Thursday, December 1, 2011

Demand Be Damned

It looks like a good bet that unemployment benefits in the U.S. will be extended again. It’s a move that’s hard to be against, although the political parties have tussled over how or whether the extension will be paid for.

There are many positive things to say about extending unemployment benefits for people who have exhausted their standard entitlement. It is compassionate and even generous. There are people whose lives will be made at least a bit easier by this government expenditure.

But it’s a bit of a leap to say, as many politicians and even a few reporters have, that the extension actually helps the overall economy. They reason that putting more money in the hands of people is a stimulus because those people will go out and spend it. But, if you follow this assertion to its logical conclusion, what they are essentially saying is that you can put people back to work by paying them not to work. The fact is that history has shown that there is always a marked downturn in the unemployment rate when the government stops authorizing unemployment benefit extensions. While those payments are a lifesaver for many, there are also a lot of people who wait until the payments stop before they get serious about finding a new job.

The problem is that pointing out this fact makes one seem rather heartless. One sounds as though one is blaming the victim. Rather than argue over whether unemployment benefits should be extended, it would be better if there were enough jobs for everyone who wants one—and even for those who don’t want one. But the fuzzy thinking exhibited by people who say that extending unemployment payments actually helps the economy illustrates why governments find themselves in patterns that actually make the economy worse.

The notion of the government putting money in the hands of people to stimulate the economy is what is called demand-side economics. If the economy isn’t doing well, according to this view, it’s because people aren’t spending enough. The opposite approach is supply-side economics. That’s where the government increases incentives for people to work (i.e. to start or expand a business), generally through lower taxes or other government-related costs. During the good economic times of the Reagan presidency, critics derided supply-side economics by calling it trickle-down economics. But after the past couple years of demand-side policy, I think more than a few people would be happy to have been getting some trickle-down.

In a way, the economy is like a dog chasing its tail, with supply and demand alternating in a constant loop. Does it make a difference whether the government helps on the supply side or on the demand side? When you think about it, the two approaches reflect two very different ways of viewing the economy, society and our culture. One encourages people to produce something, i.e. make things or perform services. The other encourages people to be consumers, to go shopping. If you are producing something, you will likely get paid for it and become a consumer as a natural result. But when you try to get the economy going by encouraging people to consume, the problem is that the products and services that people want to consume may not necessarily be in supply. It is easier for a worker to also be a shopper than for a shopper to also be a worker.

When the government puts money directly in the hands of citizens, it may result in genuine short-term benefit and make politicians popular and ordinary taxpayers feel good but, as we have seen over the past couple of years, it doesn’t necessarily translate into lower unemployment. In fact, a large government spending spree (combined with increased economic uncertainty spurred by new massive programs like Obamacare and more complex regulations) turns out to be a disincentive for people to start or expand businesses.

That is why the sharp economic drop in 2008—which history suggests should have been followed by a similarly steep recovery—was followed by one of the weakest recoveries seen in modern times. This experience should put the final nail in the coffin of Keynesian economics, but it won’t. There’s just too much fuzzy thinking out there.

Friday, November 25, 2011

The 0.002446443 Percent

There is something about a widespread and largely spontaneous protest movement that appeals to idealists and the young.

Much of the coverage of the Occupy Wall Street movement has reflected this. Most of what I have read has been studiously non-judgmental, if not tacitly supportive. It was a different story with the Tea Party protests of a couple years ago. Many of those people were middle-aged or elderly. The OSW protestors include lots of young people, and that fits in better with romantic notions of protest. They don’t get hit with questions about whether their movement is diverse enough or if they’re just being greedy and selfish.

But if I had protestors camped out on my lawn, I think I would rather have the Tea Party. By all accounts they took all their rubbish with them when they left and did no damage to the places they gathered.

Politically, what the Tea Party had going for it was that the participants were united around a fairly simple idea: limit the size and power of the government. With backing from the Koch brothers, this translated into an effective exercise of political power that changed the actual results of primary and general elections. You may or may not agree with the Tea Party message, but at least there is little doubt about what it wants—or doesn’t want.

