Author Archives: jsh54

EUwwwww.

Posted on by
Reply

The First World War, the Great Depression, the collapse of most European democracies, the Second World War: a continent in ruins and—with the Cold War—a divided continent at that.  What to do?  One answer came in a movement toward Western European unity.[1]  In 1949 came the European Coal and Steel Community (France, West Germany, Italy, the Benelux countries); in 1957 came the European Economic Community (same countries with a common external tariff, but no tariffs within the EEC); in the 1970s and 1980s came new members (Britain for example); in 1992 came the Maastricht Treaty that committed the members to ride the process as far as they could go; and the collapse of the Soviet Union’s empire in Eastern Europe.  The European Union (EU), as it is now called, started out with 6 member countries; now it has 28 members.  It also added various institutions of government.  These included a European Commission representing the member countries, a European Parliament, a Council of Ministers, a European Court to settle conflicts between national laws and EU laws, a President and a Foreign Minister, and a kinda-sorta common currency called the “Euro.”

Did it work?  Yes it did.  First, no wars have been fought between member states since 1945.[2]  Second, incomes have risen for ordinary Europeans: a recent estimate reported that the per-family income effect over just ten years has been a $6,000 increase.

So, people are in love with the European Union, right?  Well, no.  No?  Well, why not?

First, because the French used to count for a lot more than they do today,[3] so they had a large voice in designing the institutions.  These institutions bear a certain resemblance to the constitution of the first French Empire created by the military dictator Napoleon I.  The European Commission, with one appointed representative for each country, writes legislation.  The Commission then sends the proposed legislation to the popularly elected European Parliament. The Parliament can amend legislation or it can approve it or it can reject it, but it cannot initiate any legislation.  Legislation approved by the Parliament must then be ratified by the Council of Ministers, which is made up of more appointed representatives of the member states.  So, elected governments take forever bargaining with one another to achieve a moderately acceptable outcome.

Second, the EU’s government often fails to take action, but the “Eurocrats” issue regulations all the time.  Hundreds of thousands of them.  The regulations create common standards across all member states.  The European Court regularly decides that these regulations are superior to the laws of any protesting country.  To take one really absurd example, EU regulations banned bananas with “abnormal curvature.”

Third, because the Europeans have never settled the conflict over who they want to be.  On the one hand, many people see themselves as “Europeans-all-in-this-together.”  On the other hand, many people see themselves as, for example, “British-first-and-Europeans-second.”  The EU created a community where goods and services, but also people and money, moved around inside the community without any national boundaries.  Citizens of EU countries don’t need a passport to travel anywhere or work anywhere inside the EU.  Younger people often like this, but it freaks-out older people who still feel patriotism.

[1] “The endangered European Union,” The Week, 19-26 August 2016, p. 11.

[2] OK, you wouldn’t want to try to jump ship on the French Empire, but otherwise..

[3] Back in the day, the West Germans felt bad—or pretended to—about the whole unfortunate Nazi thing.  So, “working their passage” back to international respectability involved the Germans putting up with a lot of guff.  Now, they’re over it.

The ACA in August 2016 2.

Posted on by
Reply

One means to control costs included in the Affordable Care Act (ACA) took the form of a mechanism for publicly reviewing requests for rate increases by insurance companies.[1]  In Summer 2016, health insurance companies began requesting large increases in premiums.[2]

A witness for one Pennsylvania health insurer observed that his company had about 250 clients who had signed up for coverage under the ACA, then received treatment worth about $100,000 each, and then had cancelled their policies immediately after receiving treatment.[3]  The cost of the care then had to be passed on to other clients.  In Montana, ten individual customers consumed more than $4 million in care in the first six months of 2016, for an average of about $70,000 a month each.  In this case, 1 percent of customers accounted for 30 percent of pharmacy bills.  Making matters worse, in the first years of the ACA, a federal program helped insurers pay the cost of some of the most expensive claims.  Now, according to a Department of Health and Human Services economist, that program is winding down.

