The
Wall Street Journal is to many a venerable institution,
reflecting all that is best in American capitalism.
So much so that many are concerned about the implications
for the paper's integrity of Rupert Murdoch-owned
Newscorp's bid to acquire Dow Jones, which owns the
Journal. Murdoch's $5 billion take-over offer involved
a price of $60-a-share. Since that implied a 65 per
cent premium on the then prevailing share price and
amounted to 40 per cent of earnings for a company
losing revenues, the offer seemed too good to refuse.
But, given the purported conflict between the Journal's
well-cultivated image of journalistic integrity and
Murdoch's reputation for sacrificing professionalism
at the altar of profits, speculation was rife that
the Bancroft family, which controls 64 per cent of
the stake through myriad trusts controlled by as many
as 35 family members, would reject the offer. But
sections of the Bancroft's relented, after an initial
refusal to sell in May this year, and are now trying
to push through the sale. At the time of writing,
when final discussions among Bancroft family members
are under way, indications are that Mr. Murdoch would
have the last laugh.
What is surprising is not Murdoch's generous offer,
for the likes of which he is now famous. It is the
ability to paint a picture that the Wall Street Journal
is too pristine an institution to be owned by a tycoon
like him. In fact, to bolster that image, the newspaper's
management had launched on a major editorial restructuring
aimed at aligning better its print and internet editions
before and during discussions on the offer, which
was taken to imply that it did not need support from
Mr. Murdoch.
But is all the piety, displayed by those who have
focused on Murdoch's suitability as owner of the paper
rather than the price he has to offer, justified?
After all, the Journal has promoted the changes in
American capitalism that have paved the way, inter
alia, for the merger and acquisitions wave that has
come to dominate the dynamic of the system. One consequence
of that trend has been the conversion of media empires
into typical corporations that are as much the targets
of take-over and seekers of financial gain as any
other. Another recent financial media mega merger
was the 8.7 billion pounds sterling acquisition of
Reuters by Thomson Financial.
The corporate-led, profit-driven dynamic underlying
this trend, promoted vigorously by the media itself,
is not without implications for questions of integrity,
especially of the financial media across the world.
Media businesses, with some notable exceptions, are
now as keen on State policies that cushion and increase
profits and permit flexibility in ownership and operations
that promote private gains at the expense of the public
interest. One consequence has been the sharp increase
in inequalities that underlie contemporary economic
growth. The media have become the means to manufacture
consent in favour of such policies, often based on
the manipulation of selectively chosen information
rather than the impartial dissemination of the news
as it is. This has made the media the principal instrument
for promoting such policies with an obvious conflict
between the media's role as a pillar of democracy
geared to informing and even educating the citizen
and its role as an agency that serves to shift the
distribution of the gains of growth in favour of capitalists
and the rich.
One striking example of the kind of policies favoured
by the corporate media in its new financial avatar,
is the concerted effort to get governments to substantially
reduce taxes on profits or offer concessions or leave
loopholes that have the same effective result. A typical
example of the use of wrong theory and empirical manipulation
to realize this end is the promotion of the idea of
the "Laffer curve". The idea of such a curve
with particular characteristics has been used since
the mid 1970s to promote tax cuts for the rich, on
the ground that this would result in an increase in
tax revenues for the government. The curve reflects
the view that when tax rates rise, initially revenues
gained from such rates would rise, but beyond some
maximal point any further increase in taxes would
in fact reduce revenues either because individuals
would work less rather than earn more and have it
taxed away or because they would find ingenious ways
of avoiding tax payments. In sum, any country which
is to the right of the maximum would gain by reducing
tax rates either because it would have the supply
side effect of encouraging more work and output and
therefore generating more taxes or would ensure greater
tax compliance and therefore increase tax revenues.
In practice a whole host of factors including a nation's
per capita income, the extent of income inequality,
perceptions of what the government does with tax revenues,
the nature and efficacy of the tax administration
and the justice implicit in the tax system go to determine
the revenue (relative to GDP) generated by a given
structure of taxes. This implies that what is the
optimal maximum tax rate is impossible to specify,
unless a lot of variables are taken as given and their
effects are presumed to be understood. Yet, sections
of the rich who have always believed that any prevailing
tax rate is too high have pushed this view consistently,
even if not through the medium of a formal curve.
Economists inclined to advance that view have also
used the notion in various ways.
