Tuesday, November 18, 2008

Bailout Needed

Martin Feldstein, a conservative columnist and former economic advisor for Ronald Reagan, is right when he says that a bailout of the Big Three U.S. automakers would require more than $25 billion. The rest of his prognosis, however, is decidedly irrational. He quickly delves into typical conservative union bashing, claiming that the fates of General Motors, Ford and Chrysler would be saved if only their workers were paid less and given less benefits. Let's be clear: the Big Three have not descended towards failure as a result of overbearing union demands, they have begun to capitulate because high gas prices, vanishing credit and a deepening recession have created the perfect storm for a U.S. automaker. The Big Three had bad business models before the economic crisis -- their healthcare costs were overbearing and their products were substandard, and if the companies failed during a period of economic stability bankruptcy would be a boon for efficiency, not a tragedy for the economy. This, however, is not a time of stability, and the well-being of the Big Three is intrinsically tied to the well-being of a large sector of the United States economy. A bailout is needed, but not one that hurts those in most need of help, the workers.

Feldstein writes,
The Big Three pay much higher wages than production workers are paid in
the nonunion auto firms and in the general economy. And the health-care
costs of current workers and retired union members are an enormous
additional burden. The simplest solution is to allow GM and the others to file for
bankruptcy. If the companies file under Chapter 11, they would be able
to continue producing cars, and the workforce would remain employed
while the firms reorganized. The firms would also be able to get
short-term credit under bankruptcy protection.
There is no doubt that the fault of the Big Three's demise lies at their own hands, but in the midst of this economic crisis, allowing three huge companies to default would be catastrophic not just for the auto industry, but for nearly all sectors of the economy. Feldstein argues that if General Motors files under Chapter 11 it can restructure its union contracts, which would result in lowered wages and reduced benefits. His estimation of the situation is an uneducated one, however. The UAW and the Big Three have been making significant strides in recent years towards bettering the efficiency of their contracts. Last year UAW and the Big Three reached an agreement whereby wages for new hires would be two-tiered and healthcare costs would be shared between the union and the company. More than squabbling over the efficacy of the UAW and the Big Three's ability to resolve their inefficiency issues, however, allowing the Big Three to file under Chapter 11 holds broader implications for the economy that in this time of crisis must be considered. First, lowering wages and reducing benefits for hundreds of thousands of workers is detrimental to the economy. As Congress mulls stimulus package after stimulus package for the middle class, a restructuring of union contracts would amount to, in effect, an anti-stimulus. There is no reasonable economist that believes less money for middle class workers, especially those in a struggling region like the Midwest, would be anything but bad for the economy.

Second, filing for Chapter 11 would not simply resolve the Big Three from their serious structural issues. In fact, it is widely believed that the Big Three would not remain solvent under Chapter 11 at all, and wouldl have to file for Chapter 7 bankruptcy, liquidating its assets and shuttering its doors. This is because the Big Three simply does not have enough cash to operate. If General Motors does not have enough cash to buy parts, which it will not if no federal bailout is provided, it cannot produce cars and thus not remain solvent. It would have to shut its doors and put 100,000 out of work immediately. The implications of such a liquidation do not stop there, however. If GM goes out of business, so too do the parts makers and suppliers that depend on General Motors for business. Those parts companies going out of business will result in no parts for other auto companies like Ford and Chrysler, forcing them to liquidate as well. The Center for Automotive Research (CAR) just published a study that predicted a loss of 3 million jobs in the case of such a meltdown, which would raise unemployment nationally by an astonishing third and result in the loss of income of hundreds of billions of dollars. In this economic climate, such a collapse can simply not be allowed if we are to expect our economy to recover.

A bailout package for the Big Three would have to encompass policy areas from climate change to healthcare, but the solvency of the companies must be considered first and foremost. Of course, the Big Three cannot continue operating as monolithic companies with arcane business models, and will have to be pared down and made more efficient. Such a restructuring of the firms, coupled with large cash infusions to keep them solvent, would stave off collapse while ensuring that business as usual does not continue. In addition, broader reforms must be made. Instituting a national health insurance program, and allowing UAW workers to buy into it, would both greatly reduce the cost of healthcare and provide more solvency for the Big Three. In addition, tax incentives for production of environmentally friendly automobiles will help modernize the Big Three and ease its transition back to solvency. Additionally, the passage of the Employee Free Choice Act, which would make unionization of autoworkers more viable on a national level, as opposed to a regional one, would ease competitive pressures placed on the comparatively over-unionized Midwest.

Wednesday, November 12, 2008

The Importance of Guaranteed Health Care

It's odd that Max Baucus (D-MT), the centrist Democrat who assisted George W. Bush so much in pushing through his domestic agenda, is the Senator leading the progressive charge on health care reform. His plan, released today, is not a politically ambitious one -- it's essentially Hillary Clinton's health care plan, but its progressive credentials are something to take note of. Clearly the changing political winds have encouraged Baucus to reevaluate his political legacy, and in this election year's liberal wave it is predictable that a politician like Baucus would move to the left. Regardless of intent, that Baucus has submitted a generic Democratic health care policy outline is testament to the ramifications this year's electoral revolution will have on domestic policy.

Health care, especially in the United States, is a strange beast because it pervades so many aspects of social and economic life. Abstractly, a society that takes care of its denizens is one that is healthier not just in terms of protecting against illness, but in promoting a sense of social well being. The collective acceptance of the necessity of Britain's National Health Service in that country is telling, in that it reflects the societal benefits of a health care system that guarantees equal health care to every citizen, regardless of economic standing. Britains complain about the NHS incessantly, and the call for health care reform is strident, but suggest taking away their national health care service and across the board Brits will have a hissy fit. It's not even that the NHS is particularly effective, it's that it provides a social guarantee that has ramifications beyond simple treatment of disease and illness. Baucus does not call for a federally owned and operated health service (that would seem too European and socialist to be politically viable in the USA) but his plan is one that would guarantee health care to all Americans. That guarantee, solely for nominative and symbolic purposes, would be a boon for social and economic health. Take, for example, Americans' fervent support of social security. Social security is a European-inspired federal redistributionist program that has socialist overtones. Yet according to a recent CNN poll, fully 62% of Americans oppose privatising social security, let alone get rid of it entirely. This is astounding public support for a federal program that seems so at odds with the political climate of the day. Yet one cannot view public support of federal programs on an objective basis - rather, support for these programs amongst the public is emotional. This may not seem to be adequate justification for a program, but emotional support may be just as important as objective efficacy in determining the success of a policy.

