Letting the Chips Fall

During the year I spent in Chile as a student, my landlady was very protective of me. One of my weekly pleasures was going to the city center on a Friday evening and buying a bag of French fries from a little stall. (In Ireland it would be called a chipper.) They were greasy and delicious. My landlady was never happy about me eating those fries. She was continually warning me that I was going to get food poisoning from those chips. After a full nine months of patronizing the chipper, I did finally get sick. I got a bad case of what was apparently dysentery.

As I lay suffering in bed, delirious with a fever, my landlady minded me like Florence Nightingale. But she couldn’t resist leaning over me and lecturing, “Aha! I told you those papas fritas would make you sick!”

Of all the things I ate and drank in the days leading up to my illness and of all the other things I was exposed to in the air and in the water, how could she be certain that it was the chips that made me sick? Especially when they had caused me no trouble at all the previous nine months? Because she had been predicting it for so long that her mind made reality fit the prediction.

Some people on the political left sound my dear Chilean landlady when they talk about capitalism. They point to the financial crisis of 2007-2008. Aha! they say, see, this shows that capitalism doesn’t work—or at least capitalism as practiced by the Republican party.

That’s an interesting conclusion to draw. The financial crisis clearly grew out of the housing bubble. And the housing bubble clearly grew from a bi-partisan government policy over many years of pushing money into the mortgage market through the government-created entities Freddie Mac and Fannie Mae. Yes, that is an over-simplification, but the fact is that no serious analysis can credibly paint the financial crisis purely as something caused by capitalists gone wild.

President Obama’s take on the causes is particularly interesting, and I confess that I don’t completely understand it. He holds the crisis up as proof that Republican policies don’t work and that we need to go back to the policies of the Clinton administration. The irony is that a lot of conservatives actually agree. As Democrats repeatedly remind us, Clinton left the country with a balanced budget and a thriving economy. Part of this was through luck. There was a reduction in military spending due to the wind-up of the Cold War as well as an influx of tax revenues generated by the tech bubble. But it also had a lot to do with reform of a major entitlement (welfare) and tightening of government spending. Fiscal conservatives liked that, although they credited the Republican Congress more than President Clinton. And they didn’t care for the way Clinton’s successor signed a new entitlement (for prescription drugs) that wasn’t paid for. (It is amusing to hear Democrats criticize Bush on the same grounds, even though most of them, including Obama, fought to spend even more money on the unfunded program.)

Even while invoking Clinton, the current president goes in a direction that is completely opposite to Clinton’s. Obama has spent four years ballooning government spending and has given only lip service to entitlement or tax reform. He has put nothing concrete on the table and criticizes Representative Paul Ryan, who has. This may make the president look more compassionate because he doesn’t want to reform Medicare, but it is a false compassion since everyone knows that the status quo is untenable and beneficiaries will suffer more if the system goes broke than if it is reformed. If the president has a better plan than Ryan’s to save Medicare, he should say so. I would love for him to put forward a better plan, but where is it?

The only solution he offers is to raise taxes on the highest earners. This is what he means when he says that “our plan worked.” He is talking about the policies of the Clinton years. Tax levels were indeed higher under Clinton. But he confuses cause and effect. There was less resistance to raising taxes in a booming economy. In a weak economy, higher taxes tend to drive up unemployment because less money is available for investment and capital. In fact, the president himself said so when he agreed to extending the so-called Bush tax cuts.

The government is spending quite a bit more than it is taking in, and this is not sustainable. The president’s solution is simple: raise taxes. He seems to see it as a simple matter of transferring money from one place (the pockets of the wealthy) to another (federal coffers). But it’s not that simple. For one thing, it won’t bring in nearly enough money. More importantly, changes in tax policy result in changes in human behavior and, under the current conditions, that’s a change that will result in slower or negative growth and higher unemployment. Historically, the most reliable way to get more tax revenues is to create conditions that enable people to make more money. The more money they make, the more people who will be employed, directly or through investment, and the more taxes they and everyone else will pay. But if everyone is to make more money, that will include the wealthy. And the idea of the wealthy making more money seems anathema to the president.

