Tag Archives: economics

Seven Issues the Election Should Be About

April 9, 2012 – 12:05 pm

You may not have noticed, but the general election campaign started this week. I say that for two reasons:

  • Mitt Romney’s victory in Wisconsin pretty well seals his nomination. Republicans understand now: No white knight is coming to save them. It’s Romney or four more years of Obama.
  • President Obama’s speech Tuesday was essentially a keynote address for the fall campaign.

We can already see what that campaign will be like. Romney won the GOP nomination by raising massive amounts of money and carpet-bombing any prospective rival with negative ads. President Obama is projected to raise just under a billion dollars. In either case, you really can’t spend that kind of money on warm, fuzzy stuff. Constant advertising annoys people, so the best you can hope for is to transfer their annoyance to your opponent.

Given how politics has been going, we can anticipate that major issues will be dodged, misrepresented, and even lied about. The media, which ought to be ferreting out the information voters need to make a wise choice, will instead focus on whatever gaffes or stinging comebacks they can find or manufacture, no matter how irrelevant or trivial.

That’s a shame, because there really is an important debate to be had. I don’t claim to know what Mitt Romney believes in his heart – recently his campaign has suggested that we don’t know his “real views” yet – but I know what his party and the conservative movement stands for. Similarly, I’m never sure exactly how much liberalism President Obama is going to defend, but I have a good idea what liberalism means.

It’s a significant contrast. A honest debate between those two worldviews, resulting in a clear choice by a well-informed electorate, would be a tremendous plus for this country.

OK, it won’t happen. But we shouldn’t just shrug and let the candidates off the hook. Even as we see the waters start to circle around the sewer drain, let’s review what this campaign should be about.

1. Inequality. We’ve been in a vicious cycle for 30 years now: The rich get richer; they use that money to buy more political power; and then they use that political power to lower their taxes, weaken the the regulations they have to follow, and otherwise game the system in their favor – plus make it easier to buy political power.

The Republican Party has been the main (but not the only) vehicle for the rich, so it will be interesting to see whether President Obama succeeds in raising this issue, or if conservatives manage to label it all as envy and class warfare. I thought Obama laid it out pretty well Tuesday:

In this country, broad-based prosperity has never trickled down from the success of a wealthy few. It has always come from the success of a strong and growing middle class. … And yet, for much of the last century, we have been having the same argument with folks who keep peddling some version of trickle-down economics. They keep telling us that if we’d convert more of our investments in education and research and health care into tax cuts — especially for the wealthy — our economy will grow stronger. … Now, the problem for advocates of this theory is that we’ve tried their approach — on a massive scale. The results of their experiment are there for all to see.

2. The National Security State. At a time when government is supposed to be tightening its belt, we continue to spend more on defense than all our potential enemies put together. Is that really necessary? How much money could we save with a less aggressive foreign policy that didn’t inject us into every conflict?

Would the world really be a worse place? We’ll never know how the Arab Spring would have handled Saddam if we hadn’t spent all that blood and treasure in Iraq.

And then there’s the internal effect on our liberty and democracy. Government surveillance gets ever more intrusive, and more and more of the government’s actions are secret. How necessary is that?

The opposing case is that the world is a dangerous place, and would be even more dangerous if the US didn’t police it. Maybe Norway can keep its freedom defended with (and from) a relatively small security force, but the US doesn’t have that option.

It’s President Obama’s fault that we won’t have this discussion. (Ron Paul was the only Republican candidate who wanted to talk about it.) He has largely continued the Bush national security policies rather than challenge them.

3. Climate change. There are lots of legitimate liberal/conservative issues to hash out concerning how to deal with climate change: Should we lower CO2 by market mechanisms (cap and trade), by a carbon tax, or by direct government regulation? Should we bargain hard to get other countries to do their part, or should we take the lead? What CO2 level should we be shooting for and how fast should we try to get there? How do we balance the expense of current CO2 reduction versus investments in future research? Can geo-engineering play a role?

We aren’t having those debates because the fossil fuel corporations have spent enormous amounts of money to make the existence of climate change the issue, when in fact the science is well established. The Republican Party has been acting as a wholely-owned subsidiary of the fossil fuel companies, and some Democrats have also been either bought or intimidated by energy-industry cash.

4. The Deficit. Elsewhere I’ve presented the idea that the deficit is not the doomsday device many would have you believe. But it is a symptom of a broken political process. Congress’ main job is to figure out what we as a people want to buy and how we’re going to pay for it. If it can’t do that, what can it do?

A big chunk of the problem is the misinformed electorate. Survey after survey shows that we grossly overestimate how much money is spent on welfare, foreign aid, and whatever National-Endowment-for-the-Arts-type program we find most offensive. We also grossly underestimate how many government services we use personally, and we’re misinformed about how our taxes compare to Americans of recent decades. (Hint: Our taxes are far lower, especially for corporations and the wealthy.)

About half the country thinks we can eliminate the deficit with spending cuts that don’t touch “programs that benefit people like you”. That wishful thinking allows candidates to get away with proposing big-but-vague spending cuts that exempt defense, Social Security, and Medicare — just about everything we spend big on.

5. Immigration. Both liberals and conservatives are conflicted about immigration. There is no ideologically pure answer to our immigration problem, which is why the conversation never goes anywhere.

The centuries-old dream of American employers is to have a workforce that can’t vote. So their ideal is to have temporary foreign-worker programs: We bring people in for ten years or so, get them to work hard for very little money, and then send them home.

But working-class whites see immigrants-taking-American-jobs as one of the social changes they want the Republican Party to protect them from. Hence the rhetoric about rounding up the millions of undocumented Hispanic workers and sending them home.

The last thing the Republican Party wants is millions of poor, non-white new citizens — who would probably vote for Democrats. Democrats would like that, but the unions that support Democrats probably wouldn’t, for the same reason as conservative working-class whites.

Everybody agrees that we shouldn’t have millions of undocumented people wandering around. It’s a security risk, makes our worker-protection rules unenforcible, and generally undermines the rule of law. But since neither side has a solution it wants to take to the voters, both will posture about the issue rather than try to make progress.

6. Health care. Our health care system is a mess. We spend way more per person than any other country, and we get worse results. This is a great country for someone as rich as Dick Cheney to get a heart transplant, but it’s a terrible country for a poor pregnant woman to get pre-natal care. When you average it out, our life expectancy sucks and we lead the industrialized world in unnecessary deaths.

ObamaCare (like the RomneyCare it’s based on) is an imperfect first step at reform. I think it gives away far too much to health insurance companies and drug companies, but that’s politics. If Congress repeals it or the Supreme Court throws it out, we’re essentially nowhere, because the “replace” part of the Republican “repeal and replace” slogan is just a word; there is no actual plan that addresses any of the substantive issues.

And liberals shouldn’t let Obama say “Done now.” ObamaCare has a lot of holes that need filling.

7. The future of democracy. This issue runs through a lot of the others. Ideally, individual voters would educate themselves about the issues that concern them and elect candidates to represent their views. If they really felt strongly, they’d donate $20 or $50 to a campaign.

We’re far, far away from that ideal, and moving farther all the time. The Supreme Court has ruled that money equals speech, and that more speech is better than less. So elections are dominated by massive spending that produces better propaganda — not better educated voters.

