The problem with the current structure of our safety net programs

All predominantly capitalist societies, in one form or another, have some type of safety net in place. The rationale for them are diverse, but nonetheless compelling. Most obvious is the safety net’s role in preventing citizens from experiencing the suffering of abject poverty, to the extent that their very survival is at stake. Besides this, safety nets play crucial roles in stabilizing the business cycle, reducing structural unemployment (arguably, by allowing people time to find jobs that best match their skill-sets), and boosting productivity by boosting citizen well-being.

America’s complicated web of social assistance programs also serve these crucial purposes, albeit oftentimes inefficiently and rather ineffectively. Multiple programs tend to overlap, and many are desperately under-funded and poorly designed. Yet arguably the most damaging aspect of America’s social safety model isn’t the public element; rather, its the usage of the private sector for purposes of social justice.

Take, for example, the current structure of our post-World War 2 healthcare system. Utilizing tax exemptions, the government essentially subsidizes employer-sponsored health coverage for employees, incentivizing employers and employees alike to obtain generous employer coverage. In other words, the government uses the private sector to achieve the goal of public health. The ACA worsens this via the “employer mandate”, forcing employers with 50 or more “full-time employees” to provide coverage to their employees or pay a penalty. Rather than ensuring skimpy but adequate government insurance for all citizens as a safety net baseline, the government uses the private sector to do its bidding so as to avoid the label of “government takeover of healthcare” and to give the appearance of limited government.

Arguably, the same might be said for the imposition of the minimum wage. Rather than guarantee its citizens a bare minimum financial safety net, it forces businesses to look after employee’s personal well-being themselves (which, obviously, one can make an argument that businesses looking out for their employees and not “taking advantage” of them is a good thing that is to be desired; but the point that the government seems to offload its responsibilities to its citizens by placing it on the shoulders of businesses shouldn’t be automatically ignored).

This (arguably, uniquely American) structure likely has many ill-effects. First, rightly or wrongly, it places the responsibility of minimum standards on institutions whose foremost goal is the achievement of profit (which is not a criticism; it is, rather, the natural aim of businesses) which, although oftentimes in alignment with the goal of worker well-being, is not always so, especially in industries with large quantities of lower-skilled labor. Second, this model inherently has rather large amounts of red tape imposed upon businesses that make it much more difficult to function efficiently and without liability. This can often create scenarios of costs vastly outweighing the benefits, hurting citizens more than it helps. Third, it is an incomplete safety net model, as many people are temporarily (or for longer periods of time) disenfranchised from the labor market, and therefore have little to no interaction with the businesses  the government attempts to use to achieve social goals.

None of this is to say there is zero need for internal regulation of businesses or that businesses can’t play a role in the social safety net. But we should consider the idea that there are many circumstances in which the government ought to play a role in provisioning social assistance that is entirely independent and separated from private business – both for the benefit of business, and the benefit of society as a whole. Right now, in my opinion, we have too much government manipulation of the private sector for social aims – and not so much to show for it.

2017: Reaping What We’ve Sown

After a tumultuously good, bad, and ugly 2016, the arrival of 2017 brings with it new opportunities, new challenges, and – perhaps most importantly – a fundamental shift in domestic and international policy landscape, the likes of which we have not seen in decades. After the infamously shocking upset by Donald Trump in his bid for the presidency, the United States will on January 20th have a unified Republican government for the first time in eleven years. Rather than serving as a refreshing concreteness about the direction of policy and its implications (in contrast to the past several years of gridlock), however, in some ways things are more unstable and uncertain than ever. Although a unified GOP agenda is gradually materializing, many of Donald Trump’s proposals departs from established Reagan-era Republican ideology, and much of his behavior departs from norms that transcend partisan boundaries. Even for Mr. Trump alone, inconsistencies and repeated u-turns in his policy stances make for a very uncertain 2017.

My worries for this year and the years that follow are many. Top concerns include:

