Category - Political Economy

Congressional Budget Office Director Douglas W. Elmendorf summarizes his testimony to Congress (there’s also a link to the pdf file of the full testimony). Unfortunately, the simplest way to ‘distribute the value of carbon allowances,’ to paraphrase Elmendorf, is not mentioned: dividing it up equally. The technical details (division!) have been dealt with before on this blog by Jonathan.  Why would this obvious alternative be left out? My inner conspiracy theorist whispers that it’s left out to make giving away allowances the most politically viable alternative on the table. After all, why should all those poor folks benefit, when the rest of us have to shell out more at the pump?

Director’s Blog » Blog Archive » Testimony: The Distribution of Revenues from a Cap-and-Trade Program for Carbon Dioxide Emissions

UPDATE, below

The part of the new bailout bill that’s supposed to bring along the most formerly reluctant House members is to raise the coverage limit for Federal Deposit Insurance Corporation (FDIC) insured personal deposits (which includes savings and checking accounts, cds and money market accounts) from the current level of $100,000 to $250,000. Obama, McCain and the FDIC all approve. See this story, for instance. But who does this really affect? Using data from the 2004 Survey of Consumer Finances (the 2007 numbers aren’t yet available) and adding all covered accounts within households (note that this overstates coverage, since the insurance covers accounts not households) produces this table:

That’s right, this plan will help to insure that 3.5% of households with deposits over $100,000, but not the 1.5% with deposits over $250,000. I guess they’re on their own. Actually, most people in both of these categories already keep multiple accounts, to stay under the insured limit, so it will help not that much. However, it does make it look like a “compromise was reached on an improved bill,” allowing representatives to say that they held out for their constituents while they’re campaigning over the next month.

You don’t suppose that’s the point, do you?

UPDATE:

meanwhile, FDIC is doing a fine job slowing down lending.

I don’t often agree with Greg Mankiw, but in this case I do agree with two of his points, if not with his reasoning.

Robert Kuttner notes an interesting tidbit from, wouldn’t you know it, the Wall Street Journal: since 2001, wages in Europe have been keeping up with inflation and the employment rate has also been rising. Yet in the US, wages have been falling behind the inflation rate and the employment rate has also been sagging. This flies in the face of the conventional economic “wisdom,” which assumes that businesses will hire more workers when the (real, i.e., adjusted-for-inflation) wage is lower. Oh that wacky reality!

[Conflict of interest alert: Kuttner’s post is on his blog promoting his new book, Obama’s Challenge. I work for the publisher of the book.]

[First posted to Chelseagreen.com. Go to that version for links.]

Proponents of the “free market” have a tendency to ignore one inconvenient fact: there is no such thing as a free market in reality. Never has been one. Never will be one. The “free market” is a myth, a fairy tale told over and over by newspaper columnists and TV pundits and quite a few professional economists. I’ve come across a few declarations of this myth lately that irked me (for example this infuriatingly ignorant and ignorizing dreck), and so I’d like to rant for a moment.

This is not to say that markets, as a system for organizing economic activity, are no good. There are some good things about markets, flawed as they always are. There are also bad things about them. Sometimes, the flaws are their saving grace! That’s because some “flaws” in what might otherwise be a fully “free” market (theoretically, that is, but only in theory since it simply cannot exist in reality) make the results of the market activity more socially beneficial. The opposite is also true: some flaws lead to worse social results, relative to what might happen if the markets were to be fully “free.” But again, that’s all pie-in-the-sky philosophizing, because markets are never, ever fully free.

Here’s photographic proof!

One result of a free market, proven beyond any doubt in multitudes of Econ 101 courses for the past century, is the so-called “law of one price.” As Wikipedia states,

The law of one price is an economic law stated as: “In an efficient market all identical goods must have only one price.”

(Where “efficient” is econo-speak for what laymen call “free.”)

Now even in the Econ 101 courses, the professors will mention some nuances to this blanket statement, for example to account for the difference in shipping costs to deliver an otherwise identical product from different locations. Similarly, as Wikipedia notes

The law also need not apply if buyers have less than perfect information about where to find the lowest price.

Yet here we are in the brave new 21st century, equipped with the world’s greatest information tools in history, and even still, prices for identical products differ by enormous magnitudes. An example: this Samsung 32-inch flat-panel TV, as shown through Google shopping.

Check it out… the lowest price shown is $382 and the highest price shown is 149% higher at $950. The screenshot doesn’t capture all the offers that the Google search unearthed, but obviously prices vary widely within those two outliers.

How can this be? How can there be so much difference in prices for an identical product? Well, economists and business analysts can probably offer quite a few explanations, but they all boil down to this: the market is not free. It is not efficient.

So keep that in mind next time someone says that all we need to do to solve some problem is to “set the market free,” “get rid of government interference,” or “blah blah blah.” As I implied above, sometimes it will make sense to reduce the government’s influence on a particular aspect of some particular market, but too many people have adopted a blindered ideology that the “free/efficient/unfettered” market represents an ideal that we should be always and everywhere be pursuing. Not only is that doubtful that the ideal is actually ideal, but it simply cannot be achieved, nunca. And as the “theory of the second best” teaches us, that means there is no good reason whatsoever to think that the best alternative is to move as close as possible to this unachievable so-called ideal.

Class dismissed!

As discouraging as votes on things like FISA and telecom immunity have been, there are still some enormous differences between the two (?) major party candidates. For example, there’s the distributional impacts of their tax policy proposals, as well-illustrated in the figure below from the Tax Policy Center’s newly updated analysis (click on image to embiggen).

(Tip of the Econ-Atrocity chapeau to Paul Krugman)

I know I’m behind the times, but last night I was reading some (seriously) backlogged email and in it was a link forwarded by my mom to David Mamet’s recent essay in the Village Voice, “Why I Am No Longer a ‘Brain-Dead Liberal’.” It’s a strange essay that’s simultaneously difficult to follow and clearly intended as an embodiment of Churchill’s (perhaps apocryphal) dictum that “If you’re not Liberal when you’re 25, you have no heart. If you’re not Conservative when you’re 35, you have no brain.” It took Mamet more than 25 years to harden his heart, but by golly he’s done it! As for the question of whether he successfully traded it in for a new and improved brain… well, that’s not quite so certain.

It seems his first mistake is in assuming that his playwriting is an accurate reflection of reality, and then using an interpretation of his own play as a way to see back through to reality. His example of the clash between “conservative” and “liberal” is from his recent play, November.

But my play, it turned out, was actually about politics, which is to say, about the polemic between persons of two opposing views. The argument in my play is between a president who is self-interested, corrupt, suborned, and realistic, and his leftish, lesbian, utopian-socialist speechwriter.

Notice that his “conservative” is actually just a jerk: “self-interested, corrupt, suborned” — I won’t grant him “realistic” since this is Mamet’s subjective interpretation of his own character after the fact of Mamet’s conversion to a more conservative philosophy about life. Nothing about being self-interested or corrupt or suborned has anything to do with political outlook. People across every inch of the political spectrum are sometimes self-interested (and sometimes not) and sometimes corrupt (and sometimes not). True, the stereotype of a conservative in our culture is of a self-interested “old white man,” and leading conservatives in recent years, from Dick Cheney to Tom DeLay and so on, have done a bang-up job of encouraging the belief that conservatives are also likely to be corrupt; but those things don’t really have anything to do with conservatism per se, only with the nonpartisan tendency of power to corrupt and absolute power to corrupt absolutely.

On the other side is Mamet’s stand-in for a “liberal.” The key term for her is that she’s “utopian” (though her being a lesbian is surely frosting on the cake for Mamet). And again, though utopianism fits the stereotype of the left, it’s an intellectual flaw that knows no boundaries. Hitler, among other things, was certainly a utopian (and certainly not a liberal).

So Mamet has allowed himself to be confused by the surface ephemera of cultural stereotypes, has embodied them in his play’s characters, and has then analyzed them in his effort to deduce essential truths. It’s no surprise that he’s missed the mark.

Mamet’s conversion is based on his revelation that people, alas, are not generally good at heart. Instead, he says, “people are swine and will take any opportunity to subvert any agreement in order to pursue what they consider to be their proper interests.” He goes on to say that recognition of this truth of human nature is at the heart of the U.S. Constitution.

The Constitution, written by men with some experience of actual government, assumes that the chief executive will work to be king, the Parliament will scheme to sell off the silverware, and the judiciary will consider itself Olympian and do everything it can to much improve (destroy) the work of the other two branches. So the Constitution pits them against each other, in the attempt not to achieve stasis, but rather to allow for the constant corrections necessary to prevent one branch from getting too much power for too long.

Rather brilliant.

I’m in no position to disagree, but this points us towards Mamet’s next essential error. While Mamet is a fan of the separation and more-or-less balancing of powers between the branches of government, his conversion to conservatism (which, though hard to tell for sure from his essay, sounds pretty much like libertarianism) leads him to imply that the “free-market” should be left to itself and the power of government eliminated, or at least mostly so.