In addition, while voters may wake up in time for an election, the big-money interests never sleep. Defeat some special-interest measure like SOPA, and within a few months it will be back in a different form. The big banks can hire entire staffs of lobbyists to write loopholes into new regulations. Voters don’t have the time to ferret that stuff out, and if they did, they couldn’t organize themselves fast enough to do anything about it.

We aren’t having this discussion because no candidate who took it seriously could raise enough money. Worse, neither party even has an ideal vision of how to handle it. The closest thing to a practical reform vision I’ve seen so far is Lawrence Lessig’s.

Resist. Chances are, this election will be decided by something stupid: a blip in the unemployment numbers, a new Romney gaffe on the Etch-a-Sketch scale, or Obama’s inability to prove that he is not a shape-shifter from the Gamma Quadrant. Heck, we’ve had elections decided on the Pledge of Allegiance.

But we don’t have to give in to that. Collectively, social networking ought to give us Arab-Spring-level power, if we exercise it.  We can refuse to respond to nonsense. We can keep coming back to the real issues. It may not work in this cycle. But eventually, we might be able to drag the candidates back to what’s important.

By weeklysift | Posted in Articles | Also tagged , , , , , , | Comments (8)

What is Job Creation?

January 16, 2012 – 12:16 pm

Tuesday the Washington Post’s fact-checker awarded three Pinocchios (“significant factual error and/or obvious contradictions”) to Mitt Romney’s claim to have created 100,000 jobs through his work at Bain Capital.

Meanwhile, Romney’s opponents were assailing him as a job destroyer, a “predatory corporate raider” according to a pro-Gingrich SuperPAC. Rick Perry accused Bain of looting companies and “getting rich off failure“.

Lost in all this attack-and-defense is the question: What does it mean to create a job, anyway? Let me repeat something I wrote a little over a year ago:

A bunch of factors need to come together to create a job. There has to be something worth doing, a worker willing and able to do it, a capitalist to pull together all the tools and materials of production, and a customer willing and able to pay for the product or service.

So the economic environment needs to supply an opportunity and people need to fill three roles: worker, capitalist, and customer. Conservatives assume that workers and customers always appear by magic, so a job is created whenever a capitalist shows up. If that were true, then conservative economics would make perfect sense: Keep rich people’s taxes low, and they’ll be able to fill the capitalist role in more and more places, creating more and more jobs.

In fact, though, any one of the three roles might be scarce. Picture a rural hospital that would love to have a cardiologist. The money and the customers are there, they just don’t have a worker. (We don’t usually think of cardiologists as “workers”, but they are.)

During construction booms, production might be held up by all kinds of worker shortages — plumbers, electricians, carpenters. Maybe the only thing holding up a new restaurant in Tulsa is that the local workforce doesn’t include the right kind of chef. In these cases, it’s the worker who is the “job creator”, not the capitalist. What triggers the existence of the job is the arrival of the scarce worker, who could be hired by any of a number of interchangeable capitalists.

In the recent recession, workers and capitalists have both been abundant, but customers have been scarce. Business Insider puts it like this:

If a company is going to hire someone, then a crucial question they must ask is: Is this person going to help make or do something that someone is going to buy. You can talk all you want about taxes or regulation, but if end demand for a product or service isn’t there, there’s no reason for a company to hire.

That’s the logic of stimulus: Put more money in people’s pockets and they will create jobs by becoming customers.

(That insight, by the way, provides the proper response to the slogan “I never got a job from a poor person”. You’ll also never get a job from a capitalist with no customers, no matter how rich he is or how little tax he pays.)

Finally, let’s consider the economic environment. Suppose a new interstate gets built, with an exit near a town that has a lot of unemployment. Three local businessmen want to build a fast-food franchise on a choice piece of land near the exit, and the Burger King franchisee outbids the McDonalds and Dunkin Donuts franchisees. So the Burger King gets built and employs 15 burger-flippers.

As soon as the new interstate changed the economic environment, all three roles were abundant. So who “created” those 15 jobs? The government did, by building the interstate. Government infrastructure projects have created jobs as far back as the Erie Canal, which made Buffalo into a grain-processing center.

But wait. Government can’t create jobs. Everybody knows that: Rick Perry, Ron Paul, Herman Cain, Eric Cantor, everybody. If you’re too stupid to understand why not, this conservative economist will explain it to you.

Maybe they all need to think it through again.

But let’s get back to the original topic: How many jobs did Mitt Romney create or destroy during the business career that netted him a quarter billion dollars?

Quite possibly none. If capitalists weren’t the scarce commodity in the deals he did, Romney might have been just another interchangeable cog in the economic machine. He probably is no more responsible for the jobs at Staples than the clerks who man the counters or the people like me who get our copying done there. Maybe the store would be in a different place, wear a different name, and employ different people, but as far as the overall economy is concerned it would make no difference.

Ditto for the job destruction in companies like AmPad. Money was there for pirates to capture, and there were plenty of them around. Mitt was the pirate who captured that particular treasure ship (and he’ll have to work out the ethics of it with his conscience and his God) but did he change anything? Ultimately, probably not.

By weeklysift | Posted in Articles | Comments (9)

The Sifted Books of 2011: Rethinking Economics

December 26, 2011 – 12:33 pm

I don’t have a book-review strategy on the Sift. In deciding what to read and what to write about, I usually just follow my nose and figure out later what it all means. So I don’t know why I reviewed exactly half as many books in 2011 as in 2010: 8 instead of 16.

In retrospect, it’s interesting to note that more than half of the 2011 books were about economics: Debt: The First 5,000 Years by David Graeber, The Seven Deadly Innocent Frauds of Economic Policy by Warren Mosler (reviewed in two parts: first, second), Why Marx Was Right by Terry Eagleton, The Lights in the Tunnel by Martin Ford, and Consumed by Benjamin Barber.

There’s a strong contrast here with last year’s economics books. Then I was often telling you about books by economists from the liberal mainstream, like Robert Reich and Paul Krugman. But these five are more radical start-over-from-scratch books.

In retrospect, here’s what I think that means: For a long time now, I have doubted the conservative conventional wisdom that the market can solve any and all problems. But lately I’ve also begun to doubt the liberal conventional wisdom that we can achieve a fair and vibrant economy by tinkering with interest rates, regulations, and government spending. This year’s books reflect my search for a new way of thinking about the economy.

Both Graeber and Mosler are telling us that money isn’t what we think it is. Mosler’s book examines the nuts-and-bolts of how the banking system creates money, while Graeber takes a long anthropological look at where this whole idea of money comes from and how it changed society.

Eagleton challenges the capitalism-has-won narrative of the post Cold War world, and shows how our “victorious” capitalism is displaying the flaws that Marx predicted a century and a half ago. And Ford goes back to the Luddite claim that machines destroy jobs, arguing that even if it wasn’t true then, it is now.

Barber’s book is on the boundary between economics and politics, arguing that if capitalism is allowed to run wild it will destroy democracy. Consumer and citizen are two very different roles, and the more we identify with our consumer role, the less we will be able to perform our duties as citizens.

Barber presents a different side of the scene portrayed by Ford. I summarized Barber’s point like this:

The root of the problem Barber presents is capitalism’s success in satisfying all the genuine needs of people who have money, creating a situation in which “the needy are without income and the well-heeled are without needs.”

Here’s the Ford/Barber connection: In our mechanized world, the one thing the well-heeled don’t need is more labor, which is all the needy have to sell.

