Republicans

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Grand Bargain R.I.P.

Thank goodness too.

There was some angst amongst left leaning analysts earlier this week because the smoke signals rising from the White House suggested that Obama had not given up the idea of changing the indexation for Social Security. This indexation is the way in which payments are calculated each year to offset inflation. A change proposed a few years back in the height of the budget crisis would have had the effect of reducing future increments and thus reducing the amount retirees would receive versus what they would have received under the older indexation method. It all sounds very technical, which it is, but the effect would have been substantial.

The switch in indexation methods was just one element of the so-called ‘grand bargain’ Obama was desperately trying to get agreement on with the Republicans in Congress. Many of us on the left were aghast that a Democrat would propose such a large cut in social payments, and we voiced our opinions loudly at the time. Recall that at the time there was great pressure to slash spending, and silliness like the Simpson-Bowles plan was viewed as mainstream thinking.

But the Tea Party rescued us.

Vehement opposition within the Republican caucus in Congress to any form of tax increase killed off the notion of a grand bargain. As the split in the Republican ranks deepened it became obvious that a sweeping deal on the budget was not a feasible option. Subsequently we all were forced to go through a series of artificially created near disasters as the Tea Party gradually took control of Republican budget strategy.

Amidst this infighting on the right the various elements that Obama had offered up to induce compromise were largely forgotten or ignored as we lurched from one political drama to the next.

So imagine our horror when rumors began to circulate that the switch in indexation might re-appear in Obama’s latest budget.

It was a false alarm. The White House has confirmed it has no intention of including the switch. We can all calm down.

That is victory enough, but the larger message is even more dramatic: clearly the White House has given up any thought of a grand bargain. This is good news indeed because it marks the end of the foolishness of so-called centrist opinion on the Federal deficit and national debt. A grand bargain to reduce the deficit would have done untold damage to our social programs in the name of austerity or budgetary probity, neither of which would have been sensible economic policies. The deficit and the debt were never problems, at least on the scale suggested by those pressing for a grand bargain back in darkest days of the crisis. If there is a problem, which is highly questionable, it only exists way off in the future and can be dealt with in a more considered way after the current malaise has been sorted out and the economy restored to full health. The bargain being pursued a few years back was a panic move on the left and a strategic move on the right. Neither had much to do with the actual size of the deficit. Both had a great deal to do with the political landscape.

It appears, finally, that Obama has learned that there can be no compromise as long as the Tea Party rules the Republican agenda.

Thus we move on liberated from the nonsense of a grand bargain.

May it rest in peace. Better yet: in pieces.

 

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Chattanooga!

Have you been following the Chattanooga story?

In a nutshell here it is:

Volkswagen has a big production plant there. VW was given the usual trade distorting incentives by Tennessee to set up shop locally. Up until now the VW plant has been non-union, but now a union drive looks like succeeding. VW’s management has been remarkably hands off about the vote to unionize, saying it can work with unions in the US just like it does back home in Germany. In fact VW says it would be happy to import the German style work council management process it uses successfully back home if the vote is pro-union.

So far so good. Management looks like it can manage with a union. The workers want to unionize. All is well.

Umm.

Enter the Republican party.

Local Republicans are up in arms. They are threatening to force VW to repay those incentives if it allows the union in. They are hysterical. Then Senator Corker waded in and announced that VW would not build a new line of vehicles at the plant were the plant to unionize. This is despite the fact that VW has made no such statement and has said that its production scheduling is entirely independent of the union vote. Corker then told the press that VW management was unable to speak the truth because of union pressure. Presumably he is privy to management decisions that the management isn’t privy to.

The entire episode is escalating rapidly. It is revealing the extent of anti-worker sentiment that drives the Republican party, and will presumably echo in any local elections later this year.

The real problem is that the Chattanooga vote could ripple across other Southern auto plants, and could see the end of a big advantage Southern states have had when trying to induce manufacturing to set up shop there.  The low cost of the South’s workforce was based, at least in part, on its lack of a union presence. That coupled with all those tax giveaways and other incentives has produced a dramatic shift in the geographic spread of some industries, with auto-making being a leading sample. Indeed, much of the South’s recent economic rise has been based on that potent combination: cheap unskilled labor, and massive tax handouts to corporations. A shift in the workforce towards unionization and higher wages would threaten to undo the allure of the region to manufacturing forcing it to abandon its ‘race to the bottom’ style of economic policy making and to compete, instead, with the northern states who focus more on a policy based on higher skilled workers and social infrastructure investment.

Why is this a problem?

The shift would require higher taxes. And we all know how those Southern Republicans react to the thought of higher taxes.