  1. Trade wars. Mr. Trump has taken a uniquely protectionist stance that threatens the post-World War 2 American-lead global consensus on generally free trade, vowing to renegotiate treaties (some of which are Reagan-inspired, like NAFTA) while slapping tariffs ranging from 35-45% on imports from China. Not only will such measures, if enacted, reduce the benefits America receives from the laws of comparative advantage (e.g. lower consumer prices, employment opportunities, etc.), but they threaten counter-measures and reprisals that could spiral into full-blown trade wars. Such a scenario could prove catastrophic – our last set of big trade wars, during the early 1930s, greatly exacerbated the Great Depression. Were another round to occur, the economic and political  ramifications could easily upend the current international order.
  2. The disintegration of domestic and international norms. Mr. Trump does not demonstrate a knowledge or respect for established norms and practices, such as honoring NAFTA commitments, not engaging in a nuclear arms build-up (which, unlike conventional warfare tactics, will do nothing other than provoke an arms race; such weapons derive power from strategic positioning, not quantity), the cultural repulsion of Japanese towards maintaining their own nuclear weapons, the implications on U.S.-China relations of indirectly recognizing Taiwan as an independent state, and a dangerous habit of immaturely lashing out at critics, to name a few examples. This lack of knowledge and respect and the resulting breakdown will make the world more unstable and less secure as institutions weaken and the historic anarchy of states reigns with greater freedom. Such institution-weakening globally will reflect our institutional deterioration at home, where the electoral process has been repeatedly undermined with false accusations and uncertainty regarding the peaceful transfer of power.
  3. An enormous exacerbation of our fiscal sustainability issues. Mr. Trump’s plans to cut taxes aggressively whilst preserving entitlement (Medicare, Medicaid, Social Security) and defense spending will wreak havoc on a debt situation that is, in the long run, already quite unsustainable. Deficits will not only jump sharply in the short run if such plans are followed through with, but will stay higher permanently (in other words, the structural deficit will grow). It is highly likely a follow-through with his plans will entail a near continuous expansion of debt at growth rates that exceed that of GDP growth, an unsustainable situation in the long run (and a dangerous one in the short-run with an economy that is already operating close to full employment – think inflation). How plans to cut taxes will be reconciled with also strong desires to reduce deficits is a key question as the administration prepares to take power.
  4. Regression on healthcare. Don’t get me wrong, the Affordable Care Act is an incredibly flawed piece of legislation. Its weak individual mandate, combined with minimum benefit standards has placed great upward pressure on premiums (and, especially, deductibles) without much relief from subsidies (yes, the subsidies are too low and stingy) whilst still leaving millions uninsured. The deterioration of the insurance risk pools has become so acute that many insurers have been fleeing the ACA’s state exchanges for the past year. Not only that, but the regulatory burden imposed by the ACA on employers (such as stringent definitions of full-time employees, the employer mandate, filing requirements, new taxes, etc.) have generated a large amount of waste, inefficiency, and consternation. Yet, it is my belief that a repeal of the act (and the resultant loss of insurance of 20 + million Americans) would, in the long run, be to the detriment of the United States if an adequate replacement is not implemented. The availability of health insurance is correlated (in a causal way) to better health outcomes, something of which is crucial for worker productivity (and thus, living standards).  Not only is good health and the associated productivity benefits good for the recipient themselves, but the positive spillover effects and externalities of workers having health insurance can benefit businesses as well (e.g., the associated productivity gains and their impact on the corporate bottom line). Like education, health insurance is a good/service that markets have a tendency to inadequately supply at levels below those that would be optimal for society (especially for those who need it), but which governments can help bring to optimal levels via intervention. As such, repeal of the law without an adequate replacement will contribute to deteriorated health outcomes (especially if preventative care cannot be accessed), lower productivity, and lead to continuing high levels of medical bankruptcy that have placed large dents in consumer spending and has financially devastated families, to the detriment of everyone. Not only that, but the experiments the law has initiated (for example, to pay providers in bundled payments) to save costs could prove instrumental in efforts to cost-save down the road. Finally, the repeal of the law will not automatically root out many of the structural causes of healthcare cost growth that the public has complained about, such as an aging population, the inability of insurance to compete across state lines, the monopolization of hospitals, the adoption of costly high-tech medical technology, insufficient price negotiation with drug providers, continued disequilibrium in the tax treatment of healthcare, overuse of uncompensated care in emergency rooms, medical malpractice litigation, and poor diet/exercise habits, to name a few factors. As such, if the law is repealed without a good replacement, expect the number of uninsured to grow greatly while, after an initial slowdown or decline, costs resume their march upward.

The Faint Silver Lining

2017’s uncertain outlook isn’t entirely bad. In the short run, at least, the likely passage of some form of tax cuts and infrastructure spending (and resultant fiscal stimulus) will likely boost economic activity by mid-year 2017, further lowering unemployment and closing what remains of the output gap. Granted, the irony of more deficit-financed fiscal stimulus after years of Congressional resistance shouldn’t be lost upon us, and it is rather late in the business cycle for such measures, but there is an argument to be had for a bit more stimulus still. Besides, if it is well-invested (especially on maintenance, not the creation of new projects), infrastructure spending could be a boon to long-run productivity growth, the engine of long-run economic expansion. Additionally, corporate and/or general tax reform and simplification could be beneficial by lowering the amount of time and resources needed to comply with the tax code (and instead directing such resources towards more productive uses), further boosting growth and incomes.

The question is, will the beneficial impacts of our new policy regime outweigh the dangerous risks listed above (especially in the years beyond 2017)? We’ll have short-run fiscal stimulus, yes, but with (likely) permanent marginal tax rate cuts, higher structural deficits will also be permanent, not short-term. The boost to growth will likely occur in 2017, yes, but will trade wars or the Fed’s concerns about the inflation outlook lead them to raise interest rates, sinking (or, worse, cratering) growth in the years that follow? And what about the effects of new policy stances on healthcare, foreign policy, and – perhaps most concerning – the health of our defining norms and values as Americans?

I’m not particularly optimistic about the overall prospects of our uniquely uncertain direction as a country. Hopefully, my bleak outlook can be proven wrong.

The Importance of Context

Harry Truman, in speaking about his frustrations with his economic policy advisers, once quipped “Give me a one-handed economist. All my economists say, ‘On the one hand…on the other…'”. Not only is this characterization of economics one of its more appealing features to me, but I think this “it depends” mentality needs to be adapted more widely in discussions of policy and politics. Too often, a culture of puritanical ideological dispositions with one-size-fits-all prescriptions for our problems dominates, when in reality, nothing is quite that simple.

Take taxes, for example. On one side, the drumbeat is that taxes must always be lower, as this will be “good” for the economy. On the other side, the drumbeat is that taxes (especially for the “rich”) must be higher, as this will be “good” for society. While these principles are fine as general rules, they become extremely problematic when they become the sole determinant of a policy decision, without taking into account other factors. For instance, tax cuts could be “good” for the economy, but it depends on the answers to several other questions, including “What are current levels of taxation, in a historical context?” “Are current levels of taxation “low” or “high”? How do we define those?” “Do current levels of taxation produce economic harms greater than any additional revenue generated?” “How would the economy respond in the short-run? Is this desirable, given current conditions?” “How would the economy respond in the long-run? Is this desirable, given expected conditions?” “Are the benefits of tax cuts of size x of greater utility than the costs (e.g. spending cuts, extra debt, etc.) of said tax cut?” “Are the opportunity costs of a tax cut (e.g. foregone investment, less debt, etc.) of greater value than the economic benefits of the tax cut?” Even more important are the answers to questions relating to values and goals. What are the outcomes we are trying to accomplish? Does the proposed solution help to generate that outcome? What can we consider as a “good” or “bad” outcome?