Given this theme, there are two books that I should have written about but didn’t. Race Against the Machine by Erik Brynjolfsson and Andrew McAfee, and the 1944 classic The Great Transformation by Karl Polanyi. Both are woefully short of effective prescriptions, but they add important ideas to the diagnosis.

Brynjolfsson and McAfee bring in this arresting image from a book I haven’t read, A Farewell to Alms by Gregory Clark: In 1901, the British economy found jobs for more than 3 million horses. All those jobs are done by machines now, and horses are purely recreational.

There was always a wage at which all these horses could have remained employed. But that wage was so low that it did not pay for their feed.

How many human workers will go the way of the horse?

Polanyi’s book is a hard read, but fascinating. He tells the story of how the market economy was created in the 1800s. That statement is already radical, because so many people believe that the market economy is natural and goes back into deep antiquity.

In fact, Polanyi says (and Graeber agrees), markets used to be only a small part of the economy. In order to have what we now think of as a market economy, markets had to be created for what Polanyi calls the three “fictitious commodities”: labor, land, and money.

Labor is only another name for a human activity that goes with life itself, which in its turn is not produced for sale but for entirely different reasons, nor can that activity be detached from the rest of life, be stored or mobilized; land is only another name for nature, which is not produced by man; actual money, finally, is merely a token of purchasing power which, as a rule, is not produced at all, but comes into being through the mechanisms of banking or state finance. None of them is produced for sale. The commodity description of labor, land, and money is entirely fictitious.

My hunch is that the re-thinking of economics has to start there.

A related question is why our political system can’t adjust to our new economic realities. That led me to look at So Damn Much Money by Robert Kaiser, which is a history of lobbying.

The possibility of another way of functioning entirely led me to Reality is Broken by Jane McGonigal. McGonigal starts with the observation that the multi-player computer games like World of Warcraft and Halo soak up vast amounts of human time, effort, and ingenuity. What makes these invented worlds so much more engaging than reality?

Part of the answer is that successful games appeal to aspects of the human character that have been left out of the homo economicus model of human nature. In other words, we aren’t all trying to get as much stuff as we can for as little effort as possible — at least not all the time. Sometimes we want to achieve self-respect and honor even if it costs us effort and money.

McGonigal describes the widespread perception among gamers that their game persona is a better human being than their work persona. Something can be done with that. (One fictional view of how that could work is the Daemon/Freedom™ series by Daniel Suarez.)

Another book I should have reviewed made a similar point looking backward rather than forward: The Honor Code by Kwame Anthony Appiah. Major social changes, he claims, come not from self-interest but from a sense of honor. Society changes because our ideas about what is honorable change.

Appiah looks at societies that ended dueling, slavery, foot-binding, and honor killings of sexually activity female relatives. In each case, he finds that the cause is not economic and not fundamentally rational; in fact, the rational arguments against the practice were well known long before they became convincing. Instead, change happens via an invisible shift in the community’s honor code: Practices that once defended honor suddenly become dishonorable.

Two books I should have reviewed that deserve more than a paragraph here are 23 Things They Don’t Tell You About Capitalism by Ha-Joon Chang and The Myth of Individualism by Peter Callero. Maybe next year.

The one book I reviewed that doesn’t fit this pattern is The Hour of Sunlight by Sami al Jundi, which is one Palestinian’s attempt to envision peace between his people and the Israelis. Interestingly, that review was an afterthought: The article I wanted to write fell through at the last minute, and I needed something to fill the space.

By weeklysift | Posted in The Sifted Bookshelf | Comments (2)

Jobless Recoveries are Normal Now

November 7, 2011 – 2:27 pm

This might be the most important graph in American economics, but in the popular media hardly anybody talks about what it means.

It comes from the blog Calculated Risk (which has been updating it for a long while now), and is based on data from the Bureau of Labor Statistics.

Each colored line represents a different recession in the American economy since World War II, starting with the 1948 recession (in blue). The longest and deepest (in red) is the current recession. The curves are scaled according to the percentage of jobs lost, to make the different recessions more comparable. (Otherwise the 1948 recession would look small just because the economy was smaller then.) The horizontal scale is months, and the recessions are lined up so that Month Zero is when employment bottomed out.

For the purposes of the graph, a recession starts when the number of jobs peaks, and it ends when employment returns to that previous high. That’s a little different than the definitions most economists use. Typically, economists say a recession is over when GDP starts rising again, which is why the Wikipedia says the current recession ended in June, 2009. But employment is what is known in the trade as a “lagging indicator”. In other words, even after the recession is technically over, you’ve still got a lot of jobless people wandering around.

At its simplest level, this jobs-based graph just verifies something you probably already feel in your bones: This recession is longer and deeper than anything we’ve seen since the Depression, and it’s not over yet.

But that’s not what I want to point out. Instead, I want you to notice this: The last three recessions have a different shape from the others. The earlier recessions are short and sharp. Jobs go away fast and come back fast. The job market hits a definite bottom, and 8-10 months later everything is back to normal.

But the recessions of 1990 and 2000 look like smaller versions of the recession we’re in. In each of them, the bottom is flat rather than sharp, and employment doesn’t come all the way back for a long time after that — two years for the 2000 recession and nearly-two-and-counting for the current one.

Therefore: The job market is changing in some long-term way that has little to do with our month-to-month political squabbles. The 1990 recession starts and ends under President Bush the First. The 2000 recession gets started under Clinton and its long, slow recovery happens under Bush II. The worst of the current recession is on Obama’s watch, but the shape and depth of the curve was already well established when he took office.

It’s hard to find a Republican/Democrat pattern here. About all you can say for or against Obama, for example, is that the deep recession curve that had already developed under Bush II has gone on to have the same shape you’d expect from the previous two recessions.

Other simple explanations similarly fall flat. For example, we had a modest budget surplus and no wars at the beginning of the 2000 recession, but a huge deficit and two wars going into the current recession. But the two curves have the same shape.

I’m going to go on to list some characteristics and possible explanations for the new-style recession, but I don’t claim to have answers for it. (There are things I’d like to see done, but ending this article with any policy proposals I can think of would do a disservice to the data. I’m pointing to something solidly real, and my “solutions” would be speculative.) Mainly, I want to offer two principles for critiquing anybody else’s proposals:

  • If you’re not talking in terms of decades, you’re not dealing with the real problem. Whatever the causes are, they’ve been brewing since at least the late 1980s.
  • You can’t fine-tune your way out. Any change in policy that is going to make a dent will have to be big and fundamental. If the pattern is unaffected by the differences between Clinton and Bush, or Bush and Obama, we’ve either got to think a lot bigger or accept these long slow recessions as fate.

The old recession pattern. OK, now let me try to express the change in words rather than curves. The old-style recessions fit the inventory-correction model of the business cycle in a manufacturing economy.

To say that in English: Good times cause everybody to get too optimistic at the same time. (GM builds too many cars, contractors put up too many new subdivisions, Sears stocks too much merchandise, and so on.) When this over-optimism starts to become apparent, everybody slams on the brakes at the same time.

So orders drop, factories get shut down, and workers get laid off. But it’s all temporary. After a few months, retailers manage to sell off their overstocked inventories and need to order new stuff again. Then the workers get called back, the factories re-open, and the recession is over.

The last few recessions haven’t looked like that in several ways.

Bubbles. First, financial bubbles play a much bigger role in setting the recession off. The current recession starts with the housing bubble, the 2000 recession with the dot-com bubble, the 1990 recession with the savings-and-loan crisis.

