Sunday, June 23, 2013

Calm Down about the Debt, Part 3: The case for entitlement reform and eliminating FICA tax

The Federal Insurance Contribution Act (FICA) tax was created to fund our two large social insurance programs, Social Security and Medicare. Over time, as receipts from these taxes exceeded disbursements, they  were "saved" into two trust funds, the Social Security Trust Fund, and the Medicare Part A trust fund. Both funds consist of special, non-marketable US Treasury Securities, that are now (or soon will be) gradually amortized to meet the obligations of both of these programs, as disbursements exceed tax receipts going forward. However, both programs were constructed under flawed economic understandings of the realities of the way in which a sovereign currency issuer, such as the United States, spends money.There is no financial meaning to a sovereign currency issuing nation saving its own money. The US Federal Government is the monopoly issuer of US dollars, and thus has absolutely no need to "save" them for a later date. This is roughly akin to someone holding their breath and claiming to save the air for later.

Unfortunately, the debates on "entitlement reform" among the economic illiterates in Washington have been totally misplaced and useless. Because so few people (D's and R's alike) understand how the US government spends money, almost the entire discussion has been about increasing taxes or decreasing benefits. Neither of these changes are actually necessary, while the real problem, the absurdly high cost of healthcare provision in the United States, has been mostly ignored. Ok, now lets get onto the details.

It is legally true that both trust funds exist, and will in fact be drawn down to meet the liabilities of their respective programs. For example, what the Social Security trust fund basically says is "The Social Security Administration has the right to write $2.3 trillion in Treasury checks." However this accounting reality has no real economic meaning, since a sovereign currency issuing nation always has the ability to meet any and all of its liabilities anyway. No Treasury check will every bounce, regardless what "fund" it is drawn from. Additionally, a broader look at federal spending operations reveals that there is no distinction between how the Treasury writes checks for SS recipients/Medicare providers, or how it writes checks for anything else. The Treasury writes the checks, and the Federal Reserve clears them, pure and simple (more on these operations later). The fact that some people at the CBO and Social Security Administration choose to account for this spending by adding or subtracting numbers out of a certain funds does not mean that any special spending is going on. This is because all dollars are fungible; there is no difference between dollars spent on a tank for the military, or an air tank for a Medicare patient.

Unfortunately, high unemployment is the norm, and is directly caused by the government taxing too much/spending too little. Therefore, the current funding scheme basically serves to delay consumption. This may be useful during times of high inflation, but this is the exception, rather than the rule.  This is also a ridiculous government policy, since any society can always afford to consume everything it is capable of producing. Will the future American economy be able to send real goods and services back in time? Of course not!

Where the trust funds do have value is in politics. In fact, FDR and his economic advisers quickly realized the economic realities of their new Social Security program.Mariner Eccles, the Chairman of the Federal Reserve at the time, desperately pleaded to FDR to get rid of the payroll tax system of funding social security, since these new taxes were draining aggregate demand during Great Depression, a time when it was desperately need. Nevertheless, FDR correctly assessed that having Americans think they were "saving" or "pre-funding" their retirements was critical to the survival of the program.  By creating a sense among American taxpayers that they were "entitled" to the retirement benefits they had paid for in taxes, FDR knew attempts to unwind these programs would be politically suicidal. This structure was an asset to the program for most of its existence, although it has always been open secret among policymakers that such a structure is unnecessary. The reason that I feel the need to move beyond this way of thinking is because I fear that the perception of a need to fund these programs through dedicated income streams of the FICA tax and trust fund amortizations has now become more of a liability than an asset to their existence.

I regularly hear well meaning Americans worrying that their benefits will not be there for them, because at some point disbursements will exceed receipts, and the trust funds will be fully amortized (ie "Its going broke ahhhh!!!") There is a widespread misconception that SS and Medicare have a special economic status, and must be funded through dedicated revenue streams. The reality is that accounting for these programs in this way was a political decision, and we can just as easily decide to no longer do so, by paying for these programs out of revenue from taxes and bond sales, just like everything else. Much of this fear emanates from decades of right wing scare tactics, led by Pete Peterson and his myriad of propaganda outlets with innocent sounding names. While many of their tactics have been downright dishonest and manipulative, I also feel that Democrats that try to fight back are also standing on shaky ground when they neglect to explain the financial imperatives of a currency issuing government. So while the oft-touted fact that a modest increase in the cap on income subject to the OASDI portion of the FICA tax will make SS solvent until 2075 is true, I feel that this is not a necessary point to be making.