Hence the hysteria. Hence the feeling amongst local Republicans of an existential threat that must be fought off at all costs. Even if it means punishing VW, who, so far, have been entirely neutral about the union vote.

I suppose the local Republicans have it right: unionization is, indeed, a threat to their low wage economic policy. But their hysteria is still extraordinary, and threatening VW is astonishing. For a party that likes to be corporate friendly and advocates zero intrusion by the government into the workings of business, to abandon both with such zeal is a measure of its attachment to keeping worker wages low. It tells us that Republicans see low wages as the only way to generate jobs.

That’s nineteenth century thinking. I thought only New Classical economists believed that stuff.

 

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CBO: Obamacare Costs Jobs – Not!

Read all about it!

Fox News: “ObamaCare could lead to loss of nearly 2.5 million US jobs report says.”

Washington Times: “Obamacare will push 2 million workers out of labor market …”

The Hill: “O-Care will cost 2.5 million workers by 2024”

And these are just a sampling.

This hyperventilation by our right wing media, picked up and amplified by Republican leadership, was triggered by a report issued by the Congressional Budget Office, our official impartial score keeper of all things policy related. I pity the poor CBO sometimes, wading as they do into our political quagmire. Still someone has to give us the bad news and rather them than me.

How bad was the news?

Well. It was good.

Yes, that’s right. The bad news was actually good. You see the review of the impact of Obamacare on the economy was an ancillary aspect of a much larger review of the economy and Federal budget outlook. In two appendices – Appendices B and C to be exact – the CBO gives us an insight into how they treat the impact of health care reform within the many moving parts of the economy over the next ten years. Here’s the paragraph that has everyone so exercised:

“The reduction in CBO’s projections of hours worked represents a decline in the number of full-time-equivalent workers of about 2.0 million in 2017, rising to about 2.5 million in 2024. Although CBO projects that total employment (and compensation) will increase over the coming decade, that increase will be smaller than it would have been in the absence of the ACA. The decline in full- time-equivalent employment stemming from the ACA will consist of some people not being employed at all and other people working fewer hours; however, CBO has not tried to quantify those two components of the overall effect. The estimated reduction stems almost entirely from a net decline in the amount of labor that workers choose to supply, rather than from a net drop in businesses’ demand for labor, so it will appear almost entirely as a reduction in labor force participation and in hours worked relative to what would have occurred otherwise rather than as an increase in unemployment (that is, more workers seeking but not finding jobs) or underemployment (such as part-time workers who would prefer to work more hours per week). “

Read that closely and you see something somewhat different from what you read in the media. I highlighted the relevant sentence.

First, the drop in jobs is actually a drop in total work hours translated into an equivalent number of full time jobs to make it easier to comprehend. Second, that drop is seen as entirely voluntary.

This is not a loss of jobs due to employers firing or refusing to hire. It is a loss of work due to people deciding not to work  or to work less.

Why would they do that? Simple: our labor market is distorted by it being the primary location for people to find health insurance. So there are a fair number of workers who would prefer not to work, or would like to work part time, but who work full time because they need to find health insurance. Often these are older workers who would like to retire but keep working because they have a health condition that prevents them getting health care insurance other than through an employer sponsored program. Once they can locate and pay for insurance outside of the workplace they stop working. So this is not a job killer, but a lifestyle enhancer. People will be better off.

Yes, there will be instances of people being forced to work less hours as unscrupulous employers evade the law, but the CBO is clear in its estimate. The preponderance of the lost work hours will come as people opt to stop working. It isn’t because they are being forced out.

Not that you would understand this from reading those headlines.

Better yet. As those workers leave the workforce, and because employers will still be looking to hire, the net effect will be a tighter labor market and, most likely, higher wages for those who stay employed. It will also have a net positive impact on the unemployment rate.

One more thing: already the Republicans have targeted a reform they want to make to the law. They want to get rid of the subsidy Obamacare gives to insurance companies to offset, temporarily, the possible skewed risk pool that might increase insurance losses above the premiums charged. This skew is given the rather arcane name of ‘risk corridors’ and was identified as a potential reason insurers would stay out of the insurance exchanges on which the law depends. Here’s the key sentence where the CBO talks about that subsidy:

“CBO now projects that, over the 2015–2024 period, risk corridor payments from the federal government to health insurers will total $8 bil- lion and the corresponding collections from insurers will amount to $16 billion, yielding net savings for the federal government of $8 billion.“

Yes, that’s right. According to the CBO, the government is making a profit of about $8 billion on the deal. It isn’t a subsidy at all. It is a source of revenue. Nonetheless the Republicans want to get rid of it. Presumably they want to make the deficit larger.

