Are the Super-Rich Really Job-Creators?

In a New York Times op-ed column today, the ever-surprised economist, Paul Krugman, argued that it makes sense to tax the rich (“Things to Tax: http://www.nytimes.com/2011/11/28/opinion/krugman-things-to-tax.html?_r=1&ref=opinion). To those who say taxing the rich wouldn’t raise much revenue, he counters that “The I.R.S. reports that in 2007, that is, before the economic crisis, the top 0.1 percent of taxpayers — roughly speaking, people with annual incomes over $2 million — had a combined income of more than a trillion dollars. That’s a lot of money…” Let’s note also, that’s from just one-tenth of one percent of taxpayers.

Republican Senator John Kyl is ready with a well-worn comeback. Also in the New York times today, Kyl argues that the Bush tax cuts for the wealthy should be continued because, “increasing taxes on the most affluent Americans, including small-business owners who report business income on their personal tax returns, would undermine the fragile economic recovery. The best way to hurt economic growth is to impose more taxes on the people who do the hiring…” (http://www.nytimes.com/2011/11/28/us/politics/senator-questions-extension-of-tax-cut.html ).

This is a common Republican refrain, though patently bogus. Do the top one-tenth of one percent of income earners in America actually “do the hiring?” Notice that Kyl’s criterion is “small-business owners who report business income on their personal tax returns.” That’s a different group than the top 0.1% of income earners.

Anybody can report business income. That doesn’t mean they are creating jobs. If you sell some stuff on Ebay, you should report that as business income, even though it doesn’t make you a job creator and it doesn’t automatically put you in the top 1% of earners.

What is “business income?” The treasury department defines small business income as any ordinary income, long-term or short-term gains, from sole proprietorships, S corporations, partnerships, estates and trusts. (factcheck.org, March 6, 2009).

By this definition, are the rich the small business owners? 73% of Americans in the top two tax brackets report some kind of business income on their tax returns, but that does not mean they are “hiring employees” or “creating jobs.” They could be just cashing their trust fund checks.

It is a crude sleight of hand to suggest that anyone who is rich is automatically a job-creator. If that were true, it would be hard to explain why employment has not jumped way up over the past ten years while the incomes of the upper 1% of Americans rose 18 percent. (http://mediamatters.org/research/201110200011). It must be that all those rich people were not actually “hiring,” as Republicans claimed.

Some of the super-wealthy are corporate executives whose companies do create many jobs. It is hard to imagine that increasing the marginal tax rate on their personal income would cause their companies to hire fewer people. And anyway, they are not “small” business owners, the ones who actually create most of the jobs in America.

In fact only 27% of upper income tax returns show business income that makes up more than half of wages. Presumably, a real small business owner would take home most of his or her wages from the business (factcheck.org, March 6, 2009). The vast majority of people who report business income on their tax return are not running a small company that’s on a hiring spree. And even among those who are, only 2% of them earn enough money to make it into the top tax brackets (factcheck.org).

The categories, “rich” and “job creator” are almost non-overlapping. Yet Republicans routinely equate them. It is a spurious equation and I can’t understand why the news media let it go uncommented. Even Krugman doesn’t mention it. It is a completely false argument that taxing the rich destroys jobs. How Republicans continue to get away with spouting such nonsense is a mystery.

Why the Wheels Fell Off

Three years after the financial collapse of ’08, the American economy is still on life support. The main devastation occurred in unemployment, which remains above 9% nationally, as high as 25% in some regions and much higher among some age and ethnic groups. Even among those employed, the mortgage crisis limits economic growth, with almost half of mortgages worth more than equity, and tens of millions of houses in foreclosure. GDP has been limping along at 1% for years, with no prospect of an upturn as long as consumers don’t spend (what would they spend?) and retail credit remains inaccessible. There is talk about continued recession for at least two more years, more likely six.

What happened is that rich people took all the money. They left next to nothing for the rest of us. They played the capitalist game and won. They are still winning, and I expect will continue to do so, barring the unforeseen. This does not make the rich, bad people. The whole point of the capitalist game is to get rich. There are winners and there are losers. But the present outcome, painful recession for most people, is the inevitable consequence of the rich siphoning off America’s wealth over the last thirty years. It could have been moderated, but it wasn’t. Now here we are.

First, let’s make sure we understand that in fact, the rich have siphoned off the country’s wealth. According to G. William Domhoff (http://sociology.ucsc.edu/whorulesamerica/power/wealth.html),

As of 2007, the top 1% of American households (the upper class) owns 34.6% (more than a third) of all privately held wealth in this country.

