Economic policy

The Coronavirus and the Limits of Capitalism

/ ontheoutside / 1 Comment
23035851695_0ddbaae4c9_b

“Lankenau Hospital” by Montgomery County Planning Commission licensed under CC BY-SA 2.0

It’s easy to look at the coronavirus as a one of a kind.  After all, who expected this cataclysm that came from nowhere?   How could anyone have predicted it?

In fact the world is full of low-probability events that you have to care about.   The coronavirus is on a par with airplane crashes and oil-rig explosions.  Capitalism is not good at dealing with any of them.

There’s a myth about that sort of thing.  Of course we don’t need airline or aircraft regulation, because the companies in question know what a disaster would mean and will take care that such things don’t happen.  That’s a nice story, but it’s false.   People don’t get promoted because of events that didn’t happen.  They do get promoted by saving money wasted on something that’s never going to occur.

If you’re going to stop that sort of thing from happening, you need a different mindset.  Government has to spend money on regulation and public health and safe, comprehensive infrastructure.   No one else is going to do it.  We now know unequivocally that we decided we didn’t have to care about the CDC.  It has come back to haunt us.  There’s more where that came from.

In fact there’s a whole bunch of other things we’ve decided we don’t have to care about.  After all, “I don’t have to care” has been the liberating elixir of our age.  Many of these we’ve talked about before, but it’s worth recalling some here:

– Climate change

– Avoiding a depression (clearly relevant now)

– Nuclear proliferation

– Losing our edge in science and technology

We’ve washed our hands of all of this, blithely punting to a private sector that is no more prepared than for the coronavirus.

The message from the coronavirus is that bad things really can happen, no matter how much we may want to avoid thinking about them.

The coronavirus is the canary in the mine.   We’ll get over it somehow, but we’ve had our warning.

Irrelevance

/ ontheoutside / Leave a comment
2405334516_8e05bd7dcb_b

“P1040738” by frederique.baggio is licensed under CC BY-NC-SA 2.0

I find I can’t watch British TV series anymore without a post-Brexit shudder.

Those programs are no longer studies in quirkiness from a historically-great country that is almost us.  That country is gone.   It can’t even keep its own pieces together.  The solid core of the country has evaporated.  All that’s left are the quirks, and many of those are rather sordid.

Britain is a land possessed by dreams of lost empire, unwilling to accept either the now-visible reality of that imperial past or the self-evident fact that it is gone.  Ready to slap the face of anyone who reminds them of either.  What could be more preposterous?

We’re in the running.

We had our own years of empire.  By virtue of geography we were the last country left standing at the end of World War II, so we put together the world afterward.  And we ran it.  And we got comfortable with the idea that was the only way the world could be.  God chose the United States of America to rule the world.  The Brits had the same idea.

Those were the good old days.  Not only did America rule the world, but American products reigned supreme.  And notions of common effort left from the war drove broad-based prosperity through measures like the GI Bill.

Things aren’t quite the same anymore.  The rest of the world grew up.  We can’t just order everyone else around, and our products don’t automatically win everywhere.  And we seem to have forgotten those notions of common effort, with sad consequences for the spread of wealth in the population.

Unfortunately, like Britain, we haven’t forgotten empire.  That’s what we have to get back.  Rule the world.  Same population.  Blacks under control.  Winning everything.  Pot of gold for everyone.  God said so.

We have even more to lose than the Brits.

The United States is a prosperous country, in many respects the richest in the world.  We’ve messed up our social contract, but that’s ours to fix.  In the same way, there are no insurmountable problems in making worldwide growth good for everyone.  Even climate change, a monumental problem, has the technological basis for a solution.

We stand ready to sacrifice all of that to a fantasy of empire as vaporous as the British one.  It’s scary as hell that we seem ready to repeat history.  Their Brexit vote presaged Trump—what does the Boris Johnson vote say now?

Symbolism to the contrary, we have a better chance.  In Britain the vagaries of their electoral system prevented a legitimate revote on Brexit.  Regardless of who gets the Democratic nomination, we will get a chance a to vote on the future of the country and the planet.  History doesn’t repeat, people do.

But history will certainly judge.

Lessons From the British Election

/ ontheoutside / Leave a comment
55ddfb60723389.5a56f216db0a1

“Boris” by Raymond Wang is licensed under CC BY-NC-ND 4.0

There is no way to avoid talking about the horrors of the British election.  With the confirmation of Brexit and the triumph of Boris Johnson, we have all stood witness to the disgraceful demise of a nation now left only with dreams of past glory.

For us though the important question is about what it means for our own election.  On that point the discussion has been generally limited to one question:  Does it say we should worry about the Democrats going too far to the left?  That one is hard to decide, since Labor leader Jeremy Corbyn was so unpopular for his own sake. 

However, that being said, there is still much to discuss.   We propose three points:

  1. Catastrophes not only can happen, but will happen if we don’t watch out for them.

The Democratic debates thus far have played out largely as conflict between the center and left wings of the party.  That means essentially all of it has been fought in the never-never land of post-Trump.  That’s not the same as working on viable strategies to win.

This will be a very tough election, fighting the Fox News, the Electoral College, incredible amounts of Republican money, and all the (legal and illegal) powers of incumbency.  Most candidates have done a reasonable job in providing position papers for what they stand for.  They need to tell us how they’re going to win.