Bill Clinton has always understood this. But he is a good soldier and will say whatever he needs to help get the current president reelected. What is not clear to me is whether Barack Obama understands this or whether, like my Chilean landlady, he sees only what fits his preconceived notion.

Golden Moment

I am not exactly what you would call a sports fan.

In fact, my attention span has always become incredibly short on the rare occasions when I find myself plunked down in front of a television and obliged watch some sporting event. My main childhood memories of the Olympics are of my father and brother glued to the idiot box for what seemed like the entire summer, while I seethed with resentment that the TV was off limits for anything else in the interim.

As I grew up, there was the further problem that, in those days and in the circles I traveled in, the rampant nationalism engendered by the quadrennial event felt unseemly. The way the U.S. and Soviet Union competed to win the most medals felt like an extension of old imperialism.

But as my life brought me for periods to other countries, I came to see the Olympics in a different way. I became aware that, in most countries in the world, enthusiasm over the Olympics was all about people supporting their own as they tried to make their mark on the world stage. Whereas Americans and Soviets were hoping to win more medals than anyone else, people in Chile and Ireland were just hoping to win a medal—full stop. And while Americans would take their athletes (especially ones with compelling personal stories) to their collective heart, in other smaller countries people were supporting their athletes as virtual family members.

The Irish are particularly endearing when it comes to international competitions like the Olympics and the World Cup. They always seem convinced that their athletes or their team is going to come back the big winner—against all realistic odds. And they are crushed when they don’t. One forgets just how small a country Ireland is (a bit under 4.5 million in the republic), and you really do get the impression that everyone feels that they know everyone else in the nation.

It’s been years since I’ve paid much attention to the Olympics, but now things have come full circle. Decades have passed since I had to negotiate with my father and brother for the television, but now I am in contention for control of the satellite box with a 12-year-old. And she has been mad to follow the Olympics. And so I have seen a fair amount of them this year. My main impression is to wonder how American viewers put up with all the time shifting and commercials that NBC inflicts on them. Of course, this year Ireland has the advantage of being in the same exact time zone as the games. In fact, Irish interest is so keen, you would think that they were being held at the Royal Dublin Society. But even in other years when the games have been halfway around the world, the national broadcaster transmits the competitions in real time and people who care about them simply adjust their schedules, watching in the middle of the night if they have to. This is one of about two advantages I have come across of having the government in charge of your television broadcasts. (The other would be reasonable limits on how often and for how programs can be interrupted for commercials.)

Anyway, I understand that my native country has clinched the race for most medals won in the 2012 Olympic Games, and I do actually take some pride in that—even though it has absolutely nothing to do with me personally. But I suspect only family members and close friends of the American medalists have actually felt the same level of sheer joy and exhilaration that the entire Irish nation felt on Thursday when a 26-year-old woman from Bray, County Wicklow beat Russia’s Sofya Ochigava by two points in women’s lightweight boxing to claim a gold medal. It is the first gold medal Ireland has won since 1996. Crowds in Bray, who had turned out to watch a giant outdoor TV screen went wild (or “mental,” as one media outlet had it), as did frankly the Irish TV commentators. They gushed and replayed the match and the award ceremony so much that I finally couldn’t take it anymore and I switched over to BBC to watch some Englishwomen in bowler hats doing some kind of horse dancing thing.

What was lovely about seeing Taylor win was her humbled reaction to her victory and to all the fuss lavished on her afterwards. What was also striking was the fact that, among all the people she thanked and acknowledged in those first moments of triumph was Jesus. That’s not a name you often hear over the airwaves in overwhelmingly (and largely nominally) Catholic Ireland. But it turns out she isn’t a Catholic. She’s a self-identified born-again Pentecostal Christian.

While moved by Taylor’s story, I still haven’t been converted to being a sports fan. But witnessing it has reinforced in me the idea that nationhood is something stronger and deeper than merely what your birth certificate says or the passport you carry.

