for letting Wall Street run amok—and that Barack Obama, under whom she served, did too little to rein in the bankers who torpedoed the global economy. On top of that, she faces a competitor who says what the people actually think: that the system is rigged, that big banks should be restrained, and that people should go to jail.

So she has no choice but to try to appear tough on Wall Street—but she has to do that without simply jettisoning twenty-five years of “New Democrat” friendliness to business and without alienating the financial industry donors she is counting on. So the “plan” she announced yesterday has two messages. On the one hand, she wants to show that she has the right approach to taming Wall Street. Unfortunately, it’s just more of the same: another two dozen or so regulatory tweaks, mainly of the arcane variety, that will produce more of the massive, loophole-ridden rules that Dodd-Frank gave us.

Or, that could be the point. Her second message is a promise to the financial industry that, instead of real structural reforms, she will continue the technocratic incrementalism of the Geithner era—which has left the megabanks more or less the way they were on the eve of the financial crisis. Maybe, for her base, that’s a feature, not a bug.

For more, see my latest column for The Atlantic.

Who’s Afraid of Larry Lessig?

Mon, 09/28/2015 - 13:09

By James Kwak

Larry Lessig is running for the Democratic presidential nomination on a single issue — political equality — and a promise to resign as soon as Congress passes a bill that would help level the electoral playing field, end partisan gerrymandering, make it easier for working people to vote, and reduce the power of money in politics. As I’ve said before, he has my vote(and my money).

The funny thing is, the Democratic establishment seems intent on making Lessig’s point for him by keeping him out of the upcoming debates. To participate in the first debate, candidates have to get at least 1% support in three national polls. Lessig so far has only been included in one qualifying poll — in which he got 1% — but not in any subsequent ones. It’s not entirely clear why, but one factor is that the Democratic National Committee has not officially welcomed him to the race — and the DNC certainly isn’t lifting a finger to help him.

Nor, for that matter, are Hillary Clinton or Bernie Sanders. Clinton and the DNC presumably don’t want anything that could upset her coronation. Sanders is probably afraid that Lessig could split the not-another-Clinton vote and the not-another-moderate-Republican vote, both of which are his at the moment. As far as I can tell, neither Clinton nor Sanders has mentioned Lessig, let alone said that he should be included in the national polls.

There’s a petition you can sign if you want Lessig to be allowed to qualify for the debates. But for now, it’s money that talks. And Hillary Clinton’s campaign just invited me to a fundraising event in Western Massachusetts.

So here’s my pledge:

I will not donate any money to any Democratic presidential nominee (or his or her “unaffiliated” Super PAC) in this election cycle, either in the primary or the general election, who does not publicly state that Larry Lessig should be given a fair chance at qualifying for the Democratic debates.

In addition, I will not donate any money to the DNC, the DCCC, the DSCC, or any of their “unaffiliated” Super PACS this election cycle unless the DNC treats Larry Lessig on an equal footing with Hillary Clinton, Bernie Sanders, Martin O’Malley, etc.

Because, at the end of the day, there are only two things that matter. And Hillary Clinton being president is not one of them.

Also posted at Medium.

The Only Two Things That Matter: Why I’m Supporting Larry Lessig

Fri, 09/25/2015 - 11:18

By James Kwak

We have lots of problems: Expensive yet mediocre health care. Lack of retirement security. Out-of-control megabanks. Inequality of opportunity. And, of course, climate change.

At the end of the day, though, there are only two things that matter: early childhood education and electoral reform.

We need smart, motivated, knowledgeable voters. And we need a political system in which all people have an equal say. Without those ingredients, no amount of well-meaning, reasoned, fact-based argument is going to do much good.

Just think about climate change, for example. It’s abundantly clear that the planet is getting warmer because of our greenhouse gas emissions, the process is irreversible at this point, and the downside risks to billions of people are enormous. Yet, in the country that won World War Two, rebuilt Europe and Japan, won the Cold War, and exported most of the technology that makes the modern world modern, we are incapable of doing anything about climate change. Why?

Because our political system is blocked by the fossil fuel industry, politicians dependent on the fossil fuel industry, and ignorant zealots who oppose a carbon tax because it is a “tax” and a cap-and-trade system because it is “regulation.”

That’s why I’m supporting Larry Lessig for the Democratic presidential nomination.