Psychologically, it’s the same cause: Good times make people over-optimistic. But in the old model it was producers who became too optimistic about what they could sell, so they produced more than the market could consume.

In a bubble, on the other hand, it’s speculators who become too optimistic. So condos are built in Florida not because anybody expects people to live in them, but because speculators think they can flip them to other speculators for a quick profit. Or mortgages are written without any expectation that the payments will be made, because investment bankers have figured out a way to package those mortgages into CDOs that the ratings agencies will stamp AAA.

That’s a very different problem than GM building too many Corvettes or Sears stocking too many washing machines.

Bubble-popping recessions are harder to recover from because there is no “normal” to get back to. The NASDAQ stock index peaked over 5000 in March, 2000. That level was justified by visions of limitless future profits that turned out to be imaginary. So even 11 years later, the NASDAQ is still only about half what it was.

Inventory recessions are like taking a wrong turn. Bubble recessions are like dreaming something and then waking up. You can’t just go back.

Job destruction. Partly due to changes in the economy and partly due to changes in the social contract, businesses are now actively looking for ways to get rid of their workers. So the old model (where GM laid off some workers until things got better, then hired them back) looks quaint now.

These days when you lose a job, it’s gone. The company has probably closed the factory for good, merged with a competitor, or otherwise re-engineered its process to get along without you. When demand comes back, your former employer will open a new factory in Mexico or subcontract to a supplier in China or buy robots. At best, it might only threaten to do those things so that it can hire you back as a temporary contractor at half your old rate.

[BTW, this week I ran into a joke that is probably from the 50s or 60s. Union leader Walter Reuther and industrialist Henry Ford II are touring a new highly mechanized Ford plant. “Tell me, Walter,” Ford says, “How do you plan to get these machines to join your union?” Reuther replies: “The same way you’re going to get them to buy your cars.”]

Job recovery takes longer now because the economy has to create brand new jobs, not just re-start the old jobs. This means that the experience of being unemployed is completely different. The laid-off GM worker could collect unemployment, fix up the house, coach Little League, and be reasonably certain to go back to work in a few months.

Today the unemployed have to have a plan, and searching for a new job can be harder and more stressful than working. Worse, the new job often pays significantly less than the lost one.

Inequality. A long-term trend in back of the other trends is increasing inequality. As more and more money flows to the 1%, they don’t need more goods and services; they need more investment opportunities. That restless cash looking for a home pumps up the bubbles, funds the mergers, and buys the robots. But it doesn’t create new markets that need more workers.

What should we do? I’m not sure, but it needs to be much bigger and very, very different from anything currently on the table.

By weeklysift | Posted in Articles | Also tagged | Comments (7)

Economics Works Backwards Now

September 12, 2011 – 12:24 pm

Do you ever think about how strange it is to worry about “creating jobs”? Wednesday, Douglas Rushkoff observed this:

Our problem is not that we don’t have enough stuff — it’s that we don’t have enough ways for people to work and prove that they deserve this stuff.

Originally, economics was supposed to be about scarcity. People didn’t have enough food, clothing, housing, or tools. So you worked to make some, and then traded your surplus for somebody else’s surplus of the things you needed.

Today it’s all backwards. We produce plenty of goods, and if necessary we could dial the process up and produce more. What’s scarce now is work.

Try to imagine that on a personal level: It’s dinnertime. You’re hungry. There’s so much good food in the frig that you worry about it spoiling. But you haven’t justified your meal yet and you can’t think how you’re going to do it. So you have to sit there and be hungry until you can create a task for yourself.

Or on a family level: The kids each had jobs to do to help with dinner. But then we got a dishwasher, so now Jenny doesn’t get to eat dinner because we haven’t found a new job for her yet.

Crazy, isn’t it?

This week the big news was President Obama’s jobs speech, the Republican reaction, and the various economists who mostly told us that these were pretty good ideas.

But think about that speech’s focus. Not that we need to grow more food or make more cars or build more houses because those things are needed, but that we need to produce more of something so that people can be employed producing it. He tried to justify the needfulness of the jobs, but all the same it would miss the point if Obama could accomplish the same things by snapping his fingers instead of hiring people.

Rushkoff again:

it seems to me there’s something backwards in that logic. I find myself wondering if we may be accepting a premise that deserves to be questioned.

I am afraid to even ask this, but since when is unemployment really a problem? I understand we all want paychecks — or at least money. We want food, shelter, clothing, and all the things that money buys us. But do we all really want jobs?

John Kenneth Galbraith was making similar observations half a century ago. In The Affluent Society he described the following paradox: We judge our nation’s economic success by how much it produces, and we justify production because it satisfies demand. But demand has to be created by advertising, because without constant hectoring people would not want all the things we produce.

After a certain point, Galbraith said, “Production only fills a void that it has itself created.”

So why are we doing all this? In theory, our society could work less, produce less, advertise less, and we’d have no more unmet desires than we have now. But then there wouldn’t be as many jobs.

If production is a paradox, productivity as an even bigger one. On the one hand, productivity is our best friend. The reason the standard of living today is so much higher than in the Middle Ages is that an hour of work now (with the assistance of machinery, electronics, fossil fuels, and a better-organized society) produces so much more than an hour of work did then. Beyond an occasional hobbyist project, why would you choose to work all week making something that you could buy for 20 minutes worth of your salary?

But productivity and new technology kills jobs. Rushkoff begins his essay talking about the Post Office, which faces massive layoffs because email and electronic bill payments don’t require human sorters and couriers.

Again, that’s not a new idea. The French economist Sismondi satirized the pure productivity-is-good view in 1819 in New Principles of Political Economy:

In truth then, there is nothing more to wish for than that the king, remaining alone on the island, by constantly turning a crank, might produce, through automata, all the output of England.

That fantasy gets closer and closer to reality. In his 1995 book The End of Work, Jeremy Rifkin wrote:

The quickening pace of automation is fast moving the global economy to the day of the workerless factory.

Sismondi’s image of the king turning a crank captures the social problem of the workerless factory: The only reason to care whether it is in Topeka, Taipei, or Timbuktu is who owns it and who gets to tax it. Wherever it is, it will make goods, but it won’t provide jobs.

So even if “the output of England” stays the same, all the value of it now belongs to the crank-turning king (or maybe to the Workless Factory Corporation). No matter how plentiful those goods are, what can the people of England trade in order to get them?

In 1930, at the depths of the Depression, John Maynard Keynes wrote the hopeful essay “Economic Possibilities for our Grandchildren“:

We are being afflicted with a new disease of which some readers may not yet have heard the name, but of which they will hear a great deal in the years to come — namely, technological unemployment. This means unemployment due to our discovery of means of economising the use of labour outrunning the pace at which we can find new uses for labour.

But this is only a temporary phase of maladjustment. All this means in the long run that mankind is solving its economic problem.

Imagine if humanity really did “solve its economic problem”. Suppose we got off the hamster wheel of ever-increasing desires, and kept improving our productivity until we could comfortably supply everything people really wanted.

Now imagine that we could do all that with only a few people working. The way we’re currently organized, that would be Hell. Whoever owned the machines and the natural resources would have the whip hand over the rest of us, who would scratch and claw to get the few remaining jobs.

So I want to suggest this: Yes, in the short-to-medium term we really do need to create jobs. But maybe our economic problems seem so intractable because we’re using economic tools to attack what is really a social problem. Currently (because in centuries past scarcity seemed eternal and the production system needed as many workers as possible) jobs organize our lives, give us our identities, and (most of all) allow us to prove that we deserve to eat.

