Category: Uncategorized

And the Rich grow Richer

Here’s a link to a fascinating story and analysis on the growth of wealth at the top. The number that jumped out for me was that in 1982, just over 15 percent of the 400 wealthiest Americans made their fortune in manufacturing. Today is is just a bit below 4 percent.

Why the Rich Grow Richer

The article analyzes the changes in the tax code, and other government policy since the late 1970’s, and how it has altered wealth creation in America.

Run Government Like a Business? Yeah, which business?

It is a favorite suggestion of Republicans: government should be run like a business. A recent example is from a Republican candidate for Governor named Phil Moffett. His commentary in the Herald-Leader may be here: http://www.kentucky.com/2010/08/23/1403050/give-teachers-more-authority-parents.html [Note the Herald-Leader tends to hide their content after a few days]

Moffett notes a number of real problems, and I agree with him on some of the solutions. I agree that disruptive students should be removed from the classroom, and I support some forms of Charter Schools.

But the idea that government functions should be run like a business has always amused me. According to the Small Business Administration, one third of small business fail in the first two years, and over fifty percent fail within five years. That is a dismal success rate. The suggestion that government should be run like a business implies that businesses are uniformly efficient and well managed. But the numbers suggest otherwise. The concept also suggests that businesses are somehow unique in their ability to plan for the future, but if anything, the numbers say exactly the opposite.

I also wonder what business they are talking about. Certainly there are well run businesses out there. But we do not compare runners against Olympic athletes. Many businesses fail because of fraud. Remember Enron, or what about Bernard Madoff? Businesses men are no more or less noble than politicians.

You may have seen this headline: Plunging home sales could sink recovery.

Here’s the full story: http://money.cnn.com/2010/08/24/real_estate/existing_home_sales/index.htm?source=cnn_bin&hpt=Sbin

There is such a glut of excess housing that it is not only depressing home prices but it is causing potential buyers to be exceedingly cautious. They do not want to buy a house only to have the price go down. And the price could go down because there are so many excess houses out there.

And why are there so many houses available? Because of the business decisions of home builders and bankers and mortgage lenders (and certainly also decisions by government regulators and bureaucrats). If businessmen are so smart, how did they create this recession? And if they are so smart why didn’t they realize that was happening? And if you want to lay it all at the feet of government bureaucrats (at agencies like HUD and Fannie May and Freddie Mac) then you are admitting that all of those businesspeople were duped. But how could they be duped if they are so smart? Perhaps it is because they are not so smart after all.

Government can certainly learn things from business. But the idea that government should be run like a business is silly and simplistic.    

How Do You Deal With Morons?

That’s not a hypothetical question. How do we deal with people that don’t recognize facts?

Let’s say, for example, that we are doctors and we have an ill patient. A quick test reveals a bacterial infection, and the standard treatment is a penicillin like antibiotic. But let’s say that another doctor says that he doesn’t believe in modern medicine and thinks the best solution is the application of leeches and bleeding. Most people would say ignore the other doctor. But what if he is the chief resident? Or what if he is a United States Senator and the question is not what to do with a sick patient, but what to do with a sick economy?

Republicans are saying that President Obama’s stimulus package was a complete failure. Senator Mitch McConnell has said it, Republican Senatorial Candidate Rand Paul said it, and Congressional Candidate Andy Barr said it. Here’s a news report that says otherwise:  http://www.reuters.com/article/idUSTRE67N55X20100824

According to the report: 

The massive stimulus package boosted real GDP by up to 4.5 percent in the second quarter of 2010 and put up to 3.3 million people to work, the nonpartisan Congressional Budget Office said on Tuesday. 

CBO’s latest estimate indicates that the stimulus effort, which remains a political hot potato ahead of the November congressional elections, may have prevented the sluggish U.S. economy from contracting between April and June.

That is hardly a failure. Now the stimulus may not have been the best way to revive the economy, it might be bad economic theory, and it might be an inappropriate governmental intrusion into the economy. All of those statements are matters of political opinion. But to call the stimulus a failure is simply false.

And that brings me back to my question: how do you deal with people that do not recognize facts?

How can we address important public policy issues with people who are simply incapable of dealing with facts that they do not like? Would we go to a doctor who does not believe in modern science? Probably not. But the problem is that we have people who are in positions of power who are incapable of believing in facts and much of the modern world. And because of their elected position we have no choice but to deal with them on some level. But how?

I think that the only thing that we can do is to restate the base line facts in every interchange. Every time a Republican politician says the stimulus was a failure, point out that the CBO says otherwise, and then say we can debate the policy but we shouldn’t have to debate the facts.

There is an exercise in philosophical debate called the definitional inquiry. Before any philosophical discussion the parties agree on the basic underlying facts and the meaning of the terms that they will be using. That way they can have a rational debate. The law engages in a similar exercise. Early on in any case the parties have to set out some agreed facts so that the court and the parties know roughly what is in dispute. You don’t want the parties to a car wreck wasting time on issues regarding divorce or defamation. Unfortunately there is nothing even remotely similar in public and political discourse. But there should be. How can we debate the economy, and possibly craft a solution to current economic problems when the parties to the debate don’t even agree on underlying facts? It makes the process impossible. And that it part of the problem with our current national debate on most issues.      

Symptom and Disease

Rand Paul is a doctor. Surely he understands the difference between the symptoms of a disease and the cause. Surely he knows that the only way to cure a disease is to treat the cause and not simply address the symptoms.

In a speech before the Kentucky Farm Bureau on July 22, 2010, Dr. Paul said that the budget deficit is the most important issue facing the nation. Specifically he said that the deficit was his “number one concern.”

Hopefully the fact that the deficit is Dr. Paul’s number one concern means he will address the cause of the problem and not just the symptom. But if you look at his stated positions, (see his web site: www.randpaul2010.com) he is focused almost entirely on reducing the deficit, and doesn’t even seem to grasp that it is part of a larger problem.

Make no mistake, the deficit is a symptom of a larger disease. The current national budget deficit is a product of the changing economy, it is not the cause of the changing economy. The deficit is the symptom, the disease is the changing world and national economy. The world economy has been changing dramatically for the last 20 to 30 years, and the pace of change just keeps getting faster. Computers have dramatically altered the marketplace in many ways, including my eliminating entire career fields. Secretaries, draftsmen, and bookkeepers are largely a thing of the past. When I first started practicing law about 15 years ago, most law firms, even sole practitioners, had at least one secretary for each lawyer. Today most solos don’t have a secretary, and the ratio of lawyer to legal secretary at big firms is one secretary for every three lawyers. Computers and word processing software have made legal secretaries obsolete. Automation has similarly changed manufacturing. Robots and computers have replaced workers in factories. Because of automation, most companies produce more manufactured goods with fewer employees, and make more money doing it. This is good for a company’s bottom line (and good for their investors) but it is bad for employees and bad for national employment. Foreign competition is also cutting into domestic manufacturing, and in many cases preventing domestic companies from raising prices or wages. All of this has led to a general economic slowdown. The overall economy was slower in the first decade of this century than at any time since the end of the Second World War. And the last ten years have seen almost no job growth.

The national economy has slowed and this means that government revenue has slowed. But unfortunately the size and scope of government has not slowed. If you chart the growth of the economy since the sixties and the growth of government during the same period you will notice that the two roughly parallel each other. But the line for the economy essentially flat-lined during the Bush Administration, but unfortunately the line for the government continued up on about the same slope as in previous years. And the difference between these two curves is partly responsible for the budget deficit. During the flush economic times we – government and business – made commitments that made sense at the time (health care benefits, retirement benefits) but that are no longer economically feasible.

Solving the budget deficit is definitely important, but it won’t bring back jobs lost to computerization and automation. Lawyers are not going to start rehiring legal secretaries and factories are not going replace robots with laborers if the federal budget is balanced. The Chinese economy is not going to stop growing if the Congress passes a balanced budget amendment. Certainly fiscal restraint will mean that more money can go into the private sector than the public sector, but that alone will not solve the larger systemic changes to the economy.

If Rand Paul’s prescription for the ailing economy is nothing more than ending the deficit, he is treating the symptom and ignoring the disease.  

Economic Anxiety and Political Instability

The Rockefeller Institute recently published a study showing that the economic anxiety index is at an all time high.

The full report can be found at:

http://nw-assets.s3.amazonaws.com/pdf/ESI_report_embargoed_until_7-22_low-res.pdf

According to the report, the American people are significantly more anxious about their economic situation today than at any time since the study began in the early 1980’s. But according to the trends shown in the report, it is not just a spike caused by the current economic recession. The trend line has been up since the mid 1980’s (when the survey first began.)

There are many reasons for this increased anxiety but a major factor is the increase in job instability. Fewer people are working at large corporations and no longer have the expectation of career-long employment, which was common up through the 1970’s. Large companies are increasingly being replaced by small business and sole entrepreneurs. Being your own boss is great, you are free to succeed and fail based on your own efforts. But there is no safety net for poor performance. The same holds true if you are an employee at a small business. One bad month can mean the difference between employment and unemployment.

The demise of large, hidebound companies and the rise of more flexible small businesses means a more flexible economy, but this creates a need for more flexible employees. The cost of this flexibility is less security. Good for business, bad for employees sense of stability. And guess what? Employees are citizens. So economic flexibility can lead to a sense of employment insecurity, and a general sense of unease among the public.

This corresponds to the bigger problem: economic uncertainty leads to political instability. Politics have become more unsettled in the last twenty or thirty years as the economy has become more unstable. The public is increasingly worried about the economy, and not just about the problems caused by the current recession. They want stability, they want security, and most of all they want politicians that can bring this about. And increasingly the public is willing to try anything, to grasp for any solution, simple or silly.

Obama was elected, in large part because of the public’s dismay at the way the Bush Administration and the majority Congressional Republicans seemed to screw up the economy. And now that things are not getting better, the public is ready to throw out Obama and the Democrats. That is certainly understandable. The so called experts and supposed smart people who ran the economy (and the government) for the last ten or fifteen years sure haven’t done a great job, so why not try someone unproven? Why not Sarah Palin or some other new and untested leader? Given recent events, and the lousy job done by the old hands, how could inexperience be any worse?

But what if neither the Democrats nor the Republicans have a solution to the current problems? What if the national and world economy has changed so fundamentally that the old solutions are obsolete?

The Bush era tax cuts and de facto deregulation (which follow standard conservative theory) only made matters worse. And the Keynesian policies of the Obama administration haven’t improved things.

I suspect that this political instability will not go away until this high level of economic instability also goes away, or at least is significantly reduced. And neither party seems to know how to do that, so I think for the time being we are in for some interesting politics.