Another reason why the current funding scheme is undesirable is because FICA is a regressive tax. Because the amount of income subject to the OASDI portion of the tax is capped around $110,000 but has no floor, it fall disproportionately on those who work for a living and live on modest means. And at this point, it doesn't take a PhD in economics to realize that working class Americans have been getting the shaft since 1980 (hmmm, what happened then??) As I see it, the only real way that this generation of Americans will ever get the standards of living they rightly deserve is by decoupling SS funding from the FICA tax, and greatly increasing the payments made to retirees. It is my sincere hope that the millions of working Americans who never earned what they deserved may finally get just compensation in their golden years. My proposal then, is to eliminate the FICA tax system entirely, and fund SS and Medicare entirely through general revenues. As a precursor, it will be necessary to educate the American public about the realities of modern public finance.

So the next time someone asks you about the perils of the dwindling trust funds, ask them "where is the Department of Defense Trust Fund? How about the Farm Bill Trust Fund?" There are no such things, because money for these programs is simply appropriated and spent, without any savings or planning ahead involved. There is absolutely no reason that we could not fund SS and Medicare in the exact same ways, without the misleading accounting gimmicks that are the trust funds.

Friday, June 21, 2013

The case for permanent ZIRP

Cricisms of the Fed's current zero-interest rate policy (ZIRP) abound, especially among older investors with more traditional (ie gold standard) ways of thinking. I find this to be quite odd coming from many market participants, who in most circumstances would advocate for less government intervention in markets. I would advocate making this zero price for base money a permanent policy going forward.

Arguable the most important price in the world in the price of base money, ie the Federal Funds Rate. This rate sets the base price of borrowing for all banks, which then go out and sell loans with an interest rate somwhere above this rate, the higher the better. The Funds Rate is a policy tool set by the Federal Open Market Committe (FOMC) in its meetings, held every six weeks or so. Since the economic crisis of 2008, the Fed Funds rate, actually the target rate to be precise has been between zero and 25 basis points (0.00%-0.25%). This means that banks can aquire their needed reserves basically for free.

The reason I think zero should permantly be the base rate, is because this base money is risk free. Reserves are risk free assets that are instantaneously provided to banks in unlimited amounts by the Federal Reserve. The reserves are liabilities to the Fed, but only so far as the Fed promises to exchange X$ of reserves for....X$ of reserves, so it is not a liability in any real sense of the word. Additionally, the Fed arbitrarily setting a base rate is a subsidy to passive savers and safe asset holders. Modern money itself is not a store of value or investment vehicle, its a policy tool for directing economic activity and achieving public policy ends. There is no shortage of non-dollar, dollar denominated investment vehicles that investors can seek as a store of value.

The one positive effect the ZIRP and QE had was to increase bank net earnings. Even though the Fed removed earning assets from their balance sheets, the net effect of apparently permanently low interest rate policy has been to lower rates paid on bank liabilities MORE than the rates have fallen on bank assets. That is to be expected—banking is a highly oligopolized business (a handful of banks control “market” rates, as discussed below) so they are able to prevent retail loan rates from falling as much as deposit rates fall. Further, banks are jacking up all kinds of deposit and checking fees—which works so long as they all do it lockstep (if a major bank or if a lot of small banks refused to do it, they wouldn’t be able to make the high fees stick). The same thing happened back in the early 1990s as the Fed kept rates low to increase bank earnings so they could be recapitalized. It is implicitly a bank rescue policy.

Randy Wray blog post, August 1, 2012

This increase in net bank earnings is a aggregate demand leakage, because these earnings are not then “spent” by the bank. Normally, once persons spending equals another person’s income, but in this case the money just sits in the banks own account.  For example, if I buy a security for 96 cents on the dollar, the Fed buys it from me for 98. I get 2% interest instead of the 4%, had I held it to maturity. The Fed then allows the security to mature on its books, earning 100 cents while only spending 98, but this 2% is sent back to Tsy anyway!!!

