Correcting a Well-Placed Comment About Public Investment in Infrastructure

The New York Times reported on President Obama’s Miami speech yesterday where he proposed a program of public and private investment to pay for national infrastructure improvements.  The article quotes Ken Orski, the editory of Innovation Briefs and a transportatoin official for Richard Nicon and Gerald Ford.

Ken Orski tells us that back in the 19th century, canals and roads were financed with private money and suggests that public spending did not occur until Roosevelt’s New Deal.

This is not correct.

As far back as the 18th century government — federal, state, and local — invested in transportation.  None other than small government president Thomas Jefferson advocated for federal surpluses to be applied to infrastructure including canals and other “great objects” underway in the nation.  In fact, the Jefferson administration preferred government investment to private for the purposes of enabling free commerce.

Preceding the Civil War, federal investment — those pursued by Jefferson — did decline, but that did not mean private enterprise picked up the slack.  For the most part it shifted to the state level.  States spent nearly 10 times federal investment, but both were large sums for the era, nearly half a billion dollars preceding the Civil War.

The New York Times article also uses the railroad industry as an example of privately funded infrastructure investment.  This also is not entirely true, especially when you take into account the enormous grants of land.  During the 19th century tens of millions of acres were given to railroad interests which could then be sold or leased for profit to support rail investment.

The only large scale privately funded rail system in the United States was James J. Hill’s Great Northern Railway lines out of St. Paul, Minnesota, but even here there were gifts of land in place.

The point is, since the founding of the United States, government as invested in infrastructure.  The investments increased in the New Deal era and throughout the strong post-World War decades of the second half of the 20th century, but public investment did not begin with the New Deal as Mr. Orski implies and as reported by the New York Times.

Misrepresenting facts makes sensible public policy decisions more difficult as some people are likely to think that we somehow did things differently and better in the past.  It paints the wrong picture because we did, in fact, do things differently and better in the past, but that was not a past reliant more on private investment, it was a past when shared public investment built and sustained a strong America.

Related articles

• In Miami, Obama pushes for infrastructure plan (latimes.com)
• What You Need to Know About President Obama’s Plan to Improve American Infrastructure (whitehouse.gov)
• Obama unveils plans to pump billions into US infrastructure in Miami speech (guardian.co.uk)

Shut Down Simple-Minded Tax Cut for Job Creators Rhetoric

The simple-minded arguments promoting tax cuts for so-called job creators are misleading, incorrect, and frankly very stale.   For the most part, they do not fit the current economic environment and reflect a level fiscal irresponsibility that is in large part a cause of our national budget mess.  Smart tax policy has been absent for too long and it is time for that to change.

No smart business owner is going to hire people simply because he has more money.  If you manufacture widgets and you have a warehouse full of unsold widgets, what incentive do you have to hire more people to make more widgets?  You don’t have any incentive to do so.  What will you do with the additional widgets and the added costs needed to produce them?

The anti-tax movement argues that we need to ensure that “job creators” have the resources – i.e., money – to hire workers.  This argument has justified decades of increasingly unbalanced tax policy which favors the so-called job creators.  It is the “trickle down” or supply-side model that is not working, especially in our current depressed economy.

If the trickle down model did indeed work, we should be awash in jobs now.  The wealthiest among us are doing well.  They have money to invest.  Why are they not investing those resources here to create jobs here?  Because there is no demand for the goods and services in which they might invest.  Corporations likewise are sitting on record cash reserves.  Again, they are not investing here because it is not justified by demand.

If we want to stimulate growth, we need policy that puts more money in consumer bank accounts.  Often by sheer necessity, they spend the cash they have which then pushes up the demand we need.  Misleading rhetoric about “makers” and “takers” is unfair and incorrect.  One can make the argument – especially in the current market environment – that the middle and working class are the job creators.  Without growth their spending stimulates, we will be locked in stagnate economic growth.

Of course there is some investment underway.  However when businesses do invest, it is increasingly likely that they are investing in cheaper labor markets in the global economy.  We have a systematic labor and demand problem in the United States.  Maintaining tax cuts, subsidies, and other financial incentives behind the argument that it will spur growth has been proven a failed policy in the status quo and does not address the decline of our comparative advantages in the world economy.  We are poorer, less educated, and most importantly lagging behind other countries in our infrastructure and research investments.

Our remaining global stronghold is our financial sector – and to some extend our nation’s monetary system and reserve, although Republicans are determined to undercut that – but this sector serves a very small number of Americans.  Even American workers investing in 401(k)s see less from the financial sector as they have less income to invest and suffer most from the current era’s boon and bust market cycles.