When you cut through all the nonsense and actually read the CBO report, it offers pretty good news for health care reform supporters. It’s costing us less than everyone thought; it will free some workers from the drudgery of having to work just to get health care; and it will provide lots of people with coverage that they would otherwise not have. The only downside is that all the negative press from the Republicans, and the deliberate stalling of its implementation in some ‘red’ states has cause fewer people to sign up than planned or hoped for.

Ultimately the law is a success, and is already beyond repeal. It is an example of how our toxic politics has mucked up the average person’s likely perceptions of reality, and, given those headlines, it is a shining example of how shallow and biased the media can be.

We aren’t being given the facts properly. How can we possibly vote sensibly?

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Distribution and All That

Rumor has it that Obama’s next State of The Union address will focus heavily on inequality which has become quite a vogue issue in some Washington DC circles. I doubt anything will come of his speech, these obligatory speeches get swamped by politics the moment they end, but it will be interesting to hear what he has to say, because it is, as you all now, an issue that I have been prattling on about for some time now.

Let’s take a look at some background.

All economies, ours included, ration stuff. That’s what they do. In more polite circles this rationing is called allocation or distribution. We don’t use the rationing word because it makes people uneasy and conjures up Soviet era images of bureaucrats mucking around in the minutiae of our lives in ways we resent.

But rationing is rationing by any other name.

By this I mean that the economy and its institutions, and particularly its rules, set the context within which we all buy and sell things, and acquire what we can from the very long list of the things that we want. This recognizes the basic fact that resources are not infinite, nor is ability evenly distributed, and we all have varying degrees of opportunity to get what we want. Merit is never sufficient. The only time merit comes into play is when the opportunity exists to express that merit. Nor does hard work guarantee anything. It too needs a heavy dollop of good fortune to make a difference in our lives.

At its root the world is a very lumpy place. Opportunities, resources, skills, and all else we need are unevenly distributed about the place. This unevenness naturally leads to scarcity. And scarcity leads to the need to ration who gets what.

In our economy prices do the rationing. Or at least they do superficially. This means that if you are wealthy you get more stuff. If you are poor, not so much. Getting to be wealthy is very difficult nowadays, especially, as it turns out, in modern America. Who knew we were so class riddled and hidebound? If you’re unlucky enough to be born poor the chances very very high you will stay that way. The land of opportunity is more myth than reality. And is certainly more myth now than it used to be.  A level of inequality is always around and is actually a good thing because the plausible prospect of wealth motivates people to innovate and work hard. Our current problem is that the prospect of advancement is a whole lot less plausible than it was.

So our way of rationing things has created a few very wealthy folk and a whole mass of very poor folk. The kind-of-ok middle is less ok than before, but isn’t destitute.

This all matters for a variety of reasons.

In terms of economics the collapse anything resembling equality as it was a fews decades back has done a great deal of damage. It has reduced the level of demand in the economy by syphoning off more and more income to people who already have most things they want and so are not inclined to spend their increasing income. At the same time a large number of people who want more are unable to spend because they aren’t being paid enough. So, overall, the economy is sputtering along with less spending than it could have. And since spending by some people implies earnings by others, the missing demand causes us to have lower profits and fewer jobs than we might expect given the total income the economy generates.

We are stuck in a sub-optimal zone we can’t break free from.

Why did our price system produce this distorted rationing outcome?

Because the rules that set the context within which prices do the rationing, and the institutions that condition that context and operate those rules, are rigged. We are not playing a fair game. Our economy has been constructed – or rather reconstructed since the early 1980’s – so that people who earn income from capital or land, people we can generally call rentiers, are privileged. Whereas people who earn their income from work are not. On top of this we have turned our economy into a financially dominated one, rather than one based on making or providing real goods and services. This has allowed financiers to get their hands on a greater share of the pie, to the detriment of us all.

An easy way of showing this is simply to look at tax rates. A hedge fund manager, some of whom make billions of dollars a year, can pay as little as 15% on that income, whilst the rest of us face tax rates that escalate up to around 35%. Likewise, if you sit at home and earn your income from a stock portfolio the gains on that portfolio are taxed not as income, but as capital gains, and thus at a lower rate. Since about 80% of all stocks are held by the very wealthy this distorts their share of after tax income and helps perpetuate their stranglehold on our national wealth.

None of this is a revelation. It’s an old problem made much worse by our policies of the last few decades. Here’s a good summation:

“The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes.”

That’s a quote from Keynes near the end of his General Theory published in 1936. No wonder our rentier class hates him.