While I personally have no interest (no pun intended) in using government policy to remunerate the asset holding classes by paying higher interest rates, at least there is a chance that this money will be spent. If anything there already is a severe institutional bias towards the asset holding classes in America (especially in the Federal Reserve structure), and these people are the least in need of favorable government policy. But when the Fed earns interest, it gives it back to the Treasury, which cannot just go out and spend ad hoc. Thats why Quantitative Easing (QE) is such a weak policy operation.

Most importantly though, the base rate of borrowing should be zero, so the private sector can price in risk on all its lending activites after this, as it deems appropriate. I cannot think of any good reason for the base price of money to be anything other than zero, or arbitrarily raised and lowered as it is now.

While recent crises have demonstrated that private sector risk pricing is far from perfect, it seems to me that the market should be allowed to price its own risk without the Federal Reserve arbitrarily changing the price of base money, which has enormous effects across the macro economy. When the Fed raises or lowers its rates, it sends shockwaves through the financial sector, as firms scramble to reprice their books. This fed policy only serves to support the term structure of interest rates at higher levels than would be the case. And, since longer term rates influence an enormous amount of private lending, especially mortgages, higher term rates only serve to adversely distort the price structure of real goods and services.

Ostensibly, the Fed raises the cost of base money to slow down inflation. However, its sucess in doing so over the years has been mixed at best, and a rapid, across the board increase in the price level that many institutional economists and investors fear has not been seen in decades.

Therefore, I believe that fiscal policy is a much more sensible way to control inflation as it pops up and down in various sectors, such as energy, equities, mortgages, and healthcare. Fiscal policy, especially taxation, is a much more precise tool than monetary policy. Tax rates can be raised, lowered and indexed, to target specific sectors that are growing too fast, without impacting the economy as a whole. Trying to slow inflation in certain sectors of the economy by raising the base rate of money as we do now, is akin to trying to eliminating an anthill with a B-52 bomber (or doing open-heart surgery with a chainsaw, etc) : it is very impresise, and you end up hitting a lot more things than you wanted to.

For example, I have heard some say that Greenspan should have raised rates in the 2000's when the housing bubble was inflating like crazy. While there definately should have been some action by the government to deflate the bubble, raising rates for the entire economy would have been too disruptive, especially as American consumers accumulated more and more debt. Instead, Congress should have scrambled to eliminate the mortgage interest deduction, and begun taxing financial transactions related to RMBS to slow down the secondary mortage market (and enact new regulations too, but that takes too much time). I believe a similar prescription is in order for the healthcare sector, which for decades has seen its prices rise way above CPI. Some sort of tax on healthcare provision would help to slow down price growth in this market, with the added bonus of putting our federal spending on a more sensible path.

Thursday, June 20, 2013

Some more macro- calm Down About the Debt, part 2

It has long been understood that those who control the money supply can control the behavior of individual humans and society at large, for whatever they want to. It is now a good thing that such control is held by a democratically elected body.

Government borrowing is not really a net transfer out of the economy; the only concern may be the burden of interest payments, which just another form of government spending and is really a political problem. Bond holders are likely to be those that are already wealthy, and thus more government borrowing will, at least when it comes to paying interest, benefit the wealthy. However if this borrowed money is spent correctly it can do just as much to strengthen the poor and middle class, and higher levels of inflation may  negate the real rates of return that the wealthy receive on their treasury holdings anyway. Additionally, about $2.3 trillion of this debt is held by the Social Security and Medicare Part A Trust funds. The interest paid on these bonds is accrued in the trust funds and then passed on (as a higher provision of goods/services) to the recipients of these programs, the vast majority of whom are middle class Americans.

Now the Medicare/Medicaid scheme leads to the classic problem of a public/private partnership. Government is obligated to spend money into the healthcare sector, but has little say in how this privately controlled sector operates. The incentives are skewed away from efficient provision and towards lobbying for more funding and less oversight. This is the primary driver of our deficits. Even then, the problem is not that we are spending too much money, rather the problem is that too much of this nation’s real resources (people’s time and energy) is being wasted providing healthcare in an inefficient way. It would very interesting to see how much money could be saved if a single payer system, like the British NSA was adopted. (Or if a system like the VA’s Tricare was created at the national level and funded as Medicare is.)

