Exported and Armed Prohibition

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“Prohibition Repealed: New York Times, 5 December 1933” by cizauskas is licensed under CC BY-NC-ND 2.0

As a nation we seem to be baffled by the problems of drug-based criminality south of the border.  Why can’t those people live like us?  What makes us so superior?

For those questions it’s worth emphasizing that we used to have problems like that too.  Our problems were self-inflicted, but the phenomenon was similar.  Let’s talk about Prohibition.

Prohibition was a reactionary revolt much like what we’ve got with the Christian right today.   The heartland was able to stick it to the godless, immigrant-infested cities.  No more alcohol to corrupt our body fluids.

That repressive crusade was just too overarching to succeed.  It resulted in an immense network of criminality to meet demand.  Criminality pervaded every corner of the country, and the kingpins captured the news daily.  It could and did happen here.

Let’s compare with the situation in Latin American.  North of the border there is vast money to be made with illegal drugs, and the resources available to stop it are ludicrous by comparison.  Big surprise they’ve got a problem.  We have drug problems too, but we also have resources of the US.

What kind of help do they get?  They can’t even get us to slow down the sale of military-grade weapons underpinning the drug wars.

It’s like the wall.  Let’s just keep problems out.  We’ve exported and armed Prohibition.

The World We’re Making

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“STATUE OF LIBERTY” by airlines470 licensed under CC BY-SA 2.0

The first Democratic debate began with a question to Warren about the economy: “Since most Americans think the economy is doing fine, why do you need all those plans for change?”  She responded by pointing out that the “great” economy was primarily benefiting only a lucky few.

Even that, however, understates the issue.  It’s not just that unemployment rates don’t tell the whole story about what it means to be working for a living.  It’s that there is so much run amok with the direction of the country that the unemployment rate doesn’t begin to stand-in for the strength of the economy or the well-being of the country overall.

For that we need to pull together many strands and formulate a picture what it would mean to have four more years of Trump—the kind of world we are making.  This note attempts to make a start.  We can be explicit about many things.  Our decline from the confident image of the Statue of Liberty was clear from early on, but now we have more specifics.  We should leave no doubt about the risks we run.

In doing this, one goal is to avoid what I felt was a problem with the Clinton campaign.  Trump kept talking about change, but we didn’t get across the danger in those changes: what they would mean for ordinary daily life, for the environment, for the courts, for democracy in America.  Who’s to say if that would have made a difference, but many people were certainly surprised by what they got.  If nothing else, it would have called out the risk of non-voting.

What follows is an outline with a few supporting points and references.  As noted this is a start.

  1. Climate change continues unabated

More unprecedented floods, hurricanes, temperatures, etc.

By leaving the Paris agreement we broke the international unanimity that was the best chance for progress.

               Each lost year is time we won’t get back

  1. Back to the 19th century on woman’s rights

Roes vs Wade hangs by the thread of Roberts’ desire for Court legitimacy.

One more Supreme Court vacancy, and we all live in Alabama.

  1. Loss of American technological superiority

Disdain for science and technology in government

Non-support of research and education

Ignoring climate change technologies

Choosing big, established companies over innovators (Net Neutrality)

Xenophobia and racism encourage entrepreneurs to go elsewhere

=> Lower standard of living

=> Real threat to our military security

  1. Erosion of opportunities for middle class life

Education—weakening of public education and more generations in debt

Attacks on unions

Healthcare at issue—ACA hobbled with no other proposal in view

Continued declines in good jobs for people without degrees

No recognition of the problems created by technology change

Cutting the safety net—If you don’t succeed you’re a loser

  1. Nuclear proliferation and risk of nuclear terrorism

Encouraging nuclear proliferation by statements and actions (N. Korea vs Iran)

More players means more chance of theft or sale

Belligerence normalizes nuclear weapons

  1. A population divided against itself

Conflicts stoked between races, ethnic groups, cultures

No interest in racial justice—to the detriment of all

Cruel and intentionally divisive Immigration policy

  1. A world filled with senseless conflict

Major hit to both security and prosperity

Trade wars instead of alliances and international norms

New arms race already announced

Policy rooted in weakness—from fighting on all fronts

Conflict as the first choice— “Trade wars are easy.”