Politics boils down needed detailed discussion to basic slogans that are more easily understood by the public. This is good for getting people at least marginally involved in policy discussions, but the problem with this is that it can lead to solutions that are inappropriate for a given situation. You can generally be for certain policies based on certain principles, but I think it is unwise to glue yourself to specific policies based on principles without allowing for situational context to inform the creation of your solution. The same can be said for ideological labeling, which too often gives people the impression that ideas and solutions are always mutually exclusive from one another for a given person. For example, if someone either describes themselves as a “conservative” or a “liberal” (or is generally considered to be so), it is often assumed they will always be for specific policies all the time (e.g. lower taxes for the former, or universal healthcare for the latter) and never for things considered contrary to their ideology. While this isn’t entirely unrealistic (as many people do adopt such blunt thinking that consistently fits certain labels), it is not always the case, and certainly doesn’t have to be the case. A person can generally describe themselves as a conservative, but advocate for “liberal” positions on certain issues for specific situations (or even hold “liberal” positions on certain issues more generally). For example, a person can generally hold the belief that lower taxes are “good” for society, but support raising them or not cutting them in certain situations (e.g. if the’re already “low” as defined, to balance the budget, etc.). General support for a specific set of ideologies need not (and I argue should not) exclude any support for things considered contrary to their basic principles. A rigid adherence to principle is not efficient, nor optimal, for policy solutions, and divides people in ways that make it difficult to work together constructively. This is precisely why I think that there are really at least two different types of beliefs that ought to be recognized: general beliefs and principles, and positions for specific situations (that might seemingly run contrary to one’s general beliefs and principles). Not only does this describe reality a bit more accurately, but it should become ingrained in our politics. Instead of “I believe this which automatically= specific policy position”, it should be “I believe this in general, but it depends for specific issues and situations”.

To sum up: context is important. Without it, we cannot respond appropriately to certain problems, and if people are seen as strict adheres to principles regardless of the specifics of a given situation, divisions increase, and compromise is rendered impossible. Unfortunately for us, that far too often seems to be the case in the stunted world of modern politics.

I hate to sound like a deficit hawk, but…

I’d like to elaborate on this post more soon with more detail (and fun graphs), but the topic of fiscal policy and continuing federal budget deficits has been on my mind lately. My thoughts are:

  1. The economy is operating close enough to full potential that any Keynesian deficit-financed stimulus would potentially be counterproductive at this point. Similarly, continued annual deficits increasingly run the risk of crowding out private sector spending as resources are used to fuller capacity. If crowding out were to occur, interest rates would almost certainly rise, hurting growth. Though economic slack does remain, we should be increasingly cautious about running large-ish deficits in the coming years.
  2. Our long-term debt sustainability issues (which are our actual problems) certainly are not helped by short-term debt accumulation. Though acceptable in times of economic downturn and during recovery, short-term debt accumulation is less acceptable when an economy is both growing and has almost returned to near full operating capacity. If we continue to run structural (e.g. cyclical = 0) deficits, as we have for the past four decades, even in good times, our capacity to deal with the coming surge of entitlement spending will be greatly diminished. In many ways, though, we’re already too late on this regard.
  3. It might even be optimal to try to run a balanced or even more than balanced (e.g. surplus) budget for a few years. Normally, the rule-of-thumb is that, in the long run, annual debt growth (which roughly equal annual deficits) must be equal to or less than annual economic growth in the long-run (indicating that even balanced budgets are technically required for sustainability). Though this is now the case at the moment, our current deficit of around 3% of GDP is only small enough to about stabilize our debt/GDP ratio of around 75%, not reduce it. And arguably, reductions in debt/GDP would be preferable soon to give us more room for the coming entitlement spending and any future recessions we might encounter (and also to reduce the risk of a debt crisis).
  4. At the very least, we should continue to try to reduce our structural budget deficits while promoting long-term government investments (for example, in infrastructure, R&D, etc.). At the present time, further fiscal stimulus would seem inappropriate; the window for action has passed.
  5. Reduction of budget deficits is not only about timing, but rates of change (which is where the calculus comes in). Any plan must not just offer targets and amounts, but how quickly those targets and amounts are to be achieved and any feedback loops that might ensue
  6. None of the presidential candidates offers a viable long-term deficit reduction/debt stabilization plan, which is appalling. Indeed, many (especially Trump and Sanders) would dramatically increase our rate of debt accumulation in a very unsustainable way. Though many candidates offer proposals for productive spending, both that spending and, more crucially, the coming increase in mandatory program spending should be at least partially paid for, via tax increases or spending cuts. None elaborate on such a plan.

In my world, the government would:

  1. Enact reforms to mandatory programs (e.g. Social Security, Medicare, Medicaid) that progressively reduced benefit growth and raised more dedicated revenue (for example, by increasing the payroll taxes’ income cap)
  2. Reduce wasteful spending in the form of corporate subsidies (e.g. agricultural, fossil fuel), DOD procurement waste, redundant programs (for example, many overlapping government assistance programs)
  3. Raise general revenue (via reductions in excludability of health insurance from taxation, gradual phase-out of mortgage interest deduction, caps on deductions/deductability of some items, etc.)
  4. Modestly raise spending on direct R&D and R&D tax credit, transportation (highway) funding, job training programs

A more detailed discussion of the fiscal situation and solutions I would endorse will follow soon. But I thought it would be good to write down my general thoughts on the matter.

Defining Definitions in our Election Discourse

This post’s main purpose is to serve as an outlet of frustration over the muddling of definitions that is particularly prevalent in this election cycle. Prior to 2015, Americans’ understanding of the meaning and beliefs of different political ideologies already seemed confused (in my opinion). However, the rhetoric of political candidates has not helped. In particular, my complaints lie mainly with Bernie (who, for some inexplicable reason, has still not conceded to Clinton’s insurmountable delegate lead in the Democratic nomination). People seem to think he has done a service for the country by helping to “de-stigmatize” the word socialism, which is considered to be a much more prevalent ideology and economic system in Western European countries. However, I think that he has actually made things worse for political discourse by 1) confusing people about what pure, traditional economic socialism really is 2) by confirming the false belief among many that American liberals are actually best defined as socialists, when I’d argued they’re much more pro-capitalism than pro-socialism and 3) Potentially de-emphasizing needed attention on the very real destructiveness that pure socialist economics has historically wrought on societies and the many lessons that they entail. I will begin by laying out the different terms and what I think the definitions truly are before proceeding to the other arguments noted above.