This also may be a political issue if a lot of money is being taxed out of the US economy or created, diluting the value of currency in circulation, to make interest payments to bondholders overseas. This has led to a great deal of concern among Americans, but the reality is that China only holds about 10% of all our debt, and uses this lending to subsidize the American consumer economy, which in turn keeps Chinese unemployment low, and helps the government avoid a political crisis that could arise from high unemployment. (some argue the largest thing that the Chinese government fears is high unemployment. More than anything this could threaten the politburo’s power. )

Additionally, one of the reasons that the Chinese are now buying American public debt is that they got badly burned buying private sector debt after the 2008 financial crisis. Chinese investors got suckered into buying a lot of RMBS (and other instruments that were contaminated by them) so are now putting their money in much safer Tsy securities. 

Also, the Chinese have one of the highest personal savings rates in the world. Part of this is because of their cultural affinity for savings from a buddhist/taoist culture, but it is also because of a lack of government safety net. There is no Chinese counterpart to Social Security or Medicare. Therefore, the onus on providing for the future is entirely on individuals and families. Of of the ways the Chinese save is by putting their dollar holdings in a savings account at the Federal Reserve, otherwise known as buying Treasury securities. If and when the Chinese decide to start spending these US dollars (ie stop "buying our debt"), they can do two things: (1) Use these dollars to buy American goods and services (or any goods and services denominated in dollars), which will result in increased demand for US goods and services and a reduction in domestic unemployment or (2) Sell dollars in exchange for foreign currencies, which in the absence of countervailing actions by the US Fed, will result in a lower valued dollar, which in turn will make US goods and services more competitive globally, and thus domestic unemployment lower. As you can see, both scenarios resulting from the supposedly disastrous "Chinese dumping our debt" scenario, are quite positive, and similar in outcome. A weakening in the dollar would also make our imports, ie OIL, more expensive, which would be a problem. However, it is my desperate hope that by the time this happens, the US will have drastically reduced its fossil fuel consumption anyway; if not, we will have much more serious problems to deal with than debt and interest rates.

Saturday, June 15, 2013

Spending priorities part 2

The reality of our modern mixed economy is that not all socially desirable investments yield short term profits, and thus will not be pursued by the private sector, especially publicly traded companies, who singularly focus on quarterly returns. This is where the public sector steps in and makes the big, risky, or long term investments that society needs, like infrastructure, energy production and distribution, and healthcare.

On the other side of the equation, subsidies (in the form of tax expenditures) to already occurring behaviors, such as the purchase of health insurance and home mortgages, are worse than useless. These do not fit the traditional form of government investing, that is in socially desirable things that the private sector chronically underinvests in. These behaviors would occur sufficiently on their own, thus the addition of a government subsidy is purely a windfall profit to those who partake in these behaviors. They distort natural markets by giving preference to certain kinds of compensation and spending behaviors. There is nothing inherently valuable or chronically underinvested about these behaviors that makes them worthy of public support. Both end up inflating these sectors and leading to enormous waste and oversupply (ie a global housing bubble and subsequent financial crisis).

Some more macro aka Calm Down about the Debt

Think for a moment about where our national currency (dollars, for those of you who may not be economists) originates. Surely not from taxation and borrowing from China or anyone else. Our fiat currency must, first, be issued by the Federal government. That's the only way dollars get into the economy in the first instance. Dollars are extracted from the economy to manage aggregate demand and inflationary pressures, and not, contrary to what  99.9% of Americans wrongly believe, to actually pay for government expenditures.

Check with the guys at CBO, and the Fed's Operations Division, or with the Domestic Operations guys at the Treasury. They will tell you to ask yourself, why would the sole issuer of our currency need revenue per se when it can issue, electronically, all the dollars it needs to fund obligations denominated in dollars. Treasury and the Fed have a spreadsheet they add or subtract numbers from checking and savings accounts for the Treasury, states, firms, households and individuals. If you take $1,000 in cash to the IRS to pay your taxes, they shred it. They don't need that old, dirty money to spend again. 

So yes, the Federal Government is the monopoly supplier of dollars to the rest of the economy. Recipients then consume, save an/or invest/hoard those dollars. Then they can then create jobs. End of Story.

So what matters is not how much money government spends, because it has the power to create an unlimited supply of money. Therefore, concerns about government spending should be about quality, not quantity!!! There is nothing wrong with a democratically elected government being able to be sole issuer of currency and controlling the economy in this way. Civilizations have always used some form of currency, which for most of human history was controlled by private interests. Now we have the advantage of a government able to create money and spending it into the economy in the interest of the general welfare, as our Constitution demands.