What about the role of government? Well, in the abstract, coming from my time and background, I thought it was a rather good thing, but tallying up the ledger in those things which affect me and in those things I observe, I am hard-pressed to see an instance where the intervention of the government led to much beyond sorrow.

But if the government is not to intervene, how will we, mere human beings, work it all out?

I wondered and read, and it occurred to me that I knew the answer, and here it is: We just seem to. How do I know? From experience. I referred to my own—take away the director from the staged play and what do you get? Usually a diminution of strife, a shorter rehearsal period, and a better production.

Let’s ignore the fact that, once again, Mamet is mixing up the metaphors of his reality. When you take away a director, you aren’t just taking away generic “government,” you’re taking away authoritarian government. It might be true that taking away any and all forms of government leads to beautiful theatrical productions, but that’s not a conclusion Mamet can legitimately claim from his example.

Anyhow, Mamet’s bigger confusion is one of scale and it leads him to fall for a bait and switch. Sure, a group of people the size of a bunch of actors and production crew can probably figure out how to behave with one another reasonably well most of the time. “Live and let live” works, mostly, maybe, at the level of neighborhood or community. (Don’t forget, however, that it has often been transformed into “live and let lynch.”) So conservatism/libertarianism might be perfectly reasonable at small scale; to paraphrase Churchill again, this might be the worst political philosophy there is for the small scale of society, except for all the others.

But our world is not as claustrophobic as Mamet’s theatrical in-crowd. We don’t live in one giant small town. And if the separation and balancing of powers makes sense for government, where is Mamet’s desire, post-conversion to “conservatism,” for a balancing of the power of corporations, of the market economy? This is Mamet’s most interesting mistake, in my opinion, because in pointing out the inconsistency of his thinking I’ve realized that the traditional “liberal” response doesn’t hold up well enough for me. Mamet’s bashing of government as leading to not “much beyond sorrow” is the knee-jerk conservative response to failures that are real; and while I think that government is necessary to serve as a balancing power against the whims of the market economy, the frustrations that both conservatives and liberals continuously feel at the state of our society leads me to a further conclusion: this balancing act isn’t working because it’s a two-legged stool. The Constitution balances the powers by splitting them up between three branches. If one branch gets out of hand, the other two–even if only for entirely selfish reasons–will be inclined to join forces to bring the first branch back within proper limits. But it takes three branches to enable such a dynamic.

In our contemporary society, there doesn’t seem to be a third branch of structural power available, not one that I can think of at least. Perhaps once the labor movement served that role. The civil rights movement and other mass social movements might be understood to have functioned as third branches of social power in their times. Nowadays, I don’t see anything filling the role of a third branch. The result, from my “liberal” perspective, is a government largely overrun by the power of the economic sphere. (Of course, it’s not just the “economy” generically speaking that can organize and direct power; it’s the people in elite positions of the economy who can do so.) And when the government has been “suborned” (my thanks to Mamet for that–I was annoyed at first that I had to look up his fancy word, but it’s a good one) by the economy, is it any wonder that so many of the government’s actions appear to lead to sorrow?

So what’s out there to rise up as a new third leg of power, capable of enabling a balancing with government and economy? A revived labor movement might do it, but I’m not holding my breath. Some new social movement, maybe, like that of immigrants or environmentalists. But I think I might be better off buying Bear Stearns stock than putting my hopes in one of those possibilities. Even if such a social movement does arise, what chance does it have to institutionalize itself to remain relevant for more than a few years, a decade or two at the most? What makes it even more unlikely is the fact that institutionalization of social movements seems mostly associated with the demise of their social power, their appropriation into the realms of government and economy, not the maintenance of an independent power structure. How about “the church”? That’s the most likely candidate, but frankly, I’d rather stick with the second-rate status quo than risk going the route of The Handmaid’s Tale.

The only suggestion I’ve heard that might do the trick–and I don’t know that it would–is that of Peter Barnes from his book a year or so ago, Capitalism 3.0 (available in full as a free PDF). In the book, Barnes argues in favor of the establishment of a legally empowered and widespread system of “commons”; that is, resources and organizations held as common property by some relevant group of people, from the level of neighborhood to nation to world. This commons sector wouldn’t replace the market economy and its associated private property (though some resources currently utilized as private property would be converted to common property) and it wouldn’t replace government and its associated public property (though some resources currently utilized as public property would be converted to common property). What makes a commons sector viable, perhaps, as a third leg in balancing the social powers is that it would (as envisioned by Barnes) be institutionalized in a manner that maintains its separate power base from the private property economy and the government. Unlike Mamet, Barnes has no interest in dazzling readers into a state of confusion and irritation, so his writing is clear and pleasant to read. Could the commons be enough to do the trick? Would it truly be robust and resilient over time? I don’t know, but the book is short and sweet, so check it out and see what you think.

Now I want to get back to something I touched on above. One of the ironies of Mamet’s essay is that, partly (though surely not entirely) due to his obnoxious tone of condescension towards all those “brain-dead liberals” he’s left behind in his conversion, the comments in response to the article are filled with back and forth vitriol between offended liberals and conservatives offended at the offended liberals. I tried reading the comments but quickly sickened of the dismissive attitudes that predominated. So here’s the irony: Mamet thinks that people work things out when left to their own devices, just like his utopian theater group that puts on such great plays when liberated from under the thumb of the governing director; and yet his article elicits evidence of exactly the opposite. As I suggested, the theory that people just work things out A-OK might be a good theory to apply to small groups (but then, why so many runaway teenagers? why so many battered wives? why so many suicides?) but, repeating myself, the world is much bigger than that. Our modern world is filled to overflowing with connections, some seen, some hidden, between people near and far, people who not only don’t know one another but don’t even know that the others exist. Farmers in Kansas converting their fields from wheat to corn, in order to cash in on the ethanol boom, are part of a system that results in skyrocketing bread prices in Egypt (and yes, I realize that this example is one in which government plays a leading role in screwing things up, though — does it really need saying? — the US government’s ethanol policy wouldn’t be nearly the disaster that it is if the government weren’t so susceptible to the lobbying efforts of Archer Daniels Midland, Cargill, and the other agribusiness corporations).

More banal, but experienced by almost anyone reading this missive of mine, is the fact that the anonymity and distance of modern modes of communication, perfectly presented in comments on blogs and other online pages, triggers so very many people to adopt an “act like an asshole first and apologize later, if I feel like it” attitude. It’s neither liberal nor conservative to be bothered by the decay in cultural decency; but Mamet’s self-described conservative preference for just letting it all fix itself leaves a lot to be desired. Sure, sometimes government action exacerbates a problem; sometimes there’s no good solution and leaving things alone is the best available from a set of bad options. But in a world of “people [who] are swine and will take any opportunity to subvert any agreement in order to pursue what they consider to be their proper interests,” does it really make good sense to always and everywhere ask the swine to work their own problems out, regardless of the fact that some but not all of the swine are armed to the teeth, that some but most definitely not all are richer than God, that some revel in their swineness while others care at least to try for a little courtesy and decency and honesty? The answer to a swinish human nature in the realm of government was the balancing of powers. It also seems to me the best answer I’ve encountered for the overall realm of society at large. Balance those powers. Put a leash on the government, absolutely for sure, but also for sure put a leash on the economic powers cuz those pigs will steal the shirt off your back and then smile as they offer to sell it back to you at a special discount, “just for you ;).” For now, at least, that’s the liberalism this zombie is sticking with.

A Modest Proposal: Ten Steps to a Democratic Economy

In my initial installment of this series, I proposed, “Ten Steps to a Democratic Economy.” With this column, I would like to explain and defend my third proposal. I invite commentary and analysis.

3. Reform the Money System – The money supply system is directly under the control of the Federal Reserve. This agency has 14-year terms. They need to be placed under congressional control, not Presidential control. I recommend that their terms be limited to 4 years and they should be checked by Congressional fiscal policy. High interest rates currently only benefit banks and financial institutions.

The Federal Reserve, usually called, ”The Fed,” is the central banking system of the United States. The Federal Reserve System is composed of a central Board of Governors in Washington, D.C., and twelve regional Federal Reserve Banks located in major cities throughout the nation, and a number of member banks. The Federal Reserve Act created the Federal Reserve System in 1913. The board and its chairman are appointed by the President of the United States and approved by the Senate.

The money supply available at any given time in our economy is a product of the interest rates that are set by the Federal Reserve. As it raises or lowers the interest rate it charges to member banks, it increases or decreases the amount of money available to the economy. Higher interest rates slow the economy and lower interest rates speed it up. This means that the economy is producing goods and services and thereby creating jobs in a “slow” manner or in a “faster” manner.