The next 19% (the managerial, professional, and small business stratum) holds 50.5% (more than half).

This means that the wealthiest 20% of Americans hoard 85% of the country’s wealth, leaving only 15% for the rest of us (wage and salary workers).

If you exclude the value of one’s home from the calculations (because the rich often have very expensive homes), then you see that just the top 1% of households owns 42.7% of the all the nation’s financial wealth. The richest 20% hold more than 93% of financial wealth. That’s basically all the money there is! Nearly all of the country’s money is in the personal bank accounts of just a few people. The rest of us are left to squabble over the remaining 7%.

The rich are the big winners in the game of capitalism, and the winnings have been huge. A hundred years ago, the richest 1% of Americans owned only 18% of the nation’s wealth (Noah, http://www.slate.com/id/2266025/entry/2266026). Today’s huge wealth inequality is a recent phenomenon, since about 1980. It is the most obvious outcome of a capitalist system gone awry, and an explanation of the current economic recession.

Today’s painful recession is the consequence of the richest people having sucked all the money out of the economy since 1980. The rich are not having a recession. The Dow Jones Industrial Average is about 11,000 today, down a few percentage points from its bubbly high of three years ago, but by no means disastrous for the companies indexed, such as American Express, Chevron, IBM, Microsoft, Verizon, and others. Some of the big banks are having disasters recently, but that is a separate situation, and long overdue anyway. Most large businesses are doing well, making plenty of money. It’s ordinary wage-earners who are hurting.

How did nearly all the money in America flow to the top 20% of bank accounts, leaving the rest of us in recession? In my opinion, the main factors since 1980, in order of importance, were:

1. The information technology revolution.
2. Failure of education.
3. Government corruption and incompetence.
4. Globalization of economics.

The rise of the computer put a lot of people out of work from automation. I made much of my personal wealth doing just that (although not for that reason – I plead naïvete). I spent many years automating the pulp and paper industry with computer controls and robots, putting scores of hard-working people out of jobs forever. My bad. As a possible redemptive factor, I spent many more years using networked computers trying to educate the youth. However, I had far more success with the former than the latter.

Other aspects of the computer and information revolution made it easier for those who understood and controlled technology to separate people from their money, through deceptive and unscrupulous advertising and marketing (e.g, Big Pharma, Big Finance, etc.), and accumulation and exploitation of information about people. Technology and information resources are expensive and knowledge-intensive. Those who could understand it, and who could afford to put it to work, reaped wealth. Those who couldn’t, suffered. The technology revolution was not neutral – it favored the economically privileged and the well-educated, and still does. It was a primary factor causing wealth to flow from the bottom to the top of the economic pyramid.

And that brings me to the second cause of today’s financial crisis: failure of education. I have been a lifelong educator of youth and adults (except for my two-decade stint as a technology raptor). From personal experience, I can say that the educational system in this country is largely ineffective, virtually moribund. The basic cause of that is economics. Teachers are not well-paid because their product is very long-term (tomorrow’s leaders, movers, and shakers) and as we know, future value is heavily discounted. Also, students don’t vote, so why worry about them? Consequently, society as a whole has little incentive to properly finance education. Granted, many teachers are incompetent and curricula laughable, but those are consequences of economic underdevelopment, not causes.

There are plenty of smart people in this country who would become educators if they thought they could make a living at it. But except for the most elite, it is not possible. I myself dropped out of academia for twenty years because I needed to make some money. If a starting college teacher made $75,000 a year (instead of 30,000), and could expect salary growth comparable to a business or legal career, there would be qualified candidates. Actually, if there even were such a thing as a starting college teaching position, it would be an improvement. About half of college teachers are now “adjuncts,” which means part-time, with no health-care or pension, and that percentage is on the rise. Currently, postsecondary education is not a viable career for a principal earner. The situation is comparable for K-12 education (but much less so for educational administrators, who do better).

This economic analysis assumes that talent in education, as in any other field, costs more than lack of it. It is simply not reasonable that widespread, high-quality education in this country is impossible. The problem is that inadequate investment is made in classroom and administrative talent. There are also profound structural flaws in the educational system that entrenched interests are loath to address. In addition, political corruption favors the status quo (see #3: Corruption). The failure of education ultimately makes it easier for the economic elites to separate ordinary people from their wealth.