Occupy Wall Street has a fairly simple message as well, but it is more of a whinge than a prescription for action. The We Are the 99 Percent web page is full of heartbreaking testimonials to the pain caused by the recession and the achingly slow and weak recovery. The OSW message is that things are not fair and people are hurting. But there is no single message coming out of the movement, that I can discern anyway, suggesting what to do to fix things.

In my previous post, I mentioned my friend Chuck, who was certain that it was only a matter of time until the collapse of the capitalist system would usher in a socialist utopia. I lost touch with Chuck many years ago, so I don’t know if he eventually settled into bourgeois life or if he is still out there laying groundwork for the revolution. Maybe he’s even moved into a tent in one of the OSW encampments. But whether he is there or not, it seems clear that many of the most passionate OSW participants are Chuck’s kindred spirits. They keep waiting for things to get bad enough so that hordes of people from all walks of life will join them in the streets and, at least tacitly, support the radical changes they have always wanted to see.

Their problem, though, is that once they start talking about concrete steps to effect their changes, most Americans will step back. Elections have consistently shown the U.S. to be a center-right country. Mainstream liberal politicians would love to harness the energy of the movement, but that only works if the politicians offer solutions to the problems being protested. And any realistic solutions will necessarily be painful and therefore not popular.

The OSW movement has gotten a lot of traction with the media because of its claim to speak on behalf of the “99 percent.” As far as I can determine, the largest OSW demonstration in New York had a maximum of 20,000 people, by the organizers’ own estimate. (Media estimates were lower.) That’s an impressive number for a demonstration, but it works out to less than 0.3 percent of the population of New York City. It may be true that 99 percent of Americans own only 65.4 percent of the country’s wealth, but in New York less than a third of one percent, at the very most, are out in the streets.

This highlights a paradox of street protests. In countries where citizens have few or no political rights, demonstrations are inherently democratic because they are the only way for people to make their voices heard. But in democratic countries where people elect their government, demonstrations are actually undemocratic because a minority are trying to exert influence out of proportion to their actual numbers.

The problems highlighted by the Occupy Wall Street movement are real and grave. Unfortunately, there is no easy or painless solution to those problems. Even more unfortunately, the movement doesn’t seem likely to coalesce around any viable solution, easy or hard.

Thursday, November 24, 2011

End of the World as We Know It?

Back in the 1980s I had a friend named Chuck, who was convinced that the corrupt, illegitimate capitalist system would inevitably and certainly collapse under its own squalid weight by the end of the 20th century.

I never was quite convinced that Chuck was right, but he spooked me enough that I stayed well away from the stock market during that decade, thereby missing many opportunities to make a lot of money. I did my best not to make the same mistake in the 1990s.

Although Chuck’s prediction did not come true by the end of the 20th century, one might well wonder if it might not be coming true now, belatedly. In the United States, the budget deficit is on a track for disaster, and the government seems incapable of doing anything to correct things. Unemployment is stuck at a high level, and protestors have ensconced themselves in many urban centers to protest income inequality. In the European Union, the inability of a number of countries to get their books in order looks as though it may eventually bring down the economy of the whole continent. Even an economy as solid as Germany’s looks as though it could conceivably be brought down by its interconnectedness with its neighbors.

So is this it? Is the whole system going to come crashing down? If so, will it lead to a socialist utopia run by Chuck and his brethren? Or will it lead to a breakdown in civilization, as we have seen in movies like The Road Warrior? I cannot claim to have any particular insight, but my gut tells me that we are not at the dawn of a new glorious socialist age, but there are quite likely to be major, disruptive political and economic changes in our lives in the near to mid-term. The U.S. and E.U. are both getting to the point where things will either inevitably fall apart or radical changes in government policy will be instituted. Both places face looming binary choices.

