America’s “State-Run” Economy Just Like China’s: The Economist’s Easton
The Economist’s annual Buttonwood Gathering was this week and, as always, the agenda was packed with financial luminaries past and present, including Alan Greenspan, Robert Rubin, Roger Ferguson, Carmen and Vincent Reinhart, Mohamed El-Erian, Robert Shilller and many more. (Full disclosure: Yahoo Finance was a media partner at this year's event.)
But The Economist’s American Finance editor Tom Easton stole the show Wednesday afternoon when he declared that he had recently moved to the U.S. from China, but “didn’t leave a state-run economy.”
Easton discusses this provocative claim in the accompanying video and provides a list below of issues – beyond “obvious” areas such as interest rates and health care – where the influence of the U.S. government cannot be avoided.
“Everyone talks about how all-pervasive the Chinese economy and government is inside of it,” he says. The Chinese government “directs capital, controls the banking system and the ‘highlands’ of important industries. I’m still in China when I came back to America.”
In the cover story of The Economist this week, Easton examines the growth of corporate structures such as MLPs (master limited partnerships), REITs (real estate investment trusts), and BDCs (business development companies), which he says are a direct response to the government’s heavy hand. As in China, he says, this “grey market” in America is more dynamic than the state-sponsored arena.
“China and America really are on the same page now,” he says. “In both cases, to stay free you have to lobby too. It’s not a rule of law, really, it’s a rule of trying to influence influential people to get preferential terms so you can make an economy work.”
Easton’s List: The Capitalist's Dilemma
If you were involved in the financial markets, you might be interested in the following Washington issues:
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Is a company you own, work for, or may invest in able to configure itself so it can avoid taxes in whole or part? This includes companies in finance, manufacturing, energy distribution, renewable energy, casinos, hospitals, chemicals, and on and on.
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Does it compete with companies who have, or may get, this sort of advantage? If it does, can it transform itself, or can it sell assets to those that do at favorable prices?
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Will a company I am investing in or thinking about investing in be sensitive to energy costs, and thus will it be affected by the construction of major pipelines and access to Canadian energy supplies?
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Will the airline I fly or invest in be part of an industry-wide consolidation, required to be independent, or forever in litigation?
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Will the bank I invest in be able to return capital through: dividends, share buybacks, an outright sale? Can it acquire other banks?
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Is the financial institution I have invested in, or thought about investing in, a political target or a political favorite? Can it preempt a costly investigation? Can it settle an investigation?
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Given that legal settlements with financial institutions carry a formula for how a penalty is set, what might be the price for settling?
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Does the institution have friends in Congress or regulatory bodies that have an interest in protecting it? Can it get them?
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Is a company that is an existing or possible investment possibly moving a factory to a non-union state or doing something else that might upset someone in Washington? Will it be able to make a decision of this sort on commercial or political terms?
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If you are thinking of investing in a currently private company: Can it go public and meet criteria to avoid the costs of Sarbanes Oxley? Can it use a preferential structure to avoid shareholder votes unrelated to commercial activity?
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Is an investment directly or indirectly affected by a government bailout, whether that be of a private company (the auto industry) or public (Fannie and Freddie; Detroit and possibly other municipalities? Who might gain from the bailout and who might see their interest expropriated beyond what could be expected to happen in an ordinary bankruptcy proceeding?
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Is your investment taxable or tax exempt? How is this status affected by the structure in which you hold it?
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Given the importance of rules in finance, and the utter confusion and chaos surrounding the voluminous, conflicting, provisions of the Dodd Frank re-regulation of finance, what rules can help me or harm me, and what ex-politician or regulator should I hire to have an influence on what is written?
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How can I take personal responsibility for investing in my child’s education without getting damaged by tax changes, as has recently happened?
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What state programs enable me to avoid the penalties tied to federal programs? Am I really forced to rely on the state to minimize the consequences of the federal government? Does that mean I am stuck with state-selected options and am blocked from making my own investment decisions about companies? What of this may change if any of the numerous tax proposals are passed?
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Does everything change after the election of 2014? 2016?
Aaron Task is the host of The Daily Ticker and Editor-in-Chief of Yahoo! Finance. You can follow him on Twitter at @aarontask or email him at [email protected]