Third on my list of causal factors is government corruption and incompetence. The corruption is a direct consequence of how American politics is financed. The rich pay the politicians, who in turn, write laws that favor the rich. It’s an incestuous system that works well for both sides, selling power for money, trading money for privilege, all at the expense of ordinary people. It is not overt bribery, usually; this is not suitcases full of money. No, just as racism and sexism have moved from being overt to subtle, government corruption at all levels is now only detectible to the discerning. Just a special-purpose clause in a bill here, an appropriations contingency there, a blind regulatory eye, a tax loophole, and plenty of rhetorical obfuscation. It doesn’t take much to shave points off a game.

I’m not saying that illegal things are being done (though recent history suggests some of that goes on too), only that corrupt things are being done. Actions are corrupt when they violate the trust that ordinary people grant to politicians when they ask them to work on their behalf. Anyone who doubts that the American political system is corrupt is under-informed (see #2: Education).

The fourth and final causal factor in my list is globalization of economics. This came about mainly as a consequence of the technology and information revolution (see #1), which allowed rationalization of labor markets and currencies. As a result, jobs flowed out of America’s expensive labor market to cheaper markets abroad, to the great benefit of many millions of people around the world (e.g., in China, Mexico, and elsewhere), but to the loss of high-priced American workers.

Globalization of labor will continue, eventually consuming the livelihoods of the American affluent. We are already seeing this as jobs like legal research, financial trading, and X-ray interpretation move offshore. That trend will continue as global economics reaches equilibrium over the next couple of centuries, when even the most wealthy will find it difficult to exploit market anomalies to their own advantage.

Beyond labor market equilibration, globalization of trade, especially in oil, has sucked money out of the economy and funneled it to Big Oil. It is largely due to government corruption and incompetence (see #3) that America’s addiction to oil has not been treated in the past half century, despite numerous and obvious warnings.

What should be done, what can be done, about the current economic recession and its dark shadow of unconscionable wealth inequality? I have ideas, but that’s a different essay. Here I want only to enumerate my perception of the fundamental, distal factors causing the deep economic hole we are now in and from which we may never fully emerge.

Do Republicans Have Any Ideas?

President Obama’s economic stimulus package passed the House today, 244 to 188, without a single Republican vote. Not one.

I find that remarkable. The president has openly talked up his desire for more bipartisan government, and he made a big display of going up to the Hill to jawbone the Republicans.

Yet the Republicans all, to a person, essentially said, “Go soak your head.” They appear as juvenile, spiteful, self-destructive poseurs obsessed with game-playing, all while the American economy goes down the tubes. How can the whole batch of them be so consistently small, mean-spirited, selfish, and immature? Isn’t there a single statesman among them?

I try to stick to rational analysis of the facts, but these people make it very difficult to remain unemotional.

“Principles!” the Republicans cry. "Of course we want to do what’s best for America, but this stimulus package is so worthless, if not downright harmful or evil, that no conscionable person could vote for it."

That is an implausible argument under the circumstances, but at least conceivable. Is there any truth behind it? I can’t find it.

Republicans have only a single concept of governance: elimination of taxes. It does not seem to bother them, or occur to them, that if we were to eliminate taxes, there would be no government and no Republicans either. But they apparently get a “tax-cut” chip implanted in their brain as a condition of joining the party. Anything other than massive tax cuts, especially those that benefit the wealthy, is considered utterly unacceptable to them.

This is notwithstanding actual facts, such as,

1. The economic stimulus package is made up of about 1/3 tax cuts and 2/3 new spending. So it is simply not the case that the legislation does not accommodate the Republican desire for tax cuts. One third of 800 billion dollars is $260 billion in tax cuts, not a trivial amount. The Republicans’ “principled” objection to the legislation rings hollow.

2. Tax cuts don’t do much good for individuals or business that aren’t paying much in taxes. Especially for small businesses (under 100 employees), projected near-term profits are expected to be small to zero, so tax cuts on nonexistent profits wouldn't be much of an economic stimulus.

3. The Republicans had eight years to play around with tax cuts, which they did, and the result has not turned out well. The “trickle-down” mythology has been thoroughly repudiated in fact and theory. What legitimate justification could there be for clinging to the tax-cut mantra in the face of evidence? One is tempted to suspect that the motivations are less than noble.

Try this simple test. Watch any television news show that interviews a Republican about the stimulus package. Clock how much time passes before the Republican says the phrase “tax cuts.” I have done this and the mean elapsed time is 15 seconds. These people must be possessed by an evil spirit. Or have a brain implant. I am not aware of any alternative economic stimulus proposal from the Republicans that involves anything other than “Tax cuts!”

Another Republican criticism of the stimulus package is that it spends too much on non-economic items, such as health, education, and safety. In what alternate universe is education NOT the basic engine of economic growth? For a Republican, economic growth apparently only means more cash, today! No doubt there are some stupid or irrelevant line items buried in the package and I'm sure we will hear all about them soon. That kind of idiocy is not a particularly Democratic problem. If we look at the largest 80% of the stimulus package, not the 20% chaff, it looks eminently reasonable.