Other wars too?

  1. Weakened environmental and other standards

Air and water

Workplace safety

Food safety

  1. Bubble economy based on debt

Good times prolonged by deficit-funded stimulus

Proven recipe for cycles of boom and bust (back to the 19th century here too)

No Republican history of help during downturns

  1. Undermining of democracy in the US

Increasing government by fiat (“executive order”)

Restriction of voting rights

Politicization of the Justice Department

=> Democracy is not a luxury—it made us what we are.

 

Weakness and Strength

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“King of Hearts” by Duong Vu licensed under CC BY-NC 4.0

We’ve talked here before about effects of bullying.  This time we want to be even more basic—weakness and strength.

If you want to get something done, it’s important to get others behind you.   In almost any task or context, few people are able simply to impose their will.  Building alliances is the means to power—for individuals and for countries.

There was a time after the second world war when the US, as last unscathed power, could do whatever it wanted.  That’s of course the era Trump recalls with MAGA.  But we’re no longer in that world, and we do ourselves no favor by pretending it’s still true.

Krugman had a recent NYTimes piece talking about the limits to our power in the trade wars.  However to my mind he didn’t go far enough with his argument.  It’s true that our power is limited, but we also refuse to think seriously about how to get things done.

China is of course the case in point.  Despite Trump’s initial declaration that “trade wars are easy”, this one has been up and down for many months with constant chest-beating and accusations of evil.  There is still no clear idea of the timetable or eventual conclusion.  One thing that is certainly true is that there is already a legacy of hostility and suspicion on both sides—with consequences that will survive any deal.

That situation is not a fact of life, it’s a fact of weakness.  We represent 18% of China exports, and by going it alone that’s all the leverage we’ve got.  The EU represents another 18% with essentially the same grievances.  Normal behavior is to ally our interests and get to the conclusion with overwhelming power.  The Business Roundtable of Corporate CEO’s recognized that from the beginning.   However, Trump wanted a special deal with his name on it, so he chose weakness instead of strength—leaving us all to live with it.

We can even go a step farther.  As a way of exercising power, international institutions are actually useful for this kind of problem.  That’s why, despite the “threats to our sovereignty” rhetoric, those institutions exist.

China is still classified as a developing country for the WTO. Everyone expected that to change, with new rules to be negotiated. That is where the US + EU leverage would normally be brought to bear.

And negotiation in that context has two more advantages:

1. First the negotiation becomes a matter of standards for international behavior, not a question of national honor. That keeps the focus on technical issues rather than face-saving.

2. It requires us to separate what are real matters for rules of commerce (open markets, intellectual property, conditions for labor) from whatever barriers we might want to place in the way of Chinese technological development.

That may sound like a limitation, but it is actually an advantage.  It makes us think about competition for what it is, rather than as something we can cure with a big stick.  There is plenty that we’re not doing to strengthen our own act.

The bottom line here is simple.  We have chosen to fight a trade war with China out of weakness.  That weakness has already had consequences in terms of relations between countries and will also be expressed in the terms of any final agreement.

We can be explicit about what that means.  We have chosen a path that will lead to less access to the Chinese market (already the biggest economy in the world) and more hostility between countries.  On that second point we have already announced a new arms race—which will cost both countries (and the rest of the world economy) dearly.

None of this has to be.   It’s weakness instead of strength.

Solutions

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DSC_8233.jpg by bobosh_t is licensed under CC BY-NC 2.0

With the daily dose of atrocities, it’s hard to get beyond us versus them.   “My people are not like that.”   Get rid of the bad guys and everything will be just fine.  Except that it’s not so easy.

It’s a lot easier to produce factions than policies, and this is a moment that cries out for serious answers.  We’re so numbed by roadblock issues—inequality, declining opportunity, rise of authoritarianism, unstoppable climate change—that we get depressed about the future too.  But the issues are there to be solved.

This isn’t an appeal to bipartisanship, because there is no reason to think that’s the point.  The crisis is not of compromise but of ideas.  So instead this is an appeal to resist chest-beating and work on the issues.  The problems will still be there, impeachment or no impeachment.

