economic policy

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History Lessons

History repeats itself. Cliche. Truth. Or, perhaps, we repeat history. That seems to be the lesson I am learning as I continue to delve into the darker corners of inequality, which is, undoubtedly, the issue of our age.

Before I go any further I have to note – it is relevant – Paul Ryan’s extraordinary speech last week, here’s a key paragraph:

“We have got this tailspin of culture, in our inner cities in particular, of men not working and just generations of men not even thinking about working or learning the value and the culture of work, and so there is a real culture problem here that has to be dealt with.”

This is a direct racial reference to the plight of inner city minorities. Only it isn’t a plight to Ryan, it is a self-inflicted wound. Naturally it is all the government’s fault for trying to help. A little dose of self-help and individual responsibility along with a few visits to church will no doubt cure it all.

Ryan has been criticized heavily for what he said. Rightly so. We ought to be, but are not, beyond such venal racial politics. Indeed, as Paul Krugman has pointed out, race is the central thread running through what can often appear as contradictory thoughts in contemporary American right wing politics. According to the right we have, apparently, a big problem with “them”. They are the ones who loiter and live off of those government programs like food stamps, Medicaid, and various other social bailouts. They mooch off of the hard working white middle and working class.

This nasty undertone of race has a long history in the American right, but really came to the fore with Reagan’s election. He, after all, spent a goodly amount of time attacking handouts whilst on the stump in the deep south. He was well aware of the implications, in that setting, of his words. He was issuing a coded rallying cry to southern whites, the echoes of which are heard in recent efforts to make voting more difficult throughout those states.

Much of the toxicity in our political discourse issues directly from such tactics. Our inability to deal with, or even recognize, inequality as a pervasive and crucial issue is partly, if not mainly, rooted in the moocher mindset acting as cover for the racial antagonism the polite society is supposed to have eradicated. After all if we set out to deal with inequality we have, by extension, to help “them” because they are disproportionately represented in the lower levels of our income strata. And dealing with inequality implies raising taxes on the upper levels in order to redistribute incomes and re-set the balance lost in the wake of Reagan’s anti-social programs.

The failure of the left to maintain a connection with the white working class sits squarely in this same space. Reagan and his heirs were able to convince that group to abandon their own self-interest because of the imagined unfair redistribution and thus higher taxes it became associated with. That the white working class suffered nearly as much, or that its tax burden was comparatively light, was overlooked Or it became overlooked in the context of the quasi racist tones of modern right wing politics.

So here we have Paul Ryan situating himself plum inside that recent and sordid tradition. He is trying to rally white voters ahead of this November’s elections. So a few alleged indiscretions or unfortunate wordings that still a mange to get the message across are fair game.

America really hasn’t progressed as far as many of us had hoped.

Another history lesson, again associated with inequality, is that of the ‘Kuznets Curve’. I re-read the original paper, “Economic Growth and Income Inequality”, which was actually a speech Kuznets gave to the American Economic Association in late 1954. His basic idea, which took form in other work also, was that the inequalities engendered by capitalism fade away naturally as an economy matures. Early on as a nation moves out of an economy dominated by agriculture and into one dominated by industry, capital is relatively scarce, regulation lax, labor abundant, and opportunities for ‘rent-seeking’ widespread. So inequality rises rapidly. A new wealthy class emerges and social divisions open up. Discontent and competition, however, start to close the income gap. Capital becomes less scarce. Labor markets tighten. Governments act to regulate business and limit rent-seeking opportunities. The game shifts and slowly, but surely, the early income gap is reduced.

This was an easy reading of history back in the early 1950’s. The data seemed to confirm it. And economists were eager to produce a narrative that was both in line with the data and had capitalism triumphant. It was, after all, in the context of the Cold War, urgent that the American version of capitalism be portrayed in a humane and socially beneficial light. Thus, I suspect, the economics profession was willing to delve only so far as to confirm wheat it wanted to say for ideological purposes.

The next few decades, through to the late 1970’s, seemed to conform to this Panglossian perspective. America boomed. The middle class in particular became the model of American economic power, and its constant accretion of income and material well-being stood as testimony to the benefits bestowed on us all of mature capitalism as explained by Kuznets and his ilk.

But this was radical misreading of history. We now know it. A happy confluence of events created an illusion of perpetually rising living standards for the great middle class. A rapidly growing population, diminished foreign competition, abundant cheap oil, and a massive indigenous market all conspired to make it look as if mature capitalism was benign. Business was good. Wages rose. The future was assured.

Then stagflation hit, foreign entanglements and setbacks undermined confidence and the newly empowered middle class needed to be told its gains were not temporary. Something and someone had to be blamed. Changes needed to be made.

Enter Ronald Reagan and the right wing counter revolution.

