Figure Skating and Math Textbooks

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This odd coupling of topics links two separate frustrations which seem to come from the same core problem.

For figure skating the problem is one particular feature of the new scoring system—the extra points given to jumps in the second half of a program.  There’s no question that those are harder to do—anything is harder to do when you’re dead tired.  The question is why that extra stamina should be rewarded as an achievement!  In the last Olympics, those extra points were primarily an opportunity to game the system.  What was missing in artistic achievement could be made up in pure stamina.  The winner of the woman’s gold medal had all of her jumps in the second half of the program.

The fundamental problem is that from within a system, people are tempted to put a value on anything hard, regardless of whether or not it means something to the outside world.  People who have spent their careers doing and teaching figure skating have a tendency to think that any hard jumps are achievements.

Having just had reason to work my way through a high school algebra textbook, I have to say (based on an admittedly small sample) that the textbook publishers have that problem in spades.  The book was filled with minutia that need to be memorized for exam questions.  Getting through all of that is certainly hard, but it’s not the stuff that will make kids confident and successful in mathematics.  And that certainly won’t make them like it or remember it.  (One more reason it’s tough to be a teacher!)

It seems to me that high school math has a pretty good story to tell.  Core algebra is based on a really brilliant idea, that an answer you are looking for can be handled just like a number.   That lets you create a simple kind of manual computer.  If you can write down the problem, then the manual computer can solve it.  Sort of like doing your taxes with turbo-tax.  The core ideas are simple and don’t need to become a challenge.  From there it’s straightforward to do linear systems, which are part of the vocabulary in science, engineering, finance, or just about anything else.  “Vocabulary” is actually the right word.  For most students, mathematics is a language in which they need to gain confidence and fluency.

Then with quadratic equations you hit a wall.  All the techniques you just learned fail.  But you’re saved by another really good idea you would (probably) never have come up with yourself.  You do a few exercises with that idea, working toward an answer that is basically all you need to know—the quadratic formula.  Any further messing around with higher-order polynomials and rational functions is only supplementary, examples of what you can do with other kinds of problems you might run into.  No more rules to learn.

Going beyond that you have topics with really exciting applications.  Conic sections are geometrically interesting and tied to the whole story of the Copernican revolution, Kepler’s laws (“equal areas swept out in equal time”), and Newton’s gravitation.  (You don’t need calculus to tell the story.)  Sequences and series cover ideas behind every financial analysis students will see.  Permutations and combinations are important for probability and statistics and introduce the first non-trivial example of a group.  Modular arithmetic is a useful feature of every programming language.   Trigonometry is important but can become unnecessarily confusing.   Sine and cosine functions are important parts of the vocabulary, but you can get lost forever in trigonometric identities and formulas.

Mathematics shouldn’t be a drag.  There are few core principles and very little actually to memorize.  You get to see some remarkable solutions to tough problems.  One famous mathematician said that mathematics should be “like floating down a river on your back.”  My father-in-law put it differently: “Mathematics is for people too lazy to do real work.”

Steven Pinker’s Enlightenment Now

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There haven’t been any book reviews on this site before, but Steven Pinker’s Enlightenment Now is something of a special case.  This is a political book with a message that doesn’t quite fit into the current political environment, and it includes a large body of relevant history.  Not surprisingly, Pinker finds Trump antithetical to the Enlightenment precepts he is defending.  But he also finds plenty of guilt to go around.

To start with, the book seems to have two competing objectives:

  1. Validating the fact of human progress and documenting how it has been achieved. This is really a call to action based on humanistic goals.
  2. Providing reasons for optimism about the future. This is different—good things that are going to happen for reasons such as demographics, outside the scope of specific human actors.

On the face of it, a reader expects the first subject to be primary, if only because (at this point in time) you expect any political book to end up with recommendations for what to do.  But that’s not quite where Pinker is going.  He’s trying to view history not just as a demonstration of what works, but also as a way to understand where things are going longer term.  Since the two objectives are different, it helps to treat them one-by-one.

On the first subject, Pinker does a remarkable job of demonstrating the successes that humanity has achieved—In the longer term, in the last century, and in the past few decades. This involves health, security, standard of living, and many other quantitative measures of human welfare.   Much of this is unfamiliar because, as he says, this kind of thing just doesn’t make news.  The book is worth reading for this part alone.  Pinker does a good job of demonstrating progress and what is responsible for that progress:  science, rationality, and a broad-based desire to create a better world for everyone.  It is hard to argue with the historical fact that prosperity is not a zero-sum game.

In passing Pinker tries to dispose of past arguments against enlightenment humanism.  As examples:  Humans are inherently irrational (except when they want to make a point).  Humanism is a white racist production (its advocates were on the anti-imperialist side).   Science ignores human values (just plain not true).

Predicting the future is harder, and overall I’d say that Pinker is not well-served by his desire to make things look positive.  He tries to say that nuclear war is improbable, but we know that just one outlier is bad enough.  He treats the climate change movement as a kind of hysteria, because science will just take care of it in time (based on mostly anecdotal evidence).  He views the populist phenomenon as a brief episode of backsliding until more liberal generations take over from the ones now on the verge of dying out.

So in the end it seems a shame that the future predictions tend to dominate discussions of the book, when it’s the first part—the defense of progress—that is its greatest contribution.

And then there is the question of the call to action.  What Pinker espouses is humanism—the broad-based, rational process that has delivered progress.  The problem is that humanism doesn’t have a political party.

Pinker points out that much of the political process just doesn’t work:  Issue-based movements systematically deny progress for fear of losing momentum (even though that means they frequently get caught in the bind of asking for more money to continue going nowhere).  Discussion of issues is based on faulty statistics and dishonest patterns of argument.  Democracy as a whole is not as rational or responsive as we would like to think (the chapter on that subject is well worth reading).  He gives plenty of examples of bad behavior on both the left and the right.  Both sides contributed to the grim view of reality that was instrumental in producing Trump.

So where do we go from here?  Individuals can learn to be more rational in their behavior and in their evaluation of what they see and read.  They can work with the flawed organizations that are fighting bad actors such as Trump.  They can involve themselves with specific issues and help to push them along.  All told—incremental change but no miracle solution.

That’s actually the optimism of the book.   There’s no silver bullet, but the process has worked thus far.  And hopefully we will keep it going.

Political Correctness, False News, and the Attack on Education

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This is a tough time for colleges and universities.  Many of them—particularly the public ones—are being squeezed for money, and they’ve all got to deal with conflicting standards for sexual harassment, trigger warnings, and political polarization of the student body.

And then there’s “political correctness”.  It’s a difficult issue, with arguments on multiple sides, and with something quite sinister lurking in the background.

On one hand there is the classic liberal argument for universal openness.  Constraints on the intellectual environment are bad, because truth can be unpopular.   Furthermore, once you allow constraints you never know who is going to do the deciding.

It’s hard to argue with that position in an ideal world, but the real world makes the situation less clear.

First there is the question of safety or feelings of safety for the student body.   You can’t allow some people to attack others they don’t like, and the only question is how far that prohibition goes.  In the real world, the university must guarantee that every student is safe and valued.  That has to apply to all groups, religious beliefs, and sexual attitudes (liberal, Christian, or anything else).  That’s not a simple criterion to enforce, but universities cannot be faulted for setting such rules.

A second problem is harder.  Today we’re dealing with an environment where not all ideas have an equal chance, as more and more intellectual discourse is bought.  The prime example is the Koch organization, that has plowed hundreds of millions of dollars into institutes that promote their ideas.  Everyday examples are the American Enterprise Institute, the Cato Institute, and the Mercatus Center at George Mason.  People working for these institutes (e.g. Charles Murray) can do legitimate research, but they are paid for reaching correct conclusions, and their ideas are heavily promoted to serve their masters.  This isn’t exactly false news, but any implication of unbiased research is certainly false.

In such cases it is understandable that some students feel that their ideas are being squashed by the power of money—a feeling that is particularly acute in a time of Citizens United and Trump.  But it’s also true that the student intellectual environments are prey to their own fads, with self-righteous acts directed at others. (I personally remember unbridled enthusiasm for Chinese communism and Mao’s little red book.  I also remember reading Simon Leys’ Chinese Shadows, with the comment that Western fascination with Mao was proof of how little anyone really cared about China!)

So there is some justice in decrying political correctness, but that doesn’t mean that student concerns about speakers are wrong.   Any opinions can be expressed (subject to valuing all students), but it also seems that sponsors of a speaker should be required to enforce standards for on-campus speech and also to make clear the nature of the institutions represented.  And it should be part of everyone’s education to understand how intellectual discourse is bought.  With the profusion of institutes and representatives, it’s not simple to keep track of all the Koch tentacles!  Even when the subject is government, people aren’t reminded frequently enough that Pence, Pruitt, and Pompeo are all Koch creations.

However, we have not yet reached the crux of the issue.  Thus far we have treated political correctness as a real issue where there can be legitimate areas of disagreement.   That’s true for some of the discussion, but certainly not all.  You have to go back to the core Koch motivations:  shrink government, shrink controls, and above all shrink taxes.  Colleges are expensive and turn out liberals.  The Koch’s attack on political correctness is actually just a pretext for a full-bore attack on college education overall.  The whole system has to go.