  1. We need to recognize that the electorate isn’t convinced of the urgency of change.

In Britain, Corbyn’s big socialist revival was not so much wrong as a non sequitur.  What actually was all this trying to solve?  Why was it an argument for change?  It was ultimately a declaration of irrelevance.

We have a similar problem.  The very first question of the very first debate has never been adequately answered.  Elizabeth Warren was asked (more or less): “Why are you proposing all these changes when—by all polls—the vast majority of Americans think the economy is doing fine?”  That’s a question for all Democrats—what is it that’s so bad that we need change?

Warren’s answer—about radical inequality—was nowhere near strong enough.  It essentially said that all those people who answered the polls were just wrong.  But no one else has done better.  Healthcare was a great issue for the midterms—that’s something broken that we’re going to fix.  But it’s not enough to unseat Trump.  Impeachment doesn’t touch peoples’ lives directly—it’s about an abstraction called democracy.  Even climate change comes across as an abstraction, although it’s part of what’s needed.  Democrats need a short, clear reason why people need to worry that there is something that needs fixing.

That’s a bar to be passed before we can begin to get traction with specific plans for change.  Until then, like it or not, “fundamental structural change” will be a negative.

  1. We have to keep this a referendum on Trump.

Corbyn pretended Brexit wasn’t the main issue and went off with his own program.  The public was unwilling to follow.

Regardless of how broadly we see the issues, this election is about where Trump is taking the country.

We need a well-defined Trump story to challenge Republican claims of a great rebirth of the American economy.  Even on trade they’ll do what worked for George Bush on Iraq—we’ve been through all the pain, don’t miss out on the rewards!

That means we need to show what four more years of Trump will actually mean.  And how to meet the real challenges for our future.  It seems helpful to think in terms of personal and national issues for the voters:

Personal well-being

Healthcare (complete failure of vision)

Decline in good jobs (manufacturing, good jobs in general)

Education (no initiatives, no funding)

Income inequality (all growth for the rich)

Guns (unsafe to be in school!)

Climate change (what world for our children?)

Women’s rights trampled (bodies owned by the government)

⇒ Worse life for everyone but the protected few

National well-being

Eroding technology dominance (science marginalized)

New businesses sacrificed to old (Net Neutrality)

Losing out with climate change denial (ceded primary position to China)

Weakness with China and North Korea (situation is worse than ever before)

Nuclear proliferation (a danger in all directions)

Racism and divisiveness undermine our strengths (just what Putin ordered)

Demise of democracy (our major source of prosperity and power)

=>  Welcome to the Chinese century

 

That’s where we’re going.  For our own dreams of past glory.

Reasons For Pragmatism

/ ontheoutside / Leave a comment
44590252562_fa8baf6626_b

“COD Volunteers Give Back to the Community During COD Cares: Roll Up Your Sleeves Service Day 103” by COD Newsroom is licensed under CC BY 2.0

Ideology can be inspiring, but it’s never the same as a plan to get a job done.  For now it’s getting in the way on many issues.  Here are a few examples:

  • Healthcare

ACA is an imperfect compromise with known issues—in part because it was a non-final version enacted in the wake of Scott Brown’s Koch-funded victory for Ted Kennedy’s Senate seat.  All attempts since then to improve ACA have been blocked by anti-healthcare Republicans.

That being said ACA has enabled tens of millions of people to be covered for the first time, and it is supported by a non-regressive tax—the ACA surcharge.  It also attempts to get around some of the worst problems private insurance by covering pre-existing conditions and regulating how much of premiums must be paid out in benefits.  In fact insurance profit margins in healthcare are well-below margins in every other insurance category.

The most critical issues today are to improve coverage, pricing, and the range of offerings for ACA plans.  Some of this is just a matter of rolling back Trump efforts to destroy ACA.  The rest is more complicated, but nonetheless well-studied.  This needs to happen independent of long-term plans.

“Medicare of All” is an ideological choice—to get healthcare away from the insurance companies.  It’s a good slogan but something of a misnomer, because the changes from Medicare are decidedly non-trivial.  The Sanders bill optimistically assumes all private insurance will be gone in four years, but without a real plan to make it happen.  While virtually all developed countries have some form of universal healthcare, the systems are dramatically different from country to country, and many keep some form of private insurance.  Even current Medicare has many roles for private insurance.

Focusing on Medicare for All does nothing for current problems, and puts us in an ideological battle for the future.  As Krugman recently pointed out “Not many people love their insurance companies, but that doesn’t mean that they’re eager to trade the coverage they know for a new system they don’t.”  Additionally—for current Medicare recipients—Medicare for All is easily posed as a threat to Medicare itself.  That worked (using ACA) in the Scott Brown election and could well work again.

The long-term objective is affordable, universal coverage.  And the first steps start now.

  • Climate Change

If anything should ever be non-ideological it’s climate change.  Facts are facts, and the solutions are primarily matters for science and engineering.  The main political issues are how much money to spend and who is going to pay for it.

Both sides, however, have turned this into a culture war.  That the Kochs have dishonestly challenged the basic science is by now almost beside the point.  “Bad science” is just an epithet thrown out in the culture war.

