Saturday, December 28, 2013

Politics and Markets: How Governments Help and Hurt Economies

Lots of political rhetoric is spewed across news and the social media.  Most of it is just ideology, repeated and spun by pundits or posted across the social media, appearing as Facebook  facts” where propositions come to be accepted as political truths.  But they reality is that so much of passes as political fact is simply ideology; untested assertions or simply statements about the world that fail to stand up to rigorous social science scrutiny.  This is the case with assertions about taxes, or voter fraud, or a slew of many other propositions.  Two of the most cherished theories held dear to many conservatives are that the government cannot innovate and that the pathway to economic recovery is through austerity and cuts in government spending and taxes.  Both of these myths are convincingly challenged in two recent books, Mariana Mazzucato’s The Entrepreneurial State, and  Mark Blyth’s Austerity: The History of a Dangerous Idea.
    Mazzucato begins her book by constructing the stereotype of a dynamic innovative private sector where the engine that drives businesses is the “creative destruction” that economist Joseph Schumpeter once described in contrast to the dull, risk-aversive bureaucratic behavior of the government.  The myth is that government cannot innovate; it instead impedes creativity and job creation, and that the best way to foster economic growth is by limiting government activity in the economy, including taxes and regulation on businesses and creative individuals.  Government in effect crowds out entrepreneurial activity.  A wonderful theory, but how accurate is it? 
    Mazzucato offers ample empirical evidence to challenge this myth.  Her work is drawn heavily from examination of US and European economic policy and data.  What she actually finds first is that government is often a risk taker, providing a significant portion of the venture capital that has produced some of the most important technological innovations since World War II.  On one score, US research and development (R&D) tax credits and investments in military technology, the internet, and in drugs have provided most of the capital in these fields, yielding some of the most important and significant inventions in these areas.  Mazzucato points out how Apple’s Ipad, Ipod, and Iphone all were made possible by technology investments underwritten by the US government.  Agencies and programs such as the Defense Advanced Research Projects Agency, the Small Business Innovation Research program, and the Orphan Drug Act (some of which were created under Ronald Reagan) have been remarkably good at fostering innovation.
    The second point that Mazzucato makes is that the government often funds innovation at stages and in places where private sector venture capital dare not go.  Private venture capital rarely funds projects in the infancy stage where the risk is too great and the expectations of payoff are slim.  Venture capitalists are smart–they do not enter the fray until the real risks are diminished and, they invest with a short time horizon there is a likelihood of a profit.  Venture capitalists are not gamblers–they want to invest but only on good bets and when their returns quick results.  Venture capitalists invest at later stages in technology of business development and often get out quickly.
    Not so with the government.  Mazzucato points to how the government often invests at early stages where payoffs are less certain and the risks are greater, paying the way for businesses and venture capitalists later on to profit.  Government socializes early risks, is willing to underwrite more risky but long term investments, and in effect helps nurture the conditions that make private entrepreneurial activity possible.  Government thus does not so much crowd out innovation but instead facilitates first a “crowding in” and then a “dynamizing in” of investment and innovation.
    In contrast to Mazzucato who challenges the myth that government activity crowds out business activity, Blyth assails austerity as a political economic policy.  Simply put, austerity argues that during recessions or in other times when the economy is performing badly, the cure is to cut government spending, thereby freeing up capital for investment.  The idea is based on Say’s Law–supply creates demand–a staple theory of supply-side and neoclassical economic thought.  It is the idea that once enough cuts have taken place–the damage and destruction that has occurred to the economy as a result of high wages, taxes, or government spending–a new economic equilibrium were be reached whereby investors will again invest and business will hire individuals.  Yet the power of Blyth’s book both is to question the theory of government austerity and then look to its practice to see if as applied it has actually led to situations where governments can “cut their way to prosperity.”
    Blyth begins by discussing John Maynard Keynes concept of the “paradox of thrift.”  Individually it might make sense in tough economic times for one person to refuse to spend or invest and instead save.  But multiple such a policy across millions of individuals and businesses and what one gets is a recession.  With no one willing to spend or consume no businesses are willing to invest.  Merely getting tax cuts will no induce businesses to hire since no one is going to buy their products.  What results instead is a variation of a reverse prisoners’ dilemma where no one invests for fear that the economy will not rebound.  The paradox of thrift in economics is Keynes rejoinder to Say's Law;  a challenge that merely cutting taxes or placing more money in peoples’ or businesses’ hands will stimulate the economy.  Instead, so long as the risk that others will not spend or consume continues the economy will not pick up.  Thus, the need for government to stimulate demand.
    Up to this point  Austerity is no more than a forceful defense of Keynesian economics.  But Blyth goes after bigger game, challenging those, such as Tea Party advocates who single-mindedly want to cut government spending as part of a broader battle to reduce government debt.  Their argument, as Blyth describes it, sums up as “more debt doesn’t cure debt,” is assuring but simplistic and wrong for many reasons.  On a theoretical level it assumes that what is good for one individual (saving) is good as a national policy.  This is the fallacy of composition.  Second, austerity is unfair.  It asks the poor and middle class who did not benefit from the economic good times to pay for the mistakes of the rich when the economy goes bad.  By that, in 2008, it was the finance sector and the banks that brought on the recession and austerity meant that they were bailed out while the poor suffered and continue to do so by cut to food stamps and other social welfare programs.   
    Third, austerity just does not work in theory as an economy theory.  This is the strength of Blyth’s book.  Many point to Germany as an example of how austerity works successfully or conversely, why a lack thereof is the cause of Greece’s problems.  Both are exceptions.  In the case of Germany which has run a high savings export driven economy, it only works because in part other countries run deficits.  Not every country can run surpluses and be export driven.  If no one consumes then there are no exports to buy.  Germany is a unique case, as is Greece because of its  high degree of corruption.  Simply cutting debt or spending to turnaround an economy does little to stimulate investment, it places burdens disproportionally on the poor, and it fails to lift the GDP over  time.  Instead, the more successful world economies balance debt-management with investments along the line Mazzucato suggests, providing support for demand and an infrastructure that facilitates growth.
    Together Mazzucato and Blyth paint a theoretical and empirical picture that severely damages arguments that the minimalist state is the pathway to economic growth and entrepreneurial activity.  They describe a more nuanced picture of how government and business can work together to sustain  economies while producing economic fairness and equity.   They move the discussion beyond ideology where all too often many anti-tax, anti-government advocates sit.  Policy makers in Minnesota and across the country wishing to get a better understanding of what governments really do and how they can make a difference would be well suited to read these books.  The same can be said of advocates of the myths Mazzucato and Blyth attack.

Tuesday, December 17, 2013

Charity and the Poor: The Rich and Their Bah Humbug Attitudes

"Let me tell you about the very rich.  They are different from you and me.”
         —Rich Boy, F. Scott Fitzgerald

    The rich are different from the rest of us.  It is not just that they have more money.
    We already know that the rich are doing well.  Over a 30 year period their income has increased by nearly 300% while for those at the bottom it has gone up by less than 20%.  Wealth and income inequality are at record levels in the United States and social and economic mobility in America has all but halted.  Those born to rich parents are likely to stay rich, those born to poor parents are likely to stay that way.  Our educational and tax systems no long mitigate inequalities but reinforce and exacerbate them.   All this is common knowledge–at least to those who study the numbers and read the reports from the Congressional Budget Office, the Census Bureau, and scores of other organizations documenting the new class structure of America.
    Yet many justify the inequalities and tax breaks for the rich by invoking trickle down economics or by claiming that the low taxes will perhaps lead to the affluent giving to charity and providing alms to the poor.   “Government crowds out charity, depressing benevolence,” at least this is what some claim.  But is it true?  Have the rich responded to their new found excess by giving to the poor?  The simple answer is no.  Instead, what permeates their attitudes would make Scrooge smile with indifferent delight.
    Yes, the rich–those in the top quintile or top one percent income bracket do give more money overall to charity than others in society.  They have more money and therefore give more.  According to the IRS, the wealthiest 1% gave away 3.4% of their adjusted gross income in 2008–a higher percentage than any other income bracket.  But that number really is misleading.  Adjusted gross income is the income after all tax deductions are counted–deductions for mortgage interest and business losses. But what really matters is giving out of discretionary income–the money remaining after taxes and bills are paid.  Discretionary income is the place where people have choices–give to charity or hold on to the money–and this is where the rich fall down.
    According to a 2012 Chronicle of Philanthropy study the top one percent give 2.8% of their discretionary income to charity, with those making $100,000 or more giving 4.2%, and those making $50,000 to $75,000 per year giving 7.6% of their discretionary income.  Ken Stern, author of With Charity for All: Why Charities Are Failing and a Better Way to Give, wrote in the April 2013 Atlantic: “In 2011, the wealthiest Americans—those with earnings in the top 20 percent—contributed on average 1.3 percent of their income to charity. By comparison, Americans at the base of the income pyramid—those in the bottom 20 percent—donated 3.2 percent of their income.” Middle class and poor are more generous to charity than the rich.   These statistics may even undercount giving by the poor since they are less likely to itemize and therefore count their deductions in the way the more affluent do.
    The giving patterns for the rich are also interesting.  The rich are more likely to give to the arts and education whereas the middle class give to their religious institutions.  The least affluent are more likely to give to the poor–they can better sympathize with them it seems, whereas the rich cannot.  In fact, out of sight out of mind characterizes the charitable pattern of the rich.  The richest enclaves in America–areas where there are the fewest poor people and the greatest concentration of the affluent–have the worst percentages in terms of giving to charity overall and to the poor in specific.  On balance, if we lived in a more egalitarian society not only would there be less poverty but charitable giving would increase because those less than rich would donate a greater percentage of their income than the affluent.  Equality fosters charity, reinforcing government programs that do the same.  Government programs do not crowd out charity, they enable it.
     We are cutting food stamps to the poor, unemployment benefits to victims of the recession, and refusing to do charity to help the least advantaged.  How have we become a nation so indifferent to the poor?  How could people who consider the United States a Christian nation act so uncharitable? Pope Francis is admonishing the Catholic Church to return to its roots and again help the poor.. Maybe the Pope’s words will change these individuals’ minds about social policy and get the rich to open up their wallets.  Perhaps this holiday season we can begin to do more to help the needy–first through charity but more importantly through supporting social justice and government programs.
  It is also that
they don’t care about the rest of us, especially the poor.  At least this is what we can conclude when we look at charitable giving in the United States.  What we find is that the rich are stingy and

callous–Scroogelike not only with taxes, food stamps and other support for the poor–but also in how they compare to the rest of us when it comes to charity for the needy and least advantaged.

Friday, December 6, 2013

Economic Inequality and the End of the American Dream

On December 4, President Obama declared that “The combined trends of increased inequality and decreasing mobility pose a fundamental threat to the American Dream.”  So what is the state of inequality in America?  It’s not good.
    Alexis deTocqueville’s 1835 Democracy in America described the United States as a country pervaded by a general equality of conditions.  Equality was not talked of in terms of political and legal rights but also in terms of economics.  While economic inequalities existed, along with slavery, conditions in America were generally more egalitarian when compared to the European monarchies.  But that equality was undone during the robber baron era of the late nineteenth and early twentieth centuries as the Rockefellers, Vanderbilts, Morgans, and Hills amassed major fortunes, culminating levels of economic inequality unmatched...until now.
    While from the New Deal until the late 1970s social policy in America was directed toward mitigating economic inequality, those policies have been undone.  More than a generation ago Kevin  Phillips in The Politics of Rich and Poor and Bennett Harrison and Barry Bluestone in The Great U-Turn noted how the Reagan Era was ushering in an abandonment of economic egalitarianism, it is not clear what 30 years of those policies have wrought.
    A 2011 Congressional Budget Office  found that the after-tax income gap (and this includes after calculating in transfers payments and welfare)  between the top one-percent of the population and everyone else more than tripled since 1979. After-tax income for the top one-percent increased by 275% between 1973 and 2007,  for the bottom quintile it was merely 18% while for middle class or middle three quintiles it increased by not quite 40%, According to the census Bureau, the median family income fell in 2012 from $51,100 to $51,017, with average Americans earning less now than they did in real dollars in 1989.  However, there is some good news–since 2009 the income of the wealthiest 1% has increased by 31%.
    But income only tells part of the story.  Maldistributions in wealth also exacerbating and growing. According to the Institute for Policy Studies, in 2007 the top one-percent controls almost 34% of the wealth in the country, with half of the population possessing less than 3%. The racial disparities for wealth mirror those of income. Since 2007 the wealth gap has increased as the value of American homes–the single largest source of wealth for most Americans– has eroded. Studies such as the Survey of Consumer Finances by the Federal Reserve Board have similarly concluded that the wealth gap has increased since the 1980s.
    An April 2013 Pew Research Center report documents how since the crash of 2008 that the “mean net worth of households in the upper 7% of the wealth distribution rose by an estimated 28%, while the mean net worth of households in the lower 93% dropped by 4%.”  The richest have recovered nicely from the Great Recession, the rest of us have not done so well.  Moreover, the income gap has a racial component, with the a recent Census Bureau report documents in 2012 that  the median household income for Whites was $57,009, for Hispanics it was $39,005, and for Blacks it was $33,321.   The wealth disparities across race were even worse.  A February 2013 Brandeis University study by the Institute on Assets and Social Policy found that over the last 25 years, the wealth gap between African-Americans and Whites tripled from $85,000 in 1984 to $236,500 in 2009.  For the few African-Americans and Whites at the same income level, the latter had wealth  at least three if not more times that of the former.
    Finally, the gender gap in income persists. According to the Census Bureau, women still only make 77 cents on the dollar compared to males, with this percentage having remained frozen for years.  The median income of a female household in 2001 was $34,340, falling to $34,002 in 2012. While for male households it was $50,602 in 2011, falling to $48,634 in 2011.
    No matter how you slice it, the rich are getting richer and the rest of us are getting not just relatively poorer, but absolutely poorer, with women and people of color taking even a harder hit.  But why?  The Census Bureau notes several factors.  First, real incomes have actually gone up for those at the highest income levels.  We live in an era when we now pay disproportionally high salaries to business leaders and CEOs, thinking that they deserve it.  According to an April 2013 Bloomberg News study, the ratio of the average compensation of a CEO compared to its average worker is 204 to one, increasing by 20% since 2009.  In the case of JC Penny, a company that laid off 43,000 workers in 2013, when it fired its CEO he got a compensation package that was nearly 1,800 times the average wages and benefits of those dismissed.
    Second, inequality has increased because of the package of types of income earned now compared to 1979.  Far less income now is earned from wages and salary now than 30 years ago.  More money now is earned from equities, stocks, and capital gains.  Third, and perhaps most importantly, the federal tax structure is less progressive and more regressive now than 30 years ago.  Capital gains taxes are lower, as are taxes on the rich.  More taxes come from regressive federal payroll taxes than before.  Overall, the tax structure does little to rectify inequalities in income, instead it extenuates and exacerbates the growing inequalities already occurring in the economy.  In effect, the supply side revolution has helped to redistribute income up and not down.
    These policies have continued across Republican administrations and into the Obama era.  Obama more or less continued the inequalities from the Bush era.  Yes many of the Bush era taxes expired but payroll taxes went up, leaving most of us worst off than before.  Obama carried on the Bush policies of bailing out the banks but not homeowners, and even before Republican resistance  effectively ended his second presidential term, Obama showed little appetite for addressing economic inequality in America.
    So what does all this inequality mean for the United States?  In a country where economic wealth can be converted into political power, the rich can use their resources to prevent political change or reform and entrench themselves.  Wall Street and the Koch brothers are examples of this.  Additionally, income is a great predictor of civic engagement and voting and there is not question that there is a class bias in our elections.  Thus the economic inequalities reproduce and mirror themselves in the American political system.
    Class is an America reality.  The evidence is clear but facts seldom sway many individuals or  affect public policy.  Moreover, few want to acknowledge the reality of class in America, even fewer want to do anything about it, even though polls suggest that an overwhelming percentage of Americans think the government does not do enough to help the poor in our society.  There is no indication in the foreseeable future that tax policy or any redistributive policies will be enacted to address inequality, leaving the American dream just that, a dream, for so many.