Category: Economic policy

Is the US Returning to Cold War Standards?

I had just graduated from college when I saw my government invade the Dominican Republic to support a military dictator who had just overturned the democratically elected President, Juan Bosch. As my awareness grew, I realized that we were supporting brutal dictators in Vietnam, much of Latin America, Iran, Saudi Arabia, and in many other countries. We had overthrown democratic governments in Guatemala and Iran, as well as the Dominican Republic, and a few years later were to collaborate in the overthrow and murder of the democratically elected President of Chile, Salvador Allende, and his replacement by the brutal military dictator Pinochet.

At the same time, we supported the continuation of colonial rule, often very brutally, in Angola, Mozambique, what was then Rhodesia, and many smaller countries; and, most shamefully at all, we supported the atrocious system of apartheid in South Africa.

All of this was “justified” in the name of stopping Communism, which supposedly would take over all those countries if we let them become democratic.

Then came the collapse of the Soviet Union, the end of the Cold War, and the outbreak of the “third wave” of democratization – in Eastern Europe, Latin America, and Asia, and to some extent in Africa. With no more fear of Communism, there seemed to be no more need for the US to support dictatorships in other countries.

But what is happening today? The US government is turning a blind eye to brutal depression by the absolute monarch of Bahrain. It supported the coup against President Zelaya in Honduras, even while claiming to oppose it. It is maneuvering to keep the revolutions in Tunisia and Egypt from becoming “too” democratic. More broadly, it seems like the Cold War all over again!

This trend is appalling. Many people had hoped that President Obama would turn us in a different direction, but instead he seems to be opting for more of the same. The explanation given, when any is given at all, tends to be that terrorism is just like Communism – if we allow too much democracy, it is said, the terrorists will take over. This isn’t very credible, though – it’s just hard to envision massive electoral support for terrorists! (I mean, if they had that kind of support they wouldn’t need to resort to terrorism!)

Far more likely, in my opinion, is that support for dictatorship abroad is linked to the attack on democracy at home. The increase in economic inequality basically means that a relatively small number of people control more and more of the world’s resources. They benefit immensely from doing so, but they can only keep it up if they keep people from voting on it. Here in the US, they do so by a variety of disenfranchising devices (massive imprisonment, intimidation campaigns, cumbersome registration processes, gerrymandering, etc.) In countries like Bahrain, they don’t have to be so subtle. They just work through the monarchies of Saudi Arabia, Bahrain, and the like to arrest, torture, and shoot those who demand democracy.

It’s time we got more democracy at home, and used it to support democracy in other countries.

Medicare, the Deficit, and Political Playacting

No doubt you know by now that the Chair of the House Budget Committee, Representative Paul Ryan (R-WI), has proposed to reduce the federal budget deficit by eliminating Medicare for everyone younger than 55. Here is a link to the proposal. The House of Representatives has actually passed this proposal with every Democrat and 4 Republicans voting No. It is going nowhere. The Senate will not pass it, and President Obama singled it out for criticism in his speech on the budget last week. Medicare is extremely popular, and Republicans who voted for it drew criticism in their town meetings during their recent town meetings.

Nevertheless, the Republicans have accomplished one of their goals. They now have everyone thinking that Medicare has something to do with the deficit. It does not! The basic parts of Medicare, covering physicians services and hospitalization, are paid for out of the trust fund with money from the Medicare tax we all pay. That money cannot be used for anything else, only for Medicare. Right now  that fund is in surplus.

Now there is a sense in which you can add up all federal expenditures and federal revenues, including both Medicare and Social Security, and call the result a deficit or a surplus. However, that is just an accounting trick. If those part of the budget that are not either Medicare or Social Security (or a few other, much smaller trust funds, like the one you contribute to if you buy a duck stamp) are in deficit, the government will still have to borrow to pay for them.

So if we want to reduce the deficit, we have to look elsewhere. And there are really only two places to look: stopping all these wars, and ending the Bush tax cuts. Other cuts can be made, but there is not enough money there to have an impact on the deficit.

As I’ve said in other posts, I think a deficit that creates jobs would actually be good right now, but that means the money has to be spent productively. Giving it to the super-rich doesn’t provide any stimulus at all, since they do not increase their consumption, they just invest it to make even more money. So ending the Bush tax cuts for the rich today would not hurt the economy.

There is a problem with Medicare. The trust fund is in surplus now, but it is declining; present estimates are that it will run out in 2029. That gives us some time to find solutions, but there is no need to end the program. Obama’s health care plan, which goes into full effect in less than 3 years, saves some money already. In addition, we can get big savings by allowing the government to negotiate prescription prices. (Everyone knows that prescriptions are cheaper in Canada, but sometimes we forget why: it’s because Canada makes the big drug companies sell at the lowest price that lets them make money, while Congress requires Medicare and Medicaid to pay them their asking price. Go figure!) We also need to reduce health-care profiteering radically. There’s a good reason why more and more non-profit hospitals are being taken over by profit-making corporations: there is a lot of money to be made.