We need to stop the culture war and make sure we take care of the people who will be hurt as the economy goes off fossil fuels.  Green New Deal makes some things better and some things worse.  There’s so much political deal-making thrown into it, that it can’t possibly be viewed as anything other than a left-wing grab bag.  Maybe that helps in defeating Trump—which is of course necessary for any progress—but there are too many distractions from the climate change goal.

We need to make sure that everyone realizes that the new post-climate-change world is a good world for all—even people who want to drive AV’s and Chevy Suburbans.  And we need to commit to protect everyone—coal miners, car mechanics, people hit by carbon pricing—who might otherwise be hurt in the process.  That’s the objective.  We can refuse to play the Koch’s culture war game.

We have to get away from the notion that we need to create a kind of “socialist new man” of conservation.  We’re not repealing the industrial revolution.  We just changing the technological underpinning of how things work.  That’s not to say there aren’t other environmental issues, but they’re not the same.  We shouldn’t expect fixing climate change will put the EPA out of business.

  • Jobs

This whole area is filled with so many wrong and misleading ideologies that we can start with a catalog of wrong ideas.

Manufacturing is the basis of economic strength.

The Chinese have gutted manufacturing in the US.

Balance of payments is a good measure of economic strength.

A strong private sector will provide everything necessary for economic success.

Tariffs protect and strengthen the domestic economy.

Low business tax rates build national competitiveness.

Taxing businesses hurts everyone.

Strong unions and strong anti-trust enforcement will preserve the middle class.

Public sector jobs aren’t real jobs, they just pull money out of the private sector.

In the future there just won’t be jobs for everyone.

From the list it’s clear this isn’t a matter of left versus right (even if you discount the lunatic fringe running things today).  The world is moving into new territory (more and more companies with 0 cost of production, tighter and more automated international links).  So the challenge is to see things as they actually are.

Ideologies can get in the way of understanding.  No candidates seem willing to talk about the transition from a manufacturing to a service economy.  Unions and antitrust enforcement are still good ideas, but they buy less than they used to.   As the last of the points indicates, futurists tend to provide more ideology than reality, so nothing beats experience and pragmatism.

For ourselves we see government challenges as:

Supporting education and research to keep ahead of technology change.

Managing the continuing transition from a manufacturing to a service economy.

Taxing and regulating dynamic international corporations with monopoly power.

Building and maintaining a bigger public sector to provide necessary services the private sector won’t.

Maintaining quality of life for all who live here.

Consciously working at creating and managing the international institutions that make the world work.  We used to recognize this responsibility (and avenue to exercise power), and no one else is stepping into the gap.

Overall we need to recognize the problems we do have—not the ones of the 1930’s—and look what will actually be effective to fix them.

There are many other areas where the same kind of story plays out—where an ideological war masks a more tractable, practical problem.  I’d even put immigration in that category.

It’s hard, given the daily atrocities of the Trump era, to focus on anything less than epic changes.  But if we’re going to put the pieces back together afterwards, it’s pragmatism that will get the job done.

Thinking About Manufacturing

/ ontheoutside / 4 Comments

There seems to be a lot of confusion about manufacturing.

We’ll start with a few slogans that pass for generally-accepted truth:

  • Manufacturing is the core of the US economic base.
  • Restoring manufacturing is key to the viability of the US working class.
  • The Chinese have gutted manufacturing in the US.
  • The continuing decline of manufacturing is another indication of the failure of Trump’s economic policies.

One indication that something might be fundamentally wrong in all of that comes from looking at trends in the service and manufacturing sectors over the past twenty years:

mfg_in_gdp_wbsvcs_in_gdp_wb

To say the least, it looks like there is something more fundamental going on than politics or even globalization.   Manufacturing has been declining relative to services for many years and in a big way.  It’s not just because of China, and it’s not even just in the US:

mfg_in_gnp

The US has been undergoing a massive migration from a manufacturing-oriented economy to a services economy. One problem is that we don’t really have a good vocabulary to talk about that situation.  The term “services” goes from McDonald’s to Google.  But in any case manufacturing is no longer the core of national economic success.  Think about television.  The sets have become so cheap that only huge volumes can cover the low margins.  But every major company you can think of wants to get into content to run on those sets.  There are hardly even any DVD’s manufactured for that stuff anymore!

We’ve talked here before about software.  All of the leading high tech companies (including Apple) are software companies.  Software companies produce product without manufacturing.  And that’s only one of the reasons such companies can be very profitable:

– They typically sit on top of the value chain (or even, like Facebook, have only software as output)

– They tend to have monopoly power (because dominant players can afford to spend more on R&D)

– They tend to have high barriers to entry and effective customer lock-in

The world economy today has increasingly many highly-profitable dominant software companies.  Some like Google produce software; others like Apple rely on a world-wide agglomeration of highly-competitive businesses producing to their specs.  Our current national success is that we have lots of them.  Our military strength depends on their technology.  The Chinese are sensible enough to understand that’s where they want to be too.  Even in biotech—where there has to be manufacturing—you’re still talking about largely high-skilled operations in companies with a large emphasis on R&D.

 

It’s a little strong to say it, but it’s closer to reality than most of what we hear:  mass employment in manufacturing is like mass employment in agriculture—it has had its day.  The migration is as extreme as what happened a hundred years ago.  And we’re better off thinking about the consequences than blaming it all on the Chinese or trying to outdo each other with promises to make it go away.