But unless we either outlaw progress or keep inflating our desires until we consume the planet, eventually we’re going to have to rethink our lives, our identities, and the system that distributes goods. Otherwise we’re headed for Cornucopian Hell.

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Six True Things Politicians Can’t Say

September 12, 2011 – 12:16 pm

Remember how things were in high school? If a truth was unpopular, you’d be ridiculed for saying it, no matter how obvious it was. Even people who knew you were right wouldn’t defend you, because then they’d be ridiculed too. They might even think they had to speak against you, just to be safe.

Politics is like that, but mostly just on one side. The rich and powerful can emphasize the effect when it works for them (by hiring professional ridiculers) or minimize it when it works against them (via spokesmen and front groups who absorb ridicule until things are safe for conservative politicians). If the PR professionals do their jobs well, the pro-wealth politicians don’t have to offer evidence or answer opposing arguments, they can just laugh and scoff — like the cool kids used to.

But a popular lie that damages the poor or even the middle class can go unchallenged for a long, long time. If we want to hear the corresponding truths, we’ll have to start saying them ourselves.

1. Most government money is well spent. The opposite idea — that government pours money down a rat hole — is broadcast every day. But strangely, anybody who sets out to find this wasteful spending and eliminate it ends up firing teachers, getting rid of food inspectors, letting bridges fall down, or cutting off somebody’s medical care.

I’m sure the people in the path of Texas’ wildfires appreciate the “waste” Gov. Perry managed to cut from the budgets of volunteer fire departments and the Texas Forest Service. When the antibiotic-resistant plague gets rolling, I’m sure we’ll be similarly grateful to House Republicans for the “waste” they’re finding at the CDC.

Speaking this truth in public takes courage, because the ridiculers can point to famous anecdotes of government waste — bridges to nowhere, $600 toilet seats — and nearly everyone knows some story of a mismanaged local project, an acquaintance who scammed disability, or a lazy civil servant who can’t be fired.

But the private sector has its own examples of spectacular waste. How many welfare cheats would it take to equal the $300-500 million CEO Dick Fuld “earned” by managing Lehman Brothers into extinction and touching off the 2008 financial collapse? I can find waste in my own apartment — things I didn’t need, never used, or paid too much for. A certain amount of waste is the natural friction you’ll find in any human activity.

Government is a human project, so it has waste in it and always will. Except for unnecessary wars, is it more wasteful than the private sector? Does its inevitable waste cancel out the vital services it performs? Could we get those services without waste? No.

2. Regulations save money and lives. Corporations can often make a short-term profit doing something that eventually costs the public far more than the corporation makes. (The guy at Hooker Chemical who suggested burying toxic waste at Love Canal saved the company a bundle. He probably got a raise.) Stopping those bad deals is what government regulation is all about.

We hear every day how much companies spend complying with regulations, as if that were the whole story. What we gain from that spending is far more valuable. In the 60s and 70s, the auto companies fought tooth and nail against making cars safer. A car with seat belts used to cost extra. Air bags weren’t even an option, much less standard equipment. Hard, unpadded, and sometimes even sharp steering wheels killed thousands.

Traffic deaths in the U.S. peaked in the late 70s, even though the number of people, cars, and miles driven keeps going up. That’s government regulation for you.

Or consider this: Taking the lead out of gasoline has made American children measurably smarter. What’s that worth to our future economy? What’s that worth personally, to them and to us?

3. The rich are job destroyers, not job creators. You can’t have a mass-production economy if the masses can’t afford the products they make. So when the rich get too rich, growth suffers.

The last time the rich captured this much of our nation’s income was 1929 — the last time the economy crashed this badly. It’s not a coincidence.

4. Rich heirs are parasites. In political rhetoric, rich people are all hard-working, risk-taking entrepreneurs. Because politicians need contributions from the rich, they can’t point out just how useless most second-and-third-generation millionaires and billionaires are.

We are encouraged to resent the unemployed worker who doesn’t try hard enough to find a new job, but not the heir who never works. We’re encouraged to resent the black or Hispanic who gets into Harvard through affirmative action, but not the “legacy” Ivy Leaguer whose test scores are even worse.

Our plunging inheritance tax has increased inequality in the worst possible way, and makes us more like the hereditary aristocracies of 18th-century Europe. In spite of the pop-culture vampire revival, we’re still missing the underlying social metaphor of the original Dracula: Those exotically beguiling aristocrats are sucking our blood.

5. The U.S. government can’t go bankrupt (unless it decides to). Even President Obama has been invoking the spectre of government bankruptcy, but it can’t happen in any literal sense.

Why? The overwhelming majority of federal government’s expenses are in dollars. Its debt is in dollars. So what are dollars? Whatever the Federal Reserve says they are.

The Fed creates dollars the way that Delta creates frequent flier miles: It enters them on a spreadsheet. The U.S. Treasury has an account at the Fed, which the Fed can replenish by creating dollars to buy government bonds. Or it could just let the Treasury’s balance go negative. No sparks would fly out of the Fed’s computers. Negative numbers work just fine.

The only way the U. S. government can go bankrupt is if it creates a crisis for itself, like the recent debt-ceiling debacle. As long as Congress is willing to authorize the government to pay its debts, the government can pay its debts.

Though it can’t go bankrupt, the government could pay a penalty for running a big deficit in two ways: The markets could drive up interest rates (which isn’t happening), or the Fed creating dollars could increase inflation (which isn’t happening, but should).

6. Some inflation right now would be a good thing. The official mandate of the Federal Reserve is to balance inflation against unemployment. It doesn’t. The Fed goes on red-alert at every hint of inflation, but the current unemployment is not inspiring similar alarm.

An easier money policy would lower unemployment at the “cost” of inflation — which would actually be a benefit. Anybody who lived through the 70s remembers the mindset inflation brings: You don’t sit on piles of cash. You buy or invest now, because stuff is only going to cost more later.

Corporations are sitting on a trillion dollars of cash. Rich people are probably sitting on even more. A little fear of inflation would get that money moving again.

7. Fill in your own unspoken truth. …

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Why I Am Not a Libertarian

August 22, 2011 – 12:15 pm

Of all the political movements out there, the Libertarians have the coolest rhetoric. No matter what the issue is, they get to talk about Freedom vs. Tyranny and quote all that rousing stuff the Founders said about King George.

It’s also the perfect belief system for a young male (and maybe, by now, young females too). You don’t need knowledge or experience of any specific situations, you just need to understand the One Big Idea That Solves Everything: Other than a small and appropriately humbled military and judicial establishment, government is bad. Protect life, protect property, enforce contracts — and leave everything else to the market.

I should know. Thirty-five years ago, I was a 19-year-old libertarian, and I learned all the arguments. Now I’m a progressive — a liberal, whatever — and these days even I have to shake my head at how often I’m tempted to quote Marx.

What happened? Well, I suppose I could stroke my white beard and pontificate vaguely about the benefits of 35 years of experience. But I’m thinking that a decent respect to the opinions of mankind requires me to be a little more specific.

When you escape a sweeping worldview like Libertarianism, you usually don’t find an equally sweeping critique right away. A broad reframing may come later, but the transformation starts with a few things that stick in your craw and refuse to let themselves be swallowed.