There are many other ideas out there, and they are all worth considering. My point is not that I have the answer, just that we can solve the Medicare cost problem without ending the program. And let’s be clear about that. Ryan’s proposal does end Medicare. He claims he is trying to save it, but he’s not. He wants to end it and replace with something completely different – instead of paying your medical bills, with the usual deductibles and copayments, the new “Medicare” would give you a coupon for a fixed amount, good for the purchase of health insurance. If health insurance costs more than your coupon, you have to pay the rest yourself.

Moreover, the value of each year’s coupon increases at a set rate that is less than the annual increase in the cost of the insurance – so every year either you have to pay more yourself, or you have to switch to a plan with poorer coverage. That’s noe Medicare.

Even though people are rejecting Ryan’s plan, if we end up believing that Medicare is a big part of the deficit, we will think it has to be cut. That’s the sneaky victory that Ryan is putting across on the public.

5 Things to Understand about the Budget Debate

This will be a quickie – I’m trying to get a book chapter written before leaving for spring break, but you faithful readers need something to tide you over. This will be it until mid-March.

As you follow the debate about the budget – federal, but the states are involved, too – just remember these five things:

1. It’s not about the deficit! Obama’s budget proposal has a deficit of over one trillion dollars. Let’s write it out, $1,000,000,000,000 – wow! Huge! No wonder the House Republicans are upset! So they are fighting hard for $60 billion in cuts, which would leave a deficit of only about one trillion dollars. Hmm . . .

2. It’s not about the deficit! Those most rabid about budget cutting now voted enthusiastically in December for a tax cut package of over $900 billion. (Well, not quite — the most rabid are GOP freshmen, who didn’t get to vote in December because they were not in office yet. Still, the Republican leadership was there, and voted for the tax cuts.) That $900 billion is spread over several years, so defeating the tax cut would not have wiped out the trillion-dollar deficit, but it would have mad a nice dent in it.

3. It’s not about the deficit! We’re fighting wars in Afghanistan (where helicopters just killed 9 boys gathering firewood) and (though our government pretends it’s over) in Iraq. As recent protests in Tunisia, Egypt, Bahrain, Yemen, Libya, Oman, Iran, Morocco, Algeria, Iraq (yes, now that we’ve installed “democracy” there, pro-democracy protests have sprung up, and our “democratic” government is killing them!), and elsewhere have shown, foreign invasion is not the way to democratize a country. I hope they don’t do it in Libya. In any case, really ending these wars is absolutely necessary if we want to get rid of the deficit – yet very few of the deficit hawks are proposing that.

4. It’s not about the deficit! Social security does not contribute to the deficit, yet the majority of the deficit commission wants to cut it, and the Republicans are taking up the cry. (However, keep in mind that the deficit commission never agreed on a report, since there were not enough votes to approve one – so Boehner’s criticism that Obama didn’t follow his own deficit commission is bogus.) Social security does need some adjustment to keep it strong past the middle of the century (how about making the rich pay the tax on their whole income?), but it’s a separate fund. Unless the government diverts social security taxes to pay for other things, cutting social security benefits won’t do anything for the deficit.

5. It’s not about the deficit! Health care costs do contribute to the deficit, yet the deficit-conscious House of Representatives just voted to repeal the national health care law. The law has many flaws, and does not do nearly enough to control health care costs – but it does make a step, and repealing it would increase the deficit.

Conclusion: It’s not about the deficit! The budget cuts the Republicans in Congress are proposing are all based on undermining the ability of government to increase the quality of life for everybody. They will make it harder for anyone but the rich to get an education, eliminate jobs for working people, and make it almost impossible for regulatory agencies to enforce protective laws that are on the books. This is not deficit reduction, it’s class war, another attempt by the upper class to assure that the their profits, dividends, and bonuses are paid for by the rest of us. In Wisconsin, Governor Scott Walker, backed by Republican majorities in the state legislature, is holding the state hostage until his budget bill passes, even though the unions he is trying to destroy have already agreed to all the economic concessions he proposed. The only issue at stake there is the destruction of the unions, part of the destruction of the power of the working class to defend itself. That’s what’s the federal budget battle is about, as well. We should forget about the deficit and pass a budget that creates jobs, lowers the cost of education, protects the environment, and moves us toward a better health care system.

Where Adam Smith Was Wrong

Government is under attack these days, especially here in the USA. It seems clear to me that we need strong government action to create jobs, but the Tea Party proclaims that government is too big now, and that what we need to do is leave everything to the efficiency of the market.

