Living With Scarcity

A friend recently brought up the Club of Rome, and their arguments on the end of growth. While I was dismissive of this organization in the past, I didn't know that they revisited the original model. Recent reviews of their forecasts were essentially right.

Their statements on the coming era of scarcity are visible everywhere. The challenges of technology, debt, demographics, energy and climate are perfectly real and serious. We will have to structure economic policy to address them directly, which would be a huge step forward from the last decade of putting our heads in the sand. The key is probably something you've mentioned, but didn't focus too much on: social change.

The question of ordering a society under conditions of low growth (I won't go so far as to say no growth, since we do have favorable institutions and the possibility for productivity gains) most likely boils down to how dramatic of a change is necessary. The classic American liberal idea of an active government pushing significant investment and leading public-private partnerships is, in itself, a very significant change in social organization from what we have already. It means providing more public goods and broader safety net, while foregoing the extreme rewards of our current meritocracy.

I'm not sure if it's enough, or even politically feasible (yet). But we can avoid those issues for now.

With relatively low population growth combined with greater international movement of labor, I'm not sure if you will need relatively high economic growth in order to provide a generously high standard of well-being in the US. Demographic change will eventually stabilize and people can adjust to life of more intense scarcity. This can be managed with better efficiency: pretty boring things like urbanization, better public transportation, collaborative consumption and broader recycling efforts can stretch the resources we have far past their current "limits." You don't need to look very far to see shocking amounts of waste in America, and I wouldn't be surprised if much of the 21st century is about dealing with it.

You can see the beginning of this age of efficiency already. Solar power production follows moore's law; it won't be too long until it's cheaper than coal. Scientific American says that in 10 years, solar will cost half of what we pay for any current energy source. This is what I mean by growth through efficiency. There's also some crazy ideas about using bacteria to produce tremendous amounts of energy, which was one of the weird projects that got included in the stimulus.

Breakthroughs like this will become more normal in the future, but none of this will be possible without the three basic principals I kept hammering on about in a previous post: experiment, invest in technology and innovate. Not to belabor the obvious, but social reorganization is obviously an innovation too.

Questions like this always remind me of the end of the buggy and the beginning of the car, often generally referred to as the great horse manure crisis of 1894. All transportation at the end of the 19th century was animal powered, which meant that cities were bustling with tens of thousands of horses. This form of transportation produced millions of tons of manure every day, so much that urban life was quickly becoming intolerable. Predictions about the future of London in 1894 imagined a city with feet of horse shit covering every inch of public space.

Of course, we found a solution to this problem, even though extermination by manure seemed like a perfectly reasonable forecast at the time. Businesses have already learned the importance of resource efficiency, it seems likely that we can apply the same ideas to society as well. Despite the fact that our problems become larger and more complex with each passing year, humanity always increases its capacity to solve them. The solutions might be more radical than saying trust the market to solve everything, but they'll be uncovered and put into place, regardless. It's the nature of progress.

Karl Rove and the Limits of Belief

A lot of things came to a forefront during the previous election, but few were as fun to witness as the final moments of Republicans' long war on science and empiricism. Rachel Maddow has the laundry list of various conservatives "issues" that have shown the party's strong opposition to reality.

Followers of this blog should be able to recognize, by now, that I don't believe in being divisive (too much), and I don't believe in belittling or insulting others. But, at the same time, I don't accept, prima facie, mendacity, duplicity or a willingness to hide real problems under an ideological framework. I've spent more time than you can imagine talking to "liberals" about the lunacy of marxist and socialist parties and their ideas. You might find this surprising, given the framework of the national debate, but it is actually true.

But, unfortunately, I see the same commitment to principal over fact in the Republican party. It bothers me deeply, and I am very pessimistic about a party that has committed to denying science, legislating religion and refusing to acknowledge the need for change and modernization. We can be upset about how fractious the current political debate has become, but we can't get anywhere when one side of the argument encourages an echo chamber of things that just aren't true.

And if you think I'm missing something, look at the Republican attack on Nate Silver and other people who use quantitative analysis of the polls (all of whom exactly predicted the outcome months in advance).  Look at Karl Rove sitting on camera arguing with Megyn Kelly that you "can't call the election yet."

These are symptoms of an underlying divorce from reality, of a group of people who look me in the face and say that evolution isn't "real" because the Bible told them so. It's the same group of people that deny climate science because some crank they found in some corner of the web. It's the same group of people that will post any nonsense about GMOs or vaccines or agenda 21 or any other pet cause that leaps away from the world because they "believe."