What does matter is how that money is spent. Since the supply of money is unlimited, what is limited is human (and some degree physical) energy and intellectual power; those are the true assets that should not be wasted. Human and physical capital can be wasted, but money itself cannot be wasted by the federal government, since it has an unlimited supply. They should be used in the most efficient way possible, and government creating and spending money is just a way that public policymakers control how the human energy in a country is used. Simply, what government spending does is direct the way that time and energy in the country is used.

People still tend to confuse money with wealth, a mindset left over from the gold standard days. But nothing could be farther from the truth. Money is just paper, a certificate to make someone else provide a good or service to you. Thus the holding of money is really a political (power) issue. 

Simply, government spending is a means. It is amoral. What government does with that money is what is important. And whether a dollar is spend by the private sector or the public sector is irrelevant. What matters is how that dollar is spent. For example, very few people think that the government should be spending its money on making computers, or pizza, or any other consumer good for that matter. But no honest policymaker can deny that government spends its money far more efficiently than the private sector when it comes to providing some services, like education, security, or healthcare, to a large population. Part of this is the lack of a profit motive (and executive compensation/dividend payments), larger public oversight, economies of scale, and adoption of best practices that are then applied on a national level.

Lets get macro- Some basic Modern Money Theory (MMT) principles

The US federal government is the monopoly issuer of the dollar, and thus has the ability to spend as much as necessary to achieve full employment of real resources. All the viscous debating over debt and deficits has been entirely misplaced, and it is the under/unemployed who suffer. Fiscal responsibility from the standpoint of the currency issuer means spending until full employment- nothing less an nothing more. The only constrain is the possibility of inflation, if the government spends beyond the ability of the economy to produce real goods and services. However, this risk is about as far away as the moon right now, and our problems are entirely on the opposite end of the spectrum. Here are some explanations of our current sad situation:

A change in composition of the federal debt (ie treasuries into reserves, per Quantitative Easing purchases or vice versa) cannot reasonably be expected to cause inflation. First of all, reserves are not able to be spent any more than treasury securities can be spent. They are both held as interest bearing bank assets. Flooding the system with reserves could only possibly cause inflation by bringing the federal funds rate, and thus the base cost of borrowing, to a level low enough that “too many” loans would be made by banks. If indeed the cost of borrowing is too low, it is possible that many wasteful loans may be created, leading to pointless economic activity.

But even this statement is not correct, because bank lending is never constrained by reserve positions anyway. Due to the realities of our lagged accounting system, where banks make all the loans the can sell, and then settle their reserve positions at the end of a two week maintenance period, the Federal Reserve must always provide reserves to the system to maintain the target rate dictated by the FOMC; these reserve adds are not discretionary. The Fed will always provide reserves to the banking system, at a price, which is somewhere between its  ff target rate and the various discount window rates, which vary based on posting of collateral.  It is the spread between the price of reserves for the bank, and the most expensive loan that the bank can make, that determines lending activity at any point in time. It is possible that even a high federal funds rate, say 5%, will produce as much lending as the current level of 25 basis points (0.25%), if the demand for those loans also exceeds 5%. There may however be a psychological point where the up-front cost of funds is simply too high to allow borrowing to continue, even if real returns remain above zero.

Recent trends should tell us that the opposite is now true- the cost of borrowing is nowhere near low enough to market clear with historically weak demand. And since the supply of loanable funds is never constrained anyway, it is the price, not the quantity that is too low. A simple glance at the level of excess reserves in the banking system should make this obvious: In the 2000's, when way too much lending was going on, there were only a few billion in excess reserves sitting around, now there are trillions of excess reserves and not nearly enough lending. The problem is, as the ISLM model demonstrates, when unemployment is this high, the real cost of borrowing needed to bring it down is in fact negative. Since negative nominal rates are not traditionally feasible, higher inflation is needed to achieve the market clearing, real interest rate point, which lies somewhere below the x-axis.