We cannot expect to compete in old manufacturing sectors where we can no longer compete on the labor market, unless we want to undercut the middle class prosperity that has been a part of the American way of life for generations (which in fact is happening now).  We should instead be investing in future economic opportunities, maintaining a secure and educated workforce, and investing in smart infrastructure to sustain future growth.  But we are not doing this.  We are giving tax cuts instead and expecting something magical to happen.

Unfortunately, nothing magical is happening.  That’s obvious to anyone paying attention to our country’s economic trends over the past couple decades.

My two cents.

Related articles

• We Do Not HAVE to Cut Entitlements (alittletourinyellow.wordpress.com)
• Taxes Aren’t Theft, Tax Cuts For The Wealthy Are Theft (seeingtheforest.com)
• Boehner Says Taxes Are Theft, Here Is An Answer (ourfuture.org)

 

Debunking the Fair Compensation Myth

The very wealthiest 1% in the United States possess more wealth than the bottom 40%, the top 20% possess more than the lost and dying middle class.  (See well-documented report here.)  Any suggestion that policy redistribute this inequality draws cries of anti-American socialism, most loudly from those barely hanging on in the sinking tiers of America wealth.  This is simply a symptom of ignorance.  A full 1/3 of Americans believe they are among the top 10% of American income earners and nearly all still believe the United States is the land of upward mobility and economic security.

Those are problems of understanding and conditions of cognitive dissonance.  But there is another layer to inequality and it resides mostly on the upper tiers of wealth distribution.  It is the idea that the very wealthiest somehow earned and deserve their growing wealth.  This view is supported by the idea that without competitive compensation — as unfair as it might seem — we would be worse off because “talent” would not be attracted to the complicated careers of corporate management and high finance.

There is a simple one word answer to this (although you still sometimes see it written in its more archaic two-word form):  Bullshit.

This is where the obligatory apology and reassurances need to enter any polemic about capitalism and its rewards.  Most people, myself included, do not want to live in a world where people are not awarded for their talents and efforts, we don’t want to take away the benefits of good fortune, but increasingly talents, efforts, and even good fortune play an ancillary role to strategic regulatory and market regulation.  While most of us work hard to earn a living and pay our way, a very elite few employ others to work even harder for them to change the rules that favor their privileged interests.

How else do you explain public policy that gives breaks to high incomes, subsidizes profitable industry (cf. fossil fuels, mercenary wars, industrial agriculture, etc.), and dismantle social structures that distributed opportunity more equally (cf. education, health care, social security).

The fact is, in an era when we invested more of our wealth in our common interests, we all did better, rich and poor alike.  In fact, in the second half of the 20th century right, high-priced talent and corporations produced enormous wealth for this country, indeed for large parts of the world.  American society was the envy of the world,  It was the source of innovation and creativity and we made political decisions to foster those characteristics.

If we returned to those days, does anyone really think a wealthy capitalist — a “job creator” — would stash his wealth in a mattress somewhere in the Cayman Islands?  (That, by the way, is another policy-enabled issue that we should address.)  If the potential for profits exists to be taken, someone will take it.  If today’s titans are unwilling to take risks, others will follow.  Someone on the sidelines today — squeezed out perhaps because of the enormous comparative advantage that those with great wealth enjoy — might be happy to invest for a single-digit margin where today’s robber barons expect double-digit.

Would we be any worse off if that happened?

Eventually money would return to the market.  Think of a reverse auction.  Investors would jump in if they thought opportunities were being usurped.  Likewise, for every CEO unwilling to spare his talents for anything less than tens of millions, there are talented people willing to take the helm.  Perhaps economies of scale enable tremendous compensation, but it need not be this way.  We didn’t pay CEOs 350 times the average compensation of his employees to attract his talent 30 years ago, why is that necessary today?

Today corporate profits rise — dramatically rise, to record levels — and worker compensation lags, even declines, and the trend is for the worst.

The myth of fair high compensation is perpetuated by those who profit from it.  They sustain it to keep complaints away.  Once we believed kings ruled by divine right.  The time to pull back the curtain is long overdue.

Moreover, looking at so-called talent, it isn’t so rare.  What’s the difference between a hot shot hedge manager in New York versus someone with similar talent and ability in Mumbai?  The answer is Wall Street.  One has access, the other does not.  Likewise a kid raised in Manhattan’s wealth stands to gain much more than a kid raised in rural poverty.  We created this wealth, no one did it alone.  One depends on the other.  It is time we put credit where credit is due.

But most importantly, if unrealized opportunity exists, it will be exploited.  It is absurd to think that we need to sustain an economic system that disproportionately favors the few at the expense of the majority.  It isn’t talent that matters, it is access to power that matters.  If our democracy is protected — something which itself is in doubt (cf., Citizens United) — citizens can regain control of that power.