  1. Socialism: Bernie Sanders likens himself as a socialist at heart. But is he really best described as that? My definition of socialism falls along with the economic, traditional definition of socialism. Particularly, it entails the “common ownership and control of the means of production”, typically by the state (although historically, many variations of socialism have appeared in which other entities, institutions, or the masses themselves own and control the means of production). The means of production are any economic inputs (typically tangible and physical) used to create economic value or output. They can include machinery, factories, roads, infrastructure, educational institutions, etc. In my mind, if Bernie Sanders was truly a socialist, he would advocate for the government to both own and control virtually all of the means of production (including businesses, factories, etc.) This would entail a program of large-scale nationalizations of industry. Aside from “nationalizing” (better termed as a national replacement) of health insurance and 100% public funding/control of tertiary education, however, he has no such program, and largely keeps in place private ownership and control of the means of production (e.g., he allows for businesses to continue to be privately owned and operated). Consideration of the fact that all societies have different ratios of private and public ownership of the means of production leads to the important point that these ideologies and policies do lie along a spectrum. But in describing whether he better fits a socialist mold or a capitalist mold, he’s arguably more pro-capitalism than pro-socialism in general. Only his advocacy of nationalized health insurance and tertiary education would make him truly relativelymore socialist than other candidates, per my definition. Instead, his policies reflect interventionism within the confines of a predominantly capitalist economic framework that he’d like to keep intact (e.g. the taxation and regulation of a capitalist economy, with other interventions in the form of government spending). As a result, he’s much better described as a social democrat or an American liberal than a socialist…
  2. Social Democracy/American Liberalism: First, it’s important to note that these two terms are not the same. But they are quite similar. Essentially, both argue, in consideration of my definition of socialism, in a capitalist mixed economy with heavy amounts of government intervention (taxation, spending, regulation). Although these ideologies do entail some elements of pure socialism (e.g. public roads, public schools, national health insurance, etc.), they are far from pure USSR-style socialism, as private industry is still prevalent (indeed, dominate) within their prescribed economic systems. Now, granted, the taxation and regulation of capitalist institutions that they advocate for entails some control of these private means of production by the state. But not full control by any means, and certainly not actual ownership, as pure, traditional socialism would entail. It is also true that social democracy did start out as an ideology of gradual reform of capitalism into a system of socialism via democratic means over time. Now, however, like American liberalism, it’s essentially the definition stated above, with an emphasis on income redistribution and social justice. Therefore, in social democracy and American liberalism, capitalism still reigns, and given Bernie’s proposals, he best fits within these categories (which, by the way, I’m far from the first person to notice or argue).

A few things to derive from above:

1) These terms are all pretty vague and overlapping, even utilizing the narrowest of definitions. There’s technically no 100% correct description to be found for different candidates and economic systems.

2) Economic systems typically contain a mixture of capitalist and socialist elements. In my view, it’s the extent that some elements dominate that truly characterizes systems and people’s political ideologies (e.g., if more common ownership of the means of production prevails in an economy or a person advocates for mostly common ownership, it’s a socialist economy or the person is socialist, respectively). This observation of non-purity can also lend support for a dialogue of relativity (e.g., someone or some economy is relatively more socialist or relatively more capitalist than another).

3) In my opinion, the taxation, regulation, and spending of social democratic and American liberal policy aren’t exactly socialist elements (at least, not pure elements; perhaps quasi-elements). Rather, I would argue they are forms of interventionism within a fundamentally/overwhelmingly capitalist framework (private ownership of the means of production). Thus, Bernie is a social democrat/American liberal, and American liberals are not truly socialists.

4) It should be clear that, even in overwhelmingly capitalist America, true socialist elements do exist that actually serve useful functions. Public roads, public schools, public infrastructure, etc. are indeed prevalent in all overwhelmingly capitalist economies and can technically be characterized as true examples of socialist ownership and control. What really matters is what economic means of production are private versus public and balance of the ratios in determining economic and societal well-being.

All of this is also not to say that the taxation, spending, and regulation advocated for by social democrats and American liberals do not have some negative consequences, even if such interventions are not really “socialism” (e.g. system is still mostly privately owned/controlled). And it’s especially not to say that purely applied, across the board economic socialism is not destructive, when it clearly has been in the past (USSR, China, Vietnam, etc.) The economic misallocation of resources stemming from predominate state socialist ownership and control (and the ensuing incentive and signalling problems) brought upon massive economic hardship and destruction of human well-being in multiple countries throughout the 20th century. That’s what’s truly concerning to me. Although socialism shouldn’t be the taboo word it has been, considering it is found to be functioning within American society at this very moment, people should be very weary of the extent of its application and for which segments of the economy it is applied to. The very same can be said for capitalism, too. Thus, we need to shy away from puritanical, black versus white thinking – with its all-or-nothing propositions – and finally let informed, pragmatic thinking lead the way.

Thesaurus

The Case for Pragmatism

Politics in America is broken. We all know that; we all feel it. Congress can barely legislate; families and individuals disagree sharply on almost every issue imaginable. And yet, despite the recognition, it keeps getting worse. Not only have political parties sorted themselves almost completely by ideology, but extremism is on the rise on both the left and the right. Indeed, things have become so contentious that that almost every fact-based article likely will not help towards resolving the unproductive tensions that plague our discourse; rather, it will probably serve to further exacerbate them. But I just can’t take it anymore. I’m sick of the puritanism, the all-in-one position packages people accept to be a part of their liberal or conservative tribes. I’m tired of the feel-good rhetoric that spouts simplistic messaging that caters to the predispositions of people, oftentimes without basis in truth. Whatever happened to American thinking and intellectualism? Whatever happened to solving problems, to recognizing trade-offs, to thinking critically about each issue and doing the research to determine the facts? More importantly, whatever happened to an emphasis on the unbiased and objective determination and analysis of facts?  Politics has turned much too much into a basic football game, with teams and fans cheering or sneering at the players. It’s a feel-good game that people participate in to feel included in their team, instead of recognizing that the entire stadium is on fire. It’s time to grow up and get past our differences to put out the fire; not only that, but to actually do things that will actually put out the fire, not make it worse.