The E.U.’s choice is between 1) dismantling the euro zone by kicking the weaker countries out or abandoning the euro altogether and 2) accelerate political integration so that most countries surrender all meaningful national sovereignty to Berlin and Paris. The U.S.’s choice, ironically, is to 1) move more in the direction of the current European model, which as we can see is working really great, or 2) attempt to seriously prune the size of the federal government. In other words, both places have been on journeys that have gotten them to a bad place. Now their choice is to move forward or to move backward.

In the American case, moving “forward” might look like this. Confiscatory taxes would attempt to narrow the deficit and shrink the income gap that the Occupy Wall Street crowds are protesting. These taxes would affect only the top earners because the government will have voter support only if most people continue to pay low or no taxes. This will ensure that unemployment stays high, so the government will try to manage a permanent low-growth economy by providing job security for a majority but with no prospects for ever having jobs for a minority. Given that even confiscatory taxes will not erase the defict, inflation will become a permanent fixture, as the Federal Reserve has no choice but to monetize the debt.

Moving “backward” would inevitably involve much pain in the short term, as large numbers of public employees are laid off and the social safety net shrinks. But past experience suggests that eventually a robust economy would return, as more of the nation’s wealth is released from the government and put to work by the private sector. Eventually, unemployment would drop to more acceptable levels.

I honestly don’t know which way Europe is going to go. In the end, the decision will probably be made by German voters, who have to be getting fed up seeing their own economy put at risk by factors beyond their country’s control.

Likewise, the U.S.’s direction will certainly be determined by next year’s election. If the Republicans win the White House and majorities in Congress, we can expect the sort of rolling back that has happened in Wisconsin and was attempted in Ohio. If the Democrats—against all odds—win big, it’s hard to know what will happen. It’s difficult to imagine even a reelected President Obama and Speaker Pelosi moving the country further to the left in the face of the Democratic Party’s moderate faction, let alone Republican obstructionism. And those two have already demonstrated that they are incapable stewards of the American economy. The worst possible outcome will be a mixed result with continued split government and more gridlock.

The hard fact is that we are left in the position of no realistic hope for a good outcome. All we can do is hope for the least bad outcome. Otherwise, Chuck’s vision of the future may yet come to pass.

Wednesday, October 12, 2011

Math Lesson

Let's be clear. There are three kinds of people in the world: those who are good at math and those who aren't.

Unfortunately, politicians as a rule don't fall into the category of those who are good at it. At least that is the impression most of them give when they open their mouths.

So it was refreshing last month when President Obama invoked mathematics when answering criticism of his proposed so-called "Buffett rule." Said the president, "This is not class warfare; it's math." Nothing quickens my heart more than a political leader invoking the unambiguous certainty of verifiable arithmetic. But, as he usually does when talking about economic matters, the president disappointed. There is nothing at all wrong with the "Buffett rule" or increasing taxes on the super-wealthy and, in fact, it's basically a good idea. They already pay the bulk of the taxes, but they can afford to pay more. And tax rates on individuals in America are at historically low levels. (Taxes on corporations are another matter.) But the problem is that the tax bracket that takes in many wealthy individuals also takes in individuals who are operating businesses and who are not necessarily wealthy themselves.

But in trying to solve the fundamental problem of the government spending much more money than it takes in, neither the "Buffett rule" nor anything in the president's so-called jobs plan does anything about that problem. There's no point arguing over what the role or scope of government should be if a huge portion of the government's spending has to be borrowed in the first place. There's your math, Mr. President. If you take the number of taxpayers who would be affected by the president's proposed taxes on the wealthy and multiply it by the amount of additional tax each would pay, it amounts to what pundits like to call a rounding error in the federal budget. You would raise significantly more money by taking one single dollar from every man, woman and child in the country than you would by confiscating all the income from the super-wealthy. That is because the super-wealthy are such a small group. The Occupy Wall Street protestors keep chanting, with a bit of hyperbole, that the ratio of super-wealthy to everyone else is 99-to-1. No matter how much money you take from that one percent (the proposal actually targets around the top two percent), it's not enough to solve the problem. And, incidentally, if the protestors are truly distressed by the profits of brokers and banks, then the deficit should be their main issue. Look at how much of everyone's tax money goes not to programs that help people but to bankers and brokers servicing the debt.