What has been happening in Pennsylvania is not unique to the Keystone State.  In Montana in 2015, one insurer reported that it had paid out $1.26 in claims for every $1.00 in premiums.  Unable to sustain such losses, major insurance companies have had to choose between seeking much higher premiums and abandoning the health-insurance market places.  In 20 states, insurers have asked to raise their premiums by at least 25 percent.  In some other states, insurers seem to be abandoning the market places to more efficient or competitive insurers.

 

Who are the uninsured?[4]

More than half of the uninsured live in the 20 states that refused to expand Medicaid, many of them populous Southern states like Texas and Florida.  As a result, 39 percent of the uninsured have incomes below the federal poverty level.

In 2013, 28 percent of people between 19 and 34 years old were uninsured; today 18 percent are such “Millennials.”  Still, that 18 percent accounts for almost half of the total uninsured.

In 2013, 50 percent of the uninsured were white; now 41 percent are white.

In 2013, 36 percent of the uninsured were American citizens of Hispanic descent; today 29 percent of the uninsured are American citizens of Hispanic descent.[5]

In 2013, 13 percent of the uninsured were black; now 12 percent are black.

More than half (57 percent) of the working Americans without insurance work for small companies that were exempted from the requirement to provide insurance.

[1] It speaks volumes to the intellectual world inhabited by Democratic legislators that the NYT reporter Robert Pear can describe the process as intended to “shame” companies that requested increases.  Apparently, Democrats believe that immense profits by health insurers and exorbitant pay for executives explain high health costs.

[2] Robert Pear, “Health Insurers Use Reviews, Intended to Constrain Rate Jumps, to Justify Them,” NYT, 15 August 2016.

[3] The chief executive of the federal insurance market-place optimistically portrayed the join-spend-quit pattern as a one-time “decline in pent-up demand for services.”  In all likelihood, uninsured people will continue to pen-up their use of services, then join-spend-quit again.  Robert Pear and Reed Abelson, “As Insurers Balk, U.S. Makes New Push for Health Care Law,” NYT, 18 August 2016.

[4] Abby Goodnough, “Still Uninsured, Even With the Health Law,” NYT, 18 August 2016.

[5] However, the ineligibility of illegal immigrants for coverage means that the total Hispanic share without insurance has risen from 29 percent to 40 percent.

The ACA in August 2016.

Posted on by
Reply

Prior to passage of the Affordable Care Act (ACA), many Americans received their health insurance through their employers; many others bought individual insurance; and a relatively small percentage had no insurance at all.  As one part of the effort to extend health insurance to the uninsured, the ACA required everyone to have insurance, created a system of subsidies to make that insurance affordable for lower-income people, and encouraged the creation of market-places where individuals could purchase standard plans offered by insurance companies.[1]  (In essence, lots of younger, healthier, lower-income people would be constrained to buy insurance to pay for the care of older, sicker, and often higher-income people.)  Broad participation in the health-exchanges by the major insurance companies would create a competitive environment that would help hold down prices while providing a broad array of choices to customers.

In spite of the unfortunate early mishaps of the ACA (the botched roll-out of the web-site, the president’s terminological inexactitude about keeping one’s insurance, the Supreme Court’s invalidation of the portion of the ACA that tried to coerce states into expanding Medicaid), far more serious problems have begun to emerge.

In what seems to have come as a surprise to Democrats and the New York Times (“but I repeat myself” as Mark Twain once said), it turns out that people really are economic animals.  First, for many potential customers, the price of health insurance is too high for what it would buy.  While it had been projected that about 21 million people would be enrolled in health exchanges by 2016, only about 10 million have enrolled.  That’s a lot of premiums that never get paid to insurers.  In 2015, half of the people who did buy insurance in the market-places bought the cheapest possible plan.[2]  Those who buy the more expensive plans tend to be people with serious medical conditions.  Furthermore, many of these customers don’t care about choice of physician or the size of the network of providers. They have opted for plans offered by smaller insurance companies.  Some of these companies already had deep experience dealing with Medicaid payments.  They knew low income customers and they knew how to keep down costs.  Part of this involved limiting choice of care to doctors and hospitals that were willing to accept a low level of payment.