As a country, here are the things we ought to agree on and base our actions on:

  1. Almost all of us like freedom. It’s defining it and the extent it should be allowed that becomes challenging
  2. Our civic values are what unite us as a nation. Not religion, not race, not even culture. Rather, it is our core beliefs in Western values.
  3. There is an important role for government, albeit a “limited” one. Defining limits is tricky and subject to different, reasonable arguments.
  4. Proper policies should favor the inputs of data and context over ideology. Different situations and results call for different actions/non-actions.
  5. There are many problems, some of them serious. But in myriad ways, America has never been “greater”. No matter what Trump, Clinton, or Sanders think, things are actually pretty good.
  6. All sides have something to offer. There is not one set of “correct” solutions that should be implemented puritanically. Rather, a mix of solutions that is dependent upon context and data are necessary.
  7. Never believe everything you hear; rather, challenge everything (appropriately). 

These points of (what should be) agreement naturally call for cautious and thoughtful debate and consideration of each problem and possible solutions to lay out a program of gradual reform. In other words, the exact opposite of what we actually have.

 

 

Hello 2016

It has been awhile since I last posted in mid-2015. To say a lot has changed since then is, quite simply, a vast understatement. In economics, the Fed raised interest rates while Japan adopted negative rates, China is slowing, Europe is recovering, oil prices are at historic lows, and the IMF recently issued a surprise recommendation that the world’s developed economies adopt coordinated expansionary fiscal policy to prevent global growth from stalling. In world affairs, ISIS is slowly being weakened while Islamaphobia rises, Russia has intervened in Syria, a nuclear deal with Iran was signed, US relations with Cuba continue to thaw, the Trans-Pacific partnership has made progress, and plans to close Guantanamo Bay have emerged. In US politics, Paul Ryan succeeded John Boehner as Speaker of the House, Bernie Sanders has emerged as a surprisingly strong presidential candidate to Clinton’s left, and the Republican Party is collapsing into anarchy as Donald Trump is poised to win the GOP nomination. So much more has occurred, and so much more will occur, as we progress through this pivotal 17th year of the 21st century.

Going forward, I intend to post more regularly on daily/weekly happenings as well as broader subject areas of importance. In terms of the latter, I will lay out what I think should be the key priorities for US domestic and foreign policy, an analysis and argument for the policies I favor, and how this all relates to the 2016 presidential election. Additionally, an analysis of domestic and global economic trends and policies will also be offered regularly. However, in a break from historical precedent, I hope for the blog to include a greater number of spontaneous daily reflections on an even broader variety of subject matters. As such, postings should generally become shorter and more to the point. This will accommodate me much better as I simultaneously seek to finish the remainder of my post-secondary education.

2016 promises to be a new chapter, both for myself and for the world at large. In almost every single way, life is transforming rapidly and unpredictably. This year will have outsized importance in determining the trajectory of things to come. Yet as always, the paradox of path dependency looms prominently. No matter how much things change, just as much stays the same, and history can offer a compelling guide as to how the repeated narrative plays out, and what we should do about it. It’s up to us to utilize history and critical analysis to try to mold the future to create optimal outcomes for the greatest number. The question is, are we willing to embrace a new-found pragmatism in the face of unrelenting ideological irrationality and entrenched policy paralysis? If we are, then the future looks very bright indeed. If this blog can contribute to that those developments, no matter how insignificantly, then I will consider it to have succeeded in one of its core missions.

So with that, I say: hello 2016. And welcome to the Pragmatic Revolution.

Achieving a “2020” Vision

I wouldn’t be surprised if people on the internet have already used this play on words, but seriously – why isn’t this a major campaign slogan yet? Even if the vision is inarticulate and 2020 has nothing to do with the objectives, it’s still a catchy phrase.

But I take it one step further by integrating it into a neat little tax plan. Specifically: 20% flat rate. $20,000 standard deduction. By 2020.  It’s that easy.

Here’s how my dream plan would work:

  • Repeal the current income tax code.  Replace with a 20% flat rate applied to all taxable income (including capital income).  This provision contains a lot of benefits, with some amendable drawbacks.  A flat 20% rate would be fair and efficient.  Everyone could calculate it (exactly 1/5 of their taxable income), and its simplicity would destroy the artificial need for tax-preparation services.  This saves the economy billions in both dollars & hours.  It is reasonably fair – proportionally, everyone pays the same, but the rich still pay more in absolute amounts.  It would not change the tax owed by those with capital income too much (already, the top rate on capital gains is around 20%).  Additionally, its simplicity is pro-poor, who often lack the resources for tax consultation services.  Granted, it would represent, in some ways, a “tax hike” for many lower and middle-income people (who previously had lower rates applied to their incomes).  But this can be at least partially (if not fully) offset by a much higher personal exemption and preservation/improvement of a few antipoverty tax-credits (see below).
  • Introduce a $20,000 personal exemption for all households, indexed to inflation.  Starting in 2020, this generous exemption amount would be fully phased in.  It essentially means that not a penny of every dollar up to $20,000 per year will have the income tax applied to it.  In this way, people at or near poverty would not see their tax burdens increased (for many, potentially decreased compared to the current system).  Indeed, it’s at least five times larger than the current personal exemption ($4,000) and provides complete relief to people whose income is nearly twice the poverty line ($11,770/year in 2015).  The exemption amount would be adjusted for non-real increases in income (e.g. inflation) on an annual basis, chained to the index of the candidate’s choice.  Such a high exemption amount should help pave the way for elimination (or near-elimination) of any deductions (especially itemized deductions, such as the mortgage interest deduction, which primarily benefits wealthy taxpayers).  Among the biggest benefits in the vision’s exemption provision is that it allows for some continued progressivity in the tax code.  For example, a person with $20,000 in annual income would pay 0% in income taxes ($20,000 total income – $20,000 exemption = $0 in taxable income * 20% = $0 in taxes = 0% of total income); in contrast, someone with an income of $100,000 would pay about 16% in income taxes ($100,000 total income – $20,000 exemption = $80,000 in taxable income * 20% = $16,000 in taxes = 16% of total income).  So, the effective tax rate is progressive (increases by income), but it is proportionally the same for everyone above $20,000.