Yet another Republican criticism is that they did not have sufficient “input” to the drafting of the legislation. From what I can gather, that is because they declined to participate when invited. Their complaint is at best disingenuous, more likely, misdirection and petulant whining.

Finally, consider that even if the economic stimulus package was a bitter pill for any Republican to swallow, on principle, why not support it anyway, for Heaven’s sake? The country is going down! What kind of high and mighty “principles of governance” are so sacred that you would choose ashes in everyone’s mouth instead of compromise? I think “principles” are not the issue here at all. Republican behavior points to psychological immaturity and a paucity of ideas badly papered over by tawdry egos.

Maybe I was wrong in my criticism of Krugman’s book, “The Conscience of a Liberal.” (Halfway down the page at www.waadams.net/2194.html).

I said Krugman was unjustifiably hostile toward conservatives and had devolved to mere name-calling. But maybe he was more perceptive than I realized. Unless the Republicans come up with some reasoned, evidence-based explanations for their behavior, I think the Democrats should just ignore them because they can’t be spoken to.

Is Deflation Really So Bad?

The U.S. Economic recession is deepening and there is fear now of deflation, a situation where prices fall and so does demand. Normally, if prices fall, people rush in to buy, like the crazy stampedes of shoppers on the day after Thanksgiving.

But now, nobody has enough money, so demand is down. Prices drop, to lure customers and match the lower demand. But that cuts profits so companies slim down, cutting inventory and jobs. Consequently there is less to sell and more people without money. So prices fall further, more jobs are lost, inventory shrinks more. Salaries stagnate because a thousand workers apply for every job, so there is no inflation.

This vicious downward spiral ripples backward through the supply chain to manufacturers and importers, who also slow down, slim down, and lay off workers, further depressing the economy. Deflation ripples out to the housing and credit markets where sellers are under water and buyers can’t get loans. The whole economy comes to a halt and we all die (financially, anyway). That’s the doomsday scenario.

Nouriel Roubini (aka “Doctor Doom”) wrote a column in the Financial Times entitled, “How to Avoid the Horrors of Stagflation.” (FT 12/3/08, p. 13). Stagflation is a paradoxical combination of deflation and inflation. But Roubini does not talk about that, so the headline was probably added by someone who did not get the author’s drift. What he was warning against was spiraling deflation, as described above. He fears that the government’s attempts to inject money into the economy will not be enough, and not soon enough, to avert the horrors of deflation.

But I was thinking (always dangerous). Is deflation really so bad? Okay a lot of jobs would be lost, perhaps millions of them, and that is definitely bad. But let’s put that aside and come back to it in a moment.

People need to buy essentials: Food, medicine, clothing, housing, education. When the price is right, they will buy. When the price is too high they will avoid buying as long as they can and then buy only on the low end. But they will buy. So there will be an economy, even if only at a very low level. Everything cannot stop dead.

What people do not need are jet skis and wide-screen TVs and expensive designer clothes. They do not need expensive food, either restaurant or frozen. People can live without an iPod and they don’t need a vacation in Italy. A family of three does not need a 10,000 square foot home. So people won’t buy those things in a deflationary situation.

Is that so bad? Companies that sell iPods, trips to Italy, fast food and palatial mansions will wither to a fraction of their former size, if they survive at all, to serve a greatly diminished demand.

On the other side, the back of the irrational consumer society would finally be broken. Imagine people spending their time cooking beans in a crock pot, studying for school and dancing at the community center. They do not cruise the malls, which no longer exist anyway. You haven’t had a raise in three years, but on the other hand, your taxes, utilities and rent haven’t increased either, and the price of eggs has dropped by a third. There is less to buy, but there is less you need to buy. Your 401(k) is cut in half, but so is the cost of your retirement, so you are relatively as well-off as you were before the economic collapse.

The whole economy is reset to a slower, lower, more sane level without the frenzy of obsessive consumerism. Prices are stable, wages are stable. Companies grow organically, by innovation and reaching a growing demographic, not by taking on insane amounts of debt to produce products that have to be massively marketed to create artificial demand. We are all rich again, just at a lower absolute number.

What about all those millions who lost jobs back in the grip of the initial deflation (which is now)? The government keeps them afloat until they find their feet. They get other jobs, at a fraction of what they were making before, but they also cut their spending to a fraction, and as prices and demand equilibrate, they become as comfortable as they ever were, without all the “stuff.”

