Month: September 2017

Private Sector Fantasies

/ ontheoutside / 8 Comments

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This note is about a subject with perhaps more deliberately-sown confusion than any other:  the role of government in a market economy.

We start with the saint of free markets Adam Smith.   Adam Smith had no delusions that the free market system would somehow manage itself.   He saw three roles for government in a market economy:  defense, justice, and education.  Further he understood that the private sector and the free market were not the same thing—one of the roles of justice was to prevent the private sector from creating monopolies and thus perverting the free market.  In other words even as an ideal, the free market was neither self -policing (it needed to be protected against its own tendency to create abuses) nor self-sustaining (it needed government to create the population of educated workers).

With that as introduction, we want to talk more about the relations of business and government.  There are three sections.  The first two expand on policing and sustaining of the free market, as just discussed.  The third talks about scope—what objectives for society are in or out of scope for the free market. The Trump administration has positioned itself as the defender of free markets against government.  Instead they are defenders of something rather different, with real dangers as a result.

 

Policing the free market

Monopolies are bad.  they raise prices and stifle progress.  They are also by many measures growing in power.  But they are not the only area where the free market needs to be protected from itself.   For example, lack of business transparency perverts the capital markets, so the SEC plays a crucial role.

A more complicated but equally crucial role is regulation of the boom and bust cycles (with bank failures and human misery) that used to be endemic to capitalism.  Government has two responsibilities for controlling those cycles:

  1. It needs to act “countercyclically”. Despite the jargon term, this is so basic as to be biblical—save in good times to prepare for bad. In a recession the government is the only party able to stop the spiral of low sales -> layoffs -> even lower sales-> even more layoffs.  It does that by injecting money into the economy to stabilize sales.  But in a recession, tax revenues are down, and the money has to come from somewhere–preferably savings but if necessary debt.  In 2008 George W. Bush had just fought an off-budget 3 trillion-dollar war, so the cupboard was bare.  Republicans screamed about increasing the deficit, even proposing constitutional amendments for balanced budgets.  Their line “real people tighten their belts when they have to” was a deliberate misrepresentation.  Real people save for bad times; otherwise they have to borrow to put food on the table.
  2. Government needs to recognize and control the excesses that can creep in to cause havoc in the business cycle. While many factors contributed to the 2008 crash, the most spectacularly deadly was the perversion of the banking system caused by mortgage-backed securities. In the giddiness of deregulation no one was looking.  The aftermath produced the Dodd-Frank legislation as an antidote.

Finally, as a last example, there are categories of risk where you can’t count on the business decision-making process to do the job.  Low-probability/high costs events (plane crashes, oil rig blow-outs) should in theory be prevented by rational decision-making, but in practice it’s hard to refrain from increasing profits by ignoring something that “really isn’t going to happen”.  So there is a role for government there too—protecting both the public and the businesses.

Current status:

– The administration’s anti-trust position remains to be seen.  Trump campaigned against mergers, but appointed an industry-representing trust lawyer to head the anti-trust division.

– There seems to be no recognition of business cycle issues.  Trump’s tax plan runs a big deficit to stimulate an economy close to full employment.  This runs the risk of repeating 2008 with an even worse debt position to fight it.  He also wants to repeal Dodd-Frank and says he won’t enforce it now.

– The general rule is that any regulation opposed by any business is bad.

=>  There is no serious recognition that the financial system needs policing.  Trump runs the show based on what he has wanted to see for his own businesses.  This is a blind dash into another 2008 or worse.

 

Sustaining the free market

Adam Smith pointed out the need for government to supply a suitably-trained workforce.   In the eighteenth century that meant simply literacy.   The definition of suitably-trained has changed over time.  By 1940 a then astounding 50% of American students finished high school.  In that era no other country approached that level of broad education support.   Then the GI bill made college possible for veterans, and public colleges expanded widely throughout the 1960’s and 70’s.  This coincided with unquestioned American economic dominance.  An educated workforce (at all levels) remains a critical national requirement.