I am not an expert in economics, but I know that high interest rates hurt low-income people and benefit wealthy people. Low interest rates help low-income people, but do not hurt wealthy people. The wealthy have a surplus and they profit from whatever the amount of the interest that it earns. Their complaint would be that they are not being rewarded “enough” for their thrift and/or miserly behavior. People who have surplus money can, of course, give it away, but most wealthy people prefer to “rent” it out. The money you pay in interest on a loan is in effect the rent for that loan. The wealthy are the creditors and the poor are the debtors. Those who lend are the creditors and those who borrow are the debtors. (One problem with this scenario is that truly destitute, impoverished people are hardly ever loaned money. They are considered poor risks.)

When a bank grants someone a loan, most people feel happy. This is understandable but they should not feel happier than the bank. The bank is now getting a 6% return on its money, when earlier it was only getting 2%. This is how banks make money for themselves. They take it in at one window and loan it out (part of it) at the other window.

Low interest rates stimulate purchasing of goods and services. With low interest rates it is easier to borrow money to buy a car, a refrigerator or a house. This means that more people will exercise that purchase option and the economy will move along. This tends to create a bit of inflation.

Wealthy people do not like inflation. It means that their wealth does not buy as much as it used to buy. Large financial institutions feel the same way. They like to have the Federal Reserve under the control of people who are not elected by the citizens, or at least at a distance from the people. The President appoints Federal Reserve Board members. Their terms in office are for 14 years and the Senate confirms them. The House plays no role. The Senate is the more conservative of the two legislative branches. Senators have 6-year terms. There are two per state regardless of population.

Recently, after Hurricane Katrina, hit the Gulf Coast, a number of people felt that the Federal Reserve should have lowered interest rates to make goods and services available to those afflicted. It did not do so. It was focused on the anti-inflationary policy that it had been following. This is an example of monetary policy interfering with fiscal policy. Tax cuts meant that the government would have to borrow to cover the costs of the hurricane and aftermath.

Fiscal policy refers to the ability to raise revenue by way of taxes and to spend money on needed projects. In a phrase, fiscal policy refers to revenue and expenditure policy. With a democratic fiscal policy, we could collect more money from the affluent and provide more services to the poor. Tax the rich and help the poor.

It is for this reason that conservatives fear and loathe democracy. Conservatives fear that a majority would probably want to spend more money on schools, health care and environmental protection, instead of prisons, police and the military. Since the wealthy people would see an increase in their federal income taxes, if this happened, they generally oppose giving Congress strong fiscal tools, and instead rely on monetary policy to adjust the economy.

A more democratic society would give us better economic policies. Better economic policies would put people before profits.

A better world is possible.

References:

Economic Report of the People. Boston: South End Press, 1986.
(Center for Popular Economics, Amherst, Massachusetts)

http://en.wikipedia.org/wiki/Federal_Reserve

A Modest Proposal: Ten Steps to a Democratic Economy

In my initial installment of this series, I proposed, “Ten Steps to a Democratic Economy.” With this column, I would like to explain and defend my second proposal. I invite commentary and analysis.

2. Raise the Minimum Wage – I think it would be a good idea to raise the minimum wage to $10.00 per hour. It is currently $5.85 per hour.($8.00 in Massachusetts.) I would also shorten the workweek to 35 hours to give people more free time for recreation and education.

Raising the minimum wage would put a lot more money into circulation and would stimulate the economy. Most of the people who would benefit from this new policy would spend their money on goods and services that they presently do without. For all of these people, it would mean more money above the subsistence wage that they are presently earning. These people are the working poor. They are for the most part the invisible poor. Visible or not they are a reality in the current American economy.
The economist Holly Sklar is a widely published op-ed columnist and author. She is co-author of “Raise The Floor: Wages and Policies That Work For All Of Us,” which Barbara Ehrenreich calls, “A commanding work and powerful tool for the living wage movement.” She is a contributor to numerous high school and college text anthologies and is a frequent guest on talk radio.
She tells us,

“The number of Americans in poverty is a group so large it would take the combined populations of Louisiana, Mississippi, Alabama and Texas, plus Arkansas to match it. That’s according to the Census Bureau’s latest count of 37 million people below the poverty line.
Millions more Americans can’t afford adequate health care, housing, child care, food, transportation and other basic expenses above the official poverty thresholds, which are set too low. The poverty threshold for a single person under age 65 was just $9,827 in 2004. For a two-adult, two-child family, it was just $19,157.
By contrast, the Economic Policy Institute’s Basic Family Budget Calculator says the national median basic needs budget (including taxes and tax credits) for a two-parent, two-child family was $39,984 in 2004. It was $38,136 in New Orleans and $33,636 in Biloxi, Mississippi.
America is becoming a downwardly mobile society instead of an upwardly mobile society. Median household income fell for the fifth year in a row to $44,389 in 2004 — down from $46,129 in 1999, adjusting for inflation.”

Under my proposal, if the principal wage-earner was paid $10.00 an hour for a 35 hour work week, their family income would be $17,500.00. This would not eliminate poverty, but would put a floor under it. With family assistance for the working poor, in the form of tax credits or income credits, we could effectively insure that no family lived in poverty.
A higher minimum wage also helps protect the wages of workers in the higher brackets. It also promotes a greater sense of community, in that it eliminates the resentment that gross inequality in income and wealth promotes. This resentment contributes to criminal and anti-social activity.
The minimum wage would have to be indexed to inflation to protect it. To promote skilled labor, a minimum wage policy would have to include free education. By making education available to all, with free tuition, room and board, etc. we would remove a number of people from the work force and at the same time invest in future job growth for highly skilled graduates. Over time these skilled workers would pay back the system by paying their just share of taxation.
The current system will not move toward this direction unless we build a social and political movement that works to bring it into being. The current economic elite is aware of how fragile their social position is. That is why they spend so much money for lobbyists and political bribes (aka “contributions) to keep the current unjust system in place. A disciplined political organization of working people and their allies could easily overcome this. It really is just a matter of, “keeping your eyes on the prize,” as they used to say in the civil rights movement.
One thing is certain, if we do not try to build a progressive movement, then we will not have a progressive movement. If we try, we might fail. But a rational and realistic effort, very probably would succeed.
The alternative is the misery and injustice that we see around us today. To maintain that outcome, we need to do nothing.

Here’s an interesting take (read the whole thing, it’s short!) on the Laffer Curve (the theoretical source of the arguments made by people like Rudy Giuliani, that cutting taxes increases government revenues). One reason is that the higher tax rates are, the more people will try to avoid them.  Taking the logic, to it’s absurd conclusion:

If you’re the sort of person who is willing to use these tax avoidance schemes - and I would hazard to guess that not that many people in that situation are not - how low do tax rates have to be in order that you do not engage in those schemes? The answer: half a percent. Guess how low tax rates would have to be for someone making $200 million a year not to use the same schemes.

The implication, of course, is that we want to close the loopholes that allow corporations and the wealthy to dodge paying their share, unless you find 0.5% tax rate on Paris Hilton’s income (I do love to pick on her, but fill in the blank with whoever you want that makes more in a year than whole towns will make in their lifetime) to be a reasonable amount. Do you? I don’t.

A friend just sent this to me. It’s an English folk poem, circa 1764, so he says.

They hang the man and flog the woman
That steal the goose from off the common,
But let the greater villain loose
That steals the common from the goose.

The Law demands that we atone
When we take things we do not own
But leaves the lords and ladies fine
Who take things that are yours and mine.

The poor and wretched don’t escape
If they conspire the law to break;
This must be so but they endure
Those who conspire to make the law.

The law locks up the man or woman
Who steals the goose from off the common’
And geese will still a common lack
Till they go and steal it back.

Is the New Supply Side Better Than the Old? by Austan Goolsbee is getting a lot of play in the econoblogosphere today. It’s an interesting article that points out some of the weaknesses in the supply-side argument for cutting income tax rates on the highest income people. One small point of correction, however: when referencing the fact that top incomes soared after the tax cuts of the 1980s and 2001, but also soared after tax hikes in other periods, Goolsbee says:

Seeing the same pattern when taxes rose as when they fell indicates that tax cuts weren’t responsible. It suggests that cuts for high-income taxpayers likely gave windfalls to those whose incomes were already rising sharply because of broader market forces.

One might note the impact of the policy climate in various periods, as well. Since the 1980s, it hasn’t just been tax policy that has favored high-income earners over their less fortunate fellows, but deregulation and lax enforcement on a broad range of policies including labor and the environment, as well as overt war-on-the-poor measures such as welfare reform.

Hat tip to Mark Thoma.

Check out Lane Kenworthy’s piece on Taxes at the Top. Interesting and timely, given the likely call for making Bush’s high-income tax cuts permanent.

I’ll be writing more later, but for now, just a couple of things I thought make up a good contrast. Not many people would be surprised by the assertion that economic classes receive different treatment before the law in the U.S., but the following two items are certainly remarkable. First, take a look at this story, about a group arrested for feeding the homeless in Orlando. Yes, apparently charity begins and ends at home: “mass feeding in one area” is banned by a city ordinance. Don’t worry though, not everybody suffers from such casual and needless oppression. Gazillionaire hedge fund managers will get to keep their huge tax break: their income is considered capital gains and so is subject to the 15% capital gains tax, not to the regular income tax or to the payroll tax that funds social security benefits. Mark Shields explains why. Thanks to MoJoBlog for the tip on the lack of legislation.