Second, private enterprise runs on a profit and loss basis.  Having run health insurance policies for employer-provided health insurance, the major insurance companies assumed that their new customers would want the same range of choice of physicians and hospitals.  They didn’t.  Anticipating large numbers of customers, many without serious health needs, the insurance companies priced many of their policies too low.  Getting half as many customers, many with serious health issues, the insurance companies suffered heavy early losses.  Facing continuing huge losses in this sector of their business, major insurers like United Health Group, Humana, and Aetna have either decided to pull out of the health-exchange market or limit their participation.  The insurers who remain in the health exchange market place plan to steeply raise premiums for 2017.  This may well drive even more price-sensitive customers out of the market place.  A health care expert at the Urban Institute rationalized that “you can’t lower costs without breaking some eggs.”  In this case, the “eggs” are companies owned by stock-holders as an investment of their assets.  The big insurers need to learn the market or to get out.

One solution would be to let the experienced low-cost providers take over this market.

[1] Reed Abelson, “Health Insurers Lose as Clients Focus on Costs,” NYT, 13 August 2016.

[2] “Bronze,” like coffin handles.

CrISIS 9.

Posted on by
Reply

For all those angry with President Obama’s policy, the Islamic State is in retreat.  Iraq’s militias under the guidance of Iranian advisors, various Kurdish militias, and the Russian- supported Assad regime have rolled back ISIS gains.  At the same time, American efforts to focus narrowly on the danger of ISIS cut across the more powerful enmities and affinities in the region.  The Sunni-Shi’ite civil war in the Muslim world frames many local conflicts.  Russia has chosen alignment with the Shi’ites (Iran, the majority in Iraq, the Alawites of Syria, and Hezbollah in Lebanon).  The United States is having a harder time making a choice.

After the final American withdrawal from Iraq, the Shi’ite government of Nouri al-Maliki reverted to persecuting Sunni Iraqis.  Alienated, many Sunnis withdrew their support from the government.  Currently, on the principle of “once burned, twice shy,” the Sunnis of Iraq have been sitting-out the Reconquista by the so-called government of so-called Iraq.[1]  However, the occupation of the “liberated” areas by either Shi’ite militias or by Kurds merely shifted the locus of repression for the Sunnis.  The government has resisted pressure from Washington to arm Sunnis willing to fight ISIS because those same arms might later be used to resist the Shi’ites.[2]

Neither Russia nor its client Syrian government of Bashar al-Assad cared to focus on ISIS when they saw the other Sunni rebel groups as a target more dangerous and more near at hand.  Nor did the Sunni rebels against the Assad government see ISIS as the most pressing danger.  They often co-operate with Islamist groups in the fight against Assad.[3]  In the recent fighting around Aleppo, the Syrian Conquest Front (formerly known as the Al-Nusra Front—the Syrian off-shoot of Al Qaeda) has done much of the heavy lifting.  Will Islamist fighters in flight from the embattled ISIS caliphate head West to join the ranks of the Syrian Conquest Front?

If the Syrian Conquest Front, which the US still regards as a version of its old enemy Al Qaeda, becomes the dominant force in the war against the Assad government, Washington will face an ugly choice.  Which does it see as the greater threat?  With which will it align itself?  Will it support the increasingly Islamist-led rebels against the Assad government, even if that means a tacit alliance with the survivors of ISIS and a re-branded Al Qaeda?  Will it support the Assad government, even if that means following the Russian lead into a tacit alliance with the Shi’ites?

Where will future historians locate the root of this disaster?  The most obvious cause lies in the American decision to attack Iraq in 2003.[4]  Anyone who voted for that war has much to answer for.  Even before the occupation had been botched, the Turks had refused to cooperate because they foresaw the effect on Kurdish nationalism.  Then the occupation was botched.  Then came the Obama administration’s too-ready embrace of the “Arab Spring,” its overthrow of the Libyan dictator, and its un-deft handling of the Russians.

Looking farther back, though, can some of the origins be located in the refusal of Kuwait and Saudi Arabia to write-off the loans made to Iraq in order for it to fight the long war in the 1980s against the revolutionary Shi’ite regime in Iran, or to support higher oil prices so that Iraq could earn the money to rebuild?  Everything turns out to be complicated, rather than simple.