First of all, that there is nothing “artificial” or “unnatural” about low interest rates; they’re low because demand is low, and the Fed is responding appropriately. If anything, the “unnatural” situation is that rates are too high, because they’re constrained by the zero lower bound (rates can’t go below zero, except for some minor technical bobbles, because people can always just hold cash).
-Paul Krugman blog post, June 5, 2013

The constraint of this “zero lower bound” has been analyzed to death by macro economists including Paul Krugman, yet no current monetary policies that I know of have been able to achieve this negative real rate. The Bank of Japan has been trying like hell to create inflation for 20 years, with absolutely no success. Rates have stayed at zero, there has been no inflation, no currency depreciation, and almost no economic growth. Just as we learned in the case of Japan—which experimented with ZIRP over the past two decades—extremely low rates take more demand out of the economy than they put in. What Dr. Krugman does not say forcefully enough is that is it only fiscal policy, ie increased government spending, that can cause the inflation he sees is necessary to achieve the market clearing negative rate. And in the case of Japan, as my friend tells me, their culture of “shame”, for lack of a better word, leads policy makers to prematurely back off from policy measures that may be correct, but take time to reach full implementation. That is why they have had so many “start and stop” stimulus packages. None of these measures have been enough spending at once to really kick start the economy. They are too cautious to begin with, and without immediate success Prime Ministers will resign, regimes will change, and no lessons are learned.

There are mountains of underutilized capacity in the US and Europe, that cannot be moved without a pull in the other direction: the demand side. Since most demand comes from consumer and government spending, these sources must be stimulated; the former through a large FICA tax cut, and the latter with large domestic spending increases. As a side note, while both policy choices are identical in their addition of reserves to the banking system, I speculate that spending increases will produce more economic activity than tax cuts. This is because government spending that is NOT in the form of transfer payments leads to economy activity in the first instance, whereas transfer payments go directly into bank accounts, where they may be spent, but not necessarily. Recent data has shown that tax cuts and transfer payments are more likely to be saved (or used to reduce dis-savings, ie debt) than spent- although this too is beneficial because increased savings/decrease in private debt can help banks, businesses, and families (the private sector) to repair their balance sheets and begin expanding credit and spending again.

Treasury bonds are the worlds safest asset, and serve as the "foundation" out of which a credit superstructure can be built. Despite what S&P might say, Tsy Securities are rated quadruple A, not triple A or anything less. The chance of default is zero. The yield is set at auction and realized at maturity, and the Fed is always engaging in its own purchases, which makes it easy to offload Tsy securities anytime you want to.

Additionally, special banks called primary dealers and special accounts called Treasury Tax and Loan Accounts must bid at treasury auctions and sell to the Fed at their offered rate during an open market purchase, as a price of being financial agents of the government.

So it is legally true that the Treasury must sell bonds to get money it its account at the Fed, because Congress has forbidden the Treasury to run overdrafts in this account. However, this restraint has no real affect. When primary dealer banks line up at closed Tsy Auctions to "lend" money to the Govt (buy T-Bonds) they are allowed to run an overdraft at the Fed (i.e. borrow reserves directly from the Fed), to effectively borrow the funds from one branch of the Govt to lend to another branch. Since part of the Federal Reserve's jobs is to ensure a stable system of payments, the Treasury, Fed, and the primary dealer banks have the necessary procedures and mechanisms to ensure that the Treasury's General Account is never short of funds for any payment. This is why no Treasury check has or will ever "bounce". 

So MMT is both functionally and normatively true. In the US, where we pledge allegiance to “one nation, indivisible”, it is the US government, and only the government, that sits atop the hierarchy of American society. This democratic government holds the unique prerogative of creating a currency and spending it into society to direct economic activity. All other economic activity stems from this government operation.

Principles, part 3

I think the most pernicious attitude out there right now is that of policy inevitability. Whenever you hear a policymaker, especially an elected representative saying “who could’ve known or I don’t know” you should demand that person’s immediate resignation. There is no such thing as “we don’t know” in regards to modern public policy; government and our financial systems are creations of mankind that we alone can control and are meant to serve us, not the other way around. This laziness on the part of policymakers to understand policy details is such a destructive abdication of responsibility. Every time a member of congress picks up the phone to call a donor instead of calling the congressional research service, he is betraying his constituents. It is the highest responsibility of elected leaders to learn as much as possible about the government that they are taking part in; doing anything less is simply unacceptable. Even worse, there are those that do have an accurate understanding of public policy, but choose to ignore it, and their consciouses, because someone has paid them to do so. I find it hard to believe that so many Republicans are truly that stupid; at least some of them are being willfully ignorant.