Taxing Credulity

The silly U.S. campaign back-and-forth over tax rates reminds me of the old story (apparently apocryphal) about Winston Churchill.

As the story goes (some variations substitute the likes of Oscar Wilde or George Bernard Shaw for the British prime minister), Churchill is at a dinner party and says to the woman next to him, “Madam, would you sleep with me for five million pounds?”

Replies the woman, “My goodness, Mr. Churchill. I suppose I would.”

Churchill then asks, “Would you sleep with me for five pounds?”

Indignant, the lady exclaims, “Mr. Churchill, what kind of woman do you think I am?”

Comes the reply, “Madam, we’ve already established that. Now we are haggling about the price.”

Mr. President, we have already established that the wealthy should (and, in fact, do and always have) pay a greater share of their income in taxes than everyone else. All you are doing is haggling over exactly how much more than everyone else they should pay.

If the wealthy find this line of political rhetoric annoying, it’s because the president keeps implying that the wealthy are paying less than everyone else. This is neither true in dollar terms nor in percentage terms. The thing is that people (even greedy rich ones) actually don’t necessarily mind that much paying more in taxes, but they don’t particularly enjoy being attacked for being freeloaders when they are already footing the vast majority of the taxpayer bill. Those of us who don’t care for deceptive rhetoric from our national leader don’t care much for it either. The president implies that the lower and middle classes are somehow paying more because the wealthy aren’t paying enough. But they don’t.

The fact is that the lower half of earners in the U.S. pay no tax at all, so the upper 50 percent carry the entire load. The maligned top one percent pay 40 percent of the taxes. That doesn’t mean they shouldn’t pay an even higher percentage, but it’s fundamentally dishonest to frame the argument as if the bulk of the burden currently lies on the backs of the lower and middle classes. Their main burden is a bad economy, and higher taxes on the wealthy won’t fix that problem—and could make it marginally worse in the short term.

How is it that the lower half pay no taxes? I blame George W. Bush. To get his famous tax cuts (every time current tax rates are extended, they are to this day referred to as “the Bush tax cuts”), he cut a deal with Democrats to raise the lower threshold for getting caught in the tax net, thereby freeing millions of people from having to make a net contribution to the U.S. treasury at all. Speaking strictly mathematically, this was a disaster. Shrinking the tax base deprived the treasury of much more revenue than any tax cut for the rich. That’s because, collectively, the middle classes earn much more money than the wealthy. Politics aside, it makes much more sense to draw those people back into the tax system than to raise taxes on the wealthy—if you had to choose between the two, which you don’t. (You could do both and raise even more revenue.)

But expanding the tax base isn’t something that is likely to happen. Nobody wants to alienate the middle class because there are too many of them. The Democrats, in particular, don’t want to because, if they can define themselves as the party of no taxes for the lower half, that puts them in reach of a theoretical critical mass of having a perpetual electoral majority. Once you get to the point where 51 percent pay no taxes (or have no “skin in the game,” as the president likes to say), you have a potential situation where that 51 percent can elect the government and tax the other 49 percent as much as they like.

That may make great politics on paper, but it is also a great way to drive an economy into the ground. Personally, I don’t want to be in the position of defending the rich from tax increases. But I do want the president to stop the distraction of campaigning on tax rates (which, in the end, make little difference in terms of the country’s economic problems) and to at least try to do something about fixing the economy. That means tax reform and entitlement reform.

Yes, everyone knows that nothing can get done on such big issues so close to an election. But the problem is that the president has had nearly four years to do something about them (with big majorities in Congress the first two years), and he never bothered even to try. Instead, he and Congress made things worse by piling uncertainty on top of uncertainty with short-term stop-gap measures on taxes (instead of permanent rates that would allow long-range business planning) and a major healthcare bill (adding yet more uncertainty for business planning) that most people want repealed.

Is there anything to suggest that he would be any more effective in a second term?