[1] Yaroslav Trofimov, “Islamic State Slips, But Sunnis Are On the Sidelines,” WSJ, 10 June 2016.

[2] For its part, Washington has limited the flow of aid to the Kurds because the weapons supplied to fight ISIS might well be used against the Turks.  Given the recent hostility of Turkish president Erdogan to the West generally and to the United States in particular, Washington may decide to re-think this position.

[3] Yaroslav Trofimov, “Syria’s Alliance Hang on Outcome in Aleppo,” WSJ, 12 August 2016.

[4] In my view on specious grounds.

Turk’s Head Knot 2.

Posted on by
Reply

Since the foundation of the Turkish Republic by Mustapha Kemal, the military has been the guardian of the secular, Western-oriented policy laid down by “Ataturk.”  On many occasions, most recently in 1997, this has led to military coups against elected leaders.  When Recep Tayyip Erdogan first came to power in Turkey in 2003, he presented himself as the champion of a democratic Islamism.[1]  However, he took care to cripple the ability of the military to intervene in politics.  His efforts included what is now recognized to have been a faked prosecution of military leaders for planning a supposed coup in 2008.  After 2011, je also supported the Egyptian Islamist Mohammad Morsi of Egypt, another democratically elected leader.  Morsi had faced down Egypt’s military dictatorship for a time.  When, in 2013, the Egyptian generals overthrew Morsi, Erdogan had to give thought to his own desperate position.  Since 2013, Erdogan has been on a rampage as he sought to shore up his claim on power.

In mid-July 2015, some members of the military of the Turkish Republic got fed up with President Erdogan and tried to overthrow him.  They missed their punch.  Not the least part of the key to Erdogan’s survival came in the support he received from pro-democracy opposition parties.  Ever since, there has been Hell to pay.

The failed coup will have a tremendous impact within Turkey.  Erdogan has launched a sweeping purge that targets the military, the bureaucracy, the schools, and the kinda-free media.  Alleging involvement in the coup, Erdogan has either dismissed from employment or arrested thousands of people.  He has bruited it about that his one-time ally Fethullah Gulen conspired in the coup.  The American reluctance to extradite Gulen on what may well be specious charges adds fuel to the fire of Erdogan’s rising hostility to the United States.  Turkey is in danger of becoming a “normal” Middle Eastern country.

What impact will these events have in the region?  Since 2011, Erdogan has opposed Bashar al-Assad of Syria.[2]  Turkey has provided the chief conduit for foreign-fighters of all ideological commitments to reach Syria.  Turkey has provided the main road for supplies from elsewhere (i.e. Saudi Arabia) to reach those who are willing to fight against Assad.  This seems to have included many people bound for the ISIS caliphate.

Erdogan has turned even more emphatically against Turkey’s Western allies.  He had already unleashed a tidal wave of Syrian (and other) refugees on Western Europe in order to extract various concessions from the Europeans.  Even more dramatically, Erdogan’s government has accused the United States of complicity in the failed coup.

Furthermore, Erdogan has shifted his stance on the civil war in Syria.  He has sought to mend fences with the Russians.  The Turkish air force pilots who shot down a Russian strike-fighter over a penny-ante invasion of Turkish air space in November 2015 have suddenly found themselves accused of involvement in the coup.  Erdogan’s sweeping purge of the military leadership has dragged down the commander of the Second Army, which controls the border with Syria and Iraq, along with many of his subordinates.

The Assad government might hope that the Turkish supply route for fighters may be closed, while the anti-Assad government might fear that their main supply route would be cut.  So, the Russo-Assad alliance took heart.  They launched a long-prepared assault to cut the last life-lines into Aleppo.  In desperation, many of the rebel groups combined to launch their own counter-attack.  It continues, with little chance of success.

[1] Yaroslav Trofimov, “Political Foes Stood by Leader,” WSJ, 18 July 2016.

[2] Yaroslav Trofimov, “Upheavals in Turkey Threatens Rebels in Syria,” WSJ, 5 August 2016.

The current explanation.