A recent best-seller on Amazon could not be more explicit—“The Case against Education: Why the Education System Is a Waste of Time and Money”.  College education teaches nothing useful, it’s just a game to certify the capabilities of students to potential employers.  It teaches people things they don’t want to learn and will just forget anyway.  In particular nobody needs to know history, because no one is going to get a job as a historian.  Scrap the whole thing, save a fortune, and give people some useful vocational education to get a job!

The author is an academic from a reputable institution, nominally talking about what he as a teacher really thinks needs to be done.   Almost all reviews on Amazon take that at face value.  You have to know that he comes from the Mercatus Institute at George Mason, where Charles Koch sits on the board!

The argument is of course self-serving.  There’s no question about the value of education—both financial and personal—to those who complete it, and also no question about what kind of education people with money will chose for their own children.   The “just a game” story ignores the value of intellectual activity—the real goal of education—and focuses on memorized facts.  In the end the proposal comes down to a two-tiered educational model, where the world is wide open to children whose parents can afford the real thing, but not to the rest.   The Kochs are willing to pay for the basics needed to produce employees and nothing more.  Just like the good old days.

Nonetheless the argument has a scary amount of currency.  Mainstream Republicans are hostile to education in general and college education in particular (but richer ones send their kids to college anyway).  Identity politics and vilification of liberals have convinced some people against their interests to keep their kids from being corrupted by education.   Some state governments (Wisconsin, North Carolina) have deliberately attacked their state universities.  Trump’s State of the Union speech pointedly talked about “vocational education” only.  (A more recent NY Times college education overview is perhaps scariest of all in the amount of Republican rhetoric it swallows whole in its effort to be even-handed.)

We can’t claim all colleges have always paid enough attention to getting their students jobs, but the value of education has been undeniable and increasing.  Further, broad-based college education has always been one of the major strengths of this country, and the rest of the world has learned its value as well.  College at its best prepares students for a world where they will have to adapt continually to changes and opportunities, whatever those might be.  A two-tiered system would be a nightmarish step backward both for students and for the country.

Education is one of the most important battlegrounds where our collective future will be won or lost.

For the Economy—Stop the Tantrums and Look

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To forestall expectations—this article is not about Trump’s daily antics.  It starts with a basic fact from Dani Rodrick (no cheerleader for globalization).  He talks about asking students a simple question: Would you rather be rich in a poor country or poor in a rich country?

…think of a rich person as someone in the top 10 percent of a country’s income distribution while a poor person is in the bottom 10 percent.   Similarly, a rich country is in the top decile of all countries ranked by average income per person while a poor country is in the bottom decile of that list.

The correct answer is “Poor in a rich country”—and it’s not even close.  The average poor person in a rich country, according to my parameters, earns three times more than the average rich person in the poor country ($9,400 versus $3,000 adjusted for differences in purchasing power across countries).  Disparities in other aspects of well-being, such as infant mortality, go the same way too.  The poor in a rich country have it much, much better than the rich in the poor country.

Students get it wrong because they don’t realize what a minute share of society those BMW-driving superrich represent—no larger perhaps than one hundredth of 1 percent of the total population.  When we expand the numbers to cover the full top 10 percent of a typical poor country, we have come down to income levels that are a fraction of what most poor people in rich countries make.

There’s a lot here that’s relevant, but the most basic message is that when you make the pot bigger, things ought to get better for everyone—even in the most extreme cases.

We live in time period where the pot is getting bigger all over the world, and especially in the hugely populated countries of China and India.  So the right question to ask is NOT “how can we stop those people from stealing from us?” but “why are we not making things better for everyone?”  As we’ll see it is a useful question to ask.

The major changes going on in the world are technological.  Technology has made production of many goods both cheaper and ever easier to locate anywhere.  There are good (and increasingly many) jobs in that world, but they are not the same jobs.   Some jobs get replaced by technology, some jobs get moved to places where labor is cheap enough to compete with the next level of automation.  In both cases they cease to be good jobs.   As with other such cases in the past, the social dislocations are enormous—but they are only as bad as we make them.  And the best way to make matters worse is to pretend the changes don’t exist!

In this country we have both the rhetoric and the policy of such delusion.  We’ve gotten out of the business of helping people who lose jobs in the blind belief that a happy private sector will take care of it.  In fact, people are going to lose jobs and find their skills devalued through no fault of their own.  Further, with the changing economy, education is for most people the necessary path to a good job and a viable financial future.  However we have become alarmingly hostile to it, underfunding it and looking for reasons to limit it to the targeted “vocational ed” that seems to be in the air.  And internationally our response to problems of dislocation has been a tantrum:  everyone is out to get us, so we’ll take our marbles and go home.

The rhetoric says that Mexico and China and …  have caused an epidemic of depression, joblessness, and despair.  That’s self-destructive blindness.  (The worst thing about globalization is all that can be blamed on it!)  We did it.  We refused to recognize the technological dislocation we’re living through, so we provided no help, blithely punting to the private sector.  However, private sector expansion and even tariffs are false hopes for jobs that aren’t economically viable.  We have to support people, and as much as possible get them on a new track.  And we particularly need to make sure that the next generation doesn’t suffer for it.

That takes money, but it’s not as if we don’t have any.   We’ve just devoted $1.4T to a corporate tax cut that is nothing more than a misguided subsidy to have the private sector solve this very same problem!  (We know now that the money is going instead to investors, primarily via stock buybacks.  Real tax reform is another subject and can be close to revenue-neutral.)  We have to spend it on the people who need it and on education and infrastructure.

And for the rest of the economy, things aren’t so bad out there in the real world.

First of all, even before the tax cuts, our corporations and our upper tier of incomes have been doing just fine.  There are problems for people, middle class and below.   But there’s no indication that the technology-driven side of American business is going anywhere but up.

Second this is a period of unprecedented geopolitical opportunity.   China has finally reached the point where it is a viable market for the West and with an incentive to act that way.   There has been so much rhetoric about China that even the basics get lost.  China has been a statistically poor country for a very long time.  Its economic development has been export-directed and they do have some shady practices, but China’s ability to absorb imports has been limited at best.  That is no longer true, and China recognizes that its economic interdependence with the West requires a new relationship.  Given China’s size, the opportunities are real—which is to say that if we play our cards right the pie should get bigger for everyone .  (A more recent NY Times piece also makes that point.)  And given the speed and magnitude of technological change, the pie should continue getting bigger for a long time.

In some ways you can compare our situation to the world in the 1950’s.  European countries had lost their colonies and their predominance, and they had to recover from the damage in the war.  It was a rough transition, but they ended up far better off than they had been before.

We are living through a time of major transition.  We are well-positioned, but we have to help some people through it.   And with more players we may not always be so overwhelmingly predominant as we are today.   But this is an extraordinary future for us and everyone else.  We just have to be willing to open our eyes and get it.

The Budget and the Real World

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It’s worth asking the question—what exactly does all of our military spending do for us with North Korea?  They devote more of their GNP to weapons than we do, but we’re spending on more on military equipment and technology than the next 8 countries combined.  Is it solving the problem?  Would a few more aircraft carriers put us over the top?

How about the other obvious hot spots:   Syria, Afghanistan, even Iran.  Try to find one where aircraft carriers would fix it.

Since that didn’t seem to work let’s try a more general question:  what are the most obvious and successful military threats to America today?

Unfortunately the answer to that one is cyberwarfare:  both direct government action—such as disrupting elections, and private attacks (with government connections)—such as computer virus attacks.  The intelligence community has been explicit about that, since they’ve had to go public to get the administration’s attention.  Won’t get much out of aircraft carriers there either.

What is the major item in Trump’s budget?—traditional military equipment and people, including more aircraft carriers.  That not only dominates the thinking about the military, it dominates the thinking about all international relations, and it wipes out most other priorities in the budget.

As such it is emblematic of an even bigger problem.  We are refusing to understand the actual problems we face, so we end up wasting our resources instead of moving forward.  That’s no small problem; it’s the way nations die.

 

Let’s look at the economy.  Here’s some reality:

– American corporations are doing quite well, with record profits worldwide—driven primarily by America technological pre-eminence.  Newest companies, however, are not labor-intensive.

– The labor market is split.   People with the right skills are doing well, people without such skills find fewer jobs at lower wages.  With growing automation, globalization, and de-unionization, workers are weaker than ever in dealing with management.   The minimum wage has gone down in real terms, so that it is no longer a living wage.

– Education is in crisis.  Most of it is state-funded and the states are still trying to recover from the 2008 crash.  Underfunding has resulted in the student debt crisis and in debasing teaching as a profession.

 

Here’s what are we doing:

– A huge tax cut for corporations, because they supposedly can’t compete worldwide—a conclusion contrary to fact and relying on known deceptive statistics.  And anyone who thinks those new profits will be handed out as gifts to workers should look at history or the rise of the stock market!

– Reduced benefits for anyone who loses a job.  No interest in raising the minimum wage.  Appointment of anti-union judges to the Courts.

– An all-out attack on education.   We can’t waste money on anything but vocational education—the welders (382,730 jobs nationwide) and coal miners (50,000 jobs) from Trump’s State of the Union speech.  This at a time when people need both more specific knowledge and more breadth of knowledge for good jobs with ever-changing technology.   And of course vouchers will privatize education and help break the teachers’ unions—so we can save money there too!

– All-out attack on science, both in influencing government policy and as an independent enterprise.  Scientists removed from consultation roles in the EPA and elsewhere, cuts in government-sponsored research, and new taxes on major research institutions (as compared with tax cuts for businesses).  Climate change cannot be mentioned.

In other words we’re solving a non-existent problem for businesses (with a big present to investors) and at the same time abandoning the population (for both education and support) and denying the importance of the science and technology that have been our success.

 

The rest of the world has learned from us the value of an educated population and of moving forward wherever opportunity lies—but we’ve lost interest in that approach.  Instead we have a new religion of the unencumbered private sector as the solution to all problems!  As noted before, even Adam Smith himself wouldn’t sign up for that one.

This administration likes to talk about putting government on a business footing.  That’s just talk.  Businesses are hungry for facts and solve real problems.  Denying reality is the quickest way to go broke.

That can happen to countries too.

What the New Tax Law Means

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This note is about the effect of the new tax law on the middle class.  While much has been written on this subject, the focus has generally been too narrow to give the full picture.  It is important to get this right.

This note deals with three topics:

  1. Who really wins and loses with the tax cuts.
  2. How the tax cuts affect the economy.
  3. What about the corresponding budget cuts?

Most discussions of the tax law stop with item 1.  That is to put it mildly deceptive—as if the tax cuts were free money we just printed, and we’re only deciding how to divide up the proceeds.   That’s understandable from Republicans, but others shouldn’t let them get away with it.  Items 2 and 3 talk about consequences.  Item 2 affects everyone; item 3 needs to be analyzed to see how it hits the middle class.  However even the discussions of item 1 have understated the situation, so we start there.

  1. Who really wins and loses with the tax cuts.

Most discussions of this topic focus on the new rules for personal tax filing.  This is of course complicated because winners and losers are different in different states and with different levels of income or expenses.   For our purposes we assume that job has been done.  The NY Times has a handy calculator.  In the first year about 75% of payers get a tax cut, 25% pay more.  The median result over the entire population is a tax cut of $380.  By 2027 some cuts expire and virtually everyone pays more.

The first caveat is that this forgets that the federal tax isn’t the only tax paid. The new tax law has two conflicting effects on state taxes.   On one hand the limited deductability of state taxes has made taxation more expensive to the payers in high-tax states.  On the other hand the corresponding federal budget cuts will throw additional social welfare expenses back on the states.  States will have to choose between increased misery and tax increases.  Given the modest size of middle-class tax cuts, it takes little at the state level to negate them.

However the bigger part of the story is that we have left out two major pieces of the tax law.  One is the frequently-discussed new 25% rate on pass-through income.  We know it’s free money if your personal tax rate is higher, but it’s hard to quantify since we don’t know exactly who will use it.  With the armies of accountants hard at work on it, let’s just say that since the 32% tax rate starts at $315,000, you have to be at least borderline rich to cash in.

The remaining piece of the tax law is the huge corporate rate cut—the biggest part of the package.   The issue here is that the effects of corporate cuts have not been put in proper context.  On one hand we have Trump and Mnuchin talking about how the cuts will be worth $4000 for all workers (a number that very few regard as true).  But on the other hand the huge rise in the stock market (even after the recent retreat) is somehow taken out of scope—a benefit to everyone from the Trump presidency.  In fact the stock market rise is the primary rich-taxpayer payoff from the tax plan—and it has been a great deal!

There are several points to be made:

– The corporate tax cuts are a direct tax benefit to rich tax payers.

This is just arithmetic:  cutting corporate taxes increases profits and hence the financial value of what the investors own.   From the beginning, the expectation of tax cuts has been the primary driver of the stock market boom.  Since stock ownership increases dramatically with income (see the chart below), this means that the value of the corporate tax cut is hugely tilted toward the rich.

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It’s worth emphasizing just how skewed this is.  The chart shows 84% of stock is owned by the top 10% of taxpayers, but the top 1% own 40%.

– What about the bonuses to workers?

We’ve had a few public relationship announcements of benefits, but there’s no reason to expect this will represent a significant part of the tax cut effects.  At a qualitative level, one has to believe the stock market—which clearly thinks there will be no substantial loss of profits to wages.  In fact the recent stock decline was caused by the fear of inflation based on statistics showing a 2.9% annual increase in wages.  Shows how likely the business community is to put tax cut benefits into wages!  Even Mnuchin’s improbable $4000 was actually a long-term benefit (i.e. years out) based on estimates of productivity increases from projected new investments.

The link between the corporate tax cuts and investors benefits is immediate and direct.   The link to worker benefits is indirect and historically shaky.   The following unedited statement from a Cisco financial report is an excellent introduction to the real world:

“Because of the law’s corporate tax cut, Cisco plans to repatriate in the current quarter $67 billion parked in foreign banks. The company plans to spend the money on dividends paid to shareholders, stock buybacks and acquisitions.”  (With experience, we can now be even more explicit—thus far in 2018 corporations have spent $171B of tax savings on stock buybacks and $6B on employee bonuses.)

– What about jobs?