That point of view is widely held (based on the figures), but somehow it hasn’t managed to penetrate public discussion.  That’s not surprising for the Trump people, since they’ve been making it all up from the beginning.  For the left it’s different.  Traditional socialism has always had an industrial flavor that is hard to give up.  Unions and trust-busting are good, but they won’t bring back the past.  Forcing businesses that take federal research money to do manufacturing here will help some but not enough to reverse the trends.

(For the left, one particular paper has been frequently cited to show manufacturing job loss is reversible.   That paper concluded that the large manufacturing job losses from 2000 to 2010 were not due to automation here.  However, for its purposes it only examined companies that remained here and checked how many robots they had.  Nothing was said about the reasons any single company had left.)

The question then is what we should do.  The key is to start considering what we see around us as reality:

  • A long-term trend of decline in manufacturing
  • Very profitable, highly technical, non-manufacturing monopolies
  • Complete neglect of domestic services for the public good

We’ve talked about those trends here before.  As we’ve noted, some of the monopoly power is structural, so it’s not clear how far we’ll get with breaking them up.  However, monopoly power means companies are far from cost-sensitive, so the last thing we need to give them is more tax breaks.  On the contrary what’s crucial is learning to tax them, and we’ve got Apple as proof of how tough that can be.

In this picture the public sector has two important roles:

  1. Preparing the country for success in the world economy. That means infrastructure of all kinds, including education and child care as much as roads and bridges. The private sector won’t do it.  But—with an appreciation for the role of government derived from the second world war—we used to do a better job of it ourselves.
  2. Making sure the wealth of the monopolies gets translated into benefits for the population. This is another case where the private sector can’t act for its own good. Henry Ford famously wanted his employees to be able to buy his cars, but that’s certainly not the ethos of today. This doesn’t mean free money, it means employing people for the unfilled tasks needed for the public good.

We need the public sector to be the means of addressing the country’s unmet needs with resources from gilded-age inequality.

It’s worth pointing out that we have been wasting resources on a spectacular scale.  Under George W. Bush we fought a $3T war with no identifiable benefit and underwent a privatization effort (including tax cuts) that ultimately produced a near-depression.   Under Obama the Republican Congress shut down government, retarding recovery and preventing the public sector from doing any of the jobs just described.  Under Trump the primary achievement has been another $2T of tax cuts, with a jump in inequality and a deficit big enough to prevent any of the infrastructure work from getting done.  That the tax cuts went straight into stock buybacks is a clear indication of irrelevance.

It is instructive to think back to the time when the country underwent the last such a drastic economic change, when we went from an agrarian to an industrial society.   People had a hard time then thinking about it.  They got tied up in an irrelevancy—the silver monetary standard—and it took a long time before the real problems of corporate power and inequality were addressed.  A contemporary Henry Demarest Lloyd expressed his frustration this way: “The free silver movement is a fake. Free silver is the cow-bird of the reform movement. It waited until the nest had been built by the sacrifices and labor of others, and then it lay its own eggs in it, pushing out the others which lie smashed on the ground.”

We have something of that problem today.  The long-standing decline in manufacturing is a continuing but unacknowledged reality.  Instead we spend our time blaming it on the immigrants, or the Chinese, or the elites, or some combination of everyone else.  Until the blame game stops we can’t begin to decide how our economy really needs to work in the world we’ve got.  For climate actions we worry about coal miners, but there are many others in the same boat.  There is an international aspect too:  we’re too busy looking for villains to spend time on making the system work for global prosperity.

For our part we think it’s time for the public sector to come in from the cold.   In any case it’s time to stop talking about free silver.

 

 

 

Some Points on Climate

/ ontheoutside / 1 Comment

This touches a number of recent climate issues—some new, some familiar.

Background

  1. The primary issue for climate change is alternative energy sources.

We’re not repealing the industrial revolution.

This shouldn’t be a partisan or a lifestyle issue

We need good science and the will to fight entrenched special interests

  1. Conservation is important for now but not the main focus

Alternative energy will do the job if we do ours.

Chevy Suburbans are not the issue—we just need to power them differently

 “Respect for nature” by primitive peoples is irrelevant (but coming from all directions!)

  1. This is a fundamentally international problem where what we do for the rest of the world is as important as what we do domestically.  We will need to spend money on parts of the world who can’t.

s11_2018_Projections

  1. The fossil fuel companies have an evil influence on progress, but outrage at what they knew 50 years ago is a distraction.

Oil isn’t unclean—we just went too far with it.

The Carter era thought the world was running out of oil in less than 50 years

               The key issue is influence of fossil fuel companies now.

  1. Conversions of coal power plants to gas are still important—they buy time

We’re up against a carbon budget limit—any saving buys time

Progress is still rapid for alternative energy technologies—even electric cars aren’t ready for everyone yet.

Coal plants, especially new ones, continue to be a problem.

  1. We should stop calling a carbon pricing a tax.

We need to stop the huge fossil fuel subsidy—$1 T per year in the US—that comes from using the atmosphere as a free carbon dump.