So: it is the rules we set via policy and legislation that lay the groundwork for the market to ration outcomes. And the market rations via setting prices. Right now rentiers rule and thus get a disproportionate share of the national spoils. Hence our extreme inequality.

Back to Obama.

Absent his health care reform he has done precious little, other than talk, about inequality since he arrived in office. His fancy speeches rarely translate into policy.

I would like to think this is because of the adamant opposition of the Republicans who are, after all, steadfastly opposed to most efforts to redistribute our national income. Indeed they have been the main force changing the rules to increase the privilege of the rentiers. But they were abetted along the way by the Democrats who have acquiesced to the long decline in the share of national income going to the Federal government by way of taxes, and have supported a variety of the deregulatory efforts that opened the door for the financial sector to syphon off our wealth. So our erstwhile left-leaning major party does not have clean hands. It is also culpable, although less so.

How did this happen?

Because inequality matters politically. Especially when money is equated with free speech as the Supreme Court decided in the Citizens United case. This opened pandora’s box and led to wholesale corruption in our politics. If a few very wealth people can spend their fortunes on elections they can buy influence and protect their interests. They can ensure the game is rigged. So it was a Democrat who scotched an effort to change the tax rate on hedge fund managers. He was bought off by big election campaign donations.

This flood of money has successfully shifted the center of gravity of our political discourse. Issues that had general bi-partisan support a few decades ago are now highly contentious. One is the level, if any, of redistribution the government undertakes to undo the effects of our market based rationing.

Recent statistics show that bottom 20% of wage earners get about 2.3% or all our national income. The top 20% get about 57.9%. This was the raw income each segment earned in 2010. But government programs and taxation shifted things about. After that adjustment the bottom 20% was better off, with 9.3%, and the top 20% was worse off with 47.2%. So the government acts to re-ration and ameliorate some of the damage done by the rigged rules. Of course it could do more: it could un-rig the rules. But the odds of that are low given the grip the rentiers have on power.

And the rentiers are getting support from Republican voters who have shifted they support for redistribution dramatically in recent decades. It was only a few years ago that Republican voters supported government programs by a 60% to 40% margin. That has now flipped. Only 40% of Republicans support helping the poor or unemployed. This turn about is mirrored in other statistics that show Republican voters lack of sympathy for the less fortunate. When asked they seem to think that the rich got that way by dint of hard work, and that the poor are destitute because they don’t work hard enough. Neither Democratic or independent voters think this way. Indeed those groups identify the lack of opportunity as the big problem, not the lack of hard work.

Here we are then. On the eve of a major speech about a vital topic that affects us all, and with both parties aligned against any truly constructive response because they are in the pocket of the very people who benefit most from the current level of inequality. That most voters – those Democrats and independents – think we have a problem and want action is neither here nor there. We will get a speech and then the rentiers will pull the strings.

Chin up though. The tide is shifting. There is sufficient pain out there, sufficient inequality, and sufficient anger about it, that even our corrupt system cannot avoid forever. And the rentiers are suffering. After all we have a surplus of capital our economy, which gives rise to a delicious irony: the basis of rentier power is the scarcity of capital, which thus commands a high price in our world of market based rationing. If it is now comparatively more abundant, it is worth less. A whole lot less. Especially with interest rates so low – which is why rentiers are clamoring for higher rates.

Keynes talked boldly, and wrongly, about the demise of rentier power. He called it ‘the euthanasia of the rentier’. He argued, perhaps more tongue in cheek than real, that the rentier phase of capitalism is a transitional one.

We can all hope, can’t we?

Let’s hear what Obama has to say about distribution and all that.

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Republican Sanity? Perhaps

Just a quick reminder: before we all get carried away with this new post-crisis dawn stuff, we should remember that two-thirds of the House Republicans – including Paul Ryan – voted to continue the government shutdown and to force the US into default. That thought ought to pour cold water on anyone who imagines we are out of the woods.

We are not.

A great deal now depends on the fear of electoral backlash that might – but only might – discipline enough Republicans into acting sensibly in the upcoming budget discussions.

Perhaps more importantly: there is an additional cause for concern. The Ultras have already begun to mobilize their considerable financial resources in order to make strong primary challenges against many of the Senate Republicans up for reelection in 2014. This may have one of two outcomes. Either the Ultras oust the more moderate incumbent in a primary and then lose the general election. This would strengthen the Democrats. Alternatively, the Ultra primary winner then goes on to win the general election – some of these seats are in hard right states – which would then make the Senate more volatile.

In any case I think we all ought to take care and not assume that the Republicans have suddenly seen the light and will act inside the normal channels of governance.

Seeing is believing should be our mantra. Until then careful skepticism is on order.

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