Oh and by the way, Keith Knight tells it like it is.

Heterodox Economist reminds us of a useful point: Wall Street types might deserve to eat a bear market in some sense of getting their just deserts, but the connections between the financial world and the rest of the economy (including millions of working stiff jobs, etc) mean that the bear is likely to be shared around with plenty of people who don’t deserve the downside. The system as we know it is rigged in favor of the owners. Because they own, they cannot be allowed to suffer for their suffering trickles down much faster than any of their advantages. He also talks about Rosa Luxemburg, which is cool.

“Heterodox Economist” blogger Eric Nilsson has been mulling over issues of unemployment insurance. These recent posts (1, 2, 3) of his make a good introduction to his blog (that’s what they were for me).

[See part one]
Jonathan Teller-Elsberg, CPE Staff Economist

It’s worth remembering that commons already exist, lots of them, in various places and parts of the world’s economies. Most often, however, they are informal arrangements—holdovers from before the rise of modern market capitalism. In general, commons are not recognized formally by governments as a type of property arrangement deserving protection, the way conventional private property is legally protected.

It is this lack of protection that enables the famous “tragedy of the commons.” Barnes argues that, contrary to the standard perception, commons aren’t undermined by internal tragedies—they are victims of infringement from the outside. Marx described the enclosure of common land into private land as “the primitive accumulation of capital”; today, Barnes is primarily concerned with the ability of corporations to horn in on remaining commons as they seek new resources to exploit for private gain. A recent example is with the digital TV broadcast spectrum, with an estimated value of $70 billion but which the U.S. government gave away for free in 1996 to media conglomerates, even though the airwaves are supposed to be the shared property of all Americans.

The main finding of Peter Lindert’s intriguing 2003 paper, “Why the welfare state looks like a free lunch” (a warm-up for his 2004 book Growing Public: Social Spending and Economic Growth since the Eighteenth Century is that generous social democratic welfare states, with a variety of universalist and means-tested safety net and family support programs, grow just as robustly as stingy laissez-faire states. Here’s the key summary from the abstract:

There is no clear net GDP cost of high tax-based social spending on GDP, despite a tradition of assuming that such costs are large.

The finding should obviously be plastered on bumper stickers, refrigerator magnets, and dorm-room walls and played continuously on a loudspeaker outside the Chamber of Commerce, Club for Growth, Council on Competitiveness, etc. The welfare state doesn’t just look like a free lunch, it is a free lunch, at least from the standpoint of national aggregates.

Class conflict may mean that it’s hard for us to order that free lunch in the U.S. anytime soon, but the barrier between us and the free lunch doesn’t come in the obvious way.

Just a quick note from Atlanta. It’s the end of the second day of the first US Social Forum. Due to travel ‘difficulties’,  I was not here yesterday. My spies on the ground tell me the march yesterday morning to kick off the Social Forum was 10 to 20 thousand people strong. Always hard to say, exactly, but a quick examination of the program (with over fifty workshops and panels going on at once for three days) and taking in the attendance at the panels I’ve attended, and just the sheer number of people on the streets of downtown Atlanta with their USSF ID badges, this is clearly the largest such gathering I’ve ever seen in the US. Thousands of people together to discuss and strategize a different US, something so necessary for the world as a whole, and no less so for us US’ers.

And the conversations happening go far beyond simple critiques of today’s neoliberal capitalism (too easy, anyway). They’re talking about concrete alternatives that are working on the ground now, and strategizing about scaling them up going forward. Of course there’s still a long way to go, but this forum represents a most welcome development: the coming together of disparate ’single-issue’ groups to hammer out common ground and devise strategies to move forward as one. I’m sorry you’re not here!

More specifics later, must sleep….

Jonathan Teller-Elsberg, CPE Staff Economist

A few weeks ago, CPE Staff Economist Jerry Friedman wrote an Econ-Atrocity reviewing Bill McKibben’s new book, Deep Economy. Though he says McKibben “has written a clear attack on much of what ails us,” Friedman nonetheless criticizes McKibben for approaching the environmental and social problems of the day from an individualist perspective. For all that McKibben wants to promote and revive “community,” he has the attitude (says Friedman) of a “personal Salvationist . . . [who thinks that] the enemy [is] ourselves: we use too much, waste too much, want too much; and the only salvation for the environment is to change our preferences, use less, recycle more, and choose to live simply.” What McKibben misunderstands or ignores, Friedman argues, is the power of social institutions to drive behavior, regardless of the desires and seemingly free choices of individuals.

I think that Friedman will find solace in Peter Barnes’ recent book, Capitalism 3.0: A Guide to Reclaiming the Commons, since Barnes’ approach is definitively institutional. The problem, according to Barnes, is that the structure of the economy and society leave too much power in the hands of corporate capitalism. Even if all the CEOs and boards of directors and politicians were replaced with kind-hearted souls like McKibben, we would still face pretty much the same issues of environmental decay, economic inequality, and other social ills—the logic of capitalism and the legal structure of private property rights force the leaders of corporations to do what they currently do. He learned this from personal experience as co-owner and manager of several business ventures, most famously Working Assets (a telephone and credit card company that donates one percent of gross revenues to progressive charitable organizations). “I’d tested the system for twenty years, pushing it toward multiple bottom lines [that consider social and environmental impacts in addition to profit concerns] as far as I possibly could. I’d dealt with executives and investors who truly cared about nature, employees, and communities. Yet in the end, I’d come to see that all these well-intentioned people, even as their numbers grew, couldn’t shake the larger system loose from its dominant bottom line of profit.” (Ironically, Bill McKibben is quoted on the front cover of Capitalism 3.0 helping to promote Barnes’ book.)

A recent article in Psychological Science describes experiments aimed at understanding the psychology of accepting, or not, social inequalities. (If the abstract seems a bit abstract, try this slightly more reader-friendly summary from Science.)

The gist: people who accept justifications for inequality experience less emotional stress when confronted by evidence of the inequality. The more a person believes that there are good reasons for inequality, the less emotional stress they’ll have. (Stress in the form of moral outrage, existential guilt, and support for changing things to help out the disadvantaged.) So acceptance looks to be a self-protection mechanism. Also, showing people stories, propaganda, what-have-you, that feeds ideas of justification (for example, “rags-to-riches” stories) increases their acceptance of the justifications, and so decreases their emotional reaction to evidence of inequality.

As the authors abstract, “system-justifying ideology appears to undercut the [urge to bring about] redistribution of social and economic resources by alleviating moral outrage.”

I guess this helps explain why people are likely to accept that “this is the best of all possible worlds.” Giving a rat’s ass that the world ain’t so great is hard to do. It’s stressful. That’s why those of us who think otherwise have got to help each other keep our spirits up. More potlucks!

By Gerald Friedman, CPE Staff Economist

At the time of the first Earth Day, April 22, 1970, the Environmental Movement straddled two approaches to addressing environmental problems, approaches rooted in two alternative theories. Senator Gaylord Nelson of Wisconsin proposed the first Earth Day to “force this issue onto the political agenda,” to promote changed government policy to protect the environment. But many of the 20 million Americans who took part in this first Earth Day were deeply suspicious of organized politics or state action. “Personal salvationists,” they blamed environmental troubles on our weaknesses as individuals. Instead of failed social policy, the enemy was ourselves: we use too much, waste too much, want too much; and the only salvation for the environment is to change our preferences, use less, recycle more, and choose to live simply.

Twenty seven years later, the Environmental Movement confronts the same division between personal salvation and political action, a division nicely illustrated by a new book, Bill McKibben’s Deep Economy. A prominent environmentalist, McKibben has written a clear attack on much of what ails us; but he misses the underlying cause of these ills and, therefore, his prescription for remedial action is necessarily off. In many ways, a pleasure to read, the book also left me so frustrated that I threatened to throw it against the wall.

Two weeks ago, after complaining to my daughter about how much I would dislike it, I bought Bill McKibben’s Deep Economy (New York, Henry Holt: 2007) from my local Amherst book store. Already familiar with his ideas from his various other writings (including The End of Nature; Staying Human in an Engineered Age; and various New Yorker articles), I suspected that his new book would be well written, an effective attack on much that ails us as a society, and would miss the point. It is this last that led me to threaten to throw the book against the wall in frustration. And that frustration led me to write this note. (Actually, it was my wife who wanted me to write this so that I would stop ranting to her.)

What could be wrong with a book that criticizes the Bush Administration, big oil, Cargill, Monsanto, and the Economics profession (among many many other villains)? Especially when the author has such good heroes: including farmers’ markets, urban gardens, organic farmers, Heifer International, and the Indian state of Kerala. Among economists, environmentalists like Herman Daly and Bob Costanza get most of the Kudos but a few, like Amartya Sen, make friendly cameo appearances. Individualism is bad; society is productive; and I agree that would all be better off, and the world a lot better off, if we listened to Bill McKibben.