For example, when I was leaving fundamentalist Christianity, one of the first things that bothered me was the genealogy of Jesus. The Bible contains two irreconcilable ones (in Matthew and Luke); they can’t both be the “gospel Truth”. Now, decades later, that issue is nowhere near the top of my why-I’m-not-a-fundamentalist list.

So let me start with some specific, simple things before I launch into more abstract philosophy.

Plague. I recommend that anyone thinking about becoming a Libertarian read The Great Influenza by John Barry. It doesn’t say a word about political philosophy, but it does compare how various American cities handled the Spanish Flu of 1918, which globally killed more people than World War I. The cities that did best were the ones that aggressively quarantined, shut down public meeting places, imposed hygiene standards, and in general behaved like tyrants.

As you read, try to imagine a Libertarian approach to a serious plague. I don’t think there is one. Maybe most people would respond to sensible leadership, but public health is one of those areas where a few people with the freedom to pursue screwy ideas can mess up everybody.

Global warming. There’s a reason why small-government candidates deny global warming: Denial is the only answer they have. Global warming is a collective problem, and there is no individualistic solution to it. Even market-based approaches like cap-and-trade require a massive government intervention to create the market that attacks the problem.

Property. Now let’s get to that more serious reframing.

I had to live outside the Libertarian worldview for many years before I began to grasp the deeper problem with it: property. Every property system in history (and all the ones I’ve been able to imagine) are unjust. So a government that establishes a property system, defends it, and then stops is an agent of injustice.

Libertarians tend to take property as a given, as if it were natural or existed prior to any government. But defining what can be owned, what owning it means, and keeping track of who owns what — that’s a government intervention in the economy that dwarfs all other government interventions. You see, ownership is a social thing, not an individual thing. I can claim I own something, but what makes my ownership real is that the rest of you don’t own it. My ownership isn’t something I do, it’s something we do.

[Aside: This is why it’s completely false to say that government programs primarily benefit the poor. Property is a creation of government, so the primary beneficiaries of government are the people who own things — the rich.]

Property and Labor. It’s worthwhile to go back and read the justifications of property that were given in the early days of capitalism. The most famous and influential such justification was in John Locke’s 1690 classic The Second Treatise of Civil Government. Locke admits that both reason and Christian revelation say that God gave the world to all people in common.

But I shall endeavour to shew, how men might come to have a property in several parts of that which God gave to mankind in common, and that without any express compact of all the commoners.

Locke argues that we individually own our bodies, and so we own our labor. So when our labor gets mingled with physical objects, we develop a special claim on those objects. The person who gathers apples in a wild forest, Locke says, owns those apples.

The labour that was mine, removing them out of that common state they were in, hath fixed my property in them. … Though the water running in the fountain be every one’s, yet who can doubt, but that in the pitcher is his only who drew it out? His labour hath taken it out of the hands of nature, where it was common, and belonged equally to all her children, and hath thereby appropriated it to himself.

But Locke attaches a condition to this justification: It only works if your appropriation doesn’t prevent the next person from doing the same.

No body could think himself injured by the drinking of another man, though he took a good draught, who had a whole river of the same water left him to quench his thirst

And that’s where the whole thing breaks down. Today, a baby abandoned in a dumpster has as valid a moral claim to the Earth as anybody else. But as that child grows it will find that in fact everything of value has already been claimed. Locke’s metaphorical water is all in private pitchers now, and the common river is dry.

When that individual tries to mingle labor with physical objects, he or she will be rebuffed at every turn. Gather apples? The orchard belongs to someone else. Hunt or fish? The forest and the lake are private property.

The industrial economy is in the same condition. You can’t go down to the Ford plant and start working on your new car. You have to be hired first. You need an owner’s permission before your labor can start to create property for you. If no owner will give you that permission, then you could starve.

Access to the means of production. In Locke’s hunter-gatherer state of Nature, only laziness could keep an able-bodied person poor, because the means of production — Nature — was just sitting there waiting for human labor to turn it into property.

Today’s economic environment is very different, but our intuitions haven’t kept up. Our anxiety today isn’t that there won’t be enough goods in the world, and it isn’t fear that our own laziness will prevent us from working to produce those goods. Our fear is that the owners of the means of production won’t grant us access, so we will never have the opportunity to apply our labor.

I meet very few able-bodied adults whose first choice is to sit around demanding a handout. But I meet a lot who want a job and can’t find one. I also meet young people who would be happy to study whatever subject and train in whatever skill would get them a decent job. I am frustrated that I can’t tell them what subject or what skill that is.

Justice. A Libertarian government that simply maintained this property system would be enforcing a great injustice. Access to the means of production should be a human birthright. Everyone ought to have the chance to turn his or her labor into products that he or she could own.

What’s more, everyone should get the benefit of the increased productivity of society. No individual created that productivity single-handedly. No individual has a right to siphon it off.

But instead, our society has a class of owners, and everyone else participates in the bounty of the Earth and the wealth of human progress only by their permission. Increasingly, they maneuver into a position that allows them to drive a hard bargain for that permission. And so higher productivity means higher unemployment, and the average person’s standard of living decreases even as total wealth increases.

The role of government. I anticipate this objection: “You want to go back to being hunter-gatherers. We’ll all starve.”

Not at all. I want a modern economy. But a lassez-faire economy that takes the property system as given is unjust. It is the proper role of government to balance that injustice, to provide many paths of access to the means of production, and to compensate those who are still shut out.

To prevent government from doing so, in today’s world, is no way to champion freedom. Quite the opposite, it’s tyrannical.

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A Week of Down

August 8, 2011 – 11:59 am

It’s been an eventful week economically. The debt ceiling deal got passed and signed, but the stock market tanked and S&P downgraded U.S. government bonds anyway.

For the most part the media has covered this constellation of issues the way they cover anything: What-happened and what-it-means-for-citizens has gotten short shrift, in favor of assessing blame (always awarding it equally to both sides) and trying to predict how this tactical skirmish will affect future elections.

But we’re talking about trillions of dollars here, so it must have some effect on real people. Let’s start there.

What got cut first. “Only” $917 billion of spending cuts have been passed so far, including only $21-25 billion in the 2012 budget. (I’m seeing different numbers in different places; not sure why.) So worries about immediate contraction in the economy (at least from this deal) are overblown. The rest of the $900 billion is cut over the next decade.

Apparently, $350 billion comes from “security” — defense, homeland security, etc — and $567 billion (although this article in The Hill claims $756 billion) from domestic discretionary spending (i.e., not entitlements like Social Security and Medicare). That’s as specific as things have gotten so far. The Hill:

The law does not itemize the cuts, instead leaving those decisions to appropriators. But the size of reductions makes it inevitable they will impact a long list of discretionary programs, including those related to environmental protection, food safety, education and infrastructure.

<sarcasm> Food safety. Just the other day I was noticing that I hadn’t gotten food poisoning lately and thought, “That’s probably something we could cut back on.” <end sarcasm> The long-term unemployed are probably going to suffer too.

The next round of cuts. Boehner, Pelosi, Reid, and McConnell each get to name three people to a “Super Committee” to recommend another $1.5 trillion in deficit reduction by November. Their recommendations will get an up-or-down vote in both houses of Congress, with no amendments.

The problem with agreements like this is that no Congress can force a future Congress to do anything. So the agreement contains automatic cuts that will happen if the $1.5 trillion deficit reduction doesn’t pass. The automatic cuts are supposed to be ugly to both sides, so that they’ll be motivated to negotiate a deal to avoid them.