I have argued earlier that this anti-government view is just bad policy, so I won’t repeat that here. Today I want to reflect on the philosophy of the matter, which brings me to Adam Smith and his two great books, The Theory of Moral Sentiments and The Wealth of Nations. Smith pointed that in an ideal market transaction, both sides are made better off by the result. That’s a tautology – without coercion, you wouldn’t enter into a transaction unless it would make you better off in some way. Thus, in a society where everything is done by ideal market transactions, everyone should become better off continually, day by day, with the sole (but important) exception of market failure. The latter occurs when you want to make an exchange, but can’t find anyone willing to make that exchange with you.

So if the market makes everyone better off, it follows that government intervention makes someone worse off, right? This, too, is a tautology. The essence of government is force, and you wouldn’t need force (except for basic security functions, i.e. preventing theft) unless someone did not want to do what is required.

That’s the argument, in a nutshell. Milton Friedman went on at much greater length, but really made only one additional point – that the market is more intelligent than any planners could be – which is demonstrably and obviously wrong (think: bubbles).

The problem is, Smith’s argument (like any argument) is derived from some assumptions, several of which are incorrect: the assumption of uncoerced exchange, the assumption of basic morality, and the assumption of the commensurability of values. Each of these is fundamentally wrong; let me explain!

Coerced exchanges. The essence of capitalism is not the market, but the wage relationship. The capitalist is different from the feudal lord or the slaveowner because he or she (or more likely it, since the capitalist is likely to be a corporation) buys labor for a wage rather than exchanging it for the right to use land or compelling it by brute force. But why would anyone be willing to sell his or her labor to a capitalist? That may seem like a silly question today, when the need for jobs is a given. However, you only need a job because you cannot support yourself by your own independent efforts – and you probably can’t, for the simple reason that you do not have access to the things you need: tools, materials, machines, a distribution network for the things you make – unless you become the employee of a capitalist. Capitalism was only able to get going because a lot of people who had lived on the land were driven off it by the enclosure movement. Once they had no other way to support themselves, they became available as full-time wage laborers.

You can probably see where this is going. If you have no other way to live you have to get a job, whether you think the wages are enough or not. Workers can try to force up the wage level through collective bargaining – but if they are in the job market as individuals, it is not a free exchange; one side, the employer, can dictate the terms.

Failure of moral limits.  Adam Smith thought that abuses of the market would be prevented by the basic humanity of morality. Of course he was right to think that people are moral beings, and the vast majority of us try to do what is right, at least as we see it. Unfortunately, however, “the vast majority” is not enough. Immorality gives a competitive advantage, so the people whose behavior is not limited by moral principles – in other words, those willing to lie, cheat, and steal – tend to rise to the top. One very important reason we need government is to keep immorality from prevailing.

Money can’t buy happiness. Finally, it’s simply not true that values are commensurable (i.e., that they can be measured by a common unit, which we call “money.”) In practice, there is very solid evidence that more money does not lead to more happiness – after a certain point (basically, enough money to maintain a modicum of comfort) there is simply no relationship between wealth and happiness. (See Gross National Happiness by Arthur C. Brooks.) Contemporary society, driven by the imperative of increasing wealth, is producing higher levels of stress, despair, and depression. It seems safe to assume that no one chooses despair or depression (and few choose stress), we must conclude that people are not achieving Pareto optimality. Instead, they are entering into transacions that make them worse off.

None of this is an argument that any particular government intervention in the market would be a good idea. But it does mean that we should never simply assume that markets are good, and government is bad. After that, we need to look at the details.

The Real Threat Behind Obama’s Tax-cut Giveaway

As you have heard, the tax-cut compromise was enacted last night, and will become law as soon as President Obama signs it. I’d been on the radio all over the country explaining why it’s bad, but I guess Congress didn’t listen to me!

     I just want to make two points today, so I’ll keep this short. First, the House Democrats were really disappointing. Everyone expected them to add an amendment to increase the estate tax on estates over $3.5 million, giving them some chance to negotiate a better deal from the Senate. They were supposed to have the votes for that, but they didn’t do it.

      By the way, I keep hearing conservatives call it the “death tax,” as if that’s supposed to be bad. Why? In the UK, “death duties” were introduced by the Labour government of the 1940s, specifically to break up the hold of the old aristocracy on the countryside. It was wildly popular under that name! Maybe we should be more straightforward here.

     But on to my second point. Today’s Washington Post reports that:

Key lawmakers in both parties have embraced a deficit-reduction plan produced by Obama’s fiscal commission, which includes a tax overhaul that would lower rates across the board but raise additional revenue by closing dozens of long-standing loopholes, such as the mortgage-interest deduction claimed by many homeowners. Meanwhile, the relative ease with which Obama and the GOP were able to strike a deal over the Bush cuts has raised hopes on both sides for productive talks in the future.

     In other words, now that they’ve warmed up by preserving the Bush tax cuts and undermining Social Security with the “payroll tax holiday,” Obama, the Republicans, and the Democratic leaders in Congress are going to go on to pursue the wholesale attack on Social Security called for by the deficit-reduction commission. That may be the worst part of the whole deal.

     What do you think? And what do you think those opposed to the deal should do now?