We accomplish by voting wisely, that starts with turning against the regressive Republican Party.  We are not talking socialism, we don’t even need the redistribution that sustained the 50s and 60s in this country.  We simply need parity, both economic and political parity, along with the safety nets — social security, health care, education — that gives a strong society a solid foundation.

The truth is the world is changing.  The economy is changing…rapidly.  It is a global one.  Someday — which is really yesterday — we need to find a way to remain competitive in the global market.  What is happening instead is we are allowing a slim minority of people harvest the capital of generations and make off like bandits.  In the long run, even those of us who are better off will lose in this game.  It is time we wake up and get our accounts in order.

Related articles

• Redistribution of Wealth Inequality in America Video Goes Viral (americanlivewire.com)
• Corporate Profits Have Risen Almost 20 Times Faster Than Workers Income Since 2008 (thinkprogress.org)
• Inequality Is Much Worse Than You Think (huffingtonpost.com)
• Economic Leaders Pay Lip Service to Decreasing Inequality … While Pushing Policies Which INCREASE It (washingtonsblog.com)
• Wealth Inequality Will Keep Growing Unless Workers Demand Better (guardian.co.uk)

Government Subsidies and Jobs

A diagram showing an expansion in a production-possibility frontier. 

 

After reading today’s first installment of United States of Subsidies:  How Taxpayers Bankroll Corporations in the New York Times, I think it is time to think out loud.  Read along and see where you agree or disagree.

 

First, we keep hearing the argument that lower taxes for “job creators” — corporations, wealthy individuals, and small businesses — will create jobs.  Never mind the fact that we have cut taxes and went into a recession anyway and that the recovery — still with these tax cuts in place — has been a somewhat jobless one.  The argument prevails.

 

But explain the difference between a tax cut and a subsidy.  These subsidies are almost always tax credits (i.e., a tax cut), but in some cases businesses have a negative tax as an incentive to maintain business operations.  These should be added to the job creators’ opportunities, should they not?

 

In essence the “trickle down” argument  claims that if we give job creators money they’ll spend it creating jobs.  Some how, however, the facts don’t square with the rhetoric.

 

It isn’t any more true to say that a business owner will expand business simply because he has the money to do so than it would be to say I’ll spend money on baby diapers just because I have the money to do so.  There has to be a need — in the case of business, an opportunity — to drive investment and expansion.  In the current economic environment, the opportunity isn’t there because demand is low.  Demand is low because most Americans are economically disadvantaged.

 

And we have a little problem competing in the global labor market — especially in our traditional manufacturing sectors — where labor is cheap (and increasingly smarter and well-trained).

 

The auto industry featured in Sunday’s story has received almost $14 billion from taxpayers since 1985, but that hasn’t prevented auto factories from closing.  There are more cars on the planet today than ever and that number only looks to increase in coming years.  So it isn’t as if there is a decreasing demand for cars.  In this case the subsidies are given largely to offset the higher labor costs of doing business in the United States, but with mixed results.  The economics of these subsidies therefore don’t make sense and likely won’t make sense unless we expect the realities of the global labor market to change in our favor.  The subsidies, therefore, are short-term, incomplete fixes to a larger global labor problem.

 

Still thinking out loud…

 

There also exists the complaint that government doesn’t create jobs.  I’m not sure which side to come down on with this one.  It would seem that government subsidies don’t create jobs, at least not stable ones in dying industries.

 

When governments choose to subsidize a business, government essentially is in that business.  (And if you listen to politicians today, you probably don’t want them making important business decisions.)  These subsides, both large and (relatively) small, rarely reflect thoughtful business partnerships today.  Instead they are politically motivated gifts.

Subsidies do make sense in some situations.  Smart subsidies work to reduce the variable costs of production, encouraging (or enabling) business to expand, but this doesn’t always work.  Again, looking at the labor issue in the auto industry, if the American economy cannot compete in the global auto labor market, the subsidy has effect only as long as it covers losses.  When that capacity is exhausted the benefit is gone.  It becomes a gift, not an investment.

 

So why do we subsidize?  The answer appears to be driven by politics, not business sense.  When you hear about state leaders occupying a hotel to beg for the opportunity to give away taxpayer money to an auto maker, for example, it sounds a lot like desperation.  Smart subsidies would be more like smart business investments and not political desperation.

 

On the other hand, dare mention that you might want to hire teachers or repair roads — in other words invest in the future — anti-government critics complain that government doesn’t create jobs.  Aren’t teachers workers?  How about the people working for the construction companies building your roads, are they not workers?  Of course they are workers and what they do are called jobs.  And they deserve our respect.  Even the guy in the funny hat running your parks is a worker with a job.