The problem I have is that McKibben not only reads orthodox economists but believes them. For him, the economy is a social system that efficiently translates individual wishes into products; changing economic outcomes, therefore, requires two things: first we must change the technology we use; and, second, we must change individual wishes rather than reorganize the economy. For McKibben, both of these problems go back to the origins of modern economic growth in the British Industrial Revolution of the 18th century. Industrialization, and the economic growth that came after, is, first of all, the product of engineering and better technology: “[I]n 1712, something new finally happened. A British inventor named Thomas Newcomen developed the first practical steam engine” (p. 5). As a result of this technology, “Every action of a modern life burns fossil fuel” (p. 15) and “[t]he link between environmental destruction and wealth is deep and long-standing. Clearly, getting rich means getting dirty” (p. 21). In a nutshell, here is McKibben’s take on the world: we have the wrong technology, we use a technology that relies too heavily on fossil fuels, and this links economic growth with environmental degradation in a way that insures that economic growth will hurt the world.

Thus far, McKibben’s critique would be familiar to readers of Amory Lovins (cited in the book) and others. This argument may be simply stated as follows: “We’re in trouble because we, accidentally, chose the wrong technology and now we need to step back and change.” But McKibben makes a broader social critique than this by adding a second element to our social malady, also dating back to the beginning of the modern era, and also an accident. Until 500 years ago, McKibben argues, individuals were embedded in communities “as a small part of the Great Chain of Being” (p. 95). “The story of the last five hundred years,” he adds, “is the story of continual emancipation” (p. 95). He recognizes that many factors dissolved this ordered world, but, a good Weberian, he highlights one: Protestantism. Like fossil fuel-powered economic growth, individualism was at first a good thing; emancipatory, it gave space for individual expression and initiative. But it has gone too far and now “we’ve been overliberated” (p. 128).

There is so much here that is familiar, and so much that rings true and even comfortable, that I expect McKibben’s book will sell well. But, I fear that he is telling us what we want to hear rather than what we need. For starters, he is wrong about the British Industrial Revolution. Rather than steam engines, the signal change there was the creation of factories, almost always operating without steam power, where employers, “capitalists,” were able to regulate the work hours of their workers. Rather than an engineering problem, the Industrial Revolution was a solution to a social problem, the problem that people, workers, did not want to work as long or as hard as their bosses wanted. Factory production allowed capitalists to increase their profits by forcing their wage workers to labor harder or else be fired (and denied access to the means of production).

Instead of seeing the economy as a system that uses technology to transmute individual wishes into economic outputs, it is a system of profit creation, producing surplus value rather than use value. This explains many of the accidents and mysteries McKibben identifies, the odd mistakes and errors in judgement, that have led to our current malaise. We subsidize the burning of fossil fuels because of the political influence of fuel and automobile companies looking to profit. Our agricultural research emphasizes large-scale, oil-intensive technologies because these favor agribusiness profits. State policy promotes extensive housing development because these projects favor corporate profits in real-estate, construction, furniture, and transportation. State policy favors private consumption of marketable commodities rather than communal use of public goods not just to raise the Gross Domestic Product but because corporations profit from private consumption. By contrast, state policy neglects, even discourages, much that enhances welfare and makes life better for people because corporations have not figured out a way to squeeze a profit from them. Home production, community building, and the development of social capital are all shunned not only because they do not enrich any section of corporate America, but because the strengthening of communities risks promoting democratic forces who would restrict corporate profit-making in the name of popular welfare.

Yes, McKibben is absolutely right that we use the wrong technologies and we value individual action over communal interests. But the problem is not in the technology, nor in any excessive desire for liberty and personal autonomy. Nor is it in our desire for economic growth where we provide the opportunity for a better life for everyone. The problem is that we grow in the wrong way because that is more profitable for the corporations who dominate our social policy.

So what is to be done? Blaming technology and individualism, McKibben urges us to change our thoughts and revise our expectations of the world with the promise that this will save the planet and even may eventually make us better off. Like the Garrisonian abolitionists of the 19th century, he would rely on “moral suasion”; after we change our behavior and rebuild our communities “then our politics will start to change as well” (p. 175). If we see capitalism and capitalist control of state policy as the root of our environmental and social maladies then we should reverse this ordering. Instead of personal change opening the door to political action, we need political action that will end the subsidization of environmental and community destruction so that we can save our planet and rebuild our communities.

Gerald Friedman
Professor of Economics
University of Massachusetts at Amherst
gfriedma@econs.umass.edu

Scientific American is reporting on a an article in the journal Neuron that describes brain scanning experiments intended to see if poorer people react differently than richer people to opportunities to gain a little extra money.

The microeconomic law of diminishing marginal utility states that while accumulating a good—pretzels, pencils, nickels, whatever—each successive unit of that good will be less satisfying to acquire than the one before it. Finding a shiny quarter on the street is a real thrill. But, if you are carrying around a bag of coins, acquiring another one does not seem nearly as exciting. In fact, would you even bother to pick it up?

That hesitation is what researchers at the University of Cambridge in England were banking on when they designed a study to see if the haves catch on more slowly than the have-nots when it comes to reward-based learning. Reporting in the current issue of Neuron, the scientists reveal that when a small sum of money is on the line, poorer people learn quickly how to maximize their profits, leaving their wealthier counterparts in the dust.

The Washington Post reported a couple days ago on the dwindling and precarious situation among the big accounting firms. As the opening paragraph asks, “With only four major firms left in the business, are there too few to let any fail?” The article goes on to list numerous troubling and legally challenged activities by PricewaterhouseCoopers, Deloitte & Touche, KPMG, and Ernst & Young in recent years, all in the shadow of Arthur Anderson’s undoing as an enabler of Enron’s mishigas.

The CBC reports

Alberta carbon dioxide pipeline could cost $5B
Last Updated: Thursday, March 15, 2007 | 12:19 PM MT
CBC News

A plan to pipe carbon dioxide from Alberta’s oilsands and store it underground could cost as much as $5 billion, says Alberta’s environment minister.

The province wants to capture carbon dioxide and send it through a 400-kilometre pipeline. Intergovernmental Affairs Minister Guy Boutilier said earlier this month that the pipeline would cost $1.5 billion and the carbon dioxide would be used to help get more oil out of low-producing wells.

He was pushing for the federal government and industry to split the cost of the project.

But Environment Minister Rob Renner suggested Wednesday it could cost much more.

“The number of $1.5 billion has been floated,” Renner said. “I suspect that the number — all costs included — will be significantly higher than that.

“I’ve seen estimates as high as $5 billion by the time it has taken into account the cost to industry to implement the [carbon] capture facilities.”

[cont’d]

Wow. Just a thought here, and ignoring that the carbon dioxide would be sequestered (for how long and how securely?) in an effort to bring yet more fossil fuel to the surface so it can be burned and converted to carbon dioxide, most of which won’t be captured but will add to the greenhouse mix; so my thought is, just how much energy conservation technology could be implemented with $5 billion (even if it is Canadian dollars), or even the lower estimate of $1.5 billion? I’d definitely bet a dollar that it’d be enough to cancel out way more CO2 emissions than the pipeline would help sequester (and I repeat, for how long, and how securely?).

Ex-chair of the Fed, Alan Greenspan, was frequently criticized for throwing his weight around in favor of those whose economic position is based on owning financial capital, at the expense of the vast majority of the public. Congress loved everything about Greenspan and would have made him chair-for-life if they could, so it shouldn’t be terribly surprising that his replacement, Ben Bernanke, tends towards the same bias. Dean Baker paints a “hypothetical” scenario that would lead to just that conclusion. How else to explain why Bernanke would be so eager to smooth the rough waters of the financial markets? Aren’t they just natural expressions of the rational free-market system? To paraphrase Marilynne Robinson from one of her essays in Mother Country, if the markets are natural systems, like rivers, what obligation is there to flatten out the waterfalls and smooth over the rapids? The answer seems to be the obligations of class.

By Heidi Garrett-Peltier, CPE Staff Economist

You are what you eat. And according to Michael Pollan, author of The Omnivore’s Dilemma, that means we’re corn. Corn has now made its way into our diet in the form of fillers, sweeteners, oils, alcohols, pills, and breakfast cereals, not to mention of course the indirect path it takes through animal feed. Why should we care? Because cheap corn has been linked to obesity, and obesity will soon overtake tobacco as the leading cause of preventable death.