Principles, part 2

So again we must remember that markets function as a means to serving an public ends. It’s perfectly acceptable to use free markets to attain maximum production through attainment of higher resource use and production efficiencies. Where it is not acceptable is through labor costs arbitrage. Because all labor is human labor, any country that espouses values of human rights cannot be taken seriously if it allows the free markets to take advantages of disparities in working conditions. If American companies move to China because China has more of the resources they need, or somehow has more efficient business techniques, that is fine. But it is not ok for companies to use this arbitrage opportunity to escape democratically mandated public policy goals, such as pollution controls or labor standards. Not only does this race to the bottom rarely improve human lives in the aggregate, the gains are mostly realized by capital/management. Domestic prices do not decline as much as input costs do when production is offshored. Clothing may be the most obvious example. They are produced incredibly cheaply, and then sold at enormous markups. The gains are captured by the corporation’s management and expressed as bloated executive salaries and shareholder dividend payments. In no way can this be considered public policy; it is in fact just a serious of games played by the political economic elites of the world.

It can often be hard to tell if a modern phenomenon is truly an expression of free markets at work, or political priorities.  A good example was the case of Chinese tires. The Chinese were selling tires in the US that were very cheap, and these low prices were undercutting American producers. The problem is that this is not just market operations, as a causal observer might conclude. It was in fact an expression of an implicit political move by the Chinese government. The government provides some form of subsidy to the Chinese tire industry which allows them to sell tires in the US at below cost of production. American tire companies do not have this privilege, and cannot compete with the subsidized tires. The Chinese government has no natural interest to be doing this. The only reason is that they are actively trying to knock out American competition, so they can expand their share of the world tire market. After the American competition is knocked out, the subsidy can be eliminated and the Chinese can command a larger share of this market. If continued unchecked, this could have the effect of knocking out the American tire industry, not because they could not compete, but because the market was rigged. The US government then imposed an anti-dumping tariff, which was meant to offset the subsidy provided by the Chinese government. While the tariff almost certainly raised the domestic price of tires, it had the effect of saving 1000’s of US jobs in the tire industry, which was especially valuable in an election year (2012).

But I have been in Washington long enough to realize that it is impossible to draw the line at where the government ends and free markets begin. Every trade association and major corporation has a small army of lobbyists who work day in and day out to make government work to their competitive advantage (there are some 22,000 lobbyists in DC). This is in no way a free market. It is called crony capitalism, and observers of today’s economy acknowledge that this is an accurate description of our economy, writ large.

Virgin post- Lets start with some basic principles, part 1

The challenge that lies before us now is to determine whether we want to merely be a collection of individuals or a true nation. As a people we have many ways of building bonds with each other- we share our homes, our dinner tables, our religions, and our cultures with each other. But another way in which we define ourselves as a nation is through our common government. It is here, in Washington DC, that 300 million voices across 3000 miles of land and water coalesce into one sound. It is here that we must again learn to build and retain commitment to our neighbors, regardless of race, income, or sexuality. Without this force we are not likely to remain one nation, indivisible under God.

We now stand at the precipice of ecological disaster. It is in confronting this challenge that we will find our purpose as a new generation of Americans. We are a generation of unprecedented wealth, productivity, and connectivity. Yet despite these successes, none can deny that the challenges that lie before us are more profound than ever before. As it was for our grandfathers, fear itself shall be our only obstacle. If in four short years, America could rise up to crush fascism and emerge as a world superpower, surely today we can reverse our suicidal course of planetary abuse and remake our economy for coexistence with God’s creation.

The toils of our fathers freed us from our Hobbesian bounds and allowed the modern life that we so enjoy. For most of our history as a species, the earth seemed willing and able to destroy humanity. But in our age, this equation has been reversed. But we have simultaneously lost our bounds of humility. Realizing the self restraint necessary to save the planet will also bless us with a higher understanding of what we are capable of.  By healing our planet, we will pave the way for a new understanding of what it means to be humans on this planet earth. God’s greatest gift to us men was companionship and this planet. We shall not let the sins of our fathers restrain us from correcting their errors and healing our only home. Money, which itself is a creation of man, shall be no object in facing this challenge of unprecedented gravity.