 

Schools, roads, parks…these are investments in public goods (in a broad, layman’s sense).  They are what they are because the private sector will not or cannot monetize them or perhaps we simply agree that a free and democratic society should provide some basic opportunities to citizens regardless of their ability to pay.  You know…roads, teachers, clean water, a healthy environment, courts, law enforcement.  That sort of stuff.  Free market economies thrive in the certainty and security these public services provide.

(Technically public goods are non-excludable, non-rivalrous so that you accessing them doesn’t interfere with me accessing them.  So, technically, teachers and roads, therefore, don’t count, but they do for my purposes here.  Cf Social Goods.)

 

Nevertheless, we seem hell bent on cutting our way to prosperity, but we don’t bat an eye when we subsidize the private sector, the so-called free market.

 

Still thinking out loud…

 

It seems like there is a question of fairness and maybe even justice at work here, but let’s not go down that road.  Look at common sense instead.  We seemingly have billions of dollars to throw at industry and offer in tax cuts.  (And many billions more to bomb foreigners, but don’t look over there.)  Maybe it is time to ask:  When is America going to start taking care of Americans again?

 

Perhaps we need to start looking at things differently so we don’t make the same mistakes again and again.  Bailing out the auto industry and Wall Street appears to have been the right thing to do under the desperate circumstances of just five years ago.  However we should now look to the future so multi-billion dollar bailouts are not again acts of desperation.

 

If we were thinking the way we think today 100 years ago, we’d still have Acme Buggy Whips suckling at the government teat filling warehouses with a product that might have some demand at an occasional parade or high school skit.  And the CEO of Acme would be installing a car elevator in his ocean front vacation home.

 

Subsidizing industry with a competitive opportunity to grow makes sense.  Let’s say the future is a newly discovered technology — nuclear fusion — and the world is racing to capitalize on it.  Can government lend a hand to build the infrastructure to make America competitive in this new industry?  Yes.  Look, mistakes will be made and some spending will go flat.  There’s no better example than research that goes on at research universities.  But supporting this research is a public good.  The discoveries there can lead to private sector economic growth.

 

So again…what are the differences between subsidies and tax cuts?  Where are the promised jobs that come with money hording at the top of the economic ladder?  If we can invest in subsidies, why can’t we invest in jobs elsewhere, something more long term and necessary like education, infrastructure, research, and new economy technology?

 

Perhaps what we need a new New Deal in this country.  At least in the near future, the dollar is the de facto world currency and the American economy remains the engine of the world.  Our debt is trusted and cheap.  We can afford to deficit spend to increase growth.  Keep in mind that it will be easier to pay down debt after 10 or 20 years of solid economic growth than it will be to make do with less if we continue to flounder for another decade.

 

Just for fun, let’s “waste” the taxpayer’s money on something he needs:  Growth.

 

Related articles

 

• What Republicans Can Do to Adapt (But Probably Won’t) – Bloomberg (bloomberg.com)
• As Companies Seek Tax Deals, Governments Pay High Price (nytimes.com)
• How on Earth Is a 401(k) a Government Subsidy? (reason.com)
• Navigating the US’s Politicized Economy (theburningplatform.com)
• How Much Are You Paying a Year to Subsidize Washington’s Businesses? $349! (slog.thestranger.com)

 

Is it Taxes or Demand?

Paul Krugman and his peers must be frustrated.  Even the most simple and straightforward solutions to our economic mess are beyond the reasoning abilities of most Americans, including those we deem to be among our brightest and most talented.  If there was ever an era that begged for the rule of philosopher kings over the rule of the people, this has to be it.

Today’s lead story in the New York Times reports on employer reaction to President Barak Obama’s jobs plan.  Business owners explain that Obama’s proposal  is welcomed but will not change any minds soon.

Why?  Because what the business really needs is an increase in demand.  This of course is where Krugman et al chokes on their morning coffee.  Even simple people like me have been trying to explain this simple fact.

You can give business owners all the tax breaks they ask for, but they have no reason to invest in workers if they have no demand for what the workers do.   But we have been hearing nothing but the tired call to cut taxes on the “job creators.”

So, of course, Obama includes some tax cuts in his plan to placate that crowd.  And what do we find out?  Most employers would use that credit to support hires they were planning to do anyway.  In essence, therefore, the tax cut contributes to the bottom line of the “job creator” and does not stimulate growth.

For the mathematically challenged out there, that’s what has been going on in recent decades.  Tax cuts giving the wealthiest earners among us a bigger break haven’t “trickled down” as planned, but have kept a concentration of wealth at the top.  Trillions of dollars in tax cuts and trillions of dollars in unbalanced wealth in the United States; subtract from one (middle class) and add to another (upper, upper class) and you see how these numbers roll up (literally).

Even for the small business owner, a tax cut means nothing for hiring decisