Myerson’s newest model: “tax poor workers to subsidize rich bankers”

By William K. Black

Roger Myerson has recently updated an article on his purported mechanism for explaining why our supposedly efficient markets are producing growing crises.

A MODEL OF MORAL-HAZARD CREDIT CYCLES (March 2010, revised September 2012) 

Myerson’s credit cycle model is not the focus of this piece.  I write about one recommendation he makes about how to respond to a financial crisis driven by control frauds led by financial CEOs.  This is the third piece I have written on Myerson’s paean to plutocracy.  He asserted in his Nobel Prize Lecture in December 2007, as a global systemic crisis was breaking out driven by an epidemic of control fraud that the key advantage of capitalism over communism was that capitalism produced severe income inequality in the form of exceptionally wealthy CEOs.  Myerson claimed in that lecture and a lecture in December 2012 that CEOs were naturally dishonest and abusive towards shareholders.  The only reliable exception was if they had enormous personal ownership in “their” bank.

Myerson’s “mechanism” for causing abusive bankers to act as if they cared about the interests of shareholders was for the shareholders to bribe the CEOs and for the CEOs to own a controlling interest in the banks they managed.  The failure of Myerson’s designs to have any effect in containing the epidemic of accounting control fraud did not dissuade Myerson from his faith in plutocracy, cause him to read any of the relevant criminology literature, or to consider the work of a fellow Nobel Laureate in Economics, George Akerlof on “looting” (with Paul Romer).

Instead, Myerson has doubled-down on his pandering to plutocrats.  Here is his suggestion on how we should respond to the latest wave of looting by financial CEOs.

“In this sense, a tax on poor workers to subsidize rich bankers may actually benefit the workers, as the increase of investment and employment can raise their wages by more than the cost of the tax [p. 25].”

The reader may wonder whether Myerson is making an effort at irony.  No.  Our family rule that it is impossible to compete with unintentional self-parody is once again vindicated.

10 responses to “Myerson’s newest model: “tax poor workers to subsidize rich bankers”

  1. Ben Johannson

    Mr. Black, I don’t think you appreciate Myerson’s delivery of stunning mathematical precision in pinpointing absolutely nothing. The powerful uselessness of his model (I stopped counting the words “we assume” at eight) is clearly the future of econometrics.

    • Kind of like using that Gaussian cupola and Binomial Expansion Technique without asset correlation, and applicability to what it was being used for, huh? (Reminiscent of how Catherine Mann used the term “assumption” to explain how for “every one job offshored, two jobs are (magically [s_d]) created in the USA?

  2. I have an unrelated question.

    If I am a capitalist in a area with a fixed gold standard and only one coin of gold…And I take that piece of gold and split it into two pieces, half for labor, half for materials. Then if I sell my commodity on the market there is no way I am going to get more gold than I started with, (no profit)…How is this overcome?

    • reve_etrange

      Severely deflated currencies tend to be replaced by the informal debt systems of yore. The other alternative is to melt down the coin, adulterate the metal, then recast and reissue it. Check out the book “Money and its Use in Medieval Europe” by Peter Spufford.

    • You enter the realm of the circuit theory of money (Johannsen). Money itself is not property, it is a transaction catalyst called credit. The gold coin you mention is only the physical manifestation of credit called currency. You would receive credit for your product. Your profit is established as a credit on your balance sheet at the bank. The gold coin circulates as a form of universal credit, species, moving credit from balance sheet to balance sheet, but the coin itself belongs to the issuer (he wants his gold back eventually). If credit and currency did not travel a circuit, credit (and coin) would distribute unequally and credit velocity would be impaired in the form of savings or hoarding among a select few, retarding the economy, unless new credit and coin were issued. Productive investment accelerates the velocity of credit and is different than savings (deferred investment) or mal-investment (unproductive investment, financialization) which decelerates the velocity of credit.

  3. If we expand the application of the Myerson paper to the NSA leak, it appears Snowden as a contractor was not being paid nearly enough (220k) and a bonus (25 million?) at the end of his contract surely would have kept secrets where secrets are kept (off of thumb drives). To punish him and not punish bankers seems inconsistent.

    • Excellent points, Ransome, excellent points; guess Mr. Snowden’s leaks are “to big to deal”?

  4. Brooks Gracie III

    Let’s get this straight–the guys making 1/300th of the CEO’s compensation should be happy to pay an extra tax to make sure the CEO doesn’t bolt? The only thing this paper generates in me is a vision of Egyptian slaves hauling giant granite blocks up a muddy hill, dying by the thousands, in order to ensure that the Pharaoh is in bliss in his pyramid after death and receives eternal rewards. Plus ça change, plus c’est la même chose.

  5. But where is the explanation for the largest insurance swindles in human history? That $2 trillion of naked swaps on $190 billion external debt of Bear Stearns (with the potential payouts of $200 trillion)?

    Or that $460 billion of swaps by AIG, with the potential payouts of from $20 trillion to over $40 trillion?

    Something appears to be missing, me thinks?

  6. “In this sense, a tax on poor workers to subsidize rich bankers may actually benefit the workers, as the increase of investment and employment can raise their wages by more than the cost of the tax [p. 25].”

    I would refer to my discussion of the money or credit circuit. A tax could subsidize rich bankers but they by nature frequently save or mal-invest, which retards the velocity of credit and impairs employment and wages. If for some reason all the subsidy was productively invested, our workers would find themselves financially embarrassed by the tax. New credit (other people’s money) would need to be injected, to absorb the increased production and cost of production or perhaps the cost of technology to lower the cost of production and unit cost. In any event, direct (profit re-investment) rather than indirect credit investment (a tax) would ensure efficiency by excluding the possibility of the purchase of another house in the Hamptons by our banker. Wisely, our corporate tax structure encourages re-investment of profit in the form of wages and technology.