By Gerald Friedman, CPE Staff Economist
Dec. 1, 2006

A recent article in the New York Times (October 25, 2006) entitled “Hospitals Try Free Basic Care for Uninsured” raises an intriguing possibility. The Times reports how some local governments and hospitals have found that by providing primary care, supportive services, and preventive care for the uninsured they can save money by avoiding higher costs when conditions worsen down the road. Following the experience of a diabetic patient at Seton, a Roman Catholic hospital network in Texas, the Times shows how preventive care reduced “costs for the hospital” by helping the woman avoid expensive emergency room visits. By improving her health, preventive care cut her medical bills nearly in half. “The money we save,” Dr. Melissa Smith, medical director of three Seton clinics, “money that is not hemorrhaging through the I.C.U., is money we can do so much more with to help her upfront.”

We could all hope that there will be enlightened insurers who will respond to these stories. The Times is certainly hoping to promote a free-market win-win where the poor will receive care that will help them stay healthy, and health insurers and providers will increase their profits by reducing total expenditures. But this worthy goal misses the fundamental flaw of for-profit health insurance: Capitalist businesses, including America’s health insurers, are not eleemosynary institutions. They do not set out to produce useful things. Instead, they seek to create profits; any social value or use is purely coincidental. In the specific case here, our capitalist health care industry is organized to produce profits; any quality health care that it provides is a desirable, but secondary, product.

Over at the Boston Review, Michael Piore and Andrew Schrank’s recent article (“Trading Up: An embryonic model for easing the human costs of free markets”) on labor in Latin America offers a spot of good news. They’ve been studying labor inspections throughout the region, from the Dominican Republic to Mexico to Brazil and Chile, and say they’ve found “an emergent model for reconciling market and social forces.”

The following post is the text of a radio commentary I (Mike Meeropol) delivered over WAMC radio in early October.

Did you know that the US Congress has rejected efforts to punish, investigate and criminalize war profiteering?

Yes, that’s right. This past February, the House on a mostly party-line vote rejected an effort to forbid expenditures from going to any contractor, “…if the Defense contractor audit agency has determined that more than $100,000.000 of the contractor’s costs involving work in Iraq … were unreasonable.”[1]

Meanwhile, the Senate on an equally party-line vote, rejected an amendment to an appropriation bill “to prohibit profiteering and fraud relating to military action, relief and reconstruction…”[2]

What’s going on here?

By Jonathan Teller-Elsberg, CPE Staff Economist

In the U.S., talk of tax reform usually means debates about taxes on income and wealth. A little less common are discussions of flat taxes and a shift from payroll, income, investment, or property taxes to consumption taxes—that is, a federal sales tax.

We’ve seen the miserable results of lowering taxes on the rich, and we’ll be dealing with the massive government debts for decades to come. Flat taxes are simply another way to lower taxes on the rich, under the guise of simplifying the tax system. (To be sure, simplifying taxes is not exactly something to dismiss out of hand—the system is far more intimidating than it should be.) The supposed advantage of a shift to consumption taxes is that the shift away from payroll and/or other taxes should lead to more jobs. This is because a payroll tax makes it “expensive” for a business to have an employee. If the payroll tax is reduced or eliminated, the business will have more money available to hire additional workers. The problem with consumption taxes is that they tend to be regressive—meaning that they fall hardest on lower-income members of society.

Another type of tax reform that deserves more attention is the environmental tax shift (ETS), also known as the green or ecological tax shift. The idea here is to increase taxes on activities that result in environmental damage and use the money generated to reduce other taxes by the same amount. As with the consumption tax idea, most proposals center around reducing payroll taxes.

By Thomas Masterson, CPE Staff Economist

The Basic Income Guarantee (BIG) is just what it sounds like: a guaranteed basic level of income. Most proposals suggest that it be distributed to every adult citizen without regard to income or wealth. BIG would replace all of the social programs currently in place that attempt to reduce or eliminate poverty, such as welfare, unemployment insurance, and Medicaid, with a monthly payment sufficient to lift an individual out of poverty.

Interestingly, this proposal is drawing support from the right as well as the left (leftists have long supported versions of this proposal). Even Charles Murray (think “The Bell Curve”) likes it: he has written a book about it in which he seems to say that he thought it up, calling it “The Plan.” By eliminating the need to monitor for fraud and abuse of the system, BIG would actually be cheaper than our current system of multiple benefits and eligibility criteria. BIG would also get rid of the disincentive to work built into the welfare system–often working for pay leads to a decrease in benefits, making work a less attractive option. And, by allowing people to decide on their own what to use the money for (though Murray’s plan calls for $3,000 of his $10,000 annual grant to be spent for health insurance), BIG would increase efficiency. Lefties like it because it frees people from dependence on employers and gives them more bargaining power to demand good working conditions and better pay.

by Jonathan Teller-Elsberg, CPE Staff Economist

After eighteen years holding the reigns of power, Alan Greenspan has finally ended his career as chair of the Board of Governors of the U.S. Federal Reserve, as a result of legal limitations on the length of his term. As the person in charge of monetary policy in the U.S., Greenspan was, by some accounts, the single most powerful person in the world economy. His term as chair coincided with the early 1990s recession that contributed to George H. W. Bush’s loss to Bill Clinton; continued through the longest continuous period of economic growth in U.S. history; included the multi-billion dollar bailout of the Long-Term Capital Management hedge fund in 1998; persisted through the internet-inflated stock market boom and bust as the new century began; and has finished in the current period of feeble recovery.

By Yahya Mete Madra

The 1990s saw a revived interest in the writings of Karl Polanyi (1886-1964). Given that capitalism is still in the process of being re-instituted everywhere across the globe; given that the expansions and contractions of capitalism cause endless social dislocation; given that the
recent wave of financial liberalization, labor market deregulation, and privatization has led to grave socio-economic costs; this revived interest should not be surprising. Those who wanted to understand and devise alternatives to capitalism have found it useful to revisit Polanyi’s account of the emergence of capitalism as laid out in his The Great Transformation.

Polanyi maintained that exchange, along with redistribution and reciprocity, has always existed, albeit embedded in different socio-institutional forms. Nevertheless, during the nineteenth century, first in England and then in Western Europe and North America, as land, labor, and money gradually became commodities, the price mechanism and the profit motive, rather than the deliberation and negotiation of diverse social interests and concerns, became the structuring principle of the society. The market society, for Polanyi, was not only undesirable but also was socially and ecologically unsustainable. He believed that the society will develop spontaneous responses to protect itself against the advent of the logic of the markets.

(4/21/04)
By Alanna Hartzok, Co-Director, Earth Rights Institute

One day, while riding horseback in the Oakland hills, merchant seaman and journalist Henry George had a startling epiphany. He realized that speculation and private profiteering in the gifts of nature were the root causes of the unjust distribution of wealth. The insights presented in Progress and Poverty, George’s masterwork, launched him to fame. His policy approach was known at that time as the “single tax” - meaning that taxation should be shifted off of labor and onto the socially created surplus value of land and other natural resources. His message reached as far as the great Russian Leo Tolstoy, who was so taken with the idea that he frequently referred to George and “Georgism” in his novel Resurrection.

During the last 20 years of the 19th century George built an impressive populist movement bent on solving the problem of the wealth gap, and he died in 1897 while campaigning to be New York’s mayor. The “Georgists” were determined to free labor and all productive effort from the burden of taxation. Land and natural resources were gifts of nature to be fairly shared by all. The role of government would be to secure democratic rights to the earth for all people via the collection of resource rents, the surplus value accruing to natural wealth, which would be distributed in social goods, services or by direct citizen dividends.

But just as this solution to the rich/poor gap was gaining momentum, the Georgist movement was stopped in its tracks. Wealthy individuals poured their money into leading schools of economics to encourage the writing of treatises against George and the movements he had spawned. The ethical perspective that land is a common heritage and the policy approach of land value taxation were subsequently eliminated from the field of economics. The newly dominant theory focused on only two primary factors - labor and capital - with capital having the upper hand as “employing labor.” “Labor,” of course, is quite capable of self-employment given access to land. This is what the elites and the plutocrats feared most - that labor would gain full power to directly produce capital given conditions of equal rights to the resources of the earth.

Despite the elites’ success in mangling the science of political economy, the Georgist paradigm has had some influence over the years. The 1887 Wright Act in California enabled bonds raised by local irrigation districts to be paid from the increase in land values, resulting in a powerful and beneficial land reform, though this equitable and successful public finance approach was eventually undermined by private banking institutions. Now taxpayers nationwide subsidize the irrigation needs of agribusiness. Alaska’s state constitution vests the ownership of oil and other natural resources in the people as a whole and the state’s Permanent Fund distributes substantial oil revenue as citizen dividends to state residents. With no state income or sales taxes, Alaska has been the only state where the wealth gap has decreased during the past decade. This is essentially a Georgist paradigm approach, and surface land values and electromagnetic spectrum rent could be similar sources for citizen dividends.

Meanwhile, Georgist economics is again making steady progress. In Pennsylvania, eighteen municipalities, including Harrisburg and Allentown, have been revitalizing their local economies via property tax reform which shifts taxes off of homes and the built environment and onto the value of land sites. Movements for land value taxation are growing now in Scotland, UK, Ireland, South Korea and elsewhere, while Venezuela, Russia and other countries are pushing for greater resource rents from oil and mineral resources. Georgist economics is increasingly recognized as a key to economic democracy based on equal rights to the earth for all.

Recommended:

Mason Gaffney, Fred Harrison and Kris Feder, The Corruption of Economics. Shepheard-Walwyn Ltd., 1994.

Henry George’s books can now be read online. Hardcopies of his books, and those of other Georgist authors, can be ordered from The Robert
Schalkenbach Foundation (212-683-6424).

J.W. Smith, Economic Democracy: The Political Struggle of the Twenty-First Century. This excellent Georgist paradigm book can be ordered from The Institute for Economic Democracy (866-588-7445).

Kenneth C. Wenzer, ed. Land Value Taxation. M.E. Sharpe, 1999.

Georgist paradigm articles and links to other sites: Earth Rights Institute.

The Council of Georgist Organizations 2004 conference will be held in Albuquerque, New Mexico, July 21 - 25. For details: www.progress.org/cgo.

The International Union for Land Value Taxation conference is scheduled for May 27 - 30 in Madrid, Spain. For details: www.interunion.org.uk/.

Leo Tolstoy’s novel Resurrection can be read online.

(c) 2004 Center for Popular Economics

Econ-Atrocities are a periodic publication of the Center for Popular Economics. They are the work of their authors and reflect their author’s opinions and analyses. CPE does not necessarily endorse any particular idea expressed in these articles.

By Geert Dhondt, Staff Economist

Madness surrounds all of us. Luckily the world is full of contradictions. While capitalism, barbarism and madness might seem all around us, so is its opposite, its negation. Thus, if we look hard enough we can recognize the new society in the present and we will be able to see the emergence of revolutionary possibilities. In the U.S., C.L.R. James was one of the first to clearly articulate the importance of independent Black struggles in creating these openings.

C.L.R. James was born in 1901 in Trinidad. In 1932 he left Trinidad for England where he immersed himself in the Pan-African and Trotskyist movements and worked as a cricket reporter. In 1938, on Trotsky’s request, he came to the U.S. to reinvigorate the American Trotskyist movement. By the time James was deported in 1952, he had broken with Trotsky’s conception of the Soviet Union as a degenerated workers’ state and developed instead a critique of state capitalism; he had broken with Lenin’s conception of the vanguard party and emphasized a different role for Marxist organizations and intellectuals; he also developed an important analysis of the role of independent Black struggle.

By Jim Crotty, CPE Staff Economist

The Keynesian economics that Paul Samuelson popularized in the United States after World War II was a sanitized version of the radical critique of capitalism offered by Keynes himself. John Maynard Keynes’s deep-seated attack on free-market economics led him to call for direct government control of the lion’s share of investment spending, industrial policy, a confiscatory wealth tax, strict control over cross-border financial flows and managed trade. But US “Keynesians” defanged his attack, arguing that if the government regulated interest rates and budget deficits, all other decisions could be left to market forces.

In the aftermath of World War I, the British economy experienced sluggish growth and high unemployment until war preparations began in the late 1930s. The conventional analysis of the time was that high unemployment was caused by high wages that priced British products out of the global markets they traditionally dominated. The conventional solution was to smash the
strong unions in these industries.

Keynes argued that the correct policy was for the government to initiate a large long-term program of government infrastructural investment. This would reduce unemployment not only through government employment, but also by the spending of the newly employed - the famous Keynesian “multiplier” effect that has puzzled generations of students. Focus on large-scale government investment was not just a post-war expedient for Keynes. He supported this policy until his death in 1946.

Keynes believed that free-market capitalism was subject to extreme instability primarily because business investment spending was inherently volatile. To build a factory, a firm must gamble that the future profits from the factory will more than compensate for its cost. But firms cannot know what future profits will be. As Keynes put it, “About such matters, we simply do not know.” Therefore, investment can only be based on hunches or guesses about the future, and these are profoundly influenced by waves of optimism and pessimism in market psychology. Boom euphoria leads to over-investment and excess capacity, while fear of loss in the downswing causes investment to plummet. Keynes considered stock markets to be “gambling casinos” whose instability only made investment more volatile.

Keynes thought that there were almost unlimited opportunities for productive state investment - in education, housing, transportation, utilities, health, culture and so forth. He believed that if the government could keep public investment on a steady growth path, this would provide a center of gravity for private profit expectations that would drastically lower private investment instability. In 1928, he proposed a “National Investment Board” to plan and control a massive investment program, arguing that “an era of rapid progress in equipping the country with all the
material adjuncts of modern civilization might be inaugurated which would rival the great Railway Age of the nineteenth century.”

In 1935 in The General Theory he said: “I expect to see the state … taking an ever greater responsibility for directly organizing investment.” In 1943 he argued that “if the bulk of investment is under public or semi-public control and we go in for a stable long-term programme, serious fluctuations are less likely to occur.” Keynes specifically rejected the idea that government should rely on changing interest rates and budget deficits to control instability, the macro policy attributed to him by Samuelson.

Keynes understood that capitalists and renters would be likely to ‘run away’ from Britain in reaction against his program, causing skyrocketing interest rates and plummeting investment. To prevent this, he called for an ironclad regime of government control of financial flows into and out of Britain, and saw to it that every country was given the right to control capital movements by the Bretton Woods Agreement that created the International Monetary Fund in 1944.

The economic prospects of the majority of people would be greatly improved if government policy followed Keynes’ more radical vision, rather than the timid version promoted in nearly all college textbooks.

Reference:

Jim Crotty. “Was Keynes a Corporatist: Keynes’s Radical Views on Industrial Policy and Macro Policy in the 1920s,” Journal of Economic Issues, September 1999. [pdf]

Keynes’ most famous book, The General Theory of Employment, Interest, and Money, is available online.

(c) 2004 Center for Popular Economics

Econ-Atrocities are a periodic publication of the Center for Popular Economics. They are the work of their authors and reflect their author’s opinions and analyses. CPE does not necessarily endorse any particular idea expressed in these articles.

By Alejandro Reuss

Mention the name of Leon Trotsky and you might be asked, “Didn’t he have an affair with Frida Kahlo?” (He did.) Or, “Wasn’t he murdered with an ice pick?” (He was.)

He was also, however, known to dabble in revolutionary politics.

The triumph of Stalin and his falsification of history have obscured Trotsky’s importance, writing him out of the Russian Revolution and airbrushing him from photos of the era (especially those showing him with Lenin). Trotsky was a principal leader of the workers’ council, or soviet, movement in Petrograd (St. Petersburg) during the revolutions of 1905 and 1917, the main strategist of the October 1917 insurrection and the principal architect of the Red Army, Lenin’s most prominent lieutenant until the latter’s death in 1924, and a leading opponent of Stalin’s rise to dictatorial power. In short, he was one of the major figures of the 20th century.

Trotsky is mainly known for his thought on two key issues: the possibility of socialist revolution in “backward” Russia, and the rise of the bureaucratic dictatorship led by Stalin. Trotsky did not just apply Marxist theory by rote, but added new and “heretical” ideas needed to explain new phenomena. His balance sheet on the 1905 revolution, Results and Prospects (1906), argued that Russia’s leaps-and-bounds industrialization had set the stage for a revolution in which the proletariat - rather than the bourgeoisie - would be the protagonist. He would be vindicated by the October Revolution of 1917.

His masterpiece, The Revolution Betrayed (1936), presented a withering critique of the Soviet bureaucracy. In the long run, Trotsky argued, either the working class would overthrow the bureaucracy and clear the way for renewed progress toward socialism or the bureaucracy would formalize its privileges by reinstituting private property and restoring capitalism outright. Trotsky did not imagine that the system of bureaucratic rule would last another half century, but of course, he was eventually vindicated on this point as well.

Exiled from Russia in 1929, Trotsky lost the power and prestige of high position in a revolutionary government, and his efforts to build a new world party of socialist revolution (the “Fourth International”) could offer little to rival the rising tide of reaction worldwide. Nonetheless,
he considered this “the most important work of my life - more important than 1917, more important than the Civil War.”

In the founding program of the Fourth International, known as the Transitional Program for Socialist Revolution (1938), Trotsky emphasized that while mass struggles continued to rage, they were not imbued with the perspective of overturning capitalism and creating a new society. He argued, therefore, that the central task for revolutionaries was to build “bridges” from current consciousness to revolutionary politics. This did not mean, in Trotsky’s view, repeating radical-sounding slogans from the past, postponing revolutionary aims in favor of immediately “winnable” struggles, or pining for a reformed version of capitalism. Rather, it meant that revolutionaries must frame their positions on the burning issues of the day in a way that connected these issues to the aim of revolution.

