A Sum of Zeroes?

In his column this week, Paul Krugman called the economic policies of President Obama's first term "far from adequate." And judging by what we heard in the President's speech on Thursday, that's likely to continue.

After President Obama's speech, Matt Yglesias summarized the President's economic policies as basically giving up on demand-side economics. Despite his knowledge of a very bad jobs report coming out on Friday, there was no mention of any sort of aggressive fiscal or monetary policy. Indeed,  he did much the opposite; he emphasized raising taxes, cutting spending, and balancing the budget. And his proposed solutions to our economic problems were only long-term ones—improving access to education, for example. These fiscal and structural reforms are important for the long-run health of the economy, but, as Keynes famously noted, there's one small problem with the long run....

What about the near-term? As Paul Krugman frequently points out, there is an incredible human and social toll to delaying our economic recovery. Too many people have been out of work for too long, and the longer we wait to jump-start the economy, more and more people—from students on up—will never acquire the skills they need for a long-term career. These days, when we get the monthly jobs reports, unemployment only goes down because people stop looking for work. The human costs of the Great Recession are enormous, and we'll be feeling their effects for a generation to come.

Boosting near-term economic growth requires aggressive policy, both fiscal and monetary. With real interest rates at or below zero, this is the perfect time to borrow money to engage in massive fiscal stimulus. On the monetary side, more aggressive quantitative easing coupled  with higher inflation tolerance could reduce real interest rates and further spur growth.

So why aren't we doing it?

Let's start with two assumptions. First, let's assume that "Krugmanomics"—the Keynesian view of the world—is, as a practical matter, correct: the sluggishness of the economy is being caused by a severe lack of aggregate demand, and boosting aggregate demand would jump-start the economy. Massive government-funded infrastructure projects, a bailout of underwater homeowners—name your favorite demand-side stimulus, and we should do it. Second, let's assume that President Obama—a smart man with smart advisors—knows this and understands this. So why was his speech on Thursday so fundamentally anti-Keynesian?

The obvious answer is that the Republican Party has made Keynesian economics politically unpalatable. But this, in some respects, merely begs the question. Why is the Republican Party so anti-Keynesian? Generally, Republican anti-intellectualism has an ulterior motive. Republicans reject science when it hurts their donors (e.g. global warming and energy policy), but economic growth would certainly help the standard Republican constituency, so that's not a good enough reason. Republicans reject science when it interferes with religious convictions (e.g. evolution, contraception, etc.), but that doesn't seem to apply in this case, either. The most cynical view of things is that Republicans see the ouster of President Obama as such an important goal that they are willing to sacrifice American jobs and lives to accomplish it, but this attributes to Republicans in general a level of malice that I am unwilling to believe.

So, what's the issue? Partially, the problem is that this is a very complicated subject. I have devoted a great deal of time in the past four years to reading and listening to discussions of economics, re-reading my college macroeconomics textbook, and generally trying to understand the economic issues that face us. And even so, I am no more than a novice when it comes to macroeconomics. So, I can't blame most people for not understanding the issues. While I am willing to attribute malice to people like John Boehner or Mitch McConnell, I think the average Republican Congress is simply not smart enough or educated enough to grasp the issues and just does what the leadership says.

But the problem is that the Republicans have won. In the face of the most pressing problem facing America today, Republican opposition to basic economic principles has increased the misery of American families. Meanwhile, because the average voter has little capacity for understanding the debate, the Republicans have convinced many Americans that President Obama's policies have failed, despite the fact that the Republicans are the ones responsible for that failure.

So what's the solution? Democracy seems to have failed us, but it does not seem that there is any better solution. As Winston Churchill (a Nobel Prize–winner, it turns out) once noted, democracy is the worst form of government—except for all of the others.

Value-Creation Over Wealth-Creation; or, getting Atlas to stop shrugging.

These days, it seems that the conventional wisdom is that taxes and regulation always hurt the economy. Even Democrats seem to buy into this idea. For many Democrats, the question is how much tax and regulation can we stomach in the name of other values, such as fairness and justice. Instead, the question should be how much tax and regulation we need to have a strong economy. “Big government” can make us a wealthier, more vibrant nation.

There are many ways that this idea can manifest itself, but today I want to talk about one in particular: the distinction between the creation of wealth and the creation of value. A healthy economy is one that creates value. Our current economy is biased too far towards the creation of wealth.

This works better with some examples.

Example 1: The NPR show Planet Money recently discussed the “new” airline industry. There are limited profits to be made from running an airline, so many big airlines have turned to finance. They speculate in the oil market, buying and selling oil futures depending on daily fluctuations in the price of oil. They’re currency speculators. They buy and lease aircraft. According to the Planet Money team, the real profit center at major airlines is the “bank” side of the airline. The best and brightest minds, the most valuable employees—they work for an airline, but they’re really financiers. Meanwhile, the airline industry as a whole suffers, because nobody is putting enough time or effort into thinking about how to run a successful airline.

Example 2: The patent wars. Apple and Google both spend huge amounts of money on R&D, in order to develop better smartphones. Apple and Google also spend huge amounts of money buying up hardware and software patents, as both an offensive and defensive litigation strategy. If each company spends a billion dollars developing smartphones, there’s a wonderful externality: we, the consumers, get more and more amazing devices. If each company spends a billion dollars fighting patent litigation, there are no externalities (except to the law firms involved).

Example 3: Lobbying. Today, corporations spend millions (if not billions) on lobbying efforts. The idea is to create laws, or loopholes in laws, that benefit the corporation. One example is the famous “American Jobs Creation Act” repatriation tax holiday in 2004. Economists determined that every dollar that corporations invested in lobbying for this law created a 22,000% return on investment. Another example is the 1998 Copyright Term Extension Act. For a relatively small amount of lobbying money, Disney managed to push through legislation that made sure that Disney—which became an empire by repackaging public domain works—could never be “out-Disneyed.”

In each case, the rational corporate strategy creates wealth for the company and its investors. You cannot blame an airline for wanting to make money for its officers and investors, and you cannot blame Apple for needing to partake in the patent wars. You certainly cannot blame companies for trying to get a 22,000% ROI. But the more time and money that is spent on these collateral pursuits, less time and money is spent on building things. The capitalists of the twenty-first century are not Galtian “producers” who take wealth and built railroads; they are financiers who take wealth and build more wealth.

This is the entire paradigm of the modern Republican party. There’s this idea that has grown up in the last 40 years or so that there’s a tremendous amount of “slack” in the economy. There’s untapped potential for generation of wealth, in the form of poorly organized and poorly managed business ventures. If only the right capitalists come along, whether in the form of the LBO craze of the 1980s or the private equity craze of the 21^st century, they can reduce the slack and make the economy perform to its full potential.

And there’s certain evidence to believe this is true. Between 1974 and 2008, real (inflation-adjusted) mean income in the United States grew 76%, from about $26,700 per year to about $47,000 per year. Of course, averages are incredibly deceptive. The median American in 2008 took home only $26,500 — only 26% more than he did in 1974 and less than the “average” worker made in 1974. The ratio of mean to median income in 1974 was 1.27. The ratio in 2008 was 1.77. In the decade from 1998 to 2008, median income was completely stagnant, while mean income increased 14%.

So, yes, the United States has become a much wealthier country in the past few decades. But, as should come as no surprise to anyone who reads the newspaper, this new wealth has become incredibly concentrated. This is problematic for many reasons. Of course, there are the issues of justice and fairness—that the wealth of capitalist-friendly economics has almost entirely failed to “trickle down.”

But there are other problems that are more hidden in more insidious. Every person who goes to work for an investment bank or a hedge fund or the finance division of a corporation or (yes) a white-shoe law firm is somebody who is not building something. Instead, they are taking money and turning it into more money. They are creating wealth. What they are not doing is creating value. They are not creating jobs, they are not creating new industries out of wholecloth, they are not investing in either physical or human capital.

America may be richer than ever, but its foundation is crumbling. Why invest in better airlines if hedging oil futures is more profitable? Why invest in more R&D if investing in patents is more profitable? Why take a chance on a new product if creating a tax loophole is simpler and cheaper? If the wealthy are the engine of the economy, all they have managed to do is hook up a brand new engine to a 40-year-old transmission.

The great irony is that these capitalists, who never outgrew their Ayn Rand phases, forgot what Atlas Shrugged is about. In Rand’s dystopian future, the world is crumbling because the producers stopped producing. Francisco D’Anconia became a billionaire playboy instead of an industrialist. And in the greatest irony of them all (given who quotes Atlas Shrugged), the great invention that John Galt withdrew from the world was a hyper-efficient new form of green energy. Today, John Galt would never even have invented his motor. Today, he’d be too busy designing mortgage-backed securities.

So, if the problem is that capitalists put too much emphasis on wealth-creation and not enough emphasis on value-creation, what is the remedy? How do we shift the balance back in the other direction?

This, obviously, is the big question that we must answer. And the answer, in my mind, requires government intervention. Consider the mid-20th Century. In the 1950s through 1970s, the extremely high marginal tax rates created a disincentive for marginal wealth. Paying wealthy shareholders dividends or paying CEOs huge salaries was effectively just handing money over to the government. So AT&T put its extra cash into Bell Labs. Xerox put its extra cash into PARC. Lockheed Martin put its extra cash into Skunkworks. Research and Development flourished, because high tax rates incentivized R&D. And society is still reaping the benefits of those projects.

So, first and foremost, raise taxes. In addition, if capitalists put primacy on wealth-creation, make it harder to engage in wealth creation. Impose transaction taxes on financial institutions. Increase short-term capital gains taxes to disincentivize speculation. And if all else fails, change the rules. Decrease patent protections and copyright terms. Prohibit large financial institutions from engaging in certain forms of speculative behavior. And, most fundamentally, do whatever it takes—through a constitutional amendment or otherwise—to get money out of politics.

Note that the goal of all these suggestions is to improve the economy, not to throttle it in the name of fairness. Indeed, if I am right, these suggestions will reduce the need to focus on inequality and injustice. My goal with these suggestions is to create jobs and build a stronger, more robust economy. If taxes, laws, and regulations can divert wealth to productive uses, we have the potential to change the trajectory of wealthy inequality in America. Is this all a pipe dream? Perhaps. But I fear these pipe dreams may be the only way to salvage the American dream.

Why Obamacare is Constitutional

This is a little late to the game, because I've compiled it from old e-mails, but I wanted to make sure I had up here a more detailed discussion of the whole Obamacare issue. A warning: Everything I argue below is probably stated more clearly an succinctly by Akhil Amar in a recent interview, but here I go anyway.

Here's the fundamental syllogism:

1. Under Supreme Court precedent, anything regulating commerce that is not otherwise affirmatively forbidden by the Constitution is within Congress's power.
2. The ACA regulates interstate commerce.
3. Nothing in the ACA is affirmatively forbidden by any provision of the Constitution.
4. Therefore, the ACA is constitutional.

Here's the longer-winded version:

No, it's really not my money.

The Federal Government is paying me $1,200 this year to buy a house. Seriously! They took the money I paid in 2011 in home mortgage interest and property taxes, multiplied it by my tax rate, and decided to pay me $1,200. Gee, thanks, Uncle Sam!

What's that you say? They didn't pay me anything, they just reduced my taxes? I don't understand. If they're not paying me, why are they sending me a check in May? What? That was already my money and they were just borrowing it? Then why didn't I have it to begin with?

The point, of course, is that the whole idea that some amount of my paycheck is "my money" and some amount is "the government's" money is absurd. I'm not saying that's there's no such thing as private property or that people aren't entitled to earn money for their labor. I'm saying that, every April 15, the IRS performs a wacky calculation and decides how much it costs me for the privilege of living in America.

There is no right to be uninsured

As I have written elsewhere, the lawsuits against the Affordable Care Act are legally frivolous. My former professor Rick Hills, whose scholarship is deeply suspicious of expansive federal power, has called the argument "deeply silly." Most legal scholars think that a Supreme Court decision striking it down would be a blow to the Court's reputation beyond that of either Bush v. Gore or Citizens United.

The problem for the anti-ACA argument is that it's an argument about individual rights dressed up as an argument about the federal government's powers. What opponents of the ACA don't like is that they are being forced by the government to do something or buy something, and they feel that this violates their rights. However, it is impossible, under existing legal precedent, for them to make this argument. Thus, they are forced to argue that the law is beyond Congress's power.

"F" Rick Santorum

In Rick Santorum's victory speech last night after the Alabama and Mississippi primaries, he invoked his belief in the three "F's" that are the centerpiece of his campaign and his identity as a politician: "free people and markets and free economy, and, of course, the integrity of the family and the centrality of faith in our lives."

Freedom, family, and faith. That does seem to sum up the modern Republican Party. But what's striking about that trilogy is the particular conception of freedom, family, and faith that Santorum in particular and Republicans in general seem to hold. Despite all of the blather about finding a true "conservative" candidate, the Republican Party today is not "conservative" -- at least not in the "Burkean" sense of pushing for slow change with a strong status quo bias. Today's Republican Party is quite radical -- indeed, reactionary -- in its goal to push American society back to the 1950s.

And what is good, Phaedrus...

I’m a few weeks late to the party, but I want to put in my two cents about the whole birth control nonsense/”controversy” that arose last month.  But I don’t want to talk about any of the hot-button issues that have been rehashed over and over. I want to talk about what this means for God. (Knowing full well that I’m on my way to getting myself killed on a zebra crossing.)

Let’s back up a few thousand years. A famous philosophical dilemma—and a staple of freshman philosophy classes nationwide—is the so-called “Euthyphro problem,” after Plato’s Euthyphro. In its simplest (and monotheistic) form, the problem asks the following question: Are things good because God commands them, or does God command things because they’re good?