Posted on by
Reply

Back in 2000, the Clinton Administration held a conference to congratulate itself on its skillful economic management.[1]  The participants foresaw the opening of a new era of rapid economic growth.  Low inflation would run in tandem with stable growth in what some saw as a “Great Moderation.”  Markets behaved rationally most of the time.  Technological innovation increased labor productivity.  Increasing international trade through agreements like the North American Free Trade Agreement expanded high-end American exports while providing American consumers with low-cost imports and stimulating the shift of factors of production (capital, labor) out of low-end industries.  China, in particular, tantalized businessmen and economists alike.  More education and geographic mobility offered the best means for displaced workers to adapt.  Investors faced a host of “staggering high-quality investment opportunities.”  Central bankers could manage the economy with relatively small changes in interest rates.

Like many another rosy dawn, this one failed to arrive.   The host of “staggering high-quality investment opportunities” turned out to be the “tech bubble” that collapsed almost as soon as Bill Clinton handed the White House keys to George W. Bush.  “The China Market” turned out to be just as much of an illusion now as in the past.[2]  Indeed, China’s enormous labor force multiplied by rising productivity multiplied by low wages created an export giant unlike anything ever seen before.  (A 2016 paper by three economists calculated that between 1999 and 2011, Chinese competition ate up 2.4 million American jobs.)  The financial crisis at the end of the Bush administration showed that at least some markets were far from rational and self-correcting.  More education has not guaranteed a better adaptation to a changing economy, while fewer start-ups are creating new businesses and many displaced workers have been reluctant to relocate toward growth areas.  Technological innovation has destroyed far more jobs than it has created.  Indeed, one economist argues that there is a shortage of investment opportunities to provide either an outlet for savings or new jobs.

The rewards of economic change have flowed disproportionately to the upper levels of American society.  In 1990, the top 20 percent of families earned 44.3 percent of total income.  In 2014, the top 20 percent of families earned 48.9 percent of income.  In 2000, wages, salaries, and benefits accounted for 66 percent of Gross Domestic Product (GDP), while business profits accounted for 8 percent.  By 2010, wages, salaries, and benefits accounted for 61 percent of GDP, while business profits have now risen to 12 percent.  Between 2000 and 2015, median family income fell by 7 percent.  One recent poll reported that 91 percent of Bernie Sanders supporters and 61 percent of Donald Trump supporters think that the economy favors powerful interests.   (More likely it favors certain skills and behaviors, but no one is buying that line.)

Those job losses and income shifts now are having a political effect.  Of the 100 counties with industries worst hit by Chinese competition, 89 voted for Trump in the primaries.  Of the 100 counties with industries least hit by Chinese competition, only 28 went for Trump.   Faced with losing their own jobs, many Republican leaders are re-thinking their positions.  A former Treasury official in the Bush II administration reflected that “Washington and we in the establishment spent too much time celebrating the efficiency gains of trade and not enough time thinking about the people who were impacted.”

[1] John Hilsenrath and Bob Davis, “Unkept Economic Promises Drive Stormy Election,” WSJ, 8 July 2016.

[2] “If every Chinaman would add eight inches to the length of his shirt it would take all of the cotton cloth that we have in America, because they all wear them on the outside.”  Proceedings of the … Annual Convention of the Investment Bankers (1919), p. 71.

Good news and bad news on the economy.

Posted on by
Reply

The American economy is huge (producing $18 trillion worth of goods and services every year) and growing (GDP is projected to double over the next fifteen years).[1]  Business analysts had projected that the American economy would grow at a rate of 2.5 percent in the second quarter of 2016.[2]

What’s the good news?  If you leave out business inventories, then in the second quarter of 2016, the rest of the economy grew at 2.4 percent.  Also, consumer spending (which makes up roughly two-thirds of the economy) grew at a rate of 4.2 percent.  This reflects the belated rise in wages (by 2.5 percent over last year) and the fall in gasoline prices.  The United States International Trade Commission projects that the Trans-Pacific Partnership (TPP) trade deal could add 128,000 full-time jobs and $42.7 billion to the GDP by its fifteenth year.

What’s the bad news?  First, companies have been meeting the rising demand in part by drawing down their inventories, rather than by making new stuff to keep their inventories stocked.  If you include inventories, then the economy grew at a rate of only 1.2 percent.  This is half the rate calculated if inventories are excluded.