What’s wrong with this vision of economic post-apocalyptic utopia? Only human nature. People want snowmobiles and expensive handbags. It doesn’t make any economic sense, but that’s how it is. If you try to prevent these aspirations, as the communists did, it only postpones the inevitable and makes everyone miserable in the meantime. Human nature is part of Mother Nature, with whom one should not fool.

So frenzied consumerism, entrepreneurial excess, and wallet-busting inflation will be back. There is no chance society will question whether that is what we really want. I look forward to it.

Candidates Speak on the Housing Crisis

The three major presidential contenders gave speeches on the economy between March 25-27, 2008. Transcripts are at http://www.pbs.org/newshour/vote2008/ and on the candidates’ web sites.

Comparison of the three speeches illuminates the candidates, their similarities and differences.

Clinton’s View:

Clinton’s speech was all about helping families that face foreclosure on their homes because they can’t make the payments. She endorses Barney Frank’s and Chris Dodd’s proposed legislation that would have the federal government guarantee those loans. That would make the financial markets that deal in mortgage-backed securities liquid once again, putting an end to the housing-based credit crunch.

Clinton asserts (as does Frank) that the plan is self-financing, which means it would cost no taxpayer money. That’s probably a pipe dream. It assumes that most, or at least some of the homeowners would not default, so the government would not have to cover those mortgages. Of those that did default, the government would own those mortgages, but the thought is that over time the housing market would recover and the government could sell them at par, if not a profit (ignoring the time value of money).

It is a lovely fairy tale. It could happen. More likely though, most of the homeowners would default because the bottom line is, they simply cannot make the payments. That is the fundamental problem. Why would that change? Where are these families going to get the money to meet their balloons? So the government guarantee amounts essentially to a bail-out of the banks who made the loans and have to make good on the packages of them that they sold on to the financial markets.

Does it help families keep their homes? Sure it does. The government just bought their homes for them. What a deal. Lesson learned: home ownership is sacred in America. Buy a home even if you can’t afford it because the government will make the payments for you!

The Frank legislation is ultimately a giant bluff. If the financial markets believe the mortgage-backed securities are “good” again (because of the government guarantee), then the derivatives based on them are also good, so they can be valued at face and traded normally again and the credit markets can recover. Nobody loses money if everybody pretends there is no money lost!

I don’t think it will work like that and besides, it is probably too late. UBS Bank, for example, one of the firms most-exposed to these securities, has taken $40 billion in writedowns, so those mortgage backed securities, most of them derivatives, are now worthless. It would be impossible to re-value them at anything other than zero just because the government guarantees the original mortgages, because there is no audit trail from the derivatives back to the primary mortgage. So this plan will bail out the local mortgage originators but will probably not alleviate the system-wide credit crunch.

Clinton also proposes an “Emergency Working Group” to determine if this plan would even work or if some other, additional steps would be needed. It could be headed, she suggests, by Alan Greenspan, for example. Excuse me? The Alan Greenspan who as Fed Chairman presided over two massive financial bubbles and their catastrophic collapses? There must be something funny in Clinton’s Kool-Aid.

Clinton also suggests (but has not yet proposed) legislation to protect the mortgage-originating banks from lawsuits if they renegotiate the terms of mortgages they have already made. Who might sue them? The financial markets that hold the old (now worthless) versions of the mortgages. They want their money. But Clinton would allow the local banks to redo the mortgages to cut their losses. Let the Wall Street traders in mortgage backed securities suffer! (Anyway, nearly 2/3 of the subprime mortgages were not made by banks.)

Finally, for good measure, Clinton would just donate $30 billion of taxpayer money to cities and towns to do with whatever they like, from buying foreclosed housing, to building new roads, to hiring more police. That nonsequitur just looks like cynical election year vote-buying, to me.


Obama’s View:

Obama gave his speech in New York City to a room full of financial types, and was introduced by Mayor Michael Bloomberg. Contrast that to Clinton, who gave her speech to an audience at the University of Pennsylvania (the state where the next important primary elections are to be held). Clinton is politicking for votes. Obama is trying to address the fundamental issues. I think that difference in choice of venue alone tells us a lot about these two candidates.

No one takes the high ground like Obama. Whereas Clinton starts out with effusive praise for the Governor of Pennsylvania (who recently endorsed her) and then jumps right in to her theme song, “We’ve got trouble right here in River City!” Obama begins by considering the argument between Alexander Hamilton and Thomas Jefferson over the proper nature of a free market economy. Hamilton favored government intervention from time to time, as when he nationalized the debt of the Revolutionary War.

