Friday, October 5, 2007

Columns on war & taxes, and "our broken economy"

EJ Dionne is a respectable liberal. I disagree with 99% of what he says but he's not disagreeable to me. In this column he talks about the dead-on-arrival "war tax" bill proposed in congress. Let me highlight the conclusion.

And if the president believes in this war so much and doesn't want to raise taxes, let him propose the deep spending cuts it would take to cover the costs. Then Bush would show how much of a priority he believes this war is -- and he wouldn't be playing small ball.


I disagree with the "war tax" for a number of reasons, for instance the rate levels seem high given the revenue goal, but I can't see any way to combat that line. It goes back to my 'failure to lead' post: Bush talks about the importance of Iraq but he doesn't act like it. 9/12/01, with a GOP congress and an 80% approval rating, was Bush's chance to be serious and make big plays. Change the military budget from what's best for politicians to what's best for the military; put the kibosh on pork spending; take a hard look at the $2 trillion budget and find ways to offset military spending in order to keep things in the black.

Instead Bush did the exact opposite, and now he has no political capital to fight waste or new domestic spending. If he'd gone to the public in 2001 and said that the time for using the federal budget to protect incumbents was over, he'd have won the battle and could have carved out enough cash to cover even Iraq. Now he looks fiscally irresponsible and unserious for acting as though the money comes out of thin air. It's bad policy and bad politics.

Jeff Madrick has a beefy entry that advocates a big change in government policy. If you're at all familiar with The Nation, you can guess as to what kind of changes and why I'm responding. To start with, for a column of such length he gives hardly any concrete proposals, just a very generic "grow government and tax more". Also he spends way too much time re-hashing ideas he disagrees with, when a briefer summary followed by longer criticisms would do far better in proving his points.

Some of what he says seems... off. For instance this: "After growing robustly for a few years, productivity growth since 2003 is as low as it was before the Internet boom." And your point is what, exactly? The economy was still ailing in 2003 but made a nice comeback between 2004 and 2006. Certain national statistics take time to come in, but productivity isn't one of them, and using 4 year old data makes his argument look weak.

Jeff makes on argument I'll agree with wholeheartedly: rising wages don't necessarily mean inflation. Some economists similarly think that low unemployment causes inflation. In fact, both need to be measured against productivity growth. Wage inflation occurs only when a company has to pay more for the same level of production, so if wages go up only about as much as productivity then there's no inflation.

Madrick proposes a return to Keynesian economics, in which the government spends a lot and is willing to run up deficits in the hope of growing the economy. In theory, the economy will grow faster than interest on the debt, which will make the policy sustainable. Madrick to his credit isn't advocating for government ownership of or investment in private industry, and he isn't proposing busywork spending-for-spending's-sake. That said, he needs to do two big magic tricks to get to where he wants to go.

Madrick's first trick is claiming that higher taxes don't have an effect on the economy. Check this out: "No economist has ever made a defensible case that high taxes impede economic growth in the long run." Wow. How can someone write a column for a major publication like The Nation and think it's okay to toss out such a gigantic statement without any sort of backing before or after? Just proving that line would take more words than he spends on this piece which covers the entire economy.

Madrick's second trick is to say that running a bigger deficit is okay by default, based on Keynesian theory. "The budget deficit is low", we're assured. The annual deficit, perhaps. However it would be a large stretch to say that the national debt, ie. the total from past years, is low... and it's downright incredible to me that anyone talking about the future of the economy can ignore the future debt, that is, the gap between future liabilities and reasonably expected future revenues. Keynesian economic theory was formed at a time when Social Security could be continued for the foreseeable future, and when the elderly died at 65 instead of generating huge medical expenses. Even if one grants that Keynesian economics worked in the past, it's simply not acceptable to ignore the huge difference between the future as of 2007 and the future as of 1937 or 1967.

Now, it's one thing to propose additional spending for things like infrastructure and early education. Infrastructure is an important public good, and early education can shape minds for the better at a time when minds are most changeable. It's quite another to say that a little more taxation and a lot more spending is fine without also addressing future budgetary needs. Whether a right-winger or a left-winger, one absolutely must address entitlement spending when one is discussing long-term federal budget priorities. The US got away with big deficits in the past but it can't indefinitely. If Madrick was looking at the big picture in a responsible manner he wouldn't be so flippant about the deficit, which he sees as needed for the spending he proposes.