In 2004 the Bush administration granted a tax holiday for businesses to return overseas earnings.   Many businesses took advantage of the gift, but none of the promised increase in jobs materialized.  That was actually not surprising, because job increases go with new ventures—and the extra cash doesn’t create those opportunities.

The picture is even more tilted that way today.  The cost of capital has been so low, that it has been simply no impediment to investment.  Any reasonable project is fundable.  The corporate tax decrease, large as it is, doesn’t change that picture.  And even a little bit of inflation counteracts it entirely.

– Will the tax cuts bring international operations of businesses home to the US?

The corporate tax cuts mean that businesses will pay less tax than they used to for their operations in the US, so in that sense there is less disincentive for operations here.  However, the new tax rules mean that going forward businesses will pay NO tax on their operations overseas.  End of subject!

– What about foreign companies putting operations here?

That amounts to subsidizing their operations by our policies here.  Good for them, not so good for us.

– What about the corporate announcements of expansions in the US?

Corporate announcements are a little suspect, because it’s tempting to jump on the bandwagon for public relations reasons.  One obvious example is Apple who announced a $350 billion investment in America over a period of 5 years.  As it turns out Apple’s current annual domestic investment amounts to $275 billion over five years, so we’re down to $75 billion new.  In addition, with the new tax law Apple returned $252 billion from overseas to take advantage of the tax holiday rate of 15%.  That means 38 billion of the $350 went to taxes for a total new investment over 5 years of $37 billion.  Not such a big change and probably still somewhat inflated.

It’s also worth thinking a bit about that $252 billion in overseas saving.  That huge number for overseas assets is a tribute not just to Apple’s overseas business but also to modern accounting practices by which companies attribute profits to subsidiaries in convenient places.  The new tax law—with no tax on overseas operations—creates an even greater incentive for such creative profit shifting.  The new approach was sold as putting US taxes on the same footing as for the Europeans, who also don’t tax foreign profits.   However the Europeans have complex rules to avoid profit shifting, and those rules go far beyond anything in our new law.  So this is another really great deal for the investors!

Conclusion:  The direct financial effects of the new tax law are vastly to the benefit of the rich, and the greatest beneficiaries are the very richest.  In particular, it is incorrect to think of the huge corporate tax cuts as a general stimulus that rains benefits on everyone.  It is a tax present to investors who have shown via the markets that they expect to make out like bandits.  (Since this tax plan was pushed through by ultra-rich investors for their own benefit, the analogy is exact.)

 

  1. How the tax cuts affect the economy.

From the beginning this has been the most obvious concern with the Trump administration’s policies.  As we’ve noted before, the new tax plan is doing a massive, deficit-funded stimulation of an economy at essentially full employment while eliminating all oversight of speculation and other bad behavior.  That is a demonstrated recipe for disaster.  We’re only ten years from the crash of 2008, and we seem to have forgotten that such things really can happen.

The Trump administration is so intent on delivering its gifts to corporations and the ultra-rich that it cannot begin to think about matters of timing.  There is a confluence of evils.  For the Trump people, ignorance of economics and history makes them unaware they are playing with fire.   For the Koch-financed Republican Congress, enthusiasm for the unregulated greed of the nineteenth century makes them blind to the crashes and panics of capitalism in the wild.  From one economist recently: I think we should be very worried.  As a macroeconomic matter, I’m not aware of another example of this—of a country that’s basically at full employment embarking on massive fiscal stimulus.”  And he hasn’t even gotten to the demise of financial oversight!

It is worth thinking a little about other ways the administration’s stated goals could have been achieved.  The average effective corporate rate for the US is not the statutory 35% but more like 24%, which is not so far from the developed-country average estimated at 21%.   Real tax reform would bring the effective and nominal rates in closer line with each other–with the advantage of removing artificial lobbyist-created inequities in the tax plan.   That, with adjustments to assure parity with other countries, would not have broken the bank.

Such a plan would have been in line with the revenue-neutral tax reform achieved with bipartisan support under Reagan in 1986.  It would have allowed the country to address its real and pressing problems (see the next section), it would have minimized inflation and growth of the deficit, and it would have avoided the catastrophic risk just described.

Conclusion:  We need to stop some part of this train wreck waiting to happen.

The tax plan actually shows Trump’s dedication to fighting climate change.  Thus far the only year when carbon dioxide production actually fell was when the world economy collapsed in 2008.   Trump is out to beat that one!

 

  1. What about the corresponding budget cuts?

One way to think about this subject actually comes from Trump’s State of the Union speech.  Towards the end of the economic discussion Trump turned dreamy (“we’re all dreamers!”), stared into the air, and talked about how the new America is the place for young people to start off building their lives.

Like much of Trump’s rhetoric this was a call for people to think back to the good old days of the (idealized) 1950’s and 60’s, the days that Trump wants us to think he is recreating.  We should talk about those good old days, the reality for young people starting off in Trump’s America, and what really ought to be done about it.

First about those good old days:

Employment:  This was an era of strong unions, with corresponding good wages and working conditions.  Companies offered lifetime employment.  Employment was a clear path to a middle-class lifestyle.

Medical care:  Affordable without worrying too much about it.  Coverage built around employment.

Education:   The GI bill had sent people of all kinds to college for the first time.   The state university system in full expansion made college affordable.  Everyone’s kids get a newly-won chance to do anything.

Retirement:  Companies offer full pensions, based on years of lifetime employment.

Infrastructure:  New and enhanced through public spending.  The interstate highway system is a key new achievement.

Environment:  Getting better as we begin to pay attention to it via the newly-formed ecology movement with bipartisan support.

International:  The world had learned that war was a bad idea.  International institutions formed to diffuse it and to prevent another depression.

Overall this was a time of confidence—as long as you weren’t black!  People could feel sure that they knew how to create a life trajectory for personal success and for their children.

 

Let’s revisit those topics now in light of Republican policies in general and the tax cuts in particular.

Employment:  Unions have lost power in most industries.  Globalization and (even more) automation have changed and are continually changing the nature and number of good jobs.  Lifetime employment is rare.  The “Gig economy” has few benefits.  Compensation has a very large range with the minimum wage unchanged for 15 years.  There is a current threat of a new round of job losses from artificial intelligence.  Overall—employment is uncertain and not a guarantee of a middle-class lifestyle.  And if you lose your job you lose everything.

Republican policy>> The administration is actively hostile to unions and to regulation of working conditions.  For other issues Trump has pegged everything to his stimulus of the economy and his renegotiating of the trade agreements.  That resolves few of the problems just mentioned.  In the State of the Union speech Trump talked about retraining, but thus far has announced only cuts to existing training programs.  There’s no room in the budget for government-funded jobs programs, including especially infrastructure (discussed later).  Hostility toward government-funded research is a bad sign for the future.

Medical care:   Medical care has become a huge part of national spending and a major worry to most people.   Prior to Obamacare there were 500,000 medical bankruptcies per year in the US, most for people who thought they had insurance.   Obamacare was a first step to move beyond an expensive, dishonest, inequitable, and incomplete non-system.  Obamacare was of course financed with a surtax on higher incomes that has been a primary Republican target.   Obamacare isn’t dead, but Trump has tried to kill it through a number of measures to raise its cost and create uncertainty about its operation.

>> Republicans have tried for years to get out of the healthcare business.  Trump’s healthcare promises made them create proposals, but none were serious.   The first two killed the surtax directly, and the third pushed responsibilities to the states with diminishing federal funding.    The recent Medicaid waiver action allows states to cut medical services, since that improves the recipients’ lives by making them more self-reliant!

The tax bill removes the Obamacare healthcare mandate, which undermines the insurance pools and increases costs for those remaining.  Further Paul Ryan has announced that the tax bill deficit means going after Medicare.  Trump recently acknowledged the opioid crisis, but provided no funding to do anything about it.

Education:  State financing of education has never recovered from the 2008 recession.  One consequence is the college student debt crisis, and state funding of K-12 education is also down.

>> In a reasonable world the federal government would act to support the financially-strapped, state-based education system.  Instead, with the rising state social service burden, the tax plan puts the states under even more stress.

The Republican party has turned alarmingly anti-education—for the public system.  Trump’s State of the Union speech mentioned only “vocational education” as an issue, and there have been calls not to waste taxpayer money on anything else.  There’s nothing wrong with vocational education, but it’s not the whole picture, and there’s no indication that public officials are choosing exclusively that for their own children.  Further, Trump’s budget proposal takes money away from public schools to kick-start the DeVos voucher system—with educational quality sold to the highest bidder.

The tax bill has no money to fix the student debt crisis, but it goes out of its way to provide a new tax deduction for private school tuition payments!  We are in danger of losing the legacy of the GI bill to a new notion of “good enough” for the public system. This is bad both for individuals and for the country overall.   Other countries have now long recognized what we used to know—broad-based educational success drives prosperity.  Our once-best upward mobility made us what we are.

Retirement:  Companies don’t do it anymore.  Most soon-to-be retirees have little savings.

>> The tax bill deficit means Social Security is under siege from House Republicans.

It should be noted that Social Security is not actually bankrupt—it has enough current income to pay ¾ of benefits from income.   Its big problem is that with growing inequality, less and less of income is taxed to support it.  No one is fixing that problem.

Infrastructure:  Problems have been well-documented and were acknowledged by both candidates in the election.

>> From the State of the Union speech, Trump expects the states and the private sector to foot most of the bill for infrastructure.   States have no money, as noted earlier.  Private sector financing is historically limited and only goes where there’s money. Infrastructure work has the potential to help with both employment and competitiveness, but there is nothing left in the budget to make it happen.

Environment:  Technological change and lobbyist spending means that it is always tough to be one step ahead of industry.

>> The administration views all environmental regulation as the enemy.  The withdrawal from the Paris Climate Accords is part of that picture.  The EPA is a prime target of budget cuts.

International:  This is a period of growing interdependence but with increasing sources of instability.  The US used to lead in establishing order, and it profited from that role.   We have now abandoned that and are increasingly threatening unilateral military action.

>> The tax plan budget has extreme cuts to the State Department together with a large increase in spending for traditional military hardware.  The change of emphasis is unnerving, and the military part eats up a large part of the budget after tax cuts.   One also can’t discount the real risk of conflict.

Conclusion:  The result of all this is how insecure life has become for many American families.  Employment has become riskier, government support has not evolved to help, and fundamental services such as education, healthcare, and infrastructure can no longer be counted on.  The new tax law makes all of that worse, because of specific policies (education, healthcare) and because there’s just no money left (infrastructure).   The government has been put out of the running to address the problems we actually have.

 

In final conclusion, we can sum it all up by saying this is a tax plan for a two-tiered American society, where the very rich are secure in their status and their ability to pass it on to their children—and the rest of us are performing without a net.  Middle class opportunities are there but shrinking, and it’s easy to fall out.  It’s hard not to think about the symbolism in the State of the Union address pagentry, where a crowd of overwhelmingly rich and overwhelmingly white people cheered wildly for the few others who were brought in to do the job of making them richer.

Private Sector Fantasies

Adam_Smith_The_Muir_portrait1

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.

Minding the Store

It has been a long time since there was someone interested in governing the United States of America.  For now we are specializing in promotional stunts (essentially all of foreign policy) or deliveries to electoral constituencies (climate change, ACA repeal, white supremacist racism).

Now that we can have no delusions about what Trump represents (pardoning Arpaio was a last straw), the country is in dire need of a way to get through the next 3 ½ years.

So it is worth remembering that there is actually a group in government trying to do something positive for the country.  That is the bipartisan group of senators working to fix problems with Obamacare (e.g. number of plans offered).  Not only is that a laudable activity for itself (whether or not the results get quashed), but it makes you think about other things a bipartisan group could do.   Here is one short list.

– Supreme Court nominees

At this point you don’t have to be a Democrat to recognize that democracy in this country is under threat.  We need to decide that a next Supreme Court justice cannot use the war powers clause or anything else to promote legal tyranny.  That applies to the role of Congress, to delaying or otherwise manipulating elections, and to Presidential pardons.

– Jobs program subsidies

During the election both candidates spoke about a government role in promoting employment in under-served areas (Appalachia, inner cities, etc.).  More recently, Republicans have promoted a deal with Foxcomm that was very heavily subsidized by the state of Wisconsin.

This needs to be a federal program because not all states can do it themselves, because it needs to be planned at a national level, and because a federal program could reduce the leverage employers have in playing off states against each other.

– Infrastructure

This is another area promoted by both candidates in the election.  There are of course significant differences in approach.  But it seems that issues such as selection of projects, rules and roles for private investment, and protection against corruption can be solved if there is a will to do it.

– Taxes

This a controversial area, and Trump’s so-called tax reform is not helpful.   But there is agreement on at least a couple of points:

  1. Real tax reform means eliminating the current maze of special gifts to create a more equitable system and a correspondingly lower basic tax rate. That kind of reform was achieved as a bipartisan effort under Reagan.   It has little to do with proposals currently on the table, but that doesn’t mean it can’t be done.
  2. As part of that effort, there is agreement that the basic corporate tax rate is too high. So that seems a good place to start–when accompanied by item #1.

– Education

Education is one of the most important services provided by government.  Even if De Vos vouchers turn out to be off-limits, there are at least two areas where bipartisan work is possible:

  1. The student loan crisis is a huge burden on a whole generation. This is not because students have suddenly become wasteful in their habits, but because costs of college have risen rapidly even in state institutions.  Government needs to help out.
  2. Government needs to help students and states to navigate the costs and benefits of educational programs. This is not just a matter of fraudulent institutions and sweetheart deals to vendors (although there is plenty of that).   Students need the information to choose for their futures.  And we as a country need to decide what equality of opportunity means for the cost of college.

– Foreign Policy

The only foreign policy we currently have is a disdain for employees of the State Department and a desire to exploit foreign issues for chest-beating electoral gestures.  It is tough to do foreign policy by committee, but we don’t really have a choice.

 

This is by no means a complete list, but we have to recognize that government is in crisis and needs a bipartisan effort even to mind the store.