And that is the main theme of Obama’s speech. He sees the origins of the current financial crisis in the 1999 repeal of the Glass-Steagall Act which deregulated the banking industry and which allowed untrammeled greed to get us to where we are today. He comes within a hair’s breadth of accusing the government of abject corruption in repealing that act (and other similar actions, such as the deregulation of the telecommunications and energy industries that led to the Worldcom and Enron fiascos). I think he is absolutely right to focus on the root cause the those crises, and of this current credit crisis: rampant government corruption.

“…we've lost that sense of shared prosperity. … It's because of decisions made in boardrooms, on trading floors and in Washington. Under Republican and Democratic Administrations, we failed to guard against practices that all too often rewarded financial manipulation instead of productivity and sound business practices. We let the special interests put their thumbs on the economic scales. The result has been a distorted market that creates bubbles instead of steady, sustainable growth; a market that favors Wall Street over Main Street, but ends up hurting both.”

“… instead of establishing a 21st century regulatory framework, we simply dismantled the old one - aided by a legal but corrupt bargain in which campaign money all too often shaped policy and watered down oversight. In doing so, we encouraged a winner take all, anything goes environment that helped foster devastating dislocations in our economy.”

This kind of talk may not resonate with mythical Joe Sixpack, who probably would not understand a word of it, but the bottom line is that Joe Sixpack does not vote. Polls show that only 50% of Americans are paying any attention at all to the primary race. Government data show that only 50% of eligible voters even bother to vote in a presidential election. That means every educated vote counts double what it should, so it makes sense for Obama to speak to the people who are actually listening.

But what about a specific fix for the problem of Joe Sixpack losing his house? Obama, like Clinton, endorses the Dodd-Frank proposal to have the government guarantee the subprime mortgages that are the proximal stimulus for the credit crunch. As I noted above, it is not a bad idea in principle, but I am quite skeptical that it would actually solve the problem. Clinton’s ideas are more concrete, such as indemnification of mortgage originators who choose to renegotiate their loans. But I have to say, Obama understands the root causes, whereas Clinton gives no indication that she does.

Obama has some concrete, targeted proposals of his own though, and they tend to focus on causes. He looks upstream of the crisis. He is not about throwing money for the sake of throwing money.

For example, he would impose penalties on fraudulent lenders. He would allow a 10% tax credit on mortgage interest, which would proportionately reduce the mortgage burden more for those facing huge interest balloon payments. That’s minimally intrusive, yet elegantly precise. But first and foremost, he would revamp the regulatory framework dealing with financial markets. He gives five specific proposals for that revamp, all of them imminently sensible anti-corruption measures.

Obama ends by reminding listeners that he is still connected to the average person. He would “provide an income tax cut of up to $1000 for a working family, and eliminate income taxes altogether for any retiree making less than $50,000 per year. To make health care affordable for all Americans, we'll cut costs and provide coverage to all who need it. To put more Americans to work, we'll create millions of new Green Jobs and invest in rebuilding our nation's infrastructure. To extend opportunity, we'll invest in our schools and our teachers, and make college affordable for every American.”

The weak spot in this generally fabulous speech is that it is not at all clear how the President of the United States could clean up corruption in congress, which is where all this crooked legislation is made. The bully pulpit is a useful device, but I am doubtful that it is stronger than the lure of money and power. Still, we are voting for president here, not congress, so at least having a president who knows what he’s talking about would seem to be a plus.


McCain’s View:

McCain’s admirably short speech is simple, and simple-minded. There was a housing bubble, it burst. Tough luck, take your lumps.

Why was there a bubble? “A bubble occurs when prices are driven up too quickly, speculators move into markets, and these players begin to suspend the normal rules of risk and assume that prices can only move up.”

That’s not wrong, but it overlooks the original question: Why was there a bubble?In my opinion, there was a bubble because of unregulated, greedy, socially irresponsible financial practices, from the predatory mortgage originators right up through the highly leveraged traders in mortgaged backed derivatives. But McCain is blind to all that. In fact, he suggests that the root cause was greedy individuals trying to buy homes they could not really afford.

“Of those 80 million homeowners, only 55 million have a mortgage at all, and 51 million are doing what is necessary -- working a second job, skipping a vacation, and managing their budgets -- to make their payments on time. That leaves us with a puzzling situation: how could 4 million mortgages cause this much trouble for us all?... Homeowners should be able to understand easily the terms and obligations of a mortgage. In return, they have an obligation to provide truthful financial information and should be subject to penalty if they do not.”