In fairness, the president did not actually claim that his proposed tax increases would solve the deficit problem. They are meant only to pay for the new stimulus he wants. The president continues to focus on the next few weeks or months instead of on the looming disaster that is threatening the very viability of government.

One politician who does not shy away from mathematics is House Budget Chairman Paul Ryan. He has proposed a very specific plan for aligning federal revenue and spending over several years. There is much to criticize in his plan, but the reason it is easy to criticize is because it is full of specifics. If the president has crunched his own numbers to solve the structural deficit problem, he has not shared them with the public. Instead, he diverts attention from the problem by criticizing the opposition, for not supporting one more stop-gap stimulus proposal that even much of his own party doesn't support--and by talking of raising taxes on the wealthy. The Washington press corps doesn't help much because it is quite willing to follow each distraction the same way a dog follows a tossed ball. It is more interested in figuring out who is "up" and who is "down" in the political battle than dealing with the economic substance.

The reality is that, at some point, some leader is going to have to deliver some very bad news to the American people. The problem with talking about raising taxes on the wealthy is that it gives people who are only causally paying attention the impression that this will solve the problem. It won't. No one can blame the president for not wanting to be a buzz kill with the election season already underway. Assuming he understands the problem, however, he will stand a much better chance at re-election if he can talk about the economic situation in terms that people can understand and demonstrate leadership in confronting it.

Instead, he seems to be pinning his hopes on putting short-term blame on a party that, during his term, has held only one house of Congress for only one year. (He seems to have realized that too much time has gone by to keep blaming the previous administration, although his surrogates continue to do so.) That will be a neat trick if he can pull it off. But even if it does, the country won't be any better off. He seems to be hoping that, if he looks after his re-election, maybe the economy will fix itself.

Monday, September 19, 2011

Careless Policy

It seems pretty clear by now that, of all the reasons for the stubborn refusal of the U.S. economy to recover strongly, one of the biggest ones is the unintended consequences of a major health care bill that hasn't even gone into effect yet for the most part.

I do not question the good intentions of the people who wrote and passed the legislation, commonly called Obamacare. But the fact is that, while the administration is obliged to do its best to defend it, this was never going to be a widely loved government creation. Conservatives hated it for a number of reasons: because it represented the kind of big government program they have long railed against and, in the end, because they were frustrated over their powerless to stop it. But the left isn't exactly enamoured of it either because it fell so far short of what they had wanted and hoped for when Democrats swept into power three years ago. Many of them, including President Obama himself, said openly that they preferred a single-payer system or, barring that, the inclusion of a "government option." What everyone got was a complicated monstrosity that resulted out of what was possible politically.

Indeed, you could go so far as to say that Obamacare was designed to fail. Republicans certainly wanted it to fail, for all kinds of ideological and partisan reasons. But liberals certainly cannot be disappointed to see it fail as well, but only to the extent that its failure might force a crisis that results in it being replaced with what they consider to be a better system, i.e. single-payer. The problem for them is, if the health care law has to be scrapped, will the country move forward to more government involvement or roll back to the old free-market insurance system? Given the current mood of the country, you would have to bet on the latter. But realistically, the likely outcome would be to repeal some of the provisions that the Republicans find most onerous and leave the rest intact. Even Republicans, the professional politicians among them anyway, tend to be loath to give up government control on things, once it has been established.

It is worth remembering that, before the passage of Obamacare, polls showed that people generally were not that unhappy with the quality of their health care. Their main complaint was the cost of it. The other general concern was the number of people without coverage. Obamacare was designed to deal with almost every problem but the one people cared about most: cost. In fact, if you deliberately tried to come up with legislation that would cause healthcare costs to rise, you couldn't do much better than Obamacare, which put more distance between the consumer and the provider--a sure recipe for raising costs. My brother, who is a partner in a company in Nevada, told me that their healthcare costs immediately jumped 30 percent on the passage of Obamacare.