We need a plan to make the population whole—and earn the trust we will do it

History and politics

  1. Obama actually did quite a lot for climate

International unanimity (after many years of failure)

A process to do more in the future

Turning China around (look at China’s line on the emissions chart above)

               Seed funding for Tesla and subsidies for electric cars

Note—the US was the primary beneficiary of the Paris Agreement.  We’re not being told to stop emitting at twice the rate of anyone else!

s12_Top_FF_Emitters_percapita

  1. Trump’s effect on progress is far worse than acknowledged

Reversed progress on all environmental issues in the US

Broke international unanimity—okay for everyone including China, Japan, and Germany to backslide with coal power plants

Legitimized attacks on climate action everywhere (Australia)

Continues to block any international cooperation on any issue

Going forward

  1. The single most important action is to defeat Trump

He is a roadblock to progress by anyone’s definition.

Any of the Democratic candidates would be good—no one has a real plan yet anyway

  1. The Green New Deal delivers a necessary coalition for progress

Makes clear that the new world is a good place to be.

Unites all constituencies

Must eventually add carbon pricing.

Not yet a plan

  1. The youth climate movement is helpful but a little worrisome

Non-partisanship makes it easy to co-opt—speakers at rallies dismiss all establishment parties.

               Trump was (in part) elected by young people who thought voting didn’t matter.

  1. If we can get past Trump, then we all need to get serious about a real plan

consumption-by-source-and-sector

Needs to address our current usage

Make sure it happens–what to fix when and by whom

               Minimize the hurt (particularly for the disadvantaged)

Recognize full international responsibilities

Don’t expect climate efforts to fix everything.  Broader issues include:

Easing workforce disruptions from technology, globalization, etc. (not just from climate)

Education

Infrastructure (much more than climate)

Jobs and wages (unions, minimum wage, role of the public sector)

Racism and sexism (need rules for everywhere)

Inequality overall (need a tax plan)

Other environmental issues will still be there to be solved

Fixing Capitalism

/ ontheoutside / 4 Comments
44040355775_00e5b353ac_b

California Bank” by waltarrrrr is licensed under CC BY-NC-ND 2.0

There’s a lot of talk these days about fixing capitalism.   However, there’s a problem with much of it—there are so many things to fix that it all becomes a daunting task.  The point of view here is simpler.  There are a great many things that aren’t happening, because capitalism just doesn’t do them—and we can start by making sure those get done.

At its source this problem comes from our being force-fed the wildly radical idea that the private sector—capitalism—will solve all problems by itself.  So even when we realize that capitalism needs to be fixed, we tend to be overly concerned with all the patches.

However, even Adam Smith had no delusions about the limitations of capitalism.  As he pointed out:

  1. The private sector will not police itself.

On the contrary it will do everything possible to corrupt the free market with monopolies and government influence: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”  We’re used to hearing “private sector” and “free market” used almost as synonyms.   In fact, as Smith recognized, the free market is an ideal that can only be achieved when government holds the private sector accountable.

  1. The private sector will not provide the environment for its own success.

Smith even advocated a government program of universal literacy, quite a stretch for the eighteenth century and a pointer for us today.  This is a serious matter, because it shows how dangerous it is for the economy to punt everything to the private sector.

  1. Much of what is needed for a successful society is simply out of scope for the private sector.

Capitalism will not provide any service where there is no competitive advantage in doing it.  Public health and welfare, environmental questions, basic science, etc. are all out of scope.

Fixing capitalism strictly speaking deals only with the first category.  No amount of fixing is going to make capitalism deal with the rest.  Those issues are ours to solve.

It’s instructive to think about needs in each category.

  1. Policing the private sector

Monopolies are still with us and have become an increasing problem due to technology changes and weakened anti-trust enforcement.  The same is also true of corruption due to business influence on government.  These days no one even apologizes for it.

This is particularly true in the financial sector where banking, for example, has evolved into speculative gambling with losses covered by the FDIC.  You can even argue that the financial sector overall has evolved in directions that make it predatory on productive business.  After decades of Republican-inspired hands-off attitudes toward business, there is no shortage of serious issues.  However fixing all of them makes progress look far away.

Taking a step back, there is a single biggest problem:  legal tax evasion.  This is a gating item for so much progress that it just has to be dealt with.  Even before Trump’s tax cuts (and despite nominal tax rates), American companies paid the lowest effective taxes as a percent of income of any developed country.  That was largely a result of multinationals’ ability to move income to tax shelter countries—reducing rates or hiding income entirely.  Apple is only one egregious case.  The recent tax cuts made matters worse with drastically-reduced business rates, arcane rule changes for overseas income, and the new pass-through income treatment.  That pumped up the deficit—thereby hobbling government’s ability to respond to the serious sins of omission in categories 2 & 3.

What’s more, despite the insistent propaganda, taxes are actually not a primary issue for American competitiveness:

– Many studies have shown that in most industries today business profit levels reflect monopoly power to set prices well above historic levels of margin.  That’s a trend we can expect to continue.  In other words, businesses have considerable financial room to pay taxes.

– Further, as frequently noted, the savings from the tax cuts went primarily into stock buybacks.  That is companies decided the best thing to do with the tax cut money was to give it back to their investors in higher stock prices.

Conclusion:   Get the private sector (particularly large multinationals) and its investors to pay taxes.  Then work through all the rest.

  1. Providing the environment for economic success

If taxes aren’t the issue for American competitiveness, what is?  As we’ve noted here before, what makes for success is the technological advantage that has kept us in many areas on top of the heap.  That supports both our standard of living and our military strength.

Our technical dominance is based on three factors:

i. The dynamism of our economic system in generating new products and technologies.

ii. Broadly-based government support of research and education

iii. Remaining the preferred destination for entrepreneurs and other ambitious people from everywhere to realize their dreams

Let’s look at the current status of all three:

i. Unchallenged influence of big companies on government has favored established companies over new entrants. In part this is an anti-trust enforcement issue, but it has many other aspects.  The demise of net neutrality is one highly-visible example.

On this issue the interest of big business is strongly opposed to what makes for long-term national success.

ii. The administration is actively hostile toward science, government-sponsored research, and broad-based education. This is shown in purging of scientists from government agencies and restricting their influence on public policy.  One obvious example is in climate change.  Also the new tax law punished major research universities with a targeted tax.

Public investment in research had a major role in the prosperity of the 1950’s and 60’s and kicked off the opportunities of internet today.  The same kind of public investment has remade China as a technology powerhouse.  But our dedication to research has eroded over time:

R_D_spending

Instead we’re waiting for the private sector to do the job, which by definition means catch-up.

The story for education is similar.   In the 1950’s and 60’s we were expanding educational opportunities to whole classes of people who had never before had the chance.   Now we rank far down on the list for upward mobility.  Student loan debt tells the same story, and that’s only about the people DID go to college, not about the ones who were deterred by cost and DIDN’T.  Finally, educational funding in the states has never recovered from the 2008 crash.

It’s worth mentioning in passing that the value of research is not only for international competitiveness.  Basic research is part of the global project of raising human standards of living. Even when one worries about national competitiveness, progress is generally so international that openness is the ante for remaining at the forefront of progress.  Current policy to restrict international participation of US scientists weakens the country in the name of national security.

iii.  As a final point we need to emphasize the critical role that foreigners and their children are playing in maintaining our national strengths.  Many studies have shown their role both in starting new companies and in supplying the technical underpinning that makes for success.  As Steve Bannon noted (for his own purposes) such people represent more than half of Silicon Valley activity.  Google (cofounded by a foreigner) and Apple (by the son of a foreigner) are only the most obvious examples.

The current xenophobic backlash is wildly off-target.  Particularly with the weakened support for research and education, those are the people keeping our place in the sun.  (To be clear, an immigration plan that only accepts people with degrees is no counterweight to the nationalist, nativist rhetoric.)

Conclusions:

– This area has got to be fixed or we risk losing our standard of living and dominant role.  These are traditional US values and as important as ever for US success.   It we’re worried about competing with Chinese, this is where the battle will be lost or won.

– If we can get our act together, items i and iii should remain as our advantages going forward.  So we shouldn’t be defeatist about a future that is in our hands.

  1. Spending for the common good

This has been a bastard child for so many decades now, that there is much that needs to be caught up.  Here is one short list:

– Infrastructure (Much discussed, but with more sides to it than you might think.  See here for a good overview.)

– Climate change (Evidence has become incontrovertible, but we still need a real plan.)

– Universal health care (Needed not only as a benefit but also as an enabler for equal opportunity.)

– Opioid crisis (Much discussed, but with radically inadequate funding)

– Environmental protection (Not a luxury)

– Transitional assistance (Helping people through changes—from technology, globalization, etc.)

There is enough essential work here to pose a major challenge for government.  We need to confront the unmet needs of the society, then we need concrete plans, and finally we need to manage major operations with competence and integrity.  Despite the propaganda there is nothing unusual about effective, government-sponsored work.  However as with any other enterprises, this needs to be scrupulously well-run.  Just because good people are running it doesn’t mean there is less risk of corruption.  We have to get serious about public enterprise.

That means we have to get past the idea that there is something intrinsically wrong about working for the public good.  That’s after all nothing more than the other side of the “private sector will solve everything” coin.  We live with the continued juxtaposition of vast under-employment (3.7% unemployment doesn’t change the good union jobs replaced by Walmart) together with vast unmet needs that the private sector won’t address.  We’ve got to take the initiative to match one with the other.  This is not “make work”.  It’s essential work that isn’t getting done, because the private sector won’t do it.

Until we take that initiative, it’s hard to assess where we are as a society.  Public enterprise helps in many ways.  It helps with inequality and the middle class.  It helps with leverage for workers and standards for employment.  Many public sector jobs of their nature will be hard to outsource.  It makes no sense to talk about abstractions such as Universal Basic Income until we see how things shake out in a fully-functional economy.  The future may be less strange or scary than it seems.  (This isn’t just about public sector employment; work done by the public sector helps other trends as well.  Even in Silicon Valley each job in tech creates 4.3 other jobs as well.)

Conclusion:   We need to create the full-scale machinery for government service to do what the private sector won’t.

It’s always hard to foresee the future.  I remember when I was in high school, Prince Philip gave a commencement address at UCLA in which he spoke (as world expert!) about leisure.  Already then he was thinking that machines would take over work, leaving as us all to spend the rest of our lives at the beach.

That’s certainly not what happened, but there’s still something to be said for the positive spin.  Historically technology and even globalization have been good for living standards, except where societies have chosen to deny the benefits to large segments of their populations.  Both domestically and internationally we have every opportunity to do this right.  We can either organize our economy–and the world order–so that all can benefit, or we can go down in flames of our own making.