That analysis is stunning in its naivety. Of course there is some truth to it, yet financial education is virtually non-existent in America. People do not know what they can and cannot afford, and lenders are in the financial, not the education business. Blaming the victim is not a very edifying way to understand the problem.

In any case, what would McCain do about the current financial crisis? Basically nothing! He says,

I will not play election year politics with the housing crisis. I will evaluate everything in terms of whether it might be harmful or helpful to our effort to deal with the crisis we face now. …I have always been committed to the principle that it is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers. Government assistance to the banking system should be based solely on preventing systemic risk that would endanger the entire financial system and the economy.

He will “consider and evaluate” any proposals that come his way. That is hardly reassuring.

McCain offers a few concrete proposals of his own. One is to require an increase in the minimum down payment for getting a mortgage. That certainly would eliminate the “interest-only” loans that cause a lot of trouble, but it would do nothing about people currently facing foreclosure, and it would limit access to housing by those in the lower economic strata.

Anyway, I don’t think there is anything wrong with interest-only loans, as long as the costs and payment schedules are clear and the borrower is qualified to make the payments. The whole idea of housing equity as an off-the-books savings account is a concept that needs to be questioned. The problem with subprime mortgages is not the concept of interest only loans, but fraudulent lending practices. McCain has misidentified even the most obvious source of the problem.

More promisingly, McCain would increase capitalization requirements for financial institutions, but predictably, he would accomplish that not with actual regulation, but by “removing regulatory, accounting and tax impediments to raising capital.” Of course! More tax breaks for the wealthy! McCain would also eliminate “the Alternative Minimum Tax that the middle class was never intended to pay; [and] improve the ability of our companies to compete by reducing our corporate tax rate” No election year politics here!

How would McCain proceed with his suggested reform? Well first, he would do the obvious thing, call in the accountants! He would “convene a meeting of the nation's accounting professionals to discuss the current mark to market accounting systems.”

Then he would “convene a meeting of the nation's top mortgage lenders. Working together, they should pledge to provide maximum support and help to their cash-strapped, but credit worthy customers.”

Ah yes, a “pledge” from the predatory lenders to do better next time. That should do it!

McCain proposes no legislation and, heaven forbid, not even any new regulation on the financial systems.

McCain has said that the economy is not his strong suit, and this speech gives ample evidence of that.

Do Conservatives Have a Conscience?

New York Times columnist and economist Paul Krugman apparently intended to write a counterpoint to Barry Goldwater’s influential 1960 book, The Conscience of a Conservative. Krugman's retort, The Conscience of a Liberal, was loaned to me, with endorsement, by a colleague. I generally find such political essays not worth the time, and this one is no exception.

Krugman only mentions Goldwater tangentially, and while he does address some of the same topics Goldwater did, such as taxation, labor unions, and international trade, he does not go head to head with the fundamental principles of conservatism espoused by the Arizona Senator and does not deal at all with non-economic issues such as nuclear testing. So this is not, as the title implies, an answer to Goldwater-inspired conservative principles. Pity that.

What is this book about then? Krugman states that his intention is to demonstrate that conservative ideology inherently makes for bad economics. But he does not make that case, nor even seriously address it. Instead, he is concerned to set forth some values of political and economic liberalism, hoping perhaps that these will stand in contrast to implied but unstated complementary conservative principles. Even if he had done that well, the book would provide useful service. But there is nothing so systematic presented here.

Instead, we are treated to a superficial survey of the last 100 years of political and economic history, the Krugman’s-eye-view, which gives him opportunity to opinionate on selected features of that terrain.

Many of his descriptions seem accurate and germane, such as the great Southern shift from Democratic to Republican persuasion in the 1960’s. That shift has been an important fact of political life ever since. Why did it happen? Racism, says Krugman. When Kennedy sent the national guard to integrate the schools and Johnson championed the Civil Rights Act, the south was aggressively humiliated by the north for the second time in a hundred years. The Democrats made their point, but it sealed their political fate in the south. Only recently, with the relative success of Barack Obama’s campaign in southern states, is the petulant southern rejection of the Democratic party of a half-century ago showing signs of softening.

Krugman tells a good story. It might even be true. One suspects other factors, such as superior economic growth in the north might have played an equally important role in the Southern shift.

Krugman writes at length about taxation, as you would expect of an economist. His main thesis is that the anti-tax obsession of the conservatives is actually nothing but greed dressed up as compassion. He documents pretty well that it has always been the rich who have pushed for lower taxes, not the working and middle classes. He shows that conservatives favor regressive taxation, such as flat taxes and sales taxes and special tax reductions that benefit only the rich, such as for the estate tax and capital gains tax. Liberals, on the other hand, favor progressive taxation, like the income tax, which redistributes wealth from the high end to the low. This is an important difference in ideology, and Krugman documents it adequately.