If the government came to me and asked me to design an optimal healthcare system, I'm not sure what I would suggest. A truly unfettered free market will result in the lowest costs but it will leave victims among those who fall through the cracks or become unlikely victim of abuses. A completely government-run system would theoretically take in everyone but would certainly be inefficient and expensive. You may ask, who cares if it is expensive if the government is paying for it? But an expensive system eventually becomes a low-quality system. The optimal system would be one that is mostly free-market but attempts to police potential provider and drug company abuses and also subsidizes care for society's neediest--but only the neediest. Medical savings accounts are an idea that gets bruited about from time to time, and it's a good one, especially when supplemented with catastrophic insurance--which is a lot cheaper than insurance that tries to cover everything. It leaves medical choices in the hands of patients and encourages efficiency because healthcare providers must to compete directly for choices made by patients.

In the end, however, getting from the current mess to a reasonable, workable system will not be easy.

Friday, September 16, 2011

Blind Faith

My cynical side strongly suspects that many American politicians regularly profess blind faith in things they do not, in their heart of hearts, really believe.

For example, I have a sneaking suspicion that there are politicians who, deep in their souls, are agnostics if not atheists but who go to church and pay lip service to religion because it is an electoral requirement to do so. Similarly, I think there are politicos who do not really believe that anything the government can do will have a serious effect on the planet's climate but who claim otherwise for political expediency.

But, in my suspicious mind, the most common article faith proclaimed by those who do not really believe it has to be the notion that the government can do anything much, if at all, to affect the economy. As far as I can see, most politicians behave as if they do not really believe that anything the government does, or does not do, has much of an effect on the economy. For those who subscribe to this view, the politician's job is basically to position himself to take credit when the economy does well and to blame others when it doesn't--and then hope for the best. Or, if politicians actually do believe that the laws and the budgets and regulations that they pass do make a difference, then they are even more cynical than I think. That means they see their main job to put off the economy's most dire problems until things fall apart on someone else's watch--after they themselves are out of office.

How else to explain the way both major political parties pay lip service to the looming failures of major programs like Medicare and Social Security but then continue to carry on business as usual and legislate with only the short term in view? A "super committee" is supposed to sort out the deficit later this year, but is there any reason to believe that its recommendations, if it can arrive at any, will be heeded any more than the last panel that was formed to deal with the problem--and was subsequently ignored?

The current deficit crisis isn't something that began only with the brinkmanship that nearly resulted in the U.S. going into default over the summer. Successive governments run by both parties have been wilfully ignoring the trajectory of federal spending for some time now.

The country's so-called leaders have gotten away with this game for a good while, but Barack Obama may be the unlucky one to have the house of cards fall down on his watch. Recessions and recoveries generally follow consistent patterns, and one of those patterns has been that the steeper the downturn, the steeper the upturn. But it hasn't happened that way this time. After a couple of years, there is almost no discernible recovery at all. Something is different this time. For one thing, the federal deficit in terms of GDP is much larger than practically ever before. For another, businesses have seen their health care costs spike up in the wake of the passage of a major bill that was supposed to rein in health care costs. And, since the law doesn't fully come into effect for a few more years, the true cost of hiring new employees is not clear for those employers who might normally be looking to expand. Money that could be spent on reducing the unemployment rate is sitting on the sidelines because of the self-inflicted wound of government-initiated long-term uncertainty. Another one-time burst of government spending, such as President Obama has proposed, won't fix that.

Did the Democrats who drafted the health care bill consider the real-world implications of what they were doing? Or did they believe that the U.S. economy would carry on (as it usually does) in spite anything they might do. If they are getting a shock that the laws they pass actually do affect the economy, think of the shock they will get when it turns out that years of spending more than the government takes in results in harsh, unavoidable austerity, in the form of steep spending cuts and/or oppressive tax rates, or rampant inflation or, in the worst case, both.

In that case, the politicians will surely follow the course that politicians usually do. They will do their best to put the blame somewhere else.