Second, the fall in energy prices has caused energy companies to shut down a lot of production rather than investing; in other sectors, the strong dollar is choking off a lot of sales, so companies aren’t investing as much.

Third, the TPP’s projected job creation and GDP growth projections are pretty small compared to the over-all economy.  In addition, it is projected to increase wages by only 0.19 percent over where they will be otherwise.

Fourth, the growth of labor productivity holds the key to economic progress.  Labor productivity is the amount of output (stuff) per hour of work.  If labor productivity increases, the employers get more stuff to sell at the same labor cost as before.  That allows for higher profits, or lower prices to buyers, or higher wages to workers, or—the trifecta—all three.[3]  Between 1870 and 2013, the American economy averaged 2.3 percent growth in productivity each year.   This made for a gigantic rise in living standards.[4]  However, that average disguises differences in productivity growth during the sub-periods.  From 1948 to 1973, the annual growth in productivity averaged 2.8 percent.  From 1973 to 1995, it averaged 1.4 percent.  From 1995 to 2010, it averaged 2.6 percent.  From 2010 to 2013, it averaged 0.7 percent.[5]

Apparently no one knows what caused the shifts.  No one knows why it suddenly dropped in 1973 or why it dragged along at a low level for two decades; no one knows why it shot up in 1995 and stayed at a high level for fifteen years; no one knows why it fell again in 2010 (after the end of the financial crisis); and no one knows what the poor performance of the last few years portends or when it will end.  However, in the first quarter of 2016, it fell by 0.6 percent.

The future is uncertain.  Over the short-run, will companies begin investing to meet rising consumer demand or will the investment decline undermine the growth of consumer spending?  Over the longer-run, will productivity growth begin rising or will it continue to limp?  Will rejection of the TPP leave world trade as it is or will it begin a downward spiral in trade?

[1] Eduardo Porter, “Uneasy Alternative to an Imperfect Trade Deal,” NYT, 27 July 2016.

[2] Neil Irwin, “What’s Right and Wrong With the Economy,” NYT, 2 August 2016.

[3] See: Henry Ford.

[4] Alan Blinder calculates this as a 25-fold increase.

[5] Alan S. Blinder, “The Unsettling Mystery of Productivity,” WSJ, 25 November 2014.

Trumputin 2.

Posted on by
Reply

Did Donald Trump encourage the Russkies to hack the email of Hillary Clinton?  Well, no.  It doesn’t matter what the New York Times[1] or the Public Broadcasting Service says.  The truth is different.

Hillary Clinton’s private e-mail server handled both her correspondence as Secretary of State and her “personal” e-mails.  In theory, these personal e-mails related to things like the place settings at the wedding of her daughter Chelsea Clinton.  However, some people (other than Ann Coulter) believe that some of the e-mails reveal the involvement of the Secretary of State with donations to the Clinton Foundation.

Hillary Clinton shut down her private e-mail server after she ended her term as Secretary of State in 2012.  All of the “personal” e-mails were deleted, although the State Department-related e-mails were subsequently turned over to the State Department.  The server cannot now be hacked because it hasn’t been operating for four years.  Thus, the EffaBeeEye could not recover the deleted e-mails.

Was it hacked in the past?  F.B.I. Director James Comey sharply criticized Hillary Clinton’s “reckless” behavior in handling e-mail while serving as Secretary of State.  Experts consulted by the New York Times concluded that her e-mail had “probably” (i.e. almost certainly) been hacked during visits to China and Russia.[2]  This raises the possibility that the Russkies accessed her e-mail before she ended her tenure as Secretary of State and before she wiped the 30,000 “personal” e-mails from the server.

The New York Times has been quick to engage in damage control.  In its view, the released e-mails from the DNC “portrayed some [DNC] officials as favoring Mrs. Clinton’s candidacy while denigrating her opponent, Senator Bernie Sanders.”  It pointed out that the DNC had been targeted, but “apparently not those of the Republican National Committee.”[3]  This farcical idea is used to introduce a reference to Watergate and, by implication, Richard Nixon.