However, he is less clear in explaining why this difference in attitude has persisted from the time of the great railroad and steel barons, right up to today. He does note that taxation rates during and after the New Deal were 75% to 95% in the highest brackets, and that these punitive rates essentially wiped out the fortunes of many old wealthy families and transferred much of that wealth to the working and middle classes, erasing the extremes of economic inequality that had developed in the Gilded Age. But he passes no value judgment on that move. Was that a good thing to do? Liberals (speaking for myself) see wealth redistribution as a moral principle, and this book has “conscience” in its title. But Krugman seems loathe to make a moral point here. In fact he seems to uncritically admire the Roosevelt administration’s policies (as many Democrats do), not commenting on the real human meaning of a 95% tax bracket.

Today, he avers, conservatives are still trying to roll back the New Deal, not realizing apparently that the battle has been won. Today’s top tax rates are among the lowest in the world. But any tax is too much tax for the rich, explaining conservatives’ obsession with lowering taxes and their neverending attempts to undo other aspects the New Deal, such as social security, medicare, and labor unionization. Why do rich conservatives hate these policies so much? Greed, pure and simple, says Krugman. Worse, they have been relatively successful in their efforts, so today we have dimensions of economic inequality not been seen since before the New Deal.

How have the conservatives managed to pull this off? By duping the ignorant electorate, he says. You can’t just come out and say, “We rich people want even more of your money, less taxation, and we don’t care about the rest of you.” That would never sell. Instead, they trick voters with clever language, making it seem like conservatives stand for some high-minded principles, not selfish greed. They use “dog-whistle” messages, he says, which are like sounds that only dogs can hear. Conservatives use special code phrases that only other conservatives understand, bypassing most of the electorate.

It’s a cute idea but he doesn’t give concrete examples. I can think of some. “The American people know better how to spend their own paycheck than the federal government does!” That is a common conservative reason for cutting taxes. It sounds good to the uninformed, but of course doesn’t address the consequences of cutting taxes, such as overcrowded schools, disintegrating roads and bridges, reduced police funding, closed libraries, restricted hospitals, poor veterans’ services. It’s an example of a dog-whistle communication that goes right past the ordinary voter but is heard by other conservatives.

So it turns out that conservatives are basically selfish, greedy, racists. That explains a lot! Who knew?

But wait, there’s more. Conservatives are also unenlightened about morals. They resent the sexual revolution brought on by the invention of the oral contraceptive in the 1960’s. That gave women control over their own reproductive destiny, a fact deeply resented by misogynist male conservatives. The conservative “family values” emphasis is designed to stop social erosion of male hegemony and turn back the clock to the absolutist middle ages. Just as I always thought!

All this is fun for a liberal reader, but who is it going to convince? I am only slightly exaggerating Krugman’s arguments here, putting a few words in his mouth. He himself is skilled and circumspect in his writing and this book is not a sophomoric flame. Nevertheless, his subterranean messages are clear and they are primitive and not very convincing. I think he is not wrong, but since he does not make his case with evidence and reason, I do not accept his arguments.

Personally, I think the rise in conservative politics in recent years has been a good thing for the country, painful though it has been for me and many others to endure. It represents the genuine democratization of politics, the enfranchisement of those people whose voices were squelched in the New Deal and during the Democratic Reign after World War II. If it is going to be a two-party system, we need to have two parties. Even the most naïve, uneducated, misinformed citizen has a right to vote their small-minded, mean-spirited, greedy, repressed, misogynous, racist biases into political and economic policy. That is the beauty of our system. One person, one vote.

If the educated elites suppress the voices of the ignorant, that makes life easier for a while, but eventually the mobs will come for you in the night with pitchforks and torches. It is infinitely better to let them speak, win when they can, and just absorb the pain. In the long run, assuming you believe in basic human rationality, good sense will prevail. I think that’s what’s happening in the current political cycle. As the Hegelian geist moves forward, circumstances change, people realize what is really in their own best interests, and they abandon conservatism.

Unfortunately, new, tabula-rasa babies are born at a far greater rate than the educational system can handle, so there is never going to be a shortage of conservatives. We must try to stay ahead of the educational curve, and there, I think communication technology is on our side, although this particular book helps only slightly.

References:
Goldwater, B. (1960/2007). The Conscience of a Conservative. Princeton: Princeton University Press.

Krugman, P. (2007). The Conscience of a Liberal. New York: W.W. Norton.