I hope the election might do a bit to purge this instinct. It's bad for the country, and we have serious problems that need to be solved. We have problems from climate, resources, technology, health care cost, inequality, debt, demographics and global power that cannot be addressed by simple ideological answers. And yet, one party bases most of its messaging about how most of these things aren't even real. How can we solve a problem when they talk like that?

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Pretty much all of this can be summarized in the discussion by Joe Scarborough and David Frum, both Republicans, that echoes the same points I'm trying to make about the Republican party. David Frum's conclusion: "Republicans have been fleeced and exploited and lied to by the conservative media complex." They've stopped talking about reality, and we all need to fix it.

A Basic Platform for American Growth

Republicans have tried this election to deflect some of their party members' medieval views on abortion and gay rights by trying to focus on the economy. "Who cares about gay marriage when we need jobs!!!" they say.

Well, these kinds of arguments miss the fact that social issues are economic issues, and vice versa. A party's backwardness on basic facts (like the on the planet and human sexuality) is also indicative of its inability to apply empirically-proven solutions to economic problems. Hence you have a GOP that believes that government spending can't create jobs, unless of course that spending is on programs that they like.

There's a reason why the democrats have a much better track record with improving citizens' economic well-being. It stems from the very limited Republican world-view that neglects that fact that gay marriage does encourage spending and economic growth. It stems from a limited world-view that neglects that inclusive societies, that are able to tap a broader talent pool, are inevitably more successful than that relying on a tiny elite. And it stems from a limited world-view that treats the mass, the true engine of economic growth, as some form of "the enemy."

But even if we're going to get to that point, we have to get some sort of consensus on what drives economic growth. Whether the right likes it or not, there is a clear foundation for liberal policies within neoclassical growth theory. It starts from the stance that income growth ultimately results from two factors: labor and capital.

Improving labor is the work of educational policy and job retraining. The latter was a key part of the America Jobs Act that was blocked last year by Republican Congressmen. Immigration policy also plays a key role. Free markets imply both the free movement of capital and the free movement of labor. We all tend to forget the second part. Attracting and retaining the world's best, brightest and hardest working (at all economic levels) will always remain key to economic strength. Hating on "illegals" is a huge impediment towards getting a better labor force.

On the other hand, improving the efficiency of capital depends on investment policy (like well-managed financial institutions and incentives to save, hence Dodd-Frank), as well as the state of American infrastructure and basic research. Both require government investment, because this sort of public good is never adequately supported by private interests.

At the same time, governing institutions play a key role in providing the proper incentives for people to work, save and invest (in capital and in themselves). This is where social policy comes in, as well-being in general is a key part of a society's general urge for development. Things like inequality, racism, corruption and inadequate health care all negatively effect institutions and place strong constraints on growth.

All of this is summed up in a report from the White House, which details the key investment projects that they believe should be focused on if America is going to keep its edge as the world's economic leader. All of this boils down to encouraging innovation. The internet boom wasn't anything more than America reaping the rewards of a variety of strategic investments (the same is true with the fracking gas boom too). This can happen again, as long as the country can continue to invest in its physical capital and its people.

But it requires effort and it requires the desire to try everything. The silliness of the anti-green energy argument is the lack of a realization that fossile fuels (hopefully in cleaner forms, global warming has its costs too), will always have a role to play. But an economy that is based on diversity, just like any other complex system, will always be stronger than one focused just on one thing (like oil in Saudia Arabia). We should hope for an energy grid that gets equal amounts of power from all sorts of inexpensive sources. But it requires ingenuity, open-mindedness and a strong preference for empirical results.

Take that model - try everything, use lots of technology, relentlessly innovate - and apply it to anything you want. An effective public-private partnership relies mostly on the frame set by the government (with key strategic investments). This includes all of the liberal clap trap I feed you: health care, education, infrastructure, etc. From there, the magic of markets will almost always do the rest.

There's More to Economic Policy than Taxes

The following statement came up in a recent conversation. It's useful to share, since it summarizes a lot of thought about taxes:

Is the Republican model impossible economically? It just seems that there have to be economists with impecible records that support it (this may be a wrong assumption). Yet, it just seems, at a basic level, that if taxes are lowered people have more money. If people have more money they spend it. If taxes are lowered a business may have the opportunity to expand with its new capital or higher a new employee creating more revenue for them and more taxes for the government. It just seems that cutting income taxes has the opportunity to create greater revenue in regards to the other taxes that we have implemented.

We can call this the revenue for growth hypothesis. While part of the deductive logic on tax cuts for growth is very persuasive (especially on taxes as a cost), we need to very precise in our definitions. For example, whenever we start talking about these things, everything depends on what we mean by "impossible economically." Essentially, it all comes down to what we mean by "success" in policy.

All other things being equal (that great economics phrase), tax cuts should lead to more spending and should lead to more growth. After all, there was a massive tax cut in the stimulus program that Congress passed. Both Republican and Democrat administrations have argued for tax cuts for this very reason (here's Paul Ryan and here's Barack Obama; they're saying, broadly, the same thing).

But if you just stop there, you're missing the whole point. Taxes aren't the only way of managing an economy, and you often make sacrifices when instituting a tax cut. Is this tax cut justifiable in the terms of the amount of debt it will add (because they always do)? Is it worthwhile in comparison with the amount of government programs that we will cut?

It becomes a lot harder to justify all of this through simple deduction. While there might be persuasive arguments on either side of an argument, you can't see them for what they really are until enacted.

This is where we start to see problems in many of the right's arguments. Do tax cuts for rich people (which is what they are exclusively proposing; Barack Obama is already committed to keeping the Bush tax cuts for everyone else), create jobs, raise incomes, encourage growth? According to that report that the Republicans just tried to suppress, no, tax cuts for rich people don't lead to much economic growth. This is the result of a broad, 65-year empirical study from a non-partisan working group (the government body that conducts research for Congress so that they can make better decisions). I believe that most economists (when they drop their partisan hats), would agree with this.

But what about other things that Republicans do for the economy? What about fighting inflation, something that they're good at while Democrats are not? As it turns out, Princeton political economist Larry Bartels has looked at this problem, and he's found that Democrats have both higher total income growth rate and more equally shared income growth. Job growth has also been better under Democrat presidents, as has the increase in consumer confidence and total GDP per capita growth.

The same is true for conservative parties abroad. The Tories in UK, for example, have pushed an austerity budget that was widely praised by Republicans in the US. It turned out to be an economic disaster, pushing the UK into its second recession in four years.

When Republicans do increase incomes, it is almost exclusively for the rich. The difference is actually so stark that almost all of the increases in American inequality over the last 30 years can be attributed to Republican policies.

This seems to be part of the problem with bad general economic performance under Republicans, as there is a strong link between inequality and anemic growth. The IMF, for example, has presented extensive research on how inequality is bad for growth.  The World Bank agrees. These are about as mainstream of economic organizations that you'll ever find.

Most importantly, amidst all of this "cut the government" kind of fever, you have to look at the things you sacrifice when you don't tax all that much and you don't tax the rich at all. The income tax, after all, was explicitly designed to tax just those at the top, because there were much better things to fund. Universal health care, family planning policies, strong infrastructure, investments in education, open borders and even affirmative action will all do much more for sustained economic growth than tax cuts alone. All of these policies will reduce inequality and broadly raise living standards too, and all of these policies are opposed by the Republican party.

So this should leave you scratching your head. The Republican party, in its current form, has reduced all of the possible economic policy considerations to only two things: reduce taxes and reduce regulations. Everything else they oppose. You would think that with all of the social and economic problems currently facing the US - debt, technological change, climate problems - that our government would embrace a broad set of alternatives to solving them. But not this Republican Party; not right now. Until I see the kind of open thinking, transparency and willingness to embrace empirical conclusions that mark all good policy, I'm left thinking that any vote for a Republican party member will ultimately damage the economy.

It's sad too. I'm not that much of a leftist. I like Milton Friedman. I have strong sympathies for individual freedom, and there's lot about Obama's Democratic Party that I don't care for. The drone strikes, war on drugs and continuing assaults on personal freedom are abhorrent. But as long as one of our two major parties spends the vast majority of its time denying reality and spinning ideological fantasies, it's the best I've got. As the Economist says, go with the devil you know.

The Myth of Barstool Economics

Facebook has seen versions of this video floating around recently. It's a cute little story about men drinking beer in a bar, something we can all sympathize with, and it tries to make a larger statement about how "unfair" our tax system is and how we shouldn't stigmatize inequality.

Now, for anyone that's spet even a little time looking at the tax system, something seems a little off here. What's more, the Facebook version of this story, often posted in the form of a letter, is always attributed to American economists who deny having anything to do with it. Clearly, these guys wouldn't spend so much effort distancing themselves from this obviously partisan tale if they actually believed in what it says.

As the incredible Richard Wolff points out, part of the deception in the video is its simplicity. Viewers often drop their critical assessment of its content because it both seems straightforward (look at the easy math!), and it supports a common sentiment (taxes suck!). But if you only take it this far, you miss an incredibly pernicious piece of political economy.

Debunking all of this is going to take some work, and I'll be relying on the basic messages that Wolff presents, filling in details as we go.

i) While the "barstool economics" story assumes that everyone is getting the same service (a beer), the truth is that the rich receive more benefits from the government than the poor, which is why they should pay more. The tax code is just one of many examples.

ii) The original point of the income tax, as it was conceived in the beginning of the 20th century, was to use the money from the top 1-5 percent to develop common well being. The sentiment is very similar to Adam Smith's take on taxes, that those with the most should provide the most to guarantee a strong civil society. This is basically described in the original legislation. 

Over the last 50 years, the rich have been steadily moving the tax away from themselves and onto poorer people, which helped turn people against it. This is part of the reason that anti-government rage seems to only grow stronger the longer Republicans are in office: by shifting the cost of government onto

iii) The story is confusing for people who don't understand that we have a marginal tax system. You do not pay a tax rate on a total amount of money. You pay rates for certain increments that you earn.

For example, the first 10k are tax free. The next 10k are taxed at 5 percent. The next 10k at 10 percent and so on. The rich only pay the top rate on the money that they've earned above 250,000k; the lower increments are taxed at the same rate as the poor and middle class. As it works out, your effective (actual) tax rate is always lower than the tax rate of your top marginal bracket. This is why no one in the US actually pays 35 percent (the top threshold), even before accounting loopholes come into play.

So if Barack Obama is going to keep the Bush tax cuts for everyone except those "earning over 250k," what he's actually doing is adjusting the rate for the very top threshold. Rich people will still get a tax reduction for everything they earn up to 250, only the amount that comes over the top is actually taxed higher. Does that make sense?

To play the game a little, Obama's plan would be similar to this scenario:

Guys 1-6 no longer have to pay due to the cut. Every one else shares a four dollar tax cut, which is the maximum reduction that anyone would receive. Although everyone shares the cut equally, the richest guy now pays a larger portion of the bill, since some other guys have dropped out. This is true of the "discount" given in the story too, and it would happen in most scenarios that try and distribute the discount fairly.

(This demonstrates the great irony of the right's tax cutting zeal. Half of Americans don't pay income taxes because Republicans have been cutting taxes so aggressively for the last thirty years. Having created this situation, they now complain about it to further their real goal, lower rates on the rich and higher rates on the poor).

iv) In the end, the biggest problem with barstool economics is how incredibly far it is from the actual kind of tax cuts proposed by the Republican Party. Under the story's little description of a "tax cut," everyone got roughly the same savings, in percentage terms. In fact, the "percent" cut actually favored the poor.

No Republican is actually proposing anything like that. If you compare Romney and Obama's plans (assuming that Romney could actually deliver, which is a whole 'nother issue), you can calculate the "Romney saving" by combing the two together.

Graph original prepared by Ezra Klein here.

Excluding the poorest twenty percent (who would see their taxes increase), all of the bottom 99 percent would get a tax deduction of less than ten percent (comparing with the rate they'd have under Obama). The top one percent, would get a 13 percent tax deduction, while the top .1 percent would get a 15 percent tax deduction.

So, people aren't just confusing dollars and rates when they look at Republicans' tax cuts. The rate of the cut for the rich is way larger than the rate of the cut for everyone else. Combined with reduced services, you see a massive shift in the burden of government from the rich to the poor.

...And they blame the left for class warfare.

What's so Scary about a Little Inflation?

Forbes contributor Charles Kadlec sees only one thing in QE3: a good ol' fashioned dollar devaluation. As he writes:

The Fed’s zero interest rate policy accentuates the negative consequences of this steady erosion in the dollar’s buying power by imposing a negative return on short-term bonds and bank deposits. In effect, the Fed has announced a course of action that will steal — there is no better word for it — nearly 10 percent of the value of American’s hard earned savings over the next 4 years.

Now, obviously, I'm not one to agree with Kadlec's conclusions. Even though the critique of the Fed's tracking methods is a little interesting, there is not a single explanation of why a slowly devaluing dollar is a bad thing. He just assumes it outright and instead throws around a silly little thought experiment about changes in prices over 20 years. Even stranger, he doesn't seem to mind proving that a little inflation is good. He quotes the FOMC's statement on why a little inflation is much more benign than deflation, and does nothing to try and prove it false.

The FOMC's argument falls in line with the monetarist discussion of inflation, which comes from the work of Milton Friedman and from A Monetary History of the United States in particular.