The present economic situation in the United States is of particular note. There is no doubt that substantial structural flaws in America's financial system have led to economic crisis, yet the American public's lack of confidence in the economy is, by itself, a major contributor to economic decline. Many Americans have not been effected in the least by the financial crisis, but their sense of a worsening economic climate has led them to consume less, take money out of the stock market, etc., which all contribute to furthering the downturn. It's self-fulfilling prophesy at its finest, and a glaring example of the importance of public perception to policy. Classical economics has been thoroughly discredited over the last century because it assumes that humans are completely rational actors possesing symmetrical information. What is being realized now by the economic profession is that psychology has far more importance in determining an individual's economic actions than so-called rationality.

It is in this regard that health care is so important to economic well being. If adequate health care is guaranteed to all citizens, regardless of how wealthy they are and regardless of their employment, economic well-being will be more easily achieved. Individuals who know that no matter what, their health will be taken care of, will be far more likely to engage in the risks and endeavours that have made America's breed of capitalism so successful. Without social security, how many would-be middle-aged entrepreneurs not risk investing capital in their brilliant idea because they feared poverty in their old age? Baucus writes, "In the short term, health care reform would cost taxpayers more than the government can achieve in savings from all reforms and financing changes," which is obviously true. But an on-paper objective cost-benefit analysis is not nearly sufficient in determining the impact of a guaranteed health care program. Rather, it must be acknowledged that guaranteed health care for all Americans will undoubtedly contribute to a more conducive climate for economic growth, and therefore must be provided regardless of the estimated cost.

Wednesday, July 16, 2008

The Biggest Satire of Them All

With all the talk over The New Yorker cover, satirizing Barack Obama as a America-hating, flag-burning, Muslim, fist-jabbing terrorist, I thought of another satire, one that is far more serious. The last 8 years. The Onion (as is usually the case), being far more insightful than I or anyone else in this country, told us exactly what we would, over the coming years, find out. It's truly astonishing to read how accurate a portrayal this article was. It was published just as George W. Bush assumed office.

I laugh, and then I cry:

WASHINGTON, DC–Mere days from assuming the presidency and closing the door on eight years of Bill Clinton, president-elect George W. Bush assured the nation in a televised address Tuesday that "our long national nightmare of peace and prosperity is finally over."

Enlarge Image nation nightmare

President-elect Bush vows that "together, we can put the triumphs of the recent past behind us."

"My fellow Americans," Bush said, "at long last, we have reached the end of the dark period in American history that will come to be known as the Clinton Era, eight long years characterized by unprecedented economic expansion, a sharp decrease in crime, and sustained peace overseas. The time has come to put all of that behind us."

Bush swore to do "everything in [his] power" to undo the damage wrought by Clinton's two terms in office, including selling off the national parks to developers, going into massive debt to develop expensive and impractical weapons technologies, and passing sweeping budget cuts that drive the mentally ill out of hospitals and onto the street.

During the 40-minute speech, Bush also promised to bring an end to the severe war drought that plagued the nation under Clinton, assuring citizens that the U.S. will engage in at least one Gulf War-level armed conflict in the next four years.

"You better believe we're going to mix it up with somebody at some point during my administration," said Bush, who plans a 250 percent boost in military spending. "Unlike my predecessor, I am fully committed to putting soldiers in battle situations. Otherwise, what is the point of even having a military?"

On the economic side, Bush vowed to bring back economic stagnation by implementing substantial tax cuts, which would lead to a recession, which would necessitate a tax hike, which would lead to a drop in consumer spending, which would lead to layoffs, which would deepen the recession even further.

Wall Street responded strongly to the Bush speech, with the Dow Jones industrial fluctuating wildly before closing at an 18-month low. The NASDAQ composite index, rattled by a gloomy outlook for tech stocks in 2001, also fell sharply, losing 4.4 percent of its total value between 3 p.m. and the closing bell.

Asked for comment about the cooling technology sector, Bush said: "That's hardly my area of expertise."

Turning to the subject of the environment, Bush said he will do whatever it takes to undo the tremendous damage not done by the Clinton Administration to the Arctic National Wildlife Refuge. He assured citizens that he will follow through on his campaign promise to open the 1.5 million acre refuge's coastal plain to oil drilling. As a sign of his commitment to bringing about a change in the environment, he pointed to his choice of Gale Norton for Secretary of the Interior. Norton, Bush noted, has "extensive experience" fighting environmental causes, working as a lobbyist for lead-paint manufacturers and as an attorney for loggers and miners, in addition to suing the EPA to overturn clean-air standards.

Bush had equally high praise for Attorney General nominee John Ashcroft, whom he praised as "a tireless champion in the battle to protect a woman's right to give birth."

"Soon, with John Ashcroft's help, we will move out of the Dark Ages and into a more enlightened time when a woman will be free to think long and hard before trying to fight her way past throngs of protesters blocking her entrance to an abortion clinic," Bush said. "We as a nation can look forward to lots and lots of babies."

nation nightmare jump

Soldiers at Ft. Bragg march lockstep in preparation for America's return to aggression.

Continued Bush: "John Ashcroft will be invaluable in healing the terrible wedge President Clinton drove between church and state."

The speech was met with overwhelming approval from Republican leaders.

"Finally, the horrific misrule of the Democrats has been brought to a close," House Majority Leader Dennis Hastert (R-IL) told reporters. "Under Bush, we can all look forward to military aggression, deregulation of dangerous, greedy industries, and the defunding of vital domestic social-service programs upon which millions depend. Mercifully, we can now say goodbye to the awful nightmare that was Clinton's America."

"For years, I tirelessly preached the message that Clinton must be stopped," conservative talk-radio host Rush Limbaugh said. "And yet, in 1996, the American public failed to heed my urgent warnings, re-electing Clinton despite the fact that the nation was prosperous and at peace under his regime. But now, thank God, that's all done with. Once again, we will enjoy mounting debt, jingoism, nuclear paranoia, mass deficit, and a massive military build-up."

An overwhelming 49.9 percent of Americans responded enthusiastically to the Bush speech.

"After eight years of relatively sane fiscal policy under the Democrats, we have reached a point where, just a few weeks ago, President Clinton said that the national debt could be paid off by as early as 2012," Rahway, NJ, machinist and father of three Bud Crandall said. "That's not the kind of world I want my children to grow up in."

"You have no idea what it's like to be black and enfranchised," said Marlon Hastings, one of thousands of Miami-Dade County residents whose votes were not counted in the 2000 presidential election. "George W. Bush understands the pain of enfranchisement, and ever since Election Day, he has fought tirelessly to make sure it never happens to my people again."

Bush concluded his speech on a note of healing and redemption.

"We as a people must stand united, banding together to tear this nation in two," Bush said. "Much work lies ahead of us: The gap between the rich and the poor may be wide, be there's much more widening left to do. We must squander our nation's hard-won budget surplus on tax breaks for the wealthiest 15 percent. And, on the foreign front, we must find an enemy and defeat it."

"The insanity is over," Bush said. "After a long, dark night of peace and stability, the sun is finally rising again over America. We look forward to a bright new dawn not seen since the glory days of my dad."

Tuesday, July 15, 2008

Infrastructure Part 2

I went to the Senate Banking committee's hearing on national infrastructure the other day to see Michael Bloomberg (mayor of NYC), Shirley Franklin (mayor of Atlanta), John Peyton (mayor of Jacksonville) and Mark Funkhouser (mayor of Kansas City) give testimony.

Senator Dodd (former presidential candidate) in his opening remarks affirmed his support for a national infrastructure bank that would be an independent institution which ranks and funds projects on their merits. All the witnesses, and especially Bloomberg, expressed their support for such an infrastructure bank, emphasizing the need to fund infrastructure projects on merit.

This seems like a common problem that needs to be addressed, and one that in the current system of national infrastructure funding is certainly not. Accountability and a system meritocracy for the infrastructure projects that are funded by the federal government is virtually non-existent. In the current system, most infrastructure projects are funded through earmarks - projects particular to certain constituencies that are added solely for political reasons. The main argument for an infrastructure bank, besides the increased funding for infrastructure that it would represent, is that it would be an independent commission not privy to political whims.

The proposed infrastructure bank has been compared to the Federal Deposit Insurance Corporation, which I think is an apt comparison - a federal agency that is nevertheless not subjective to the political process. The infrastructure bank would be different, however, in that it would work in close conjunction with Congress in securing funding, but outside of funding (which it could also receive from other sources, such as user fees and puplic-private partnerships), it would be independent.

Along the same lines, Bloomberg and Funkhouser complained about the vision-less-ness of the nation's infrastructure program (or lack thereof). Bloomberg recommended a national commission, similar to the one proposed by Representative Blumenauer in his testimony to the House of Representatives, that would lay out a national vision for infrastructure and make funding recommendations. This, like an infrastructure bank, would provide independence from the political process. One proposal I've heard is that the funding proposals from such a commission would need to be voted down by 3/5 of Congress, providing additional insularity from politicization.

None of these proposals will come to fruition without political initiative, however. What was mentioned by Bloomberg was the "unsexiness" of infrastructure funding, and the disadvantage it receieves from that. This is true: Mayor Funkhouser talked of the $2.3 billion needed to fix Kansas City's sewage system, which emits 6 billion gallons of sewage into nearby lakes and rivers due to deficiencies. Nobody, however big the problem may be, wants to talk about sewage, or even crumbling roads and bridges for that matter. It is encouraging, however, that Congress, and the nation, seem to finally be taking notice - I expect substantial progress on the infrastructure front to be made in 2009, especially if we get a Democratic Congress and a Democratic president (although, to the Republicans' credit, all major infrastructure proposals in Congress to date have been largely bipartisan).

Infrastructure Part 1

I attended a hearing on infrastructure the other day in the House of Representatives and heard testimony from a few representatives about possible solutions.

One solution, proposed by Representatives Keith Ellison (the guy from Minnesota who put his hand on a Qur'an when he was sworn in) and Rosa DeLauro, is to establish a national infrastructure bank that would act as a specially-chartered federal entity charged with investing in major infrastructure. Robert Goodspeed writes of the proposed infrastructure bank,
  1. An infrastructure bank would solve solves the short-sighted funding problem, and creates a new body to fund large projects beyond existing programs, expanding capital for infrastructure. However as planners are well aware, not all transportation infrastructure is self-supporting. The interstate highway system, many bus and subway lines, and an intercity transportation network would not exist today if each of their parts were required to be self-supporting, but that doesn't mean they are bad investments. I worry it would create additional funds for high-visibility projects, leaving the rest to fight over a limit pool of money.
The bank's funds would come from direct subsidies, direct loan guarantees, long-term tax-credit general purpose bonds, and long-term tax-credit infrastructure project specific bonds, with an aim of making the entity self-sustaining in five years. It's a good idea, and one supported by Barack Obama, but I think proposals for the infrastructure bank need to be more ambitious in terms of funding. If required infrastructure improvements alone are estimated to be $1.6 trillion, $60 billion for the bank is not nearly enough. It's also not enough to fund these "large" projects - most infrastructure projects of even moderate size run well into the tens of billions of dollars.

Representative Blumenauer proposed establishing a commission to assess the nation's infrastructure needs and draw up a national vision for infrastructure. He said that this vision should be tantamount to FDR's massive infrastructure plan, and I think that's a good idea. The problem is, Blumenauer's plan doesn't address funding, which is the major impediment to initiating federal infrastructure projects. Hiking up the gas tax is unreasonable andpolitically unpalatable. It is also a conceptually bad idea, as the emphasis should be on reducing driving; if that is achieved, revenue from a gas tax won't be enough to effectively fund infrastructure projects. Indeed, it already isn't - the Highway Trust Fund (which is funded by the gas tax) will go into deficit in 2009 for the first time ever.

It's quite obvious that funding from the federal government will not be able to sustain infrastructure projects alone, which is probably why Ellison's proposed national infrastructure bank is so modest in its funding proposals. One idea, put forward by DeLauro and supported by Representative Mica, is extensive public-private partnership programs. In such a program, which was said to be "more like a business deal," by Mica, the government and the private sector would jointly raise capital for an infrastructure project, with the government assuming a portion of the risk. User fees, usually taking the form of tolls or fees for ridership, are another solution to making infrastructure investment more viable. Regardless, more federal funding is needed, and fortunately Congress will now probably be more willing to release more money for infrastructure, especially transit.

There are also minor funding proposals, such as the container fee on incoming cargo proposed by Representative Calvert. This is a good idea, and a solid incremental step in securing additional infrastructure funding, but a more comprehensive national funding program, such as establishing a national infrastructure bank, is needed to ensure proper funding both for new infrastructure projects, and for infrastructure repair.

In sum, Congressional progress on this issue is encouraging, but if tax hikes are necessary to ensure sufficient funding it will be interesting to see if Congress' mettle holds up. Regardless of the political situation, massive funding increases are required in order to secure America's infrastructure future, especially considering the need, in face of higher gasoline prices and global warming, of a much more extensive nationwide transit system.

Family Leave

There are only four countries in the world that do not offer some form of paid maternity or parental leave, those being Papau New Guinea, Lesotho, Swaziland and the United States. Besides this being an overtly feminist issue, it is also an economic one and one that, I think, would be beneficial to examine.

The first matter that should be addressed is the one of efficiency. If paid family leave is not provided by firms voluntarily - that is, if in a free market with no governmental mandate, paid family leave is not provided, it is assumed that family leave is inefficient. Market theory espouses that in such a situation, the costs of paid family leave outweigh the benefits. Therefore, mandating paid family leave would result in a situation that is not socially optimal. Mandated paid family leave can be efficient, however, if it corrects a market failure - and a market failure does arise in the externalities associated with raising children. Studies have shown that children are healthier and more successful when they are well-cared for, and when their parents raise them (as opposed to a nanny). Healthy and productive children grow up to become healthy and productive adults, accruing benefits for society - thus, there is a positive externality associated with taking good care of children: it is under-provided by the market, and must therefore be subsidized in some manner by the government. Mandated paid family leave is just such a subsidy.

Also, adverse selection is a problem addressed by mandated paid family leave. If only certain firms offered paid family leave, the individuals most likely to work at such firms will have a higher probability of taking advantage of the benefit, and thus the cost of the benefit to the firm will increase. This will result in lower wages, which further worsens the problem of adverse selection, since the only workers willing to work for the lower wage would be the ones most likely to take advantage of the paid leave benefit. Adverse selection results in a lower than optimal number of firms offering paid family leave. Government mandated leave fixes this problem - there will be no downward wage cycle associated with adverse selection if every firm is forced to offer paid family leave.

The most prescient question regarding mandated paid family leave, in my opinion, is one of wages. If mandated paid family leave has a substantial negative effect on wages (particularly woman's wages) then the externality it corrects might not be worth it. According to economic theory, mandated family leave would shift the supply curve for labor to the right (the attractiveness of the benefit will draw more people into the workforce) and the demand curve to the left (as a result of an increase in costs for the firm). This unambiguously lowers wages, but the true result of mandated paid family leave is not so simple. Wages could increase as a result of paid family leave if it encourages longer job tenure and increases the potential for an individual to move up in the company. So, the net effect of paid family leave is somewhat ambiguous.

Studies have shown that paid family leave not in excess of 3 months results in an increase of 3-4% in women's employment relative to men, and no decrease in wages. Paid family leave programs in excess of that amount of time (and especially in excess of 9 months), however, have shown a noticeable drop wages, albeit increased women's employment.

The ambiguous economic effects notwithstanding, having mandated paid family leave is clearly something that is beneficial - if not to wages, then to society. The most obvious reason is to correct the externality of raising children, but paid family leave also works to create a more hospitable work environment for women, something that is certainly needed.

Tuesday, May 27, 2008

"It's Crazy"

Apparentely, driving in the United States has gone way down as a result of increased gas prices. Who knew? According to CNN, never before has driving fallen this precipitously.

From the CNN article,
Nakeisha Easterwood of Smyrna, Georgia, said with gas prices on the rise, she sometimes catches rides with friends, and doesn't drive into town more than once a day. "It's crazy," she said.
What a novel concept - carpooling and not driving more than necessary. So novel, in fact, that apparantely it's crazy. Hopefully this crazy idea begins to catch on.

Monday, April 28, 2008

Chauvinism in America

A study from Harvard University last year found that of 168 nations worldwide, the United States is one of only four whose government does not guarantee paid maternity leave. The others, naturally, are Lesotho, Swaziland, and Papau New Guinea. Such is indicative of an oft-overlooked chauvinistic attitude in American society and economy, especially in the work place. The United States' overall lack of progressivity is shameful - in addition to not guaranteeing paid maternity leave, the United States has the highest incarceration rate in the world, is the only western nation still to employ the death penalty, and was the only western nation not to sign the Kyoto Protocol. America's chauvinism, however, may take the cake as its least-redeeming feature, and is indicative of how much further the feminist movement in the United States has to accomplish.

Feminism in the United States is typically thought of as a vitriolic campaign of bra-burning and man-hating, but the real, and more important, feminist movement takes place amongst working women. By the mid-20th century women were entering the workforce in increasing numbers, and in turn, demanded increasing rights in the work-place. These women, mostly through the vehicle of labor-unions, secured more equal pay and undermined sexist hiring practices, but the structure of the American economy required more than simply equalizing wages. Although wages for women in the workforce are still substantially lower than for their male counterparts, wage-equalization in the United States has made reasonable progress over the last 60 years. The problems faced by women in the workforce today are more of a result of chauvinistic attitudes toward family structure and a woman's role rather than a woman's relative productive ability.

Women face a hard time in eliminating gender differences in the workplace because they are, in fact, different. Most notably, women become pregnant. Their primary role, in America's society, is that of a mother, not a worker. This attitude toward a woman's role in American society has resulted in insidious structural barriers for workplace gender equality. The absence of paid maternity leave is one of the most grievous examples. Pregnant women in the United States do not have special protection from adverse treatment by employers. One woman, it is reported in the WSJ by Sue Shellenbarger, was fired for "poor performance" while pregnant and was unable to prove that her bosses knew she was pregnant, thus having no recourse to compensation. It is striking that the burden of proof falls on the pregnant female worker, and not the employer who fired her. The choice in American society for women is clear: work, and forgo having children, or stay at home. In face of this, the feminist movement in America must succeed in going beyond gender equality - they must achieve special workplace rights for women.

If the chauvinism in the United States, particularly prevalent in the workplace, makes securing equal rights for women difficult, securing special rights is an apparent exercise in futility. This is terribly unfortunate. There are numerous progressive measures that should be taken in order to allow for more economic and societal security for women. Tom S. writes,
In most states, family leave policies are still appalling, day care is expensive, and working women's wages are stagnant. Women are disproportionately represented in the ranks of part-time and contingent workers, both sectors of the labor market that are volatile and insecure.
Women should be encouraged to work, not feel compelled to stay at home. One of the major arguments in favor of increased unskilled immigration is that it has provided cheap child-care workers, freeing up skilled American women to pursue careers. If this is the case, cheap or free day care would have even greater salutary effect. The French government provides universal free day care, and the results are striking. 64.3% of women in France are employed, compared to 59% of women employed in the United States. And this is despite the fact that France's unemployment rate is 7.5%, compared to America's 5.1%. Further, women are frequently not hired to upper-level management positions in the United States due to fears of lowered productivity resulting from their potential pregnancy. The United States government, of course, does little to alleviate such a problem - it does not offer protection to female workers, nor does it offer incentives for corporations to hire women to upper-level positions.

Being content with the status quo in American gender-relations is not satisfactory. Not only does America's lack of gender equality in the work-force have substantial effects on the economy (think of how much more productivity could be gained with increased labor-force participation from women), but it is a grave injustice in and of itself. The fact that older women and working women have disproportionately supported Hillary Clinton in the Democratic primary is indicative of a feeling of discontent with the current state of gender affairs. They do, indeed, need to change.

Thursday, April 10, 2008

Free Trade and Colombia

Matthew Yglesias writes,
As best I can tell (peruse the text if you're interested) [the FTA agreement] actually involves very little changes on the US side at all. In essence, Colombian goods already flow very freely into the United States except for in our more famously protected sectors (agriculture, etc.) and what we're offering Colombia here is a very solemn promise to keep it that way.
And Kevin Drum writes,
(1) Trade is pretty damn free these days. There's really only a limited amount of progress left to be made. (2) We've had sluggish wage growth for the past seven years and we're now entering (or about to enter) a recession. Expecting public support for trade agreements at a time like this is just quixotic. There's really not much point in banging our collective heads against the free trade wall right now. (3) We've been hearing forever that we should pass trade agreements today and fix their harmful impact on the working class tomorrow. But tomorrow never seems to come, does it? Maybe it's time to switch that policy sequence around for a while. (4) There's not really any danger of seriously regressing on trade. The worst that's likely to happen is a slowdown in new agreements. We'll all live through that. (5) A lot of us who supported NAFTA are sort of wondering what happened to all the benefits that were promised. As near as I can tell, there's a pretty widespread agreement that NAFTA, on balance, hasn't really had much net impact.
To which Daniel Drezner responds,
It also explains why ratifying this FTA is a good idea -- it locks in U.S. policy. As I've posted previously, the reason these agreements are a good idea is precisely because they prevent the drift towards protectionism that is otherwise inevitable in a pluralist political system. ...The biggest benefit of the FTA with Colombia has little to do with economics and everything to do with our bilateral and regional relationships. Go back to NAFTA. Kevin is right to point out that the agreement's economic effects were not terribly large. On the other hand, even skeptics of trade liberalization -- Dani Rodrik, Paul Krugman, and Joseph Stiglitz -- supported NAFTA because it locked Mexican economic reforms, promoted political reforms, and cemented a stronger bilateral relationship.
The idea of trade agreements being used as instruments of U.S. policy, and not as methods of improving economic well-being, is dubious to me. Drezner argues that locking in U.S. policy towards a more free-trade oriented economy is good because it prevents protectionist sentiment from becoming actual U.S. policy. I tend to think that bad trade deals, however, will end up contributing more to protectionist support than the "locking in" of such deals will prevent. Kevin notes that the benefits of NAFTA are not seen -- this leads to a lack of support for other trade deals that might be beneficial. So although NAFTA might be "locked in," trade deals in the future might not garner enough support as a result of NAFTA's lack of perceived success. Drezner goes on to write,
FTAs matter more than unilateral reductions of trade barriers because they decrease the likelihood of policy reversals
Yet if unilateral reductions of trade barriers lead to substantially larger economic gains than do bilateral free trade agreements, implementing unilateral reductions of these barriers, considering the economic gains that will be seen from them, will do more to generate support for free trade than will ineffective bilateral agreements. Yes, unilateral trade policies are easier to reverse than are free trade agreements, but the desire to reverse them will not be there if they are actually seen to be doing good. On the other hand, free trade agreements are lumped together with all free trade policies, so ineffective free trade agreements will lead to less support for more effective unilateral measures. That all being said, free trade agreements are not necessarily bad - indeed, some can be effective. On the whole, NAFTA is probably a net-good - but the trade policies that are espoused in NAFTA are not nearly as effective as unilateral reductions in barriers to trade in the United States would have been. Indeed, trade agreements are oftentimes (or perhaps always) a consequence of geopolitics rather than a pact intended to accomplish true economic good. Trade agreements implemented on political, instead of economic, grounds are prone to have poor economic consequences. As Joseph Stiglitz points out,
Developing countries may be even more disadvantaged in one-on-one bargaining with the United States; a series of such agreements may leave many developing countries worse off than they would be even with another unfair multilateral agreement. ...Trade negotiations entail a myriad of proposals for changing the rules of the game, and developing countries are often at a disadvantage in assessing the impact of each of these proposals on themselves, let alone the general equilibrium impact on the global trading system.
So essentially the scenario is: 1) The United States has its own geopolitical interests in mind when negotiating free trade agreements, not the economic interests of other parties, 2) The United States has considerable leverage with developing nations, enough to force them to accept trade agreements, and 3) Developing nations are oftentimes unable to determine whether a trade agreement is good or bad for them.

Such a situation will result in trade agreements that are, in all likelihood, not good for the United States economically, not good for the developing nation economically, and enforced by the strong hand of the United States. This is supposed to be good for stemming the protectionist tide?

Tuesday, April 01, 2008

Cooperation and Economic Growth

(click on image to enlarge)

The graph shows the correlation between the level of cooperation (plotted on the y-axis and determined by a public goods game) and GDP per capita. It finds a positive correlation between cooperation and GDP per capita in a society, which is no surprise.

The authors of the paper write,
In some countries (US, Australia, UK, Switzerland, China), people were punished for defection, which is considered "normal." In others (Oman, Greece, Saudi Arabia, Russia and Belarus), people were ALSO punished for cooperation.
The authors hypothesize that people in some countries punish cooperation (rather than defection) because they have a culture of "revenge," i.e., if Mr. X punishes Mr. Y for defection, Mr. Y punishes Mr. X back.

Such a finding suggests that development in underdeveloped countries is stymied by a culture of revenge. It also suggests that punishment for defection encourages cooperation (a logical result of incentives) and thus stimulates economic growth. These findings introduce a dynamic to development study that is often overlooked, or perhaps considered unchangeable and thus discarded.

Gregory Clark in A Farewell to Alms, a economic history of the world which attempts to determine why some socities are rich and others are poor, disagrees with Jared Diamond's prognosis that a society's economic well-being is entirely determined by geography. Instead, he claims that the types of people that make up a society determine its economic success. To quote Wikipedia,
Prior to 1790, Clark asserts, man faced a Malthusian trap: new technology enabled greater productivity and more food, but was quickly gobbled up by higher populations. In Britain, however, as disease continually killed off poorer members of society, their positions in society were taken over by the sons of the wealthy, who were less violent, more literate, and more productive. This process of "downward social mobility" eventually enabled Britain to attain a rate of productivity that allowed it to break out of the Malthusian trap.
The positive correlation between cooperation and GDP per capita appears to support Clark's thesis. Such a conclusion can be inferred as a validation of cultural racism - that some cultures are superior to others. It is ridiculous to claim that one culture is "better" than another - one who makes this claim assumes they have the right to determine what is good and bad; obviously, such a claim would be ridiculous and false. Nevertheless, it does seem true that certain cultures are better at promoting economic growth than others.

Diamond may not yet be disproven - indeed, it is a fairly convincing argument, laid out in Guns Germs and Steel, that geography is the major determinant of a society's culture, and by extension propensity for economic success. Regardless, a cultural dispropensity for economic success is a problem. Although an affinity for one's culture is oftentimes very strong, I would argue that one's affinity for a decent life (in other words, a life not beset by hunger, disease, or want of shelter) is stronger. A destruction of a culture in exchange for a better life is, in my opinion, entirely justified. Being able to eliminate the "negative" aspects of a culture while preserving its general nature is, obviously, ideal and is a major challenge for development experts and economists.

[Unrelated adendum regarding revenge: A fascinating book I read a while ago called Three Cups of Tea explored in some depth the culture of tribal Pakistan and Afghanistan. In these tribal cultures, the concept of revenge is extremely important. These cultures are extremely impoverished. Since revenge is so central a tenet of their culture, individuals from these regions who feel victimized (of which there are many) by American invaders oftentimes turn to terrorism in order to exact revenge.]

Monday, March 31, 2008

Military Success and Legitimacy

The intense fighting in Basra and Sadr City over the last six days has exposed Iraq Prime Minister Maliki’s military as not well equipped to provide security. Seen by many as a move to consolidate political power in the wake of upcoming elections, Maliki ordered military action against Mokata al-Sadr’s Mahdi Army in Basra, a Shiite stronghold in south-eastern Iraq. The Mahdi Army, expected by the Iraqi government to be easily defeated, provided a “very strong resistance that made us change our plans,” according to Iraq’s defense minister. The battle of Basra offers an illuminating glimpse into a problem plaguing the American and Iraqi militaries in Iraq – the ineffectiveness of illegitimate military force.

Basra should be a stronghold of support for President Maliki. After all, Maliki is a Shiite in a predominantly Sunni country, and Basra is heavily Shiite. Nevertheless, Basra has proven to be a thorn in Maliki’s side, as it harbors the powerful contrarian Mahdi Army. The lack of support for Maliki proves just how unsupportive Iraqi citizens are of American occupiers. A Basra resident sums up the overall sentiment well when he says, “unfortunately with the presence of this new government and this democracy that was brought to us by the invader, it made us kill each other…and the war is now between us.” Maliki’s government, although democratically elected, is seen as propped up by American support and acts in effect, as an American puppet. This close affiliation with the Americans gives no legitimacy to its military efforts in rabidly anti-American cities such as Basra.

This lack of legitimacy has proven itself to be perhaps the most important determinant of military success in Iraq. Vastly better trained, better armed, and better informed military forces of both the Americans and the Iraqi government have failed to defeat loosely organized and poorly equipped insurgent militias. Why? The militias had (more or less) the support of the people, as well as an identifiable enemy around which they could rally support. As the Iraqi government is viewed as largely illegitimate by the Iraqi people, any opposition group is, regardless of their intentions, deemed legitimate. Thus, radical groups with bad intentions can easily gain popular support, simply through demonizing the unpopular group in power. Such examples can be readily seen in recent memory, notably Idi Amin’s use of anti-Milton Obote sentiment in Uganda in 1971 to take power, and Milton Obote’s use of anti-Idi Amin sentiment in 1981 to retake power.

The American presence in Iraq, therefore, faces a dire problem. If the Americans are able to win over popular support in Iraq, the governments that they support and prop up have a chance at success. Such a hope is, however, overly idealistic given the situation in Iraq and the deep-seated hatred most Iraqis hold towards the American “invaders.” More likely a consequence of America’s presence is a country fragmented by ethnic tensions and ruled regionally by radical strong men who claim legitimacy on the back of American illegitimacy.

The third possibility is an American withdrawal. Without an American presence in Iraq, there is no enemy from which radicals such as al-Sadr can garner support. The process will be painful, but Iraqi leaders will ultimately be judged not by their affiliation with Americans, but by their ability to do good by Iraqis. The call for American withdrawal is often framed as a policy that is best for Americans. The huge benefits that Iraq would see from such a withdrawal are unfortunately overlooked, but they are far more dramatic. Without American troops in Iraq, reconciliation and nation-building can truly begin.

Friday, March 28, 2008

Foreign Policy Divide

Ezra Klein sums up the ideological differences in foreign policy approach pretty well:
Neocons envision a near-static population of terrorists, and prescribe an aggressive policy of killing them in order to rid the world of terrorism. Liberals see a dynamic population of terrorists and prescribe broad policies meant to blunt their popular appeal and deprive them of public support. Neocons looks at the liberal prescription and say, essentially, "you're not killing enough of them." And liberals look at the Neocons and, aghast, say, "stop making so many more."
I don't think anyone with even a modicum of intelligence believes the population of terrorists to be static, but the conservative approach towards terrorisism is, as Klein says, one of eradication. The dynamism of the terrorist population, however, prevents a policy of eradication from being viable. I think the key difference between the conservative and liberal approach lies in their respective differences of who (or what) the enemy is. For all the conservative hard-talk about "radical islam," and "islamofascism," conservative policy indicates that conservatives believe the enemy to be individual people, not extremist ideology. Terrorism cannot be eliminated by going after individuals - in fact, it will probably be augmented. Instead, the causes of extremist ideology must be identified and eliminated. As has been proved time and time again, it is not bombs that eliminate extremism, it is tackling what Samantha Power calls "climates of fear." Bombs inspire fear, fear inspires terrorists. This, apparentely, is too complex for conservatives to grasp.

Tuesday, March 25, 2008

Denmark's Carbon Success

The Danish appear to have been remarkably good at reducing emissions while maintaining strong growth. The New York Times reports:
Everyone seems to be talking about a carbon tax. ... The idea is that polluters should pay for the environmental damage they cause. Slap a tax on carbon, the theory goes, and you will get fewer carbon emissions, more revenue for government and energy independence, all at the same time. No wonder people from both sides of the political divide have come out in support of it.

But a carbon tax isn’t a new idea. Denmark, Finland, Norway and Sweden have had carbon taxes in place since the 1990s, but the tax has not led to large declines in emissions in most of these countries — in the case of Norway, emissions have actually increased by 43 percent per capita. ...

The one country in which carbon taxes have led to a large decrease in emissions is Denmark, whose per capita carbon dioxide emissions were nearly 15 percent lower in 2005 than in 1990. And Denmark accomplished this while posting a remarkably strong economic record and without relying on nuclear power.

What did Denmark do right? There are many elements to its success, but taken together, the insight they provide is that if reducing emissions is the goal, then a carbon tax is a tax you want to impose but never collect.

This is a hard lesson to learn. The very thought of new tax revenue has a way of changing the priorities of the most hard-headed politicians... But if we want lower emissions, the goal of a carbon tax is to prompt producers to change their behavior, not to allow them to continue polluting while handing over cash to the government.

How do you get them to change? First, you prevent policy makers from turning the tax into a cash cow. Carbon tax discussions always seem to devolve into gleeful suggestions for ways to spend the revenue. ...

Denmark avoids the temptation to maximize the tax revenue by giving the proceeds back to industry, earmarking much of it to subsidize environmental innovation. Danish firms are pushed away from carbon and pulled into environmental innovation, and the country’s economy isn’t put at a competitive disadvantage. So this is lesson No. 1 from Denmark.

The second lesson is that the carbon tax worked ... because it was easy for Danish firms to switch to cleaner fuels. Danish policy makers made huge investments in renewable energy and subsidized environmental innovation. ...[T]he tax gave companies a reason to leave coal and the investments in renewable energy gave them an easy way to do so... The key was providing easy substitutes. ...

[A] carbon tax has been promoted almost as a panacea — just pop in the economic incentives and watch them work their magic. But unless steps are taken to lock the tax revenue away from policymakers and invest in substitutes, a carbon tax could lead to more revenue rather than to less pollution.