Republicans are so set against any tax increases on the wealthy that they wouldn’t agree to them even in this automatic deficit-reduction package that isn’t supposed to happen. Their motivation is supposed to come from defense spending cuts.

The painful-automatic-reduction feature of the agreement sets up another hostage crisis in November, with the idea that both sides will have hostages, so no one will get shot. Somehow I don’t find this comforting. Jonathan Chait has compared such agreements to ransoming your child from kidnappers for “$100,000 and your other child”.

The precedent we’ve set. Keep in mind that the debt ceiling has never been used this way before. Most other countries don’t even have a debt ceiling, because it’s redundant: If Congress passes a budget with a deficit, it shouldn’t have to separately authorize borrowing to cover it. (That’s like going to a restaurant with nothing but your Visa card, eating, and then debating whether you’re going to take on this additional debt by signing the receipt.)

In the past, debt-ceiling increases have been opportunities for the out-of-power party to posture about the irresponsibility of the in-power party. But never has there been a negotiation in which the president made concessions to get the ceiling raised. That’s because the debt ceiling is a doomsday device. Nobody seriously believed that the country would be better off if our government couldn’t meet its commitments.  So there was nothing to negotiate about.

But now hostage-taking has become a respectable tactic. Don’t take my word for it, listen to Senate Minority Leader Mitch McConnell.

I think some of our members may have thought the default issue was a hostage you might take a chance at shooting. Most of us didn’t think that. What we did learn is this — it’s a hostage that’s worth ransoming.

McConnell says this “set a template for the future. … we’ll be doing it all over.”

I keep flashing back to the novel The First Man in Rome. As the story begins, the Roman Republic has few rules but a lot of traditions. In a gradual back-and-forth escalation of advantage-seeking, Marius (the main character) and his enemies violate the traditions — sometimes with justification, sometimes not. By the end, Marius is mounting his enemies’ heads on spikes in the Forum.

So yeah, there is nothing illegal about holding the American economy hostage until you get what you want. It’s just a violation of tradition, something we’ve never done before. But if you go far enough down that road, you wind up with heads on spikes.

The downgrade. Raising the debt ceiling and cutting future deficits was supposed to keep our credit rating up. It didn’t. On Friday S&P downgraded the U.S. government’s bonds from AAA to AA+, which is still pretty good. (Japan is at AA-, and they manage to sell 30-year bonds at less than a 2% interest rate.) The other major ratings service, Moody’s, is maintaining the AAA rating, at least for now.

As with the debt-ceiling crisis, lots of blame is going back and forth. Democrats and Republicans are blaming each other, the administration is criticizing S&P, and so on.

Here’s the thing to understand: What bothers S&P isn’t the sheer size of the federal debt. (Again, Japan is much worse fiscal shape, and they’re far from bankrupt.) It’s the dysfunctionality of our political system. If you look at the trends and do the math, our current level of taxation doesn’t cover the expenses of a world empire with an aging population and an inefficient health care system. None of that is unsolvable, but S&P says:

The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed.

No one has a plan to disengage our military commitments, the Republicans have drawn a line in the sand against any increase in revenues, and our society is probably not willing to let large numbers of old people die in the streets. So how does that situation resolve? Inflation? Or maybe one of the future fiscal hostage crises goes bad and we actually default.

Given what we’ve just seen, it’s hard to make the case that loaning money to the U.S. government is risk-free.

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The Mosler Proposals

August 1, 2011 – 10:58 am

Two weeks ago I introduced you to Warren Mosler’s Seven Deadly Innocent Frauds of Economic Policy, a short and insightful book you can read for free.

Review. Mosler’s main point is simple: Money doesn’t work the way you think it does. A dollar is just a data entry at the Federal Reserve, and doesn’t represent any physical substance. So if the Fed’s computer says you have a billion dollars, then you do. Those dollars didn’t have to “come from” anywhere or correspond to anything; they’re just data. (If Delta gave you a million frequent flier miles, would those miles have to come from somewhere?)

Consequently, the U.S. government’s spending is not limited by it’s ability to tax or borrow. Dollars can simply be created out of nothing by making an entry in the Fed’s database. Here’s how it works: The Treasury “borrows” by issuing a bond which the Fed “buys” by entering a credit in the Treasury’s account. Checks to Social Security recipients, defense contractors, or whoever eventually wind up at the Fed, which “cashes” them against the balance in the Treasury’s account.

According to the Fed balance sheet at Wikipedia, the Fed currently owns $1.6 trillion of the total $14.5 trillion of Treasury securities. That’s $1.6 trillion that came from nowhere.

A debt-ceiling aside. Those debt-ceiling clocks have been ticking down to the moment when the Treasury’s account at the Fed hits zero. Tuesday, CNBC’s John Carney asked the trillion-dollar question: Does that event actually mean anything? Or would a negative number in the Fed’s database work just as well?

Carney thinks it would.

Think about it. The check comes into the Federal Reserve. It looks at the U.S. government balance and discovers that we’re at zero. What does the Federal Reserve do?

I’m pretty sure the Federal Reserve would go ahead and credit the bank submitting the check with the deposit to account for the fund transfer.

What are the constraints? Then what keeps the government from giving us all a few million? Fear of inflation. Since our economy doesn’t produce enough goods to satisfy 300 million millionaires, those magically-created dollars would bid up the price of everything.

But here’s the next major point: We have unemployed workers, idle factories, empty storefronts, and so forth. The economy is just dying to produce more, if only somebody had dollars to pay for it. In this situation, there really is a free lunch: The government creates more money by spending without taxing or borrowing, and the economy creates more goods and services. No extra inflation.

Go back to the airline analogy. If Delta created and distributed massive numbers of frequent-flier miles, all the frequent-flier seats would fill up instantly, making most people’s miles more-or-less worthless. But what if most those seats had been flying empty? Then Delta could create some quantity of new miles without damaging the value of existing miles.

If you believe that, what do you do? Obviously you spend more and tax less, until the economy starts producing close to capacity.

Some of Mosler’s proposals are larger versions of things that have already been tried: suspending the collection of Social Security and Medicare taxes while continuing to pay benefits (not threatening future benefits, since the trust funds are also just data at the Fed), and giving money to the states (because it makes no sense to lay off teachers and construction workers when we still have work for them to do).

Mosler also wants to establish universal health care through a combination of a conservative idea (health savings accounts for the first $5000 each year) and a liberal idea (Medicare-for-everybody for larger expenses).

His most creative proposal is for a new category of federal job, which pays $8 per hour plus benefits. These new hires would work throughout the government rather than in a few big make-work projects. Any government office that wanted to employ them could do so without using money from its budget.

If you’ve ever worked in an office, you know that there are always useful projects that nobody can get around to doing. You may not be able to pull a shovel-ready thousand-worker project out of the air, but you could easily put two temps to work tomorrow morning, if you could just find the money.

As the economy moves closer to capacity, many of these workers will move into better jobs (aided by their continuous work history). If industry starts to have trouble finding workers, the government can ramp up the amount that the $8 workers cost project budgets.

Mosler would clean up the residue of the housing bubble in two ways: (1) Give banks freer access to loans from the Fed in exchange for tighter regulation. (2) Have the government buy foreclosed houses from the banks (making the banks eat any negative equity) and rent them back to their owners for two years. After two years, the owners have first crack at re-buying before a general auction is held.

The real economy. Probably the best thing to glean from Mosler’s book is a respect for the real economy (goods and services) as opposed to the financial economy (dollars).

This comes through clearest when you think about future generations. We have worried way too much about the numbers in future Fed databases, as if numbers make an economy robust. Instead of good numbers, we should be trying to leave future generations skills, good health, peace, a clean environment, social cohesion, and a solid physical infrastructure.

If they have those things, they will be able to produce the goods and services they need. If not, dollars won’t help them.

By weeklysift | Posted in The Sifted Bookshelf | Comments (7)

Digging into the Deficit

July 25, 2011 – 10:58 am

At the heart of the debt-ceiling debate is the question: How did the deficit get so high? It’s really pretty simple: We cut taxes, and healthcare got expensive. It all boils down to the next two charts.

The first chart refutes John Boehner’s mantra: “Washington has a spending problem, not a revenue problem.” We’ve got both.

spending and revenue

[Source: economist Jared Bernstein, who says he got it from the Office of Management and Budget. Here at the outset, I should justify the scales. I think there are only two legitimate ways to track government spending through time: as a percentage of GDP or inflation-adjusted per capita. A common conservative trick is to show raw revenues/expenditures tracking ever upward, which just proves that the country is getting bigger.]

Revenue (in blue) peaks just before the Bush tax cuts take effect, and then takes a second plunge when the Great Recession starts in 2007. Spending (red) is in a slow downward trend from the beginning of the graph until 2000. There’s a bump in 2000-2002 that could be blamed on a recession. (Recessions not only increase safety-net spending like unemployment insurance, they lower GDP. So spending-as-a-percentage-of-GDP gets a push from both sides.) But spending stays up (probably due to the Iraq War) during the tepid “Bush Boom” of 2003-2007, before jumping again when the Great Recession hits in 2007.

The second chart focuses entirely on spending.

health care spending

[Source: Christopher Conover at the conservative American Enterprise Institute, who attributes his numbers to the federal Bureau of Economic Analysis. This chart is about total government spending — state and local as well as federal — so the percentages of GDP are higher than in the first graph. It also goes back much further. The big spike is World War II.]

Conover notes:

Between 1966 and 2007, the entire increase in the size of government relative to the economy resulted from growth in tax-financed health spending.

And Matt Yglesias draws the obvious conclusion:

[G]rowth in government spending is overwhelmingly not the consequence of grasping liberals coming up with evermore things for the government to do. Instead, the government has for a long time shouldered responsibility for health care finance, and health care is very expensive.

So a more precise statement of the deficit problem is: We have a revenue problem and a healthcare spending problem.

Now let’s dig deeper into revenue. This chart shows revenue by type of tax:

taxes by type

[Source: The Department of Numbers blog. The vertical scale is percentage of GDP.]

Income tax stays within a range, with a blip up to create the Clinton surplus, and then a dive from the Bush tax cuts. (BTW: Unless you are willfully blind, it should be obvious that tax cuts do not increase revenue.) When this chart ends in 2007 we’re near the bottom of that range.  Payroll taxes (Social Security and Medicare — in yellow) go steadily upwards, while corporate taxes go steadily downwards from nearly 6% of GDP under Eisenhower to less than 2% now.

OK, so at the very least we have a corporate tax revenue problem.

Now let’s look at income tax. Conservatives make a big deal about how much tax the rich  pay — more than ever, by just about any measure.

tax burden of the rich

But that’s mostly because they are raking off a much higher percentage of the total national income. (In 50 years, when one guy is making all the income, he’ll necessarily pay all the income tax. Wouldn’t you hate to be him?)

In fact, the effective income tax rate (i.e., what they actually pay) has dropped considerably for the very rich, even as their income has shot up.

income and tax rates of the rich[Source: Ezra Klein, who attributes it to the economists listed at the bottom of the graphic.]

So: We have a problem getting revenue from corporations and the rich, and a healthcare spending problem.

Finally, let’s delve into that healthcare problem. Part of it isn’t a problem at all. As a society, we’re spending more on healthcare partly because the healthcare industry has better products than it used to.

A century ago, hospitals couldn’t do much more for you than a dedicated family member could do at home. Today, they can. People who a generation ago would have died in their 50s from heart attacks and cancer are surviving into their 80s and dying in nursing homes. It costs more, but personally, surviving into my 80s is precisely what I want to spend my money on. The option to buy a longer life is an opportunity, not a problem.

But there is a related problem: Compared to other countries, we’re not getting what we pay for.

Americans spend more, live less

[Source: University of California Atlas of Global Inequality. This data is from 2000, but things have only gotten worse since then, as the next chart will show.]

For all our healthcare spending, we live about as long as Cubans — four years less than the Japanese, and even two years less than our Canadian neighbors. (You might picture the Japanese living some spartan lifestyle we’d find unacceptable. But Canadians?)

And while all nations are spending more on healthcare — because everybody wants a longer life — the U.S. is pulling away.

rising American costs

[Source: Ezra Klein. The vertical scale is inflation-adjusted dollars per capita.]

And that’s the worrisome issue: If we’re on a higher exponential-growth path than everyone else, eventually healthcare spending will swamp the rest of our economy.

Total cost vs. government cost. Maybe you noticed I pulled a switch: The last two charts have been about total healthcare spending, not just government healthcare spending. Only about half of our healthcare spending goes through the government (Medicare, Medicaid, Veterans Administration, etc.).

If you think that government healthcare spending is the whole problem, then you do what Paul Ryan proposed: Replace Medicare and Medicaid with capped private health-insurance subsidies. The cap can be wherever the budget needs it to be, so the government-spending problem is solved.

But if total healthcare costs stay on their exponential path, they swamp the economy anyway. Eventually the government subsidies are tiny compared to the real cost of healthcare, and middle-class people start dying of curable diseases because they can’t afford treatment.

To an extent, it already happens. The U.S. performs badly in what public-health professionals call amenable mortality — i.e., preventable deaths.

preventable deaths by country

Now, I can’t see any democracy allowing middle-class people to die for lack of care, so either we’ll scrap democracy or government will end up paying for care no matter what Ryan’s projections say. And that’s why I focus on the total cost of healthcare.

Single-payer. Paul Ryan believes dialing back government funding will slow the rising costs, but his justification is a combination of wishful thinking and just-so stories about the market. The countries that get better results do the exact opposite: Virtually all their healthcare spending goes through the government.

All the evidence of actual countries tells us this: Government healthcare is more efficient than private healthcare.

In the private part of our healthcare system, the easiest way to make money is to shift costs to somebody else  — insure the people who don’t get sick — not lower the cost of care. (Ryan’s plan is similar — it shifts costs from the government to individuals.) Only single-payer systems, where there is nobody to shift costs to, deal with the real problem.

So the long-term answer to the healthcare spending problem is paradoxical: Extend Medicare to everybody.

In the short run, it will essentially double government healthcare spending. (Done right, this would be invisible to both the federal deficit and your personal budget. What you pay now in health-insurance premiums you would instead pay as taxes.) But in the long run, a single-payer system would get our costs (and outcomes) in line with countries that do healthcare much better than we do.

Summing up. So that’s my answer to the long-term deficit: End the Bush tax cuts at least for the wealthy and maybe for everybody (because the economy did fine with the Clinton tax rates). Close loopholes until corporate taxes get back to Eisenhower-era levels. And move to a single-payer system to get healthcare costs under control.

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