Sure, I’d like to see Bernie Sanders become president — or, more accurately, I’d like to see a lot of the policies that he proposes become law. I’d even be OK with Hillary Clinton — that is, the version of Hillary Clinton who gives speeches to Democrats when she’s campaigning for the nomination. But in the current political system, a smart president with his or her heart more or less in the right place, plus $2.50, will get you a small coffee at Starbucks. Remember, we’ve had one of those for the past six and a half years. Sure, Obamacare is better than nothing. But just twenty-five years ago, it was a conservative think tank’s alternative to real health care reform, before it became Mitt Romney’s health care plan.

By the time Barack Obama leaves office, Democrats will have controlled the White House for sixteen out of the past twenty-four years. Both Bill Clinton and Obama were elected with large majorities in both houses of Congress. And yet, on most social and economic issues (apart from “cultural” issues, most notably marriage equality), we are barely holding the line against a conservative onslaught. Tax rates on investment income — virtually the only thing that matters when it comes to long-term inequality — are higher than under President George W. Bush, but lower than when Clinton took office. The estate tax has been slashed. Federal regulatory agencies have been hamstrung by industry lawsuits. Funding for food stamps has been cut. Privatizing Medicare is the official policy of House Republicans, including Mitt Romney’s running mate in 2012. Things are considerably worse on the state level: think about Scott Walker’s Wisconsin, or the fact that twenty states have refused to accept federal money to help poor people by expanding Medicaid. Even the “victories” have been bittersweet: the Dodd-Frank Act did a patchy job partially reversing decades of deregulation that produced the financial crisis, and the Affordable Care Act enshrined into law something that was considered a conservative plan just twenty-five years ago. The most common argument for electing a Democratic president in 2016 is to prevent things from getting worse: to stop Republicans in Congress from gutting the federal government, and to stop the Republican majority on the Supreme Court from getting even stronger.

For thirty years, since Ronald Reagan’s first term, Democrats have been playing a short game, focusing on winning the next presidential election (to prevent things from getting worse), and slowly sliding to the right in order to win that election. Republicans have been playing a long game, focusing on base-inspiring ideological issues, state legislatures, and the federal judiciary (although they kind of shot themselves in the foot under George W. by succumbing to garden-variety corruption). And yes, if you look at presidential and congressional elections, we have been winning about half of them. But the outcome has been a slow retreat in which Democrats sign off on one conservative idea that is now considered “moderate” only because an even more conservative idea has outflanked it on the right.

The fundamental issue is the political system itself, not the content of the policies that it produces. It isn’t just Democrats who think that the political system is bought and paid for, either: that’s one of the reasons for Donald Trump’s popularity amid a sea of politicians with Super PACs. If we want real change in the long term, we have to fix the system. That means real equality of political participation, not just the formal equality of one person one vote — if, that is, you can get yourself registered, and avoid having your voting rights stripped by your state, and get out of work in time to make it to the polling station, and live in a place where your vote matters.

One of the most common objections to Larry Lessig’s candidacy is that even if he does become president, he won’t be able to pass his electoral reform bills. But why won’t he? Because Republicans have a solid lock on the House of Representatives — and they have it because of systematic gerrymandering on the state level. Again, the problem is with a political system that allows the majority in the state legislature to use redistricting to entrench itself in power.

If we don’t fix the system — then, well, nothing else really matters. Forget about doing anything about climate change.

At a minimum, Larry Lessig’s campaign will bring attention to the importance of electoral reform and political equality. And if he does win the Democratic nomination? Well, I’d like to see the election that will follow. We know that a large majority of Americans have lost faith in the political system. What will happen when one candidate campaigns solely on a platform of leveling the playing field?

(And, let’s face it, it’s not like we have such great candidates this time. Bernie Sanders is a self-professed socialist, Hillary Clinton is one of the most disliked people in American politics, and … Joe Biden?)

Finally, yes, even a President Lessig, elected in a referendum on political equality, might not be able to pass the reforms we need, at least not in the next term of Congress. But, as Lessig wrote, what is the alternative? Does anyone believe that either President Clinton or President Sanders will be able to do anything about political equality? How could either of them come into office with more of a mandate for change than Barack Obama had six and a half years ago? And what impact has he had on the political system itself? Zero.