If we want to fight climate change, we should stop talking about morality and come up with specific plans.  That’s not trivial, and bad plans can make matters worse—certainly in missed opportunity.  Green New Deal isn’t a plan yet, and spending money on that scale means we better be clear enough about what we’re doing to avoid corruption even among the good guys.   Similarly if we want to improve education we need a plan with funding and a way to get more people involved.   Fundamental problems such as inequality or lack of opportunity are even harder—we need both individual prosperity and national growth.  Detail matters.  The country needs specific proposals and a serious dialog to move forward.  In this Elizabeth Warren’s many proposals are important whether you agree with her answers or not—they are specific enough so that we can start having confidence that this is a job we can get done.

One thing that is certainly true is that we can’t continue denying reality or the interconnectedness of the world we live in.

Any new President will have plenty to fix in sheer damage control.  The country has been weakened in many ways.  But we also have to think about this as a new beginning with bright prospects.  (A recent NYTimes piece was good on prospects though rather breezy on answers.)  It is not a given that 19th century level inequality is a fact of life or that we can’t be expected do much of anything for the common good.  Since there’s no shortage of either money or opportunity, what we’re faced with is the difficulty of getting to where we ought to be.

After World War II, the US led the world into becoming a much more equitable and prosperous place.  That challenge is again on the table.

The Tariff Tax

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As many economists have noted, tariffs are not a sneaky way to get free money from foreigners.  They are a tax paid by all of us in higher prices, and that’s exactly what has happened with the Trump tariffs to date.

Since a tariff is a tax, it’s worth thinking about what kind of a tax it is.  We’ll be specific.

For this note we’ll restrict ourselves to the two biggest ones:  the new Chinese tariff of 25% on $250 B of annual inputs and the new Mexican tariffs, scheduled (as Trump says) to reach 25% on all Mexican imports ($346 B annually) by October.  This costs a total of .25 x ($250 B + $346 B) = $149 B annually.

At first glance this doesn’t seem too bad, since aggregate annual income in the US is $13T, and $149 B /$13 T is about 1%.  But that’s the wrong comparison.  The primary impact here is on prices, which means we’re talking about consumptionnot income.  This is like a sales tax.   Consumption is much more evenly distributed than income, so lower incomes pay more.

It is a truism that the rich spend less of their income, because they don’t have to.  But in fact we can be specific.  Even if we throw out the highest 5% of incomes, the income distribution in this country is more than 3 times more inequitable than the consumption distribution.  What’s more, the US Bureau of Labor Statistics publishes a breakdown of consumption spending by decile segments of US income.  That is, for each 10% segment of the population—ordered by income—they give a percentage of total consumption spending.  These ten slowly-increasing percent values give a quantitative picture of what it means to say the rich spend less of their income:

4.1, 4.5, 6.1, 7.0, 7.8, 9.0, 10.5, 12.1, 15.1, 23.7

Going back to the $149 B of tariffs, this tells us how those tariff costs are allocated to the different segments of the population:  4.1 % to the lowest tenth of income, 4.5 % to the next tenth, and so forth.  Further, since the total number of households in the country is 141 million, we can even say something about how much households in each segment will actually have to pay.  For the lowest segment this is

$149 B x (0.04) / 14.1 M = $433

The calculation is the same for each segment, using the percent values just listed.  In addition the Labor Statistics figures also include the average income level associated with each population segment.  That lets us directly compare Trump’s much-touted tax cuts with tariff costs.  Putting it all together we get the following chart

Population segment Percent of consumption Average income Tariff cost Tax cut
1 4.1 $6,000 $433 0
2 4.5 $16,000 $475 $50
3 6.1 $25,000 $644 $180
4 7.0 $35,000 $738 $360
5 7.8 $45,000 $824 $570
6 9.0 $60,000 $951 $870
7 10.5 $75,000 $1110 $1310 (combined in source)
8 12.1 $100,000 $1268
9 15.1 $130,000 $1596 Not in source
10 23.7 $250,000 $2504 Not in source

What we see is that the Chinese and Mexican tariffs alone overwhelm the Trump tax cuts for 60% of the US population (and come close for another 20%).

Conclusion:  Tariffs are a serious and regressive tax.  Since they are also an expensive and uncertain way to create jobs (at $800-900K each), this is no silver bullet.  And that’s before we even think about retaliation.

For Sanity on China

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What are our stated objectives with China?

  • We want to bring them into the world economic system on appropriate terms of fair play.
  • We want access to their markets according to those rules of fair play.
  • We want protection for our businesses and workers, also according to those rules of fair play.

Those are perfectly normal and achievable objectives.  We can be specific about how to get there, and the probability of success is high.

What are our actual objectives in the trade war?

Trump has been clear about this in both words and deeds.  Our trade war is to assure that China will never be able to challenge our technological, economic, and military dominance.

Those are not the same as the stated objectives (although the press seems confused about the difference).  They are objectives for a real war.  And if you’re going to fight a real war—with bullets or with tariffs—you had better be sure you’re going to win, or the results won’t be pretty.

Problem #1:  We don’t run the world.  We are 18% or Chinese exports, same as the EU.  We’ve gone out of the way not to have an alliance with the EU on this issue.  (It’s worth noting that the EU already has a far lower balance of payments deficit with China than we do.)  The Chinese domestic economy is already larger than ours.  We can inflict pain, but we can’t put them out of business.

Problem #2:  China’s technological and military strength is not just because they’re stealing from us.  That genie is already out of the bottle, and it is an imperialist delusion to believe we can keep them poor and dumb.

Problem #3:  We’ve converted an issue of international good behavior into a matter of domination.  Without boots on the ground there’s no way in hell we’re going to enforce an agreement of subjugation.  (The distinction is not a gray area—we’re either thinking about rules we’d be willing to apply to ourselves or not.)

What’s going to happen?

The Chinese will go build their (very large) part of the world without us.   We will have no effective access to their markets or their technology (already today technology is a two-way street).  We’ll be back in a cold war with all that entails in risk, mutual hostility, military spending, and stunted world growth.

What should we do?

  1. The first step is to cool the chest-beating jingoism. (China is in fact a mixed bag for the US economy.) That way we can at least recognize the difference between the two types of objectives.  It’s the only way to behave rationally.
  2. If what we want is a correct and viable world order, then that means we need an alliance supporting our view. Ultimately this should end up in the WTO, but a first step is to codify what we want and assemble wide support.  That will add both carrot and stick to achieve our objectives.  The Business Roundtable of corporate CEO’s was explicit about this from the beginning.
  3. History shows that the best way to avoid war is mutual commerce. That means establishing rules we can all abide by.
  4. If we’re worried that the Chinese are going to take over anyway, then the best thing to do is to recognize and play to our strengths. Overall the odds are well in our favor.   The fact is that we’ve been here before.  Not so many years ago the perceived technology threat was Japan.  In China, Xi’s thirst for control makes him an enemy of what made for China’s success.

History is full of disastrous, inconclusive wars that no one wins.  Trade wars too.  We’re not so weak that we have to blunder our way into this one.

Software

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This note is a follow-on the previous item about prosperity.  Software was mentioned there, but it deserves its own focus.

There isn’t enough discussion of software businesses.   That’s an important gap, because it lets people fantasize away the changes that are taking place in employment.  Without that discussion we can blame just about anything on globalization, and then believe tariffs will fix it.  Or we can talk about automation, and still think about unions and incremental retraining as the answer.  But that’s wishful thinking.

Software businesses are different.  There is essentially nobody doing production, so there is essentially no incremental cost of production.  Product cost is research and development.  As we noted before that tends toward monopoly businesses that are hard to tax and regulate.

We also mentioned the effect on employment.  It’s not that these companies don’t hire people.  Apple and Google are getting up toward 100,000 people.  But the vast majority of the jobs, well beyond development, require a high degree of technical sophistication.   Even sales and low-level support must deal with the technical sophistication of the products.  In a company like Amazon, with close to 600,000 people, there is a rigid distinction between the sophistication of the good jobs in headquarters versus the hordes of people filling boxes.  Our current technology leaders are all software companies, with all that entails.