The package Reagan sold and the revised political trajectory he set us upon, and which successive presidents of both parties have hewn closely to, lead directly to today’s extraordinary levels of inequality. The line connecting the two is direct and clear. Reagan’s genius was to convince the white middle class to destroy itself all whilst being convinced it was helping itself. The hypocrisy and ethical indifference of the course he set out on have epic lessons we need urgently to learn. And to teach once learned.

Reagan, Clinton, and Bush each contributed to the inversion of the Kuznets curve. They drove us backwards to a society where deregulation, anti-labor activity, and rent-seeking became the norm once more. Only this time the discontent was managed carefully and government neutered. The triumph of neoliberal politics and its incessant attachment to pseudo-free market economic theory, led us to reverse the Golden years and to undo the middle class. It produced an economy dependent upon bubbles to create the illusion of growth. It papered over a great shift in income distribution. It argued that the return to a more basic capitalism would ‘lift all boats’ even though most boats were palpably taking on water. Only now that they’ve sunk is the message tainted sufficiently that a few, a precious few, on the left are organizing resistance.

We are indeed repeating history. We ignored or mis-learned the key lessons of those post-war decades. Capitalism may produce great wealth, but that wealth has to be distributed democratically in order for a middle class to prosper. And it is democracy that we have undone.

Meanwhile it is arrant nonsense to argue that all we ned to do is open up a few doors of opportunity and all will be well. No it won’t. Income inequality limits opportunity. It prevents it being real. It has ramifications on health and longevity. It has anti-social effects that prevent a united political response to the greed of the 1%.

Which, naturally, is the goal of our elite.

This isn’t an argument over economic theory so much as bare knuckled politics. Those of us who care are going to have to get angry to get attention because the cognitive capture of the elite is near complete. Let’s hope we can make a difference soon.

What’s the American analog to the Bastille anyway? What do we storm?

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Federal Deficit

What will the Republican party do now?

In case you missed it, we learned today that the Federal deficit has now shrunk back to $680 billion, the level it was in 2008. That means it dropped over $400 billion, or about 37%, in 2013 alone. This is the most aggressive budget correction in US history, apart from the drop seen just after World War II as they US shifted from a war footing. Oh, and the Congressional Budget Office is predicting it while drop even further in 2014.

Curmudgeons like me would argue that the decline has been too rapid and that the economy is suffering from too little demand as a result, but the real problem is for those who have made a case for massive cuts in entitlements in order to control the ‘runaway’ budget. We never needed those cuts. We still don’t. And won’t any time soon.

So what are they to do?

Here’s the strange thing: the shift seas entirely predictable. Revenues are recovering because total income has risen and so tax revenues have grown – nearly 13% in 2013 alone. At the same time there has been an entirely predictable tailing off in crisis oriented government spending. So the vicious squeeze on the budget that the crisis caused has begun to unwind by itself.

Just like we said it would.

Which is why the focus should have been, and still ought to be, on growth.

That won’t happen because of the Republicans, but at least their main talking point has been revealed as vacuous.

As I said: What will they do now?

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Inequality

I am preparing a talk on inequality here in America, and so have been re-reading the Piketty and Saez work. Amongst the more eye-opening facts I have come across is the assertion, by Saez, that the surge in the top 1% incomes is so large that the growth of the bottom 99% amounts to only half the average [mean].

Think about that for a moment.

It would be like walking into a room full of people two feet tall with one thirty footer in the corner. The mean average is meaningless in such circumstances. We are all taught that in statistics class, but to come across such an egregious example in a dataset as large as all US tax returns is astonishing.

Not only is this an alarming fact, but to portray it adequately on a chart is difficult to do. The line representing that 1% doesn’t fit well with the 99%  because any scale you use cannot easily accommodate such extremes.

When I chat with people about the topic I realize that most have no clue as to how skewed and screwed up the economy now is. Even when they start to comprehend they retreat into a kind of ‘it doesn’t affect me’ denial.  The fact seems to be that most people want to cling onto the mythological image of America they carry with them, perhaps because confronting the reality we have made for ourselves means accepting unpleasant and disturbing facts.

Yet they’ve all been hurt by what happened.

They key, I think, is to be as apolitical as possible when you portray the facts. People can absorb those facts given time and lack of controversy. The bigger challenge is getting them to understand that they have suffered and need to do something to help re-assert a more acceptable balance.

There are still plenty who argue that inequality does no harm and that those who accumulate great wealth and/or incomes somehow deserve it. Ironically mainstream economics can help win the argument. Once you get people to commit to allegiance to free markets you can more easily get them angry over massive inequality when they realize it represents a perversion of market magic.

But then you get trapped into arcane discussions about how mainstream economics has nothing to do either with capitalism or reality or much of anything at all. People’s eyes glaze over, and economics is once again shown to be a waste of time.

Why do we bother?

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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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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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