You can take that one step farther.  Equality of opportunity is usually discussed in terms of social effects, but there is a corresponding benefit to the free market.   Business and the market benefit when all persons are able to achieve up to their capabilities.  The United States used to lead the world in upward mobility, but with rising inequality it now ranks behind most developed countries.

There is one more government role that fits here as well, namely research.  Government support of research produces people to be hired by cutting-edge businesses, and also supports the creation of new businesses to exploit the progress of science and technology.

Current status:

– For college, the student debt crisis speaks for itself.  A whole generation of students can’t imagine when they will be able to get out of debt.  This is compounded by De Vos’ support of shady lenders and weakening of controls on fraudulent educational institutions.

– For K- 12 education, states have retreated in funding, and De Vos is proposing a voucher system that will abandon the broader population.  Vouchers will be fixed in dollar value, to be augmented by surcharges at the now-privatized schools.   If you want a good education you pay for it; if you can’t, there is no guarantee of what you get.  This is institutionalized separate and unequal.

– Trump’s budget essentially abandons the government’s role in research, and his appointees have attempted to minimize the role of science.

=> There is surprisingly little recognition that government has an important role here at all–except to privatize it!

 

Scope of the free market

Adam Smith felt that the private sector could not be trusted even to defend free markets.  So it is not surprising that there are other aspects of society that need defending as well.

We give a few examples:

– Well-being of workers.   Smith describes effects of supply and demand on workers, and he even points out that adequately-paid workers may be more productive, but he makes no claim of utopia from the free market.   In fact in Smith’s description, workers’ welfare depends on a market for labor in which individuals have little bargaining power.

– Resources and the environment

Enterprises will use the environment for their own benefit, unless there are rules to the contrary.

– Infrastructure

Public resources such as roads, bridge, airports, internet, etc. should be built and maintained as needed by everyone.

Current status:

– Trump has pushed to limit OSHA workrules, opposes unions, and has no plans to raise the minimum wage.

– The EPA is being severely cut and redirected to helping businesses.

– The stated approach to infrastructure is via private investment, which will go where the money is.

=> There is no recognition that areas such as these can be out of scope for the private sector.  Instead there is a blind belief that growth solves everything.

 

From this summary it should be clear how far we are from free market economics.

The current national policy is that the private sector just needs to be encouraged to go do its thing.   We don’t have to care about policing its risk, we can let it take care of education and research, and nothing other than its success is needed to solve every other problem in society.  Just make sure it’s flush with cash and let it go.

That was the history of the nineteenth century, and for vast part of the population it was no picnic.  And it is worth remembering that 1929 really did happen.

Even thinking of the more recent past there’s an eerie familiarity about our situation.  We have a supremely confident lunatic fringe with the power to run amok.  The last lunatic fringe to take control of our government (remember the neocons?) gave us the Iraq war—which destabilized the Middle East and bankrupted the country—and the crash of 2008.

This time it could well be worse.

Strange Revisionist History

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You can almost call it a conspiracy.   The right and the left have decided to rewrite the history of the last election in remarkably similar ways:

The Right:  The election was a thumping rejection of everything liberals stand for.  The public was finally given the opportunity to say so, and it rejected the administrative state and all its policies, both foreign and domestic.

The Left:  The election was a thumping rejection of centrism and its coddling of the right.  Trump’s core voted for him, because the Democrats have become too close to Republicans in outlook.  Other traditionally Democratic constituencies either went to Trump or didn’t vote for the same reason.   The only way to save the country is for the party is to return to its ideological roots on the left.

For starters, one of the most outrageous events in the history of the United States has disappeared from the narrative—the FBI’s deliberate effort to throw the election.   They got away with it, and we may never know what was behind it.   What’s more, of all the elections in recent history, this has got to be the one least fought on the issues.   By all reports, Hillary Clinton’s emails were the only subject on the news for the last two weeks prior to voting.  In fact one of the many national myths that died in this election was the place of truth in our much-vaunted free press.  Finally the Trump phenomenon itself has been whitewashed out of existence.