But they’re not the only ones.  Globalization and automation are essentially equivalent ways of dealing with non-core functions.  More and more companies can think of themselves as software companies, designing products that can be produced either by machines or some arms-length operation that might just as well be.  In this it is important to recognize that outsourcing is itself a technology area.  Growth in outsourcing reflects how much easier and more reliable it has become. Production becomes machine-like.  That trend is not going away.

There are several types of conclusions to be drawn here.

–  For businesses, the real money is to be made in staying on top of the heap.  That’s the software model.  It will continue to be the direction of business focus, and with it profit margins have proved substantial.

– For employment it means that we have to be realistic about where good jobs are going to be.  There are two types:

  1. There will be technically sophisticated jobs of many sorts. But all will require a sophisticated educational background. We cannot stint on education.
  2. There will be jobs that can’t be easily outsourced or automated. These can be significant in number, but not necessarily in traditional areas. Example areas are human interactions, such as healthcare, daycare, or personal services.  There is also infrastructure, which is largely outside of controlled, automatable environments and not easily moved offsite.  Much of this work will require government intervention to get done.

– We can’t expect things to just work out.   Full employment is not going to produce good jobs for everyone.   We are supposedly living in economic heaven—lowest unemployment in years—but wages still have grown only barely beyond inflation.  And in that, things are far worse at the bottom than at the top of the income scale.  Unions should be strengthened, but they can only do so much about technology (both automation and outsourcing).  And tariffs always sound good, but they are extremely expensive ways to create jobs and historically do more harm than good.

 

In this world, if we want to avoid a declining two-tiered society of haves and have-nots, we have to recognize the role of government—not just to protect people but for national success.

– We have to do better than the current hodge-podge support of education and infrastructure.  Both are critical to the good jobs of the future.  Both require government commitment.

– We have to produce a system of taxation and corporate governance that supports business success without starving that environment that feeds it.  As Apple (among many others) has shown, software profits can be moved anywhere to avoid taxes.  The latest tax changes have actually that easier.

– There are serious problems that are simply outside the scope of the private sector to fix.  The most obvious example is climate change, where we are not only ignoring not only the threat but also the business opportunities it presents.

– We have to understand roles for people in making it happen.

This isn’t actually radical.  It’s closer to the economy we had in the 1950’s and 60’s, when government supported education and research, and businesses reinvested earnings.  We just have to stop believing in good fairies.  There are no miracles solutions delivered by the private sector or anyone else.  We collectively have to provide the environment for both business success and the well-being of the population.

That is a big job, and we’d better start planning for it.  Heaven only helps those who help themselves.

Let’s Just Do Immigration

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Now that Trump has decided that the target for the total number of immigrants is unchanged, why don’t we just fix immigration:

  • Family unification is a good thing, but it has taken too much of the total, now 70%.
  • It’s sensible that some fraction of immigrants should get in based on special capabilities or other demonstrable merit.  (It’s worth noting that the current system is actually not so bad in that respect.)
  • It’s also sensible to have some fraction of immigration that is not so constrained.  You never know who’s going to be a hero, and diversity has value.  Moreover past immigrants mostly came from places where they were denied opportunities for such merit.  So a lottery system has value too.

As a default, divide it up 1/3 for each and call it even.  Otherwise negotiate the limits for a while and then call it done.  (As an interesting variant, Canada handles family unification with relationship points in the merit index.)

Additionally:

  • We need to settle DACA once and for all, because there is no value to anyone in not doing it.  Since we’re talking about merit, these are upstanding, fully-adapted, English-speaking contributors.  And their number, compared to Trump’s new annual totals, is on the order of 1%.
  • For the rest of currently undocumented immigrants, we had a bipartisan bill passed by the Senate in 2013.  That can still be a basis for work.  These people are almost all working and paying taxes.

This isn’t so hard.   It only takes the will to do it.

There remains the question of enforcement.  For that, the problem is that we’ve been postulating solutions without any serious analysis.   Politicians shouldn’t be arguing about this.  (Border control was never wild about the wall until they were told they”d better be.)  There needs to be an independent assessment of how money should be spent to enforce the law.

However one thing that is definite is that there is no excuse for mistreatment of desperate people looking to escape overwhelming problems for themselves or their families.  We can’t satisfy them all–immigration law is there to say who gets help–but that’s no excuse for treating them all as criminals or worse.