The news in the last couple of weeks has had endless references to two people who we have been repeatedly told are brilliant: former Treasury Secretary and top Obama advisor Larry Summers and Amazon founder Jeff Bezos. The paeans to the genius of both men say a great deal about the quality of public debate in elite circles.
Larry Summers has been in the news because President Obama told a number of reporters of his desire to have Summers replace current Federal Reserve Board chair Ben Bernanke when his term ends in January. This caught many by surprise, since Janet Yellen seemed the obvious pick for this position.
In addition to having served the last two years as vice-chair at the Fed, Yellen had previously been president of the Federal Reserve Bank of San Francisco, headed President Clinton’s Council of Economic Advisors, and been a member of the Board of Governors. Yellen also had an outstanding academic background, having been a professor at both Berkeley and Harvard. In addition, she would be the first woman to chair the Fed.
But Summers supporters countered that the country needed his brilliant mind. New York Times columnist David Brooks led the charge, telling the audience of an NPR show about Summers’ “meta-cognition skills,” which Brooks defined as his ability to know what he doesn't know.
While most of us really don’t have any idea of how smart Summers actually is, we do have some basis to assess his record. He was a big proponent of deregulation of the financial sector in 1990s and in the last decade, right up to when the collapse of the housing bubble led to the financial crisis. Apparently his meta-cognition skills didn’t help him much on that one.
Summers also was an opponent of actions to break up the big banks even when they when they were bankrupt and would have collapsed if the market was allowed to work its magic. Largely as a result of Summers’ actions, the big banks are bigger and more profitable than ever.
Summers also played a role in getting President Obama to accept a less than adequate stimulus and then shifting his focus to deficit reduction, even when the economy clearly needed more stimulus. The weak recovery and continued high unemployment is the price that we are paying for these policies. Whatever meta-cognition skills Summers may have, they do not seem to have benefited the country thus far.
Jeff Bezos has been in the news because of the surprise announcement of his purchase of the Washington Post for $250 million, roughly 1 percent of Bezos’ estimated wealth. This announcement was quickly followed by news stories praising Bezos’ extraordinary business acumen in building up Amazon as the dominant force in on-line retailing.
While Bezos has succeeded over many competitors in the on-line world, it was more than just his brilliance that allowed him to get a hand up on the competition. In the vast majority of states Amazon has an advantage over brick and mortar competition (including brick and mortar stores with Internet sales) because it does not have to collect sales tax.
This is a really big deal. In many states, including California and New York, sales taxes are in the range of 7-8 percent. This means that if Jeff Bezos and a mom and pop retail outlet could both deliver the same product to your house for $100, Bezos would be able to pocket an extra $7-$8 on the sale because the mom and pop retail outlet has to collect the tax, whereas Jeff Bezos gets to put everything you pay into his pocket.
This comes to real money. Last year Amazon.com’s sales in North America were $34 billion. While Amazon does collect taxes in some states and in many states sales taxes are lower, but if we assume an average uncollected tax rate of 5 percent, Amazon and Bezos effectively got a subsidy from taxpayers of more than $1.7 billion last year. This was a year in which Amazon recorded a small loss.
In fact, if we go back through Amazon’s history the size of the implicit subsidy through Amazon’s sales tax exemption vastly exceeds the company’s cumulative profits. This raises the question of whether Amazon would even exist today without the generosity of taxpayers in being willing to subsidize Amazon’s business at the expense of brick and mortar competitors.
None of this changes the fact that there are many would be Jeff Bezos out there who benefitted from the same subsidy in setting up online retailers, but who did end up out of business. The subsidy by itself didn’t make Bezos ridiculously wealthy. But it is absurd to imagine that Amazon would have been anywhere near as successful if it had to compete on a level playing field with traditional retailers. Those who leave this fact out of the picture are re-writing history.
It will be a big step forward when reporters and columnists are able to look at the people they consider brilliant with open eyes and talk about their accomplishments and failures in a serious way. In the recent Summers and Bezos chapters they have been awed into vapidity.