An increase in gasoline taxes ... would likewise be the wrong policy for the United States. Higher gas taxes would raise revenue but do little to curb pollution.

Instead, if we want to reduce carbon emissions, then we should follow Denmark’s example: tax the industrial emission of carbon and return the revenue to industry through subsidies for research and investment in alternative energy sources, cleaner-burning fuel, carbon-capture technologies and other environmental innovations.

This makes perfect economic sense. At present, income elasticity of demand for oil is relatively inelastic (estimated at 0.3 by some economists), meaning that price increases (a carbon tax) would not be met with a reduction in the quantity of oil consumed. Denmark's policy, however, provides for such inelasticity and works to reduce it - by creating substitutes. Substitutable goods, in this case more renewable forms of energy, make demand more elastic and thus allow taxes to have a greater effect in reducing consumption. Instead of ruminating on all the ways governments can redistribute a carbon tax bonanza, the responsible and indeed only effective approach is to use carbon tax revenue to subsidize renewable energy.

The other, perhaps more popular, policy prescription proposed is the cap-and-trade system, whereby firms are given carbon allowances. Under this system, firms can buy or sell their carbon credits if they wish to pollute more, or if they pollute less than their allowance. Such a system has many problems. As Harvard economist N. Gregory Mankiw writes,
Cap-and-trade systems are also relatively inefficient, for two reasons. First, they encourage utilities to pollute more before the cap-and-trade system is put into effect in order to "earn" pollution rights. Second, they waste the opportunity to use the Pigovian tax revenue.
Under a cap-and-trade system, the government does not raise revenue from carbon emissions as in a carbon tax scheme, and thus would be required to raise other taxes in order to properly subsidize renewable energies. A carbon tax reduces emissions and subsidizes renewable energy in one fell swoop.

As the Danish have proved, economic growth and lower emissions are not mutually exclusive. The world's reliance on oil today is simply a result of it being the most convenient and cheapest form of energy. If government subsidies allowed the cost of other forms of energy to approach that of oil, and if government taxes allowed the price of oil to simulteanously increase so as to approach that of other energy sources, the world's dependence on oil would wither away. It seems paradoxically simple, given the current raging debate on energy, that something as simple as a tax is the solution.

[Addendum (for Carol): Of course, a carbon tax is not all peaches and rainbows. As with any tax, the cost is ultimately born by the consumer, which lowers living standards.

(click on image to enlarge)

As the graph (which I made myself, I proudly add) shows, a carbon tax certainly decreases oil consumption, but at the cost of lower individual utility. After the tax, the consumer moves from indifference curve U2 to indifference curve U1, representing a lower level of utility. The detrimental effects of a carbon tax can be assuaged by providing a rebate, but that would limit the amount of government revenue able to be used to subsidize other forms of energy, and thus limit the efficacy of the tax. Consequently, as with all taxation, a trade-off exists. The present threat to the environment is sufficiently great, however, to warrant a temporarily lower (ceteris paribus, of course) standard of living, at least in countries rich enough to afford it. In my opinion.]

Friday, March 14, 2008

Follow Turkey's Lead

Turkey's military excursions into northern Iraq to eliminate Kurdish terrorist cells have received much attention from the international community. Their recent decision to invest up to $12 billion in the Kurdish southeast region of the country should receive the same. Turkey's recent Kurdish policy is the model Western nations should follow in counteracting terrorism abroad - a combination of specified force and effective prevention. Prevention comes in the form of heart-winning: economic assistance, greater human rights, more education, etc., all things that prevent young individuals from turning to terrorism.

The West should learn from such a strategy. It is not through military force alone that terrorism can be eradicated - indeed, through such a strategy terrorism will only grow in strength, for it gives disaffected individuals in the Middle East even more cause for violent action. If the United States did more to promote its image abroad, or if it appeared to care even one iota what those beyond its borders thought, terrorism would have a hard time attracting so many willing to give their life in the fight against the supposed "evil empire," to use Ahmadinejad buddy Hugo Chavez's words. Even simple superficial measures such as closing down Guatanamo or preventing Abu Ghraib would have tremendous impact on winning over the hearts and minds of would-be terrorists.

There are those who will say that America should not have to appease terrorists, but arguing on principle rather than reality betrays the principles that those forwarding such arguments rely on so heavily. The policies that America pursues in combating terrorism must be those that are most effective, not those that are ideologically convenient. If policy A is best in protecting Americans, the United States government has a moral and constitutional obligation to pursue policy A, regardless of whether or not it appears that big and badass USA is 'conceding' to the terrorists.

To that end, it has been proven that overt and blunt military action is not effective. The Middle East and Southwest Asia today are not more safe than they were before the War on Terror, and neither is America. No, there have not been terrorist attacks on United States soil in the six and a half years since September, 2001, but nor were there in the eight years between the two World Trade Center attacks (besides the Oklahoma City Bombing, but I admit that because it was conducted by an American citizen) - such a period of time is no effective means by which to judge anti-terror policy. Besides, I'd argue that domestic anti-terror measures are the sole reason why such attacks have been prevented - indeed, there have been no shortage of attempts at terrorist attacks on the United States, they have just been foiled by amped-up domestic security. Think of the shoe-bomber, the anthrax scare, the liquid-explosives plot, and the numerous other terrorist conspiracies that have been prevented. Also, Britain and Spain have been victims of catastrophic terrorist attacks as a result of their involvement in America's crusade. Were there ever so many continued threats before America's initiation of the War on Terror? Indeed, it seems as if Bush's foreign policy escapades serve only to give the Department of Homeland Security more work.

So step away from the smart bomb, USA. Embrace reconcilliation, compassion and education. A good repuatation goes much further than does a bullet.

Thursday, February 07, 2008

The Significance of Symbols

Humans are seemingly rational creatures - their employment of reason and language distinguishes them from all others. There are, however, things humans do that confound explanation of their rationality. For me, one of those things has always been man's deep affection for symbols and emblems. Emerson writes,
The inwardness, and mystery, of this attachment, drive men of every class to the use of emblems. The schools of poets, and philosophers, are not more intoxicated with their symbols, than the populace with theirs. In our political parties, compute the power of badges and emblems. See the huge wooden ball rolled by successive ardent crowds from Baltimore to Bunker hill! In the political processions, Lowell goes in a loom, and Lynn in a shoe, and Salem in a ship.’ Witness the cider-barrel, the log-cabin, the hickory-stick, the palmetto, and all the cognizances of party. See the power of national emblems. Some stars, lilies, leopards, a crescent, a lion, an eagle, or other figure, which came into credit God knows how, on an old rag of bunting, blowing in the wind, on a fort, at the ends of the earth, shall make the blood tingle under the rudest, or the most conventional exterior. The people fancy they hate poetry, and they are all poets and mystics!
Why are individuals so attached to seemingly insignificant objects? I find such an attachment similar to humanity's incessant religiosity, and indicative of the possibility that man is not nearly as rational as we might want to believe. We must know that a lucky pen does not actually provide luck, and yet if we are taking a test we just have to use that pen. Likewise with religion - even the most ardent Christian, Jewish or Muslim believers will acknowledge that their religion does not satisfy tests of logic - that it requires a so-called "leap of faith." Indeed, religion necessarily abandons logic, the very foundation of man's rationality. So why do humans believe, oftentimes fervently, in religion?