This is not a trivial matter, because it affects where we as a country go from here.  What follows is a quick summary (from the outside) of what the election was about and what conclusions should be drawn from it.

 

The basic story of this election was simple.  The Clinton campaign tried to make Trump’s character the major issue in hopes of attracting bipartisan support.  Other specific issues came out primarily during the debates, where she was successful (Clinton won the first and third, and tied the second), but not so often after the debates were over.  The focus on character seemed to work well at first, in particular with the discovery of the Trump sex tape.  But it was undermined by the (unsupported) innuendo of the first FBI letter—she was just another crook.  By then it was too late to change tactics, because the press was obsessed with her emails.  More innuendo in the second FBI letter sealed the deal.

For Trump voters this election was a religious experience.  For the rest Clinton’s emails were the issue.  Republicans now voted Republican, the effect of the Russian leaks was amplified, Sanders voters and misogynists had their fears confirmed, and the belief that Clinton would win made for general Democratic complacency.   With the character issue gone, too many people bought Trump’s simplistic economics—“he’s a businessman, I’ll make a buck” or else just didn’t vote.   One example statistic—at Penn State less than half of students registered prior to the election actually voted.  In swing states Clinton lost 4.5 percentage points of advantage in the two weeks following the FBI letter and lost the election by less than 200,000 total votes in four states.  This was so close that even Jill Stein was significant in most of them. (See here for a detailed discussion of factors influencing the election.)  Republican control of Congress was another side of the same coin.

It remains to talk about the Trump phenomenon.   Donald Trump is a demagogue outside the limits of what either party has produced in the recent past.   He is a professional huckster and promised salvation.  He created scapegoats and whipped up his audiences so that they were ready to kill. You can argue that Democrats should have done more for his target population (although the Republican Congress essentially shut down the government for six years), but in the election no honest proposal would have competed with Trump’s lies.  Demagogues are a real problem in a democracy.  A chilling thought is that in Athens, our original model for democracy, once they elected a demagogue it was never possible to go back.

 

This is not to deny that the Clinton campaign made mistakes, but that wasn’t why she lost.  This is my list, always easy after the fact:

– Excessive focus on Trump’s character.  I would have liked more issue-oriented ads.  People needed to understand the reasons to fear Trump’s “change”.  (But that would have complicated a non-partisan appeal.)

– Handling the FBI letters.  Clinton should have taken the high ground—welcomed the examination of her letters as a way to settle the email issue once and for all.  Contrast with Trump’s taxes.  (But the innuendo was still there, and at the time no one could believe that the FBI itself was corrupt.)

– Despite Trump’s comment, Clinton wasn’t nasty enough.  She and the Obamas liked to say “when they go low, we go high”.  This was not a time for class.  She should have gone after Trump as a businessman, with testimonials from the people who denied him financing.  At the end of the campaign Clinton talked about bringing the country together; Trump talked about locking her up.

– Countering Trump’s tweets.  This is a strategy problem going forward.   Tweets seemed to keep Trump on people’s minds much better than traditional grass-roots organizing.

– Top-down campaign.   As canvassers we were told not to change a word of the canvassing scripts, and there was little interest in our impressions of the voters’ concerns.  Trump’s people had ears to the ground.

 

Some Conclusions

– This was not a campaign on the issues, and we shouldn’t pretend it was.  There was no mandate to take the country to the land of the alt-right, and also no proof that the Democratic Party does or doesn’t need ideological changes.

– A major influence on this election was corruption in the FBI—an unimaginable failure of our criminal justice system—and we had better worry about what that says.  The concern is not just for elections but more generally how governments can use the FBI against opposition.   (Anyone who questions the corruption should reread the Comey letters. There have been many explanations of why the letters were written, but none explain the carefully crafted—and unsupported—”she’s a crook” innuendo.)