Prosperity in Today’s Economy

/ ontheoutside / 8 Comments

14145037140_53a399bf56_z

The title of this article sounds rather ordinary, but in fact there’s more to say than you might expect.   There aren’t a lot of new facts here, but we bring together several strands of argument that don’t tend to be followed to conclusion.  It’s useful to think step-by-step about prosperity today and going forward.

  1. Our national standing today is largely determined by technology.

There are many aspects to this.  The most obvious one is the role of high-tech companies in the economy.  The NYTimes had an article a few months ago (on the occasion of Apple’s becoming the first $1 T company) with graphic displays showing the size of Apple (as well as Google, Microsoft, Amazon, and many others) in the US economy.  The dominance of high-tech is unmistakable. That’s what supports our standard of living and always has. Railroads, steel, automobiles were all high-tech in their day.  (Note this is not saying that Google or Facebook are angels, it’s our national strength in technology that matters.)

It is only because we are on top of that heap that we have the money that supports the rest of the economy.  That includes much of small business and service industries.  It is from the strength of our competitive economic position that we can pay for the non-competitive industries we choose to support.  The aluminum and steel tariffs are being paid by us from the industries that don’t need them.  To state this somewhat differently—we are not going to build a dominant economy by selling each other stuff anyone can make at artificially high prices.

It’s also worth pointing out, given all the discussions of the military budget, that the technology argument applies in spades for the military.  Building new aircraft carriers is not going to make us safe.  One only has to think, theoretically of course, about the effect of a North Korean virus disabling the military’s command and control.  From the chart below, it is obvious that our level of military spending ought to quash everyone else hands down if money were the only object.  But it’s not doing the job, because that’s not the game anymore.  And it’s not just AI, it’s across the board.

20170424_Military_Expenditure

What all this means is that the people who support our technology position are critical resources who matter to all of us.

This is a lot less elitist than it sounds, because it’s not saying we shouldn’t care about or value everyone else (more on that later).   The point is that we shouldn’t be spending our time worrying about who is or isn’t supplanting whom.  Our success depends on nurturing and exploiting the best and the brightest—at least for these skills—and we had better spend our time trying to find them and encourage them, regardless of race, gender, or sexual orientation.  And if foreigners choose to come here and establish successful startup companies—mostly in high tech—we should be happy they do.  It is a major strength of the US economy that people find the US to be the best place to realize their ambitions.  We erode that strength at our peril.

Anger at elite technologists may be natural, but they are the wrong targets.  Their effect on the rest of us is positive.  What we need to avoid is a two-tiered society of haves and have-nots, as we’ll discuss later.

  1. Businesses today are different from the past in important ways.

Since we’ve identified the key role played by the tech sector, it’s worth thinking about what kind of businesses those are.  So let’s take a quick look at Google, Apple, Amazon, Microsoft, and Facebook.

– A first point to notice is that they are all some form of monopoly.  This is not surprising as they are all (even Amazon and Apple) essentially software companies.  Software businesses invite monopoly, because costs of production are minimal. In such cases, research and development costs become primary, and the company with largest market share can afford to offer products with more features than a smaller competitor can.  As automation continues, particularly with AI, similar arguments will apply to much of the rest of the economy.

Managing monopolies is a serious issue:

Monopolies squelch competition.   It is imperative for our success that established companies can’t limit the innovative power of new entrants.  That has been our historical advantage over foreign competitors and is a major factor in any discussion of how we deal with the rise of China.  This is not just a problem with Google, etc.  The demise of Net Neutrality is a classic case of giving in to established players, in this case the major telecom carriers.

Monopolies take more than their share of our money.  Monopoly power limits price sensitivity. Since the determining feature of competition is more often uniqueness more than price point, products are priced at what the market will bear—as with the iPhone or patented drugs.   Furthermore, through manipulation of assets including intellectual property, hi-tech monopolies have been tough to tax.   Apple’s success in this is legendary.   Their windfall from the recent corporate tax cuts is something to behold (and unnecessary as a spur to investment).  It is imperative we learn how to tax monopoly-level profits.

– Next, personal success in these companies requires a high-level of technical competence.   Amazon is obviously a case in point, with two completely different populations:  the mass of box fillers versus the corporate staff.  Note that technical competence is not just a matter for developers, but is also required for the many people in management, support, administration, and even sales.  As just noted, as automation proceeds, this trend will extend well outside of high-tech.

This represents the threat of a two-tiered society, as discussed earlier.  As a country this implies at the very least a basic responsibility for broad-based solid education and a livable minimum wage.

It should be emphasized that strengthening of education is required for both national success and personal prosperity.   Regardless of what advantages we have for staying on top of the heap, we cannot succeed if we don’t have the people to do it.

– Third, all of these business are intrinsically international.  With the growth of the world economy (and China in particular) economies of scale are such that we have to think in global terms.

– Finally our fourth and last comment for this section is about a different trend not limited to high-tech—the institutionalized irresponsibility of business.  It has become gospel that businesses have responsibility only to their investors, and all other considerations are more or less theft.  Businesses used to care about retirement, healthcare, training, even local charity.  But current reality is that if someone is going to care about those things, it’s out of the question for it to be them.