Assuming that the Russians had hacked Clinton’s e-mail server, Donald Trump urged the Russians to release the now-deleted e-mails. “If Russia or any other country or person has Hillary Clinton’s illegally deleted emails, perhaps they should share them with the FBI.”

Nevertheless, the incident has become more of a problem for Republicans than for Democrats.[4]  For example, Paul Ryan’s spokesman responded by denouncing Russia and Vladimir Putin as “a global menace led by a devious thug.”  For their part, the Democrats quickly portrayed Trump as having invited the Russians to hack a server that had—in reality–been out of operation for four years.

Did the Russians hack the Clinton e-mail server while it still functioned?  Did they provide any information to the Obama Administration through the FBI legal attache in the Moscow embassy?[5]  How would revealing the contents of her personal e-mails harm Hillary Clinton’s chances to become president?  Should American voters anticipate an “October surprise”[6] based on these hacked e-mails?

[1] Ashley Parker and David E. Sanger, “Trump Eggs On Moscow In Hack of Clinton Email,” NYT, 28 July 2016.

[2] David Sanger, “Hillary Clinton’s Email Was Probably Hacked, Experts Say,” NYT, 6 July 2016.

[3] It would be odd if the Russians did not attack the computer systems o both major parties.  Perhaps we’re waiting on revelations about Republican plans to derail Donald Trump.

[4] Or perhaps I just read the wrong newspapers.

[5] Not likely.

[6] See https://en.wikipedia.org/wiki/October_surprise on the origins of the term.

NAFTA You.

Posted on by
1

Most economists hold that “past major trade deals [NAFTA, Chinese entry to the WTO] have benefitted most Americans.”[1]  Now we’re facing the Trans-Pacific Partnership (TPP).  There is no doubt that this is true.  Still, lots of working people think that an open world economy has turned into a disaster.  Naturally, in an election year, all sorts of candidates—from Donald Trump to Hillary Clinton to Boris Johnson—are having road to Damascus experiences.  It’s how you get ahead in a competitive environment.

How is this possible?  On the one hand, there is a certain gap between quantitative-based reality and perception-based reality.  While economists calculate that “trade deals benefited most Americans,” most Americans (55 percent) calculate that they did not.[2]  Who is right?

On the other hand, Economics is the greatest of the “social sciences” that arose at the end of the 19th Century.  Those social sciences (Economics, Sociology, Psychology, Political Science, Marketing) all study the behavior of people in the aggregate to discover “laws” of human behavior.  The thing is, people don’t live their lives in the aggregate.  They live their lives individually and for themselves.  “Most” people can be doing really well, while a minority are doing badly.  The minority takes no consolation from the happy situation of the majority; apparently, the fortunate majority gives little thought to the hardships of the minority.

However, some research indicates that this is too simple an answer.  Lots of people who oppose free trade are not individually harmed by it, but they believe that the country as a whole is harmed by it.  It has been suggested that isolationism plays a role; that nationalist feelings of “cultural superiority” plays a role; and that racism (couched as “ethnocentrism”) plays a role.  People who have less education are more likely to be isolationist, nationalistic, and “ethnocentrist” than are the better educated.  Gregory Mankiw has a funny coda to this story: once people have more education, this nonsense will pass.[3]

There is another possible explanation.  Many people recognize that America is still a racially segregated society, but not many people recognize that America is still a class segregated society.  My father taught people to drive and eventually bought the business[4]; his brother had some experience in construction and some training as an engineer in the US Army, and then became a consulting engineer[5]; their brothers-in-law were a mill-hand at Weyerhauser, a ship-wright at Vic Foss Boatyard, and a salesman-turned-entrepreneur.  My beloved[6] in-laws graduated from Ivy League colleges, often went to grad school or law school, are “professionals,” and have lovely summer homes on the Eastern Shore, in New Jersey, and in Nova Scotia.  All the same, if the people losing from globalization mostly come from one social group, then maybe their extended families and friends intuitively or out of human sympathy push back.  Their own family and friends also suffer from economic change.  They recognize that they themselves may suffer in the future.  Class solidarity trumps [NPI] economic “rationality.”