Now, it turns out, there is one little problem. Without a huge Super PAC backing him, Lessig needs as much free media as possible to make his case, and there’s no better free media than the televised debates. But he may not be included — because the organizations that run the polls that determine who gets into the debates are not including Lessig’s name, even after he raised $1 million and announced his candidacy. According to some sources, the reason could be that the Democratic National Committee has not “welcomed” Lessig to the race, which it did with the other announced candidates. That, of course, would be only too ironic, in the year that the entire party establishment is rowing hard to lock up the nomination for Hillary Clinton.

If you think that Larry Lessig should at least be included in national polls so he has a chance to qualify for the debates, there is of course a petition you can sign.

And free, universal early childhood education? Well, there’s overwhelming evidence for its benefits. But until we fix the political system, it isn’t going to happen.

Also posted at Medium.

Bernie Sanders Wants to Spend $18 Trillion: So What?

Wed, 09/16/2015 - 10:39

By James Kwak

The front page of yesterday’s Wall Street Journal featured an article claiming that Bernie Sanders wants to increase federal government spending by $18 trillion over the next ten years—an increase of about one-third over that time period. This was apparently supposed to raise some kind of alarm—what kind of maniac is this?—and I’m sure both Republicans and Hillary Clinton are happy the Journal is doing their work for them.

The problem is that a spending figure, even one as big as $18 trillion, is meaningless on its own.

Most of that money—$15 trillion—is the expansion of Medicare to cover all Americans. Yes, that’s a lot of money. But we are already spending a ton of money on  health care—with embarrassingly poor results. In 2013, total premiums for private health insurance cost Americans $962 billion, individuals and families paid $339 billion out of their own pockets and “other private revenues” accounted for another $121 billion of health care (data here). That’s $1.4 trillion of health care spending, paid for by families and businesses, most of which would be replaced by Sanders’s plan. Project that out for ten years, add health care inflation, and you’re talking about a lot more than $15 trillion.

At the end of the day, what matters isn’t the amount of money that the federal government spends for health care. What matters is the amount of money that the American people spend for health care. The government is just a device that we use to provide certain services that are better handled collectively than individually. If the government can provide equivalent service at lower prices, then the gross dollar amount involved doesn’t matter.

I’m pretty sure—and I’m speaking partly from personal experience—that most businesses would be happy to have the federal government take the health care headache off of their hands once and for all. Rising health care premiums are a major reason why companies find it hard to give their employees generous raises. This is a real problem for, say, profitable technology companies (Apple, Google, etc.) who have to compete with unprofitable startups who can offer big raises without worrying about the bottom line.

Many people would be happy to stop paying private insurance premiums (either in the individual market, or the employee contributions in the employer-sponsored market) and instead pay a higher payroll tax to support expanded Medicare. Many people would also be happy separating health insurance from their work status permanently. Some other people would prefer the current system—primarily rich people whose payroll taxes would exceed their current insurance premiums. That’s a distributional issue, and it comes down to whether we want a policy that favors rich people or one that favors poor people.

Now the big issue, I admit, is whether the government can provide equivalent service at lower prices. For the vast majority of consumer goods and services, it can’t. That’s why we buy our phones and computers from private companies like Apple, not from government agencies.

The usual argument against a federal health insurance program is a blind assertion that the government can never provide services that rival the private sector. That’s what you learn in Economics 101, therefore it must be true. But real economists have known for more than half a century that health care doesn’t behave like ordinary consumer goods. The paper that everyone still cites is by Kenneth Arrow—he of the Arrow-Debreu Theorem, which is perhaps the most extreme theoretical statement of the powers of markets to achieve efficient outcomes in equilibrium.

If you don’t want to read economics papers, the best evidence that health care is different comes from comparing the United States to other rich countries, which all have something closer to a single payer model for health insurance. As is well known, we spend a lot more money and have comparable or worse aggregate health outcomes. There is a huge ongoing debate about why this is, which I’m not going to try to settle here.

The main point, however, is that if you want to argue against the Bernie Sanders health care plan, you have to make the case that Medicare for all will actually produce worse outcomes or higher costs than our current system. The fact that it costs a lot of money is beside the point.

Also posted at Medium.

Alphabet: Less Than Meets the Eye

Tue, 08/11/2015 - 08:27

By James Kwak

The reorganization of Google into Alphabet means … well, not very much, at least for now. Instead of everything being inside one big corporation called Google, now there will be a bunch of corporations (one of them called Google) all owned by a holding company called Alphabet. “Holding company,” in this case, means that Alphabet will have no operations of its own: it will be a corporation that simply owns all the other corporations.