The idea of a curve with theoretical and empirical
substance gained currency during the Reaganite years
of indiscriminate tax cuts, with the idea reportedly
attributed by Wall Street Journal correspondent Jude
Wanniski to Arthur Laffer, a subsequent member of
Reagan's Economic Policy Advisory Board, who is supposed
to have drawn the curve for her education on a napkin.
Popularity, of course, invites attention. And innumerable
economists have spent time and energy to show that
the concept is theoretically hollow and empirically
unsubstantiated. This seems to have influenced even
the US Congress with the US Congressional Budget Office
questioning it validity in a 2005 paper.
But given the interest behind promoting the idea and
the support of influential media of the kind that
the Wall Street Journal represents, the idea has just
not gone away. Since the rise of the Laffer curve
idea in the 1970s taxes have been cut many times over
across the world. Yet it is routinely invoked to justify
further cuts in taxes. The point is that even today
influential newspapers like the Wall Street Journal
promote the idea, based on obviously mistaken reasoning.
Consider for example a recent report in the Wall Street
Journal titled "We're Number One, Alas"
(13 July, 2007). Lamenting that the US is not among
the 25 developed nations that have opted for "Reaganite
corporate tax cuts" since 2001, the newspaper
provides two reasons why the US government should
follow the path adopted by these countries and others
such as Vietnam. First, it makes the country a more
attractive site for foreign investment. This, however,
is unlikely to attract a country which without much
effort draws on the world's capital to finance its
huge trade and current account deficit. But there
is a second reason, according to the Journal: "Lower
corporate tax rates with fewer loopholes can lead
to more, not less, tax revenue from business. … Tax
receipts tend to fall below their optimum potential
when corporate tax rates are so high that they lead
to the creation of loopholes and the incentive to
move income to countries with a lower tax rate."
Note the subtle shift in argument. Reduce corporate
tax rates to prevent incomes from moving out of the
country in search of relative tax havens. If every
country begins to do this, the race to the bottom
can take corporate tax rates to near zero. The call
is not for international agreements that prevent such
tax evasion, but to reduce taxes on fat corporate
profits in a world where intra-country inequality
is clearly rising. What is shocking is that this line
of reasoning is backed up with the accompanying graph
that ostensible delivers a smooth Laffer-type curve
from cross-country data. To any student with simple,
school-level graphing skills it should be clear that
using the low tax UAE and a median-tax outlier like
Norway to draw the curve is a basic error, since all
other points do not match its trajectory.
Yet using that graph the Journal approvingly quotes
an "expert", Kevin Hassett, an economist
at the American Enterprise Institute whose view as
expected is that the U.S. "appears to be a nation
on the wrong side of the Laffer Curve: We could collect
more revenues with a lower corporate tax rate."
Chart
1 >> Click
to Enlarge
Reports
of this kind, precisely at a time when the Journal's
take-over is being discussed, make nonsense of the
counterposition of the Journal's integrity with Murdoch's
greed. From a social point of view they reflect the
same disturbing trend in today's world.
Democracy presumes accountability. But not all its
pillars are as accountable as the others, if at all.
An area of concern has been the media, owned privately
most often and zealously guarding its independence
on the basis of the fundamental right of freedom of
expression. Media monopoly, reflected in cross-media
ownership across concentrated media markets, combined
with corporate interests outside of the media business,
have long been seen as a dangerous blend. Especially
since there is no adequate countervailing power against
such corporate influence in modern democracies. For
long this aspect of the media, while much analyzed,
was underplayed, because of a focus on the dangers
of a state controlled media, as opposed to a competitive
private media environment, where the battle for eyes
and ears was expected to ensure a high degree of integrity.
More recently the danger of the misuse of media power
has increased because of two tendencies. First, the
direct entry of media moguls into the political arena,
illustrated by Silvio Berlusconi in Italy and Thaksin
Shinwatra in Thailand. This allows political power
to be pursued by utilizing the power of a media protected
by the democratic commitment to freedom of expression.
The second, and more pervasive, is the coalescence
of corporate and financial interests with media interests.
One reason is that the competitive media business
often warrants concentration, on the one hand, and
mobilizing funds for expansion and modernization from
the capital markets, on the other. What is happening
to the Wall Street Journal is just a reflection of
this trend. We may grieve for democracy. But that
is not the same as grieving for the Journal.