Trotsky’s life and politics ought to be viewed critically, especially in light of his role (with Lenin and the Bolsheviks in general) in building a state machine that would grow into a totalitarian juggernaut. Ideas like those in the Transitional Program, however, should be put to work in the
present whatever we conclude about the author’s past. Trotsky was not the only, or even the first, theorist to insist on drawing the connections from every immediate issue to the fundamental problems of capitalist society. I learned this lesson from the writings of Trotsky and from his disciples. Today’s revolutionaries need not learn this from Trotsky as well - but those who do not learn it from him should make sure to learn it from someone else.

Further reading by and about Trotsky:

Two good short introductions to Trotsky’s life and thought are:
Phil Evans and Tariq Ali, Introducing Trotsky and Marxism, Icon Books, 2000.
Ernest Mandel, Trotsky as Alternative, New Left Books, 1995.

The following are Trotsky’s most important books (all published by Pathfinder Press):
The History of the Russian Revolution.
My Life: An Attempt at an Autobiography.
The Permanent Revolution and Results and Prospects.
The Revolution Betrayed: What Is the Soviet Union and Where Is It Going?
The Transitional Program for Socialist Revolution.
For an excellent collection of these and other writings online, see The Leon Trotsky Internet Archive.

Isaac Deutcher’s monumental three-volume biography of Trotsky (Oxford University Press, 1970) is the definitive work on the subject:
The Prophet Armed - Trotsky: 1879-1921
The Prophet Unarmed - Trotsky: 1921-1929
The Prophet Outcast - Trotsky: 1929-1940

(c) 2004 Center for Popular Economics

Econ-Atrocities are a periodic publication of the Center for Popular Economics. They are the work of their authors and reflect their author’s opinions and analyses. CPE does not necessarily endorse any particular idea expressed in these articles.

By Suresh Naidu, CPE Staff Economist

Piotr Kropotkin is famous within two groups that one never sees at the same party. The biologists and evolutionary anthropologists who derive inspiration from Kropotkin’s research into the evolution of human sociality rarely intersect with the anarchists and political theorists who respect Kropotkin’s views on revolutionary change and the abolition of the state and private property. However, there was no disparity for Kropotkin, who derived many of his political beliefs from his studies of human and animal evolution.

Kropotkin had a long and interesting life. Born in 1842 to Russian nobility, he began his career as an exemplar of his class, serving in the military during the Crimean War, but eventually wound up working with the revolutionary Jura Federation. His politicization followed lengthy and difficult travels, during which he developed a deep affinity for the Russian peasants and workers he encountered. Later cut off from any political influence by Lenin, Kropotkin’s last writings were notable predictions of the tyranny that would result from the Bolshevik retention of wage labor and reliance on state coercion.

A large portion of contemporary social and biological science follows in the footsteps of Kropotkin’s academic work. Responding to the social Darwinism of his day, he wrote his primary scientific work, Mutual Aid: A Factor of Evolution, arguing that a major factor in the evolutionary success of humans was a predisposition to cooperate and share, without the need for institutions such as the market or the state.

Modern day research has provided overwhelming evidence to corroborate Kropotkin’s thesis. Anthropologists and archaeologists have found widespread decentralized cooperation within many non-industrial societies. Experimental economists have definitively shown that people are not classically selfish, with people often giving away substantial amounts of money and actively cooperating in laboratory settings, even against their narrow self-interest. This is not merely “enlightened self-interest,” rather a deeply seated desire for fairness as an end in itself (this desire may or may not have roots in biology). Biologists have acknowledged that competition among early human groups could have contributed to the evolution of cooperative behavior on the part of individuals.

Much of this literature has paralleled Kropotkin in refuting a naive socio-biological theory of human behavior. Rather than concocting stories that rationalize the current order in terms of fitness, it points to potential ways of organizing human interactions that can replace the dominant institutions of our day with something more democratic and egalitarian. Kropotkin built his belief in anarchism on the knowledge that people can organize their lives without self-interest or governmental coercion as prerequisites for large-scale cooperation.

There are many current examples of such cooperation. Elinor Ostrom and colleagues are documenting community management of scarce resources and public goods provision without the aid of governments or market pricing systems. Steve Lansing examines how Balinese rice farmers coordinate their complex ecological interactions with a few simple rules. Yochai Benkler identifies Open-Source Software as an example of large-scale non-market, non-state coordination. Erik Olin Wright and others study how participatory directly democratic institutions function to solve practical problems from Kerala to Chicago. Human institutions that harness the natural propensity to cooperate (and sometimes punish those who do not) are quite pervasive.

The political implications Kropotkin drew from his work are not the ravings of a lunatic egghead. Anarchism is commonly caricatured as naive, or worse, a haven for would-be terrorists. Instead, the politics advocated by Kropotkin are best interpreted as general principles. First is an ethical imperative, that there is no policy substitute for social norms and ideals of behavior - a belief that one’s personal behavior can either reinforce or undermine the status quo. The second is a deep suspicion of facile state or market fixes to social problems. Together, these imply respecting and considering people’s abilities to develop community solutions and autonomously self-organize before suggesting “policy” or “market” solutions. Kropotkin’s mix of science and politics are not vestiges of a bygone age, but very relevant ideas deserving greater intellectual and political engagement.

References:

Stephen Jay Gould, “Kropotkin Was No Crackpot,” Natural History, July 1997.

For experimental fairness, see Ernst Fehr et. al., “Fairness and Retaliation: The Economics of Reciprocity,” Journal of Economic Perspectives, Summer 2000.

For group selection giving rise to cooperation, see Elliott Sober and David Sloan Wilson, Unto Others, Harvard University Press, 1998.

For egalitarian cooperation in hunter-gatherers, see Christopher Boehm, Hierarchy in the Forest, Harvard University Press, 1999.

The remarkable case of Balinese rice farming is found in Steven Lansing and John Miller, “Cooperation in Balinese Rice Farming.”

For community solutions to public goods problems, see Elinor Ostrom’s classic Governing the Commons, Cambridge University Press, 1990 and Trust and Reciprocity, Russell Sage Foundation, 2003.

For Open-Source Software, see Yochai Benkler, “Coase’s Penguin, or Linux and the Nature of the Firm,” 112 Yale Law Journal 369 (2002).

For the efficacy of direct democracy, see Erik Olin Wright and Archon Fung, Deepening Democracy, Verso, 2003.

(c) 2004 Center for Popular Economics

Econ-Atrocities are a periodic publication of the Center for Popular Economics. They are the work of their authors and reflect their author’s opinions and analyses. CPE does not necessarily endorse any particular idea expressed in these articles.

By Gerald Friedman, Professor of Economics, University of Massachusetts, Amherst

The strength of conservative economics comes from methodological individualism. By treating economic outcomes as the product of individual choice subject to constraint, conservatives treat all social interference, either by government or by concentrations of private power, as illegitimate interference with individuals’ choices. Any reformist economics must begin by challenging this individualist premise.

Beginning in the 1880s, Richard Ely (1854-1943) articulated a different vision for a reformist economics built on Aristotle’s dicta that man “was formed for society.” Ely led a group of younger economists who founded the American Economic Association in 1885 to promote economics as a social science, uniting labor, scholarship, and the church to advance social reform. Ely declared that the “younger political economy no longer permits the science to be used as a tool in the hands of the greedy and the avaricious for keeping down and oppressing the laboring classes. It does not acknowledge laissez faire as an excuse for doing nothing while people starve.”

By Léonce Ndikumana, Assistant Professor, University of Massachusetts, Amherst

American interest in Africa has been traditionally peripheral, opportunistic at best. In the past, aid to African countries supported client regimes that the United States and its allies needed to prevent the expansion of communism on the continent, as in the case of former Zaire under the late Mobutu Sese Seko. In these circumstances, the objective of economic aid was not economic development of African countries, but instead aid often contributed to propping up dictatorships that catered to the interests of the West.

By Michael Ash, CPE Staff Economist

A recent finding from two researchers at the Federal Reserve Board implies that rich people did all of the extra consuming during the 1990s “boom.”

They reached their conclusion by looking at savings, the flip side of consuming. While the historic pattern has been that the rich save and the poor eat hand-to-mouth, the pattern of savings stratified by income class reversed over the past decade. The savings rate of high-income households declined very sharply, and the increased savings of the poor partly paid for the upper-class consumption spree.

The overall savings rate (savings as a percent of income) fell from 5.9 to 1.3 percent over the 1990s. Table 1 shows savings stratified by income class.

By Liz Stanton, CPE Staff Economist

1. You’ve Been Psychologically Conditioned To Want a Diamond. The diamond engagement ring is a 63-year-old invention of N.W.Ayer advertising agency. The De Beers diamond cartel contracted N.W.Ayer to create a demand for what are, essentially, useless hunks of rock.
2. Diamonds are Priced Well Above Their Value. The De Beers cartel has systematically held diamond prices at levels far greater than their abundance would generate under anything even remotely resembling perfect competition. All diamonds not already under its control are bought by the cartel, and then the De Beers cartel carefully managed world diamond supply in order to keep prices steadily high.