And there you have it.  Those two elements – the 20% rate with the $20,000 personal exemption – form the 2020 in the plan.  Benefits, already described somewhat above, include:

  • Simple calculation
  • Elements of fairness (combo of progressivity and equal proportionality)
  • Would likely boost growth & efficiency of tax collections
  • Could very well boost economic growth
    • simple calculation = less time & resources devoted to calculation = higher productivity, savings
    • lower rates boost economic demand and/or supply

Drawbacks include an uncertain impact on the federal budget and the tax burden of the poor/middle class.  For the former, there is reason to think that this plan could well boost tax revenues (thereby helping to close the annual deficit).  The simple calculation of the tax could boost compliance, and the higher growth it could produce would mean higher incomes = more revenues.  Additionally, the elimination of many deductions and credits would save a ton of money; currently, federal tax expenditures total around $1 trillion per year.  As for the burden on the poor/middle class, this plan could entail the loss of several tax credits or deductions that currently benefit them.  To mitigate the impact, some of these credits/deductions could be maintained, but at the threat of making the plan less fiscally sustainable.  Additionally, the impact on those whose incomes are not high but fairly above the poverty line (e.g. those above $20,000, but not too far above) is concerning; it’s unclear whether the proposed tax plan would represent a sizable increase in their tax burden relative to the current system (despite the $20,000 exemption).  People will also scream that this is a tax cut for the rich (who face marginal tax rates of up to almost 40% in the highest income quintiles).  However, it’s important to remember that even the effective income tax rate of the richest in America usually comes in around 20%.  With the 20% rate applied to all of the income of the super-rich (except the first $20,000), their effective rate will basically be 20%.  And with the elimination of some of their favorite deductions and loopholes, it could even represent a tax hike for them.

For too long, our political system has been paralyzed by short-term thinking and an unhealthy attachment to everyday opinion polls.  Now more than ever is the time for policymakers to start projecting clear, attainable visions for the future, with workable frameworks.  When it comes to the tax code, this plan isn’t anywhere near perfect; not by a long shot.  But it’s a place for them to start.

 

 

 

American Freedom: it’s time to put a ring on it

Well, this is it. Any day now (possibly within just hours of this posting), the Supreme Court will finally determine the constitutional status of gay marriage nationwide; and in the process, will likely end up overturning the few remaining barriers to a new era of positive freedom for the United States. Though being deliberated on by just nine elderly justices, I’m confident their determination will reflect both the overwhelming tide of public opinion and the true meaning of liberty as intended by the Constitution. It is something that is inevitable; it is something that is unprecedented; and simultaneously, at the same time, it is something that is long, long overdue.

To many, this will be a bitter pill to swallow (surprise!) . I know, because at one point, that would’ve been my situation. Social conservatism is a very powerful force in this country. That’s not at all inherently a bad thing (I’d argue much of that sentiment is actually a force for much good), and many well-meaning, good people, people whom I love very much, hold very traditional, socially conservative values.  And they have a right to do so.  But the ideology and core beliefs that they espouse has a tendency (sometimes, but not always) to overrule independent thinking, or the ability to think of different possibilities and to adapt accordingly (although to be fair, that’s generally true for all ideologies).  The value system that structures “traditionalists'” world, in reaction to a non-traditional concept, tells them no, or that it’s wrong, and that no other reality can or ever should exist.  Whether it be for moral or religious or status quo reasons, preservation of “tradition” (as constructed) is key.  Anything else is a threat, and is labeled as wrong and undesirable accordingly.

I deeply understand all of this; again, like I said, I was at that point once.  But I strongly challenge all those who still hold “traditional” views to seriously rethink their positions; if not on every social issue (which is understandable), then at the very least on this issue of gay marriage.  Because the arguments for gay marriage are simply overwhelming on all angles – from a societal, economic, and moral standpoint.  Now, it should go without saying I won’t be able to address anywhere near the full amount of arguments both sides pose (nor do I really want to), and I’m certainly not an expert on anything.  But here are a few brief things that I think people who oppose gay marriage should consider (and yes, full disclosure, my opinion is injected into many of these arguments):

1)  First and foremost, having “unconventional” attractions is simply NOT a choice.  Too many people, too many studies, too many instances in the animal kingdom confirm this.  And I have no idea why someone would EVER choose (given rampant societal discrimination) to have “unconventional” attractions.  It’s a perfectly natural thing that just is.  If this cannot be swallowed, spend some time on it (especially if you want to even begin considering gay marriage pros/cons).  If second-hand sources don’t suit you, then please, go out and meet people who have these “unconventional” attractions (there are many such people – more than you’d think – and whether they identify as LGBTQ or not).  Your perspective will be transformed; perhaps not instantly, but inevitably, it will be.

2) America is (quite simply) built for freedom (including religious) and the pursuit of happiness.  If you object to gay marriage, you can freely say so, refuse to endorse it, say you think it is wrong, etc.  Those are all legitimate beliefs you are entitled to personally have.  But America’s promise is to allow all people to live their lives as they see fit to pursue happiness (as long as they are not harming anyone else).  If you object on religious grounds, that’s fine; but America is not about forcing people (via the government, of all institutions) to be confined to your beliefs, or for you to be forced to follow theirs.  Let’s not deny any group of people their right to pursue happiness; especially those who are not harming others or infringing upon anyone else’s rights.