In addition, because of the sheer size of the country, the US more than anywhere else has to deal with the phenomenon of towns or regions where the economic base can just disappear. Company town are the obvious example. In an age of accelerating technology change, we can’t stop such things from happening.   And we can’t expect rescue to happen by all by itself.

However we emphasize this isn’t just about charity.  In the current state of affairs, the private sector is not be doing what’s necessary even to provide the environment for its own success.

That leads to the next topic—what do we need for national success?

  1. Our infrastructure problems mean more than we thought.

Infrastructure has to be thought of as whatever is necessary for national success and personal welfare.  I.e. much more than roads and bridges.  The educational system fits in this category as it is required for both personal and national success.  Declining upward mobility and the student loan crisis are two indications that there is a lot that needs to be done.

Support for theoretical research is in the same category.  It is precursor work for new technologies before they are ready for business. A point worth stressing it that it is not only the research itself that is important—research work assures that there will be a population ready to exploit new opportunities as they arise.

Continuing on, we list a few more significant infrastructure projects needing immediate attention.

– The American Society of Civil Engineers keeps a web site with a break down of national infrastructure requirements.  We currently rate a D+.

– To that we add the urgent needs of combatting climate change, which will be considerable, regardless of how the final plans work out.

– Healthcare is currently in flux with ACA under attack and nothing to replace it.

– Finally we have the general specter of a two-tiered society, with all the misery and threat of conflict that represents.  That too needs to be dealt with as a national problem, and there’s no one in this picture other than government to do it.

Government’s role in this picture is three-tiered:

i. Government needs to make sure everyone has the education and access to the opportunities to succeed.

ii. Government needs to support what is necessary for national infrastructure, much of which will not happen spontaneously in the private sector.

iii. Government needs to supply a last-line safety net for those who fall through the cracks.

This is a non-trivial task, and we emphasize that the biggest part of it is not charity.   We have a current mismatch between a dearth of good jobs and a growing backlog of infrastructure needs of all kinds.

From the point of view here our much-discussed infrastructure needs—back to the roads and bridges—have to be viewed as bellwethers.  The fact that we can’t deal even with roads and bridges means that we have a fundamental problem funding the common good, and we have to take that head on.

  1. There is a mismatch between the needs of our country and the forces that currently control it.

The governing ideology of this country is simple to summarize:  let the private sector do it and get out of the way.  All government regulation is bad, and taxes are just a brake on the private sector’s ability to make everything great.

The chief beneficiaries of this policy are the ultra-rich funders of the Republican Party, although the problem of money in politics (especially after Citizens United) transcends parties. In this enterprise Trump is largely a front man for the real forces running things.

For these people, with fortunes going back even into the nineteenth century, it’s natural to regard the country as a money-machine.  Taxes, regulations, and government services—except for the military—are deductions off the bottom line.

The problem with that view, even for them, is that it is the wrong model for the world we just described.  That set of policies would make sense in an extractive economy, where all that is necessary for success is a cadre of imported experts to arrange for pumping oil with purchased technology.  In that case you don’t need much from the national population in order to collect the proceeds.

That’s not our situation.  As described, we live in a technology-dominated world where the population must earn our national success.  For that world we’re currently going in the wrong direction.  Devaluing education, denying climate change, cutting research, encouraging xenophobia will get to us sooner than we’d like to think.  China is a formidable challenger.

However, it not so hard to be optimistic if we can just be serious about what needs to be done.  We have all the tools for success:  the money, the work to be done, even the means to avoid a two-tiered society.

The story is not complicated.  If we can return to exploiting our strengths, then we should be able to remain in the technological forefront for our chosen areas of focus.   If we can control the monopolies, then the associated margins in an expanding world economy should yield money enough (if we can collect it) to produce a workable society for everyone ready to participate.

There is certainly no shortage of work in the infrastructure area, and it needs all kinds of people.  In this respect the Green New Deal may be too glib in pinning everything on climate change, but their basic idea is correct.   If we play our cards right, the high technology future will provide the funds to support the infrastructure for its own success and for the prosperity of the nation.

We should not underestimate the job.  Careful and transparent planning is critical—defining exactly what needs to be done to support both the economy and the population.  And then determining how that work can be best supplied.

It should be emphasized is that we’re NOT talking about socializing away the free market economy.  If there’s one bad misconception that needs to be hammered down everywhere, it’s the idea that the private sector is magic for all problems.  We’ve just gone down a long list of things it’s not going to do.

Even Adam Smith was clear about this from the beginning.  The private sector is a participant in the public economy, but that economy will deliver the benefits of a free market only if #1 government keeps the private sector from corrupting the markets (e.g with monopolies and bribes) and #2 government provides the resources (e.g. education and other infrastructure) necessary for success.  That’s the definition of our job.

This will necessarily require a renewed focus on government and public service.  It’s interesting that a couple of recent mainstream books (Volker, Lewis) have recognized public service as an important issue.  In that respect “Green New Deal” isn’t a bad term:  we need to be as serious as Roosevelt’s brain trust in planning for the next stage for our country’s future.

This is a battle both old and new.   In Smith’s words, “The interest of [businessmen] is always in some respects different from, and even opposite to, that of the public …The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention.”  Wealth of Nations is only achieved when government does its job.