– The core Trump supporters are not going to change allegiance any time soon regardless of what we propose.  They’ve been promised salvation, and they’ll wait a long time for it.   As one book on group violence puts it, fanatical allegiance may grow out of economic issues, but once it gets going it has a life of its own.  We should understand their problems,  but they’re not going to help in 2018.

– Not all Trump voters are the same.  Those is a good chunk of traditional Republicans who were given a reason to ignore what he is.   Those people are harder to get now that they voted for Trump, but they’re not like the Trump core.  For 2018 if they are worried enough—and they ought to be even on economic grounds—they will come.

– Many things had to go wrong for Democrats to lose this election, starting with the FBI.  The election was so close, just about any one of them effectively decided the vote.   Here is one list:

– First FBI letter

– Russians and Wikileaks

– Misogyny

– Bitter Primary fight

– Second FBI letter

– Obama’s decision not to mention the Russian investigation of Trump

– Belief that Clinton would win (further suppressed vote)

There is no question that an inclusive Democratic party can win.  The biggest issues going forward are voter restrictions (Kobach) and gerrymandering.

– We should not take this election as proof that we need to remake the Democratic Party based on what made Trump successful.  Trump won by lying, not because he had a better solution.  What we do need to do is be preemptively sensitive to all constituencies who have problems.   By the time there is a Trump in the picture he will be hard to beat.

– We have a responsibility to address the problems of Trump core voters, and those problems are both hard and pervasive.   Trump’s win is clear evidence that this is fertile ground for demagogues (here and elsewhere).  It is a real challenge to develop workable, salable economic policy.

– Finally, on a more mundane level, there is clear evidence that campaigns have changed.  The effectiveness of Twitter shows we need to go back to first principles about what works.  This has become a scary, high-tech business, and we had better be sure we’re equipped for the fight.

Hurricane Harvey and the Burden of Proof

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Hurricane Harvey was an extraordinary event.   The rainfall totals and flooding were without precedent even in the hurricane-prone Texas Gulf region.  The New York Times pointed out that fully 40% of the flooded buildings were in areas classified as “of minimal flood hazard.”

Scientists have been very circumspect about what part of this to attribute to climate change.   Michael Mann gave a careful summary of contributing factors, principally sea-level rise and water temperature.  The message is that climate change didn’t cause the hurricane, but did make it worse.  No one can quantify just how much worse, and certainly out-of-control development in Houston contributed to the destructive effects.

However, the fact remains this was an unimaginable storm.   It was out of the range of what anyone thought to see from weather, even from hurricanes.  That is the threat of climate change.  Weather isn’t limited to what we know and understand.  Once we perturb the system, the power of the elements can surpass anything we are used to—that is what’s at stake.  We can’t even guarantee the changes will be gradual.

The evidence behind climate change is considerable and increasing.  A previous post here discussed one particular way of looking at it.  Any reasonable business, faced with a risk of this magnitude, would be doing its best to quantify that risk, so as to take appropriate action.   Businesses that choose to ignore disruptive new technologies or entrants are the ones that disappear—along with their disparaging comments on how the new stuff will never amount to anything.

That’s us.   Coal and oil interests (Koch brothers and their cohorts) are horrified that anyone would even think about keeping their assets in the ground.   With this administration anything that any business doesn’t like is bad–and for climate change we actually have Koch representatives (Scott Pruitt, Mike Pence) running the show.  So climate change doesn’t exist.  Can’t even talk about it.   Come back to me when things are so bad I can’t laugh at you.

What is the burden of proof here?  We are long past the stage of serious concern.   We haven’t reached the stage where people with something to lose are ready to give in, but that’s not going to be until their businesses blow up in a storm.   With climate change you have to act early if you want to prevent a future of weather run amok.   Carbon dioxide in the atmosphere just adds up.  If you wait for things to get bad, they will go from bad to continually worse through all the years it takes to get off coal, oil, and gas—and then stay that way for many decades more.

We are at the stage where the appropriate response to risk is action.  Research and the Paris Agreement process are imperatives.  CEO’s of failed companies can always go on to the next one, but with climate change there’s nowhere to go.