3) Gay marriage does NOT harm anything, including the institution of marriage.  Quite the contrary; it bestows countless benefits from almost every angle imaginable.  To put it in a rambling, incoherent sort of way: economically, expanded marriage rights increases people’s financial security, decreasing expenditures on social assistance programs. This reduces the budget deficit, resulting in lower-than-status-quo-trajectory debt levels.  Psychologically/economically, expanded marriage rights boosts happiness/self esteem, leading to higher productivity and more economic growth. This allows for more tax revenues/less social expenditures, again resulting in a lower budget deficit and lower-than-status-quo-trajectory debt levels.  Socially, expanded marriage rights helps to save (not destroy) the institution of marriage, which is already crumbling due to 50% + divorce rates among “traditional” marriages.  Socially again, expanded marriage rights helps to reinvigorate the nuclear family (again, crumbling largely due to high divorce rates).  Again from a social standpoint, marriage is not an unchanging institution (it has changed countless times over centuries and millenia).  Thus, the expansion of marriage rights does not constitute an attack on marriage.   Socially/morally, expanded marriage rights allows for continued/easier discussion on the inherent humanity and entitlement to equality of LGBTQ people, providing progress towards further acceptance and integration (among other economic, psychological, social benefits, etc.).  Morally, it also represents a basic expansion of positive freedoms (freedoms to do something, not from something), which, especially in this case , is a very good thing.    And the list can go on and on and on.

Nothing I’m writing here is in any way revolutionary, or is something that hasn’t been said before. Really, all I’m doing is simply adding my voice to the voices of millions of my (far more courageous) fellow millennials in calling for full marriage equality within the United States, and providing a short list of supporting rationales. But I felt like I should at least go on record expressing said support, mere hours/days before a ruling, even if it ultimately does nothing to change the minds of naysayers.  Because right now, fifteen years into the 21st century, it is time for American freedom to start reaching its fullest extent possible – and for us to finally do the right thing, and put a ring on it. Those who have been denied the right to marry whom they love, simply because of who they are, surely deserve nothing less than that.

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Not yet, Janet: America’s still not ready for a higher target rate

A common observation of my blog by readers is the fact that I don’t oftentimes take strong positions on the issues I discuss.  At first,  I took these comments with great pride, because being impartial and presenting multiple possibilities to a question is the defining hallmark of the economics profession.  President Harry Truman once remarked: “Give me a one-handed economist! All my economics say, ”On the one hand, on the other…”.  But, as the Truman quote suggests, this is not always a splendid thing.  People want precise answers and opinions; and although I do oftentimes think in ways that incorporates both sides of an argument, I am not without biases of my own.  So to mix it up a bit, I’m going to prominently infuse those biases into the posts I make.

And what a perfect time to do so, because policymakers (particularly of the monetary kind) have some big decisions to make soon.  The context can be painted as the following: the American economy is finally operating close to (or much closer to) its productive capacity.  Official employment is almost “full” (with U3 at 5.5% in May), and wages are finally beginning to rise at a faster clip (nominal wages are up 2.3% year-over-year in May, the fastest since 09′).  But inflation remains very subdued, with year-over-year core PCE and CPI inflation rates still hovering between 1 and 2% (below the Fed’s 2% target).  The Fed, under the direction of chair Janet Yellen, has indicated (currently and historically) that it’s target for the Federal Funds rate (the key rate on overnight bank loans) will be raised once these thresholds are approached.  But there’s a few reasons why I think it needs to wait longer:

1) Historically, inflation hasn’t spiked when unemployment fell below its estimated “NAIRU” rate.  As noted elsewhere on this blog, as the U.S. economy reaches it’s productive capacity (equilibrium), this is likely to push up wages as employers compete more for a scarcer supply of workers. This helps to produce “wage-push” inflation; businesses hike prices to pay for higher wages (at least partially), and workers use their higher wages to push up aggregate demand in an economy already producing at capacity.  These capacity constraints also help to produce the “too much money chasing too few goods” explanation of inflation.  This means that, theoretically, we should see a rise in inflation very soon.

Except we probably won’t.  Why?  Due to historical experience and the readings of several other economic indicators, I don’t think the economy is actually near full capacity yet.  In other words, our estimates of the non-accelerating inflation rate of unemployment (NAIRU) are too high.  The experience of the 1990’s (as elaborated on by Jared Bernstein and Dean Baker) provides support for this view.  Near the end of the decade, unemployment plummeted – from 5.6% in 1995 all the way down to 4% by year 2000.  NAIRU estimates for the year 2000 were consistently higher than the actual unemployment rates achieved; starting at 5.4% in 1994, those estimates actually increased to 5.8% in 1996 before dropping back down to 5.2% by year 2000.  In other words, economists expected inflation to start accelerating once U3 unemployment reached and fell below these rates.  Yet, as the charts below demonstrate, inflation (especially PCE less food & energy) barely budged during the 1990s – and actual unemployment rates were far below NAIRU estimates!  Part of that was no doubt due to the late 90’s productivity spurt, but productivity is still growing at a decent (if not stellar) clip right now, meaning more output can be produced with a given (or less) amount of input.  As more output can be squeezed out of given inputs, there is less of a need to raise prices to maintain profitability.  If now is anything like the late 90’s, productivity growth can absorb wage growth/cost pressures for a while before businesses will have to raise prices to maintain profits.  In other words, unemployment could fall a ways further from its current 5.5% rate before we start to see inflationary pressures, which means that our current NAIRU estimates (around 5-5.5%) are too high.  This would make sense; I feel like, ever since the 1970s hyperinflation episode, policymakers have been overly cautious in making sure that policy tightening begins before inflation gets too high.  Thus the artificially high NAIRU estimates.

Source:

Source: “The Unemployment Rate at Full Employment: How Low Can You Go?” by Jared Bernstein and Dean Baker. http://economix.blogs.nytimes.com/2013/11/20/the-unemployment-rate-at-full-employment-how-low-can-you-go/?_r=1

Source:

Source: “The Unemployment Rate at Full Employment: How Low Can You Go?” by Jared Bernstein and Dean Baker. http://economix.blogs.nytimes.com/2013/11/20/the-unemployment-rate-at-full-employment-how-low-can-you-go/?_r=1

Additionally, there are the countless other indicators that suggest the economy is still being underutilized.  The more comprehensive U6 unemployment rate, which, as the BLS describes, measures “…total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force”, still stands at 10.8% in May 2015 (seasonally adjusted).  The employment-to-population ratio has also yet to recover from the recession, standing at 59.4% in May 2015 (down from a cyclical high of 63.4% back in December 2006).

2) It’d be good to have a long period of low unemployment after the disastrous labor market of the past few years.  As everyone (especially recent college graduates) knows, the job market hasn’t been stellar for a while; it’s only just getting back to “normal”.  U3 hit a 3-decade high of 10.0% as recently as late 2009, the U-6 measures were even higher, and worst of all, long-term unemployment as a share of the unemployed hit both a record high and stayed high for a record amount of time (see chart below).  Such high rates of unemployment for such long periods of time undoubtedly have helped destroy millions of household finances over the years while also threatening to create structural unemployment (as skills atrophy and people become less “employable”).  I think, like a yo-yo, such high and extended periods of unemployment should swing the opposite way: exceptionally low unemployment for an exceptionally long period of time.  This will aid households in naturally repairing their finances (which did appear to actually “improve” over the years, but it seems personal bankruptcy and/or exceptionally painful (destructive?) saving were the main reasons).  It will allow workers to practice their skills and boost their self-esteem (which can create a virtuous cycle of higher productivity).  Additionally, it can also help to generate wage pressures so wages can “catch up” the ground they lost (as in, the growth that would have occurred had the economy been operating at full capacity since 2007).  Some might argue that this could threaten profits too much; however, coming at the heels of several years of record profits and high volumes of cash reserves, I think employers would be able to healthy absorb wage hikes for a fairly long period of time before this became an issue.

3) Continued loose policy would help counteract an over-appreciation of the dollar.  The U.S. dollar has gained rapidly against a basket of currencies since last fall (up by a full 21% against the Euro since this time last year).  There are many reasons for its rapid rise – a collapse in oil prices, investor confidence in the strength of the U.S. economy, and – ironically enough – investor expectations of a target rate hike.  The concern is that either this appreciation continues or that its rapid rise has already done too much damage.  Stronger currencies make exports more expensive (by boosting the relative prices of exporters and decreasing their competitiveness) while simultaneously making it relatively cheaper to import.  Though the latter is good for consumers, the combination of lower exports and higher imports wreaks havoc on the trade balance (which, for America, is almost always in deficit), thereby lowering GDP growth.  Arguably one of the biggest forces restraining the dollar from rising much further is a continuation of loose monetary policy.  End it, and the dollar rise alone could stall a still rather mediocre recovery (by historical standards).  Along with the other reasons above, it’d be preferable to continue a low target rate at least until some of the other pressures are alleviated.

4) Even if it did threaten to raise inflation a bit above current targets, this wouldn’t necessarily be a bad thing.  Look, too much inflation is bad.  Everyone knows that rising prices squeeze family budgets and distorts economic decision making (shifting future demand into the present to avoid higher future prices, leading to a negative feedback loop of higher inflation).  It’s literally a hidden (or not-so-hidden) tax that eats up the purchasing power of savings and investments.  But a little bit of inflation is not a bad thing.  Stable, fairly low inflation can actually benefit an economy.  It makes wages less sticky by placing pressure on employers to raise them (so employees can maintain cost-of-living).  By lowering the purchasing power of dollars spent on repaying fixed-amount burdens, it also reduces the real debt of indebted consumers who, after becoming extremely over-leveraged during the 2000s, could still use some relief so they can resume healthy (but moderate) spending.  This reduction in real debt burdens also goes for the federal government (whose $18 trillion tab, while manageable in a $17 trillion economy, could still use some relief).  Inflation a bit above the current target of 2% (say, 3 or 4%) would still be manageable; and in my opinion, is absolutely worth it if low unemployment can be attained.  Now, this does present a credibility problem for the Fed; it’s consistently stated that 2% target figure, and if inflation were to rise higher than that, then it could spook investors and lead to concerns that the Fed will not contain it (and that another Weimar Republic-style meltdown is on its way).  So perhaps the Fed should inform investors of a new, slightly higher target rate, while making it clear that absolutely no higher rates will ever be tolerated.  It might help to remind economic agents that these targets didn’t even exist as recently as 40 years ago, so it’s hardly like they’ve remained consistent.

5) A recession can still be handled by both fiscal and monetary policy, even if rates start out at zero.  So what if the Fed can’t lower nominal rates any further?  They have Q.E. and a general unlimited capacity to purchase securities, emergency lending capabilities, operation twist, forward guidance, etc., etc.  And there are tens of thousands of governments in the United States that theoretically have the capability to engage in expansionary fiscal policy (though the Federal government, with its unique status of having no balanced operating budget requirement, will probably remain the most potent public sector actor).  If you raised rates now and caused a recession, you probably still wouldn’t be able to cut them that far anyway (since they probably won’t reach that high before equilibrium is breached).

6) Savings rates were plummeting anyway…and the boost to equities is (arguably) still good.  Due to a myriad of factors (wage stagnation, cultural shifts, a global savings glut, etc.), Americans no longer save the way they used to.  Indeed, in 2005, the savings rate went negative for the first time since the Great Depression, and in recent years has only climbed back up to around 5%.  Too many trends outside of the Fed’s control will continue to keep downward pressure on savings rates.  And there’s no guarantee that a rise in the effective Fed Funds rate would necessarily translate into higher interest rates for savers (in savings accounts, C.D.’s, etc.)  Additionally, the effect of the Fed continue to purchase securities to maintain a low effective Fed Funds rate is to lower the yield (and boost the price) of bonds/securities, making equities relatively more attractive (for their higher returns).  This has allowed the stock market to soar, bolstering the “wealth effect” for households (prompting them to spend more) and increasing the returns to retirement accounts tied to the equity markets.  And we can’t forget the impact of low rates making long-term borrowing (e.g. for mortgages) easier, translating into higher house prices (and thus greatly boosting the wealth-effect for the middle class).

Overall, then, the argument against raising rates now is clear.  Now granted, the target rate will have to be raised eventually (probably within the next year or so) – these positive effects will not last forever, and there is a risk of overshooting targets and objectives if rates stay low too long.  But it’s time to break from the past policy hyper-conservatism and boldly declare a new approach; today’s challenging economic environment requires nothing less.