This is supposed to have something to do with making the company “cleaner and more accountable,” “empowering great entrepreneurs and companies,” “improving transparency and oversight,” blah blah blah. In itself, however, it does none of this.

There is no substantive difference between a corporation with a bunch of divisions and a corporation fully owning a bunch of other corporations. In both cases, the CEO at the top of the pyramid has complete control over everything that happens within the entire structure, and is accountable to no one except the board and shareholders of the top-level corporation. As for transparency, there’s no rule saying that any corporation has to release audited financials, or have audited financials in the first place, or publish any financials at all (except for tax filings, which are not public). The rules requiring disclosures only apply to publicly traded corporations, and in the new structure, there is still exactly one of these: Alphabet, which still owns everything.

The new Alphabet is planning to release financial information for its new Google subsidiary, but that’s purely voluntary — and it’s something they could have done already. Any corporation always has the option of disclosing more information than it is legally required to, and most public corporations take this opportunity to release information that they think will help them with their investors (if only because many investors are unwilling to buy stock in companies that don’t say anything about how their numbers break out across product lines or regions).

Alphabet’s subsidiaries will each have a CEO and, presumably, a board of directors. This could be good, it could be bad, but most likely it won’t make a difference. There’s no reason you couldn’t call the head of an operating division its “CEO” instead of “president” or “general manager” as is the case today. Nominally a corporation has to have a board of directors, but in the case of an Alphabet subsidiary all of its members will be named by Alphabet. So to the extent that the board does anything, it will be less efficient than the current situation, in which Larry Page can simply call the head of, say, Nest, and tell him what to do. And to the extent that a subsidiary corporation duplicates any of the infrastructure that is currently handled at the top, Google level (finance, HR, IT, etc.), that’s simply a waste. However, the most probable outcome is that Alphabet will continue doing what Google is doing today: the various subsidiaries will be semi-autonomous, doing some things independently and drawing on shared resources for others.

While we’re at it, let’s clear away the too easily bandied about comparisons to Berkshire Hathaway. Berkshire is a corporation that owns other corporations. But that’s because Berkshire is Warren Buffett’s investment vehicle: he uses it to buy companies that he thinks are undervalued, like most recently Precision Castparts. The companies that Berkshire buys have nothing to do with each other, or with Berkshire’s historical insurance business, so of course Buffett leaves them intact. That also makes sense because he may want to sell them someday, or at least preserve that option. Google, by contrast, has never bought a company solely as an investment play. It has always done so because of supposed synergies between the acquisition and Google’s other businesses. When Alphabet starts buying companies that have nothing to do with its existing companies, then you can start comparing it to Berkshire.

In short, the reorganization of Google into Alphabet doesn’t change anything about how the company has to behave, so any actual changes are things that could have been done without the reorganization. The corporate structure will only really matter if investors can own stock directly in the subsidiaries, so a subsidiary could have a different shareholder mix from Alphabet. Then a host of new rules could apply, including required financial disclosures on the subsidiary level and restrictions on transactions between the subsidiary, Alphabet, and the other affiliates in the group. Then the subsidiary would have to be run independently for the benefit of its shareholders — which is good from its shareholders’ perspective, but bad from the perspective of the conglomerate as a whole, because it limits flexibility.

This week’s reorganization could be a preparatory step in that direction — but, then again, it might not. It’s not clear if Larry Page and Sergey Brin have a master plan. And, if they have a master plan, there’s no particular reason to think it’s a good one. Page and Brin are obviously the technology world’s version of geniuses, having invented the original Google search algorithm and turned it into the world’s dominant search and online advertising business. But there’s no reason to think they have any particular insight into questions of corporate organization. For decades (if not centuries), everyone has known that there’s a basic trade-off between consolidation and autonomy, and that as you get bigger and bigger it gets harder to run everything on a fully consolidated basis.

These days institutional investors tend to distrust companies that combine too many businesses under a single corporate umbrella, so as time passes the pressure on Alphabet to break itself up for real will only grow. In the meantime, the new structure is not a best of both worlds, because there is no best of both worlds: you can’t have a corporate structure that provides maximum autonomy and transparency on the subsidiary level and also permits maximum coordination across the entire group. Not even if you are a Silicon Valley billionaire.

[Also posted at Medium.]