For the economy to grow, the amount of money available has to increase. We have inflation because we play it safe; we allow money to grow faster than the economy, because the alternative is disastrous. Deflation, when the supply of money not keeping pace with the economy (or more usually declining faster than the economy), is very punishing to anyone with debt; your ability to pay your debt decreases while the required payments stay the same. Since the relationship is basically fixed, its not surprising that deflation almost always leads to a collapse in economic activity. This is the heart of the room to grow argument that most contemporary economists support.

Moreover, inflation allows for wage flexibility. It encourages hiring. It provides the central bank the opportunity to cut rates when needed. It encourages more people to be involved in financial markets, instead of hoarding hard currency. And most importantly, it encourages businesses to spend saved cash on machinery and other fixed assets. It's hard to argue that inflation is too high when American companies are holding more than a trillion dollars in cash.

Of course, as is often the case in economic policy, higher inflation rates do have a real cost. Most economic explanations of inflation, especially those that remain hawkish, talk about how inflation is a secret "tax" on savers. This is only partially true. Inflation moves money from savers to debtors. It benefits government when it is a debtor, but it benefits most people as well, since most working people are debtors too. If the government is a saver (like Spain and Ireland before the crisis), then inflation hurts them too.

Going back to the much more important issue, there is no reason to assume that wages wouldn't increase at the same rate as inflation. Wages are entirely independent from any understanding of inflation. They can increase faster than inflation or they can increase slower than inflation. Inflation has everything to do with the relationship between money and national growth (GDP).

Which is why it is possible to have real wage growth (wages growing after inflation) and it is possible to have negative wage growth. Nonetheless, growth was almost always higher during periods of higher (moderate) inflation.

Now, during these situations, rich people suffered. And Republican governments tended to address this suffering by reducing this inflation. But reductions in inflation tended to be recessionary too, reducing job growth and wages. Which is why, since WWII, Democratic presidents have been in charge of higher employment and higher wage growth. Maybe not everything is connected, but these things are.

This is another stimulus just waiting to happen. Unfortunately, at 2 percent inflation, there just isn't any incentive to get started on this. The real return on fixed assets just isn't high enough, but it would be if inflation was higher.  Yes, higher inflation would be bad for bankers, and that's obvious since you site another person from the financial community as your hard currency expert (aren't you at least a little surprised that they all share the same background?). But I would rather have an economic recovery than a bunch of rich bankers.

Scott Sumner, the guy chiefly responsible for moving inflation back to the center of the discussion on monetary policy, is a libertarian. In fact, nearly every economist advocating NGDP targeting (raising inflation to compensate for a slowdown in spending) are libertarians. They are intellectual descendants of Milton Friedman, also a libertarian.

I'm not advocating some radical leftist theory, and you haven't heard me mention anything about forced full employment, or increased government transfers (at least not right now). I'm advocating ideas started by a libertarian (uncle Milty) supported by other libertarians (uncle Freddy) and to this day still advocated by libertarians (the Market Monetarists). Hell, I'm starting to get worried about the accusations that I'm a traitor to my own side.

If you base NGDP targeting on the rates of return from GDP futures, which would be a market-driven target, you would get an entirely market-driven monetary policy. The supply of currency would expand during downturns (not being a hard currency), but this is exactly what Friedman said was necessary.

To get there, you have to learn to love (a little) inflation (sometimes). These spurious arguments about war and peace are stopping you from realizing that this could easily be a strong, stable and entirely pro-market monetary policy. People like Kadlec just need to come out of the Austrian woods to see that there are other market-based monetary regimes. I promise, it won't hurt a bit.

Institutionalist or Insurrectionist?

Chris Hayes' Twilight of the Elites is the current book on the reading list. I'm enjoying it quite a bit, and I'll probably have a lot more to say about it once I make it through. In the meantime, I'll be talking about it as a nice piece of swath of institutional and institutional decay literature that I've been digging through. This includes Winner-Take-All Politics and Unequal Democracy (both of which I've talked about in earlier posts), along with more economic takes on institutions, like Why Nations Fail (my review).

Essentially, the book can be divided into two halves, two perspectives on an interrelated problem: institutional decay. Ostensibly, Hayes is writing about the failure of America meritocracy and how this seemingly egalitarian system has been transformed into something supporting oligarchy and plutocracy. Hayes has a wonderful piece in The Nation detailing this very phenomenon and showing how an obsession with "smartness" has betrayed fundamental American values and led to the institutional crisis that has persisted past the financial crisis and great recession. Although problem is multifaceted, Hayes prefers to simplifying things by calling the general decay a Crisis of Authority. I'll follow his lead; it makes things easier.