Man possesses the capacity for rationality, but he is governed by powers far more influential - his passions. Thomas Hobbes wrote that man's fear - his passion of aversion- outweighs not only all other passions, but also his rationality. What is religion but a comfort blanket, designed to protect the insecure from the dangers of the unknown? Like a father who refuses to admit to his family that he is lost, so is man in his understanding of the universe. The father's insistence that he knows where he is going is tantamount to religion's assertion of absolute truth.

It is not surprising, then, that religions employ extensive use of symbols - indeed, the two provide the same thing - assuagement of man's passion of aversion.

Saturday, January 19, 2008

Freedom: Political vs. Social

Libertarians, myself included, have been preoccupied with the notion of freedom from government coercion (I will heretofore refer to such freedom as political freedom.) For a society to be free, libertarians espouse, governments cannot coerce individuals or interrupt any unharmful (and libertarians take that word to its most limited sense) individual activity. What I have often disregarded, however, is social freedom. As Will Wilkinson puts it,
If we lived in a libertarian wonderland of minimal government, yet where social norms were so stringent that any woman who dared aspire to a career, or any man who dared love another man, or anyone who dared to deny God, would be faced with ferocious social ostracism, isolation, and exclusion, then we would have to say that all people in our society are not free in a very morally deep sense.
Indeed, a society of extensive political freedom can often be greatly unfree. The question is, does freedom aside from political freedom matter? Many libertarians, I am sure, will argue that as long as a society is not subject to coercion (in other words, it is politically free) the actual operation, or indeed the actual freedom, of that society is irrelevent. These arguments, however, miss the actual crux of libertarianism's emphasis on individual freedom - they confuse the ends with the means. For a libertarian, individual freedom must be the desirable end. Political freedom is merely a means to that end - lack of government coercion by itself means nothing, for what is really the difference between social coercion and political coercion? The libertarian should perhaps place more emphasis on social freedom than on political freedom, for social mores and pressures are just as effective as government coercion, and oftentimes more far-reaching.

Libertarianism's contradiction is that, like Homer with alcohol, government is both the problem and the solution. A government can actively attempt to enforce individual freedom by regulating harsh social constraints, but in doing so the government is using coercion that necessarily limits individual freedom. If a preacher in a small Texas town advocates ostracizing homosexuals, the government can either censure the preacher -a violation of individual expression through political coercion- or allow the homosexuals to be ostracized -a violation of individual expression through social coercion. In either case, freedom is compromised. A government can also conduct activities in so called "libertarian paternalism." This would involve a government "educating" citizens on every individual's right to social freedom. A government telling an individual to believe in freedom is irresponsible, however, for true freedom allows an individual to believe in whatever he wants. Wilkinson is ambivalent about what exactly a government should do to ensure total freedom, but puts much onus on the individual:
In my opinion, it is the responsibility of decent people concerned with liberty to at least denounce, if not actively work to tear down, the racist beliefs and norms that enable liberty-killing structural discrimination. If you don’t think ending discrimination is the government’s job–that this is the sort of thing that should be done by persuasion, not force—then you should take this responsibility extra seriously.
I am not usually a supporter of allowing societies to "figure themselves out," but in such a case as social freedom is concerned, government intervention appears to do more harm than good. That does not mean, however, that political freedom is to be valued more than social freedom - it is just that the two do not face a clear-cut tradeoff that would make effective policy easy to enact. Wilkinson is right in saying individuals play the ultimate role in promoting social freedom, for indeed individuals change society, not governments.

Wednesday, January 09, 2008

The Fair Tax and the National Savings Rate

The national savings rate in the United States is zero, or even negative. It is a large reason why the credit crunch and the housing market collapse have the potential to hurt the American economy so greatly - Americans haven't saved and thus have no safety net. Rising inflation in the United States contributes to a disincentive to save, as does America's culture of consumerism. Additionally, the Federal Reserve faces pressure, and indeed has bowed to pressure, to lower interest rates in order to stimulate America's economy, further reducing the incentive to save. A healthy savings rate is crucial, especially for an economy that faces a growing fraction of workers who will soon pass their peak earning years and approach retirement, as does the United States. Savings allow investment, which sparks long-term growth and economic health. How can America increase its savings rate in face of growing incentives to do just the opposite?

Mike Huckabee's Fair Tax is purported to be a fix-all solution to America's economic woes - it is said to increase the savings rate, simplify America's tax code, bolster the competitiveness of domestic goods and allow for more economic freedom. It will indeed help America's dismal savings rate. The Fair Tax is a flat sales tax that would replace the income tax - in effect, such a tax would provide an incentive to consume less and save more. Such is perhaps the Fair Tax's most redeemable quality - it almost makes the Fair Tax worthwhile. The tax however, has numerous disadvantages: it will indubitably lead to tax evasion and higher unemployment, it is inherently regressive, it stunts international trade by its system of rebates, it would require huge administrative effort and cost and will result in endless political bickering, and perhaps most importantly, it is not politically feasible in the United States. So if not the Fair Tax, then what?

The most effective explicit tool in manipulating the savings rate is the interest rate set by the Federal Reserve. A higher interest rate yields higher savings. Unfortunately the interest rate is likely to be lowered further in response to continuing economic concerns and slowdown - although a higher interest rate promotes more savings, a lower interest rate does promote growth, which is also needed. The interest rate, however, is not the most healthy means by which savings should be encouraged. A culture of savings must arise in America, not simply savings dictated by the will of the Fed chairman. In order to accomplish this, systemic changes must occur.

Americans' savings rate probably decreased over the past 10 years as a result of their increasing economic well-being, in addition to low interest rates. Not only did Americans take money out of savings and place it in the stock market and treasury bonds, they also simply consumed more, thinking that considering America's economic success (and especially the increasing value of their homes, which they could borrow against more and more easily), they were economically secure and did not have to allow as much for future "rainy days." In light of America's recent economic woes, savings will in all liklihood increase, but changes must still be made to ensure that higher rates of saving become permanent, not just reactionary.

There are a few ways that a higher savings rate can be encouraged - in my opinion, tax reforms that encourage saving by shifting the tax base towards consumption are most beneficial. This, of course, invokes Huckabee's Fair Tax - but a value added tax, coupled with lowered but more even more progressive income taxation, is a far better solution.