Maybe, shock absorbers against the impact of trade deals are best?  Or maybe not.

[1] N. Gregory Mankiw, “Trade Is Good, But Voters Aren’t Buying It,” NYT, 31 July 2016.

[2] This may be an example of what Marxism terms “false consciousness.”  People think that they are something different from what people in authority tell them they are.  Alas.

[3] Arthur Koestler, Darkness at Noon, has a funny coda to Mankiw.  People always suffer from relative lack of development

[4] My Dad taught me how to tie a necktie and had a couple of suits, but he didn’t wear a jacket or tie to work.

[5] Basically a burr under the saddle of construction companies trying to cut corners on jobs that they had bid.

[6] I’m not being arch here.  They’re wonderful and incredibly generous human beings with a Hell of a lot more social conscience than I possess.

A Fork in the Road.

Posted on by
Reply

“All I know is just what I read in the papers, and that’s an alibi for my ignorance.”—Will Rogers.

One sign of our political paralysis/polarization shows up in the reliance on special bi-partisan commissions to deal with troubling issues.  The 9/11 Commission did an excellent (if imperfect) job.  The Simpson-Bowles Commission[1] also did an excellent, if imperfect, job.  The work of the 9/11 Commission requires no explanation.

The Simpson-Bowles Commission sought to address the growing problems with federal spending, taxation, and deficits.  Basically, Social Security, Medicare/Medicaid, and Defense each consume about 22 percent on federal spending.  So, two-thirds of the budget goes to old people and to psychological Viagra.  Even though reforms in 1983 cut benefits by 25 percent, the dynamics remain unsupportable.  Simpson-Bowles made a series of recommendations to address the rising cost of entitlements.  The Commission recommended a combination of tax reforms to enhance revenue with spending cuts.[2]  These recommendations went nowhere, for reasons that are equally disgraceful to both parties.   President Obama returned to the need for cuts in his failed effort to strike a budget deal with the Republicans.

Currently, the trust fund for Social Security is projected to run dry in 2034.[3]  After that the system will have to rely on only withholding taxes from current workers.  That, in turn, will mean that payments will fall to 79 percent of the promised level.  One alternative would be to increase withholding taxes by something like 25 percent.  Another alternative would be to reduce benefits by limiting the cost-of-living adjustments.  A third would be to increase benefits.  Some argue for a 10 percent raise for recipients, others for 100 percent of their own benefit plus 75 percent of their deceased partner’s benefits.  A fourth alternative would be to give care-givers and widows who left the work force an equivalent pay for their loss of Social Security income (although they paid no withholding tax during that period).

The current presidential campaign has shifted the debate on this issue.  The white populist revolts led by Donald Trump and Bernie Sanders have racked the Republican and Democratic parties alike.  Established party positions have had to shift in response.  According to Nancy Altman, “the real question is whether you expand Social Security across the board, so middle-class workers get an increase,…Then you can argue about how big to make the increase.”

Democrats have endorsed expanding and “modernizing” Social Security.  Three years ago “Progressives” began looking for a new issue to galvanize the Democratic electorate after the end of Barack Obama’s presidency.  [NB: So, the Democratic agenda is driven by the search for new ways to extend the role of government?  Rather than,…?]  First, Bernie Sanders took up the cause; then Hillary Clinton joined in.  Characteristically, realizing that she would have to veer to the center after winning the nomination, she took the low road: expanded benefits for widows and widowers and for those who lost benefits because they served as caregivers.

Still, how to pay for the expanded benefits?  One answer would be to raise the cap on taxable income above the current $118,000.  Another answer advanced by Democrats would be to “privatize” Social Security funds by investing them in equities.  The Bush II administration tried this on without success.  Now it may become a Democratic policy.

What can we afford?

[1] See: https://en.wikipedia.org/wiki/National_Commission_on_Fiscal_Responsibility_and_Reform

[2] See: https://en.wikipedia.org/wiki/National_Commission_on_Fiscal_Responsibility_and_Reform#Final_plan

[3] Mark Miller, “Social Security Expansion Gains Support in Washington,” NYT, 16 July 2016.