Let's go back to the point I agreed with him on: fast wage growth is not bad by default. If only he would make it easy for me.

Such a theory means that federal policies to promote higher wages have an additional justification: economic growth. Higher minimum wages, support of living wages and laws more favorable to unionized labor may actually improve productivity and benefit us all rather than being a cost to society.

...

The wage share of the nation's income has fallen sharply since rising in the late '90s. Inflation is at rock bottom and inflationary expectations are weak.


Thus he claims that the government can force businesses to pay higher wages to the benefit of the economy. Ah, but he makes a mistake I see from many progressives: he fixates entirely on wages as the only form of employee compensation. The true cost of labor includes benefits, especially health benefits whose costs have skyrocketed. Perhaps his call for universal coverage would eliminate that in theory? No mention of that. Jeff implies that the economy hasn't done well by workers because wages haven't gone up fast enough, but an accurate picture requires determining how much employees cost their employers.

Why am I putting so much into 'total cost of labor'? Because he's calling for massive government-mandated increases in wages as a way of raising them, and he's defended this proposition by saying that fast wage growth isn't necessarily a bad thing and by saying that wages aren't rising fast enough. Since he isn't claiming to offset the cost of benefits, he wants wages to go up independent of productivity growth. Even putting aside the basket of anti-minimum wage right-wing talking points, there's one obvious result of this: inflation. Jeff implies that because of productivity gains over the last few decades that there's lots of room for a sudden jump in wages, but that room quickly evaporates when you factor in benefits. Hiking wages to the extent he seems to propose (as I mentioned earlier he's vague) would cause the cost of labor to rise faster than productivity, which is the definition of wage inflation.

Last but not least I'll touch on his idea of what I'd call "progressive protectionism". That is, it's de facto protectionism in the guise of good intentions.

The objective of trade pacts should not be to protect American workers per se but to bring to the rest of the world the progressive revolution in living standards that US factory workers started to enjoy a century ago. Higher minimum wages, protection against labor abuses, adequate healthcare and a decent environment will help develop domestic markets in these nations, which will in turn stimulate their productivity growth and make them less dependent on exporting to the United States. Meanwhile, Americans will compete on a more level playing field and find export markets for their goods.


I can't get over the use of "per se". That implies he wants to 'protect workers' (ie. protectionism), but doesn't want this to be the stated rationale. I've seen a lot of proposals along these lines, and it's an issue on which I believe a person is either unserious or dishonest.

Protectionism, that is putting tariffs on goods for the sole purpose of giving domestic producers an advantage, is a long-since discredited theory. It's something that we can thank for the length and depth of the Great Depression. It's something that sadly has roots in both the left and right of politics in many countries. 'Progressive protectionism' seeks to impose costs on foreign manufacturing for insufficient wages, work standards, benefits and other such things. The implication is that mighty America will dictate to other nations how they handle their economy.

Unilateral sanctions as a "we don't like your specific dictatorship" foreign policy tool have had minimal effect; why would this be any different? Multilateral sanctions, such as those brought against South Africa, have worked. Good luck getting that to happen today. Germany won't put sanctions on Iran for sponsoring terrorism and building nukes, why would they stop doing business with Laos or Chad over minimum wage? It's wildly unrealistic to think that in an age where the US is becoming a smaller and smaller portion of the global economy, we can single-handedly force the third world to raise their standards.

Again, put aside free market talking points on the issue, let's just look at the practical effect. The US threatens the third world with trade barriers, nobody else joins in, and the third world by and large keeps doing what it's doing just without the US. This would be the best way possible to make sure the US misses out on the benefits of globalization. Meanwhile I could talk about how countries with decently free markets have moved into the global middle class thanks to trade without the attempted use of progressive-minded economic hegemony, but hey, it doesn't matter because everybody knows we won't be a global economic overlord for long. Jeff either believes that such a trade policy would work exactly as he says, or he's using it as a mask for populist protectionism. Politicians tend to do the latter, but I believe Jeff is honest. And by honest I mean incredibly wrong.

When you accumulate all of the ways to "fix" the economy you're left with wage inflation, a bigger debt leading into the entitlement crunch, one-way trade barriers and higher taxes. Sounds like the solution is worse than the problem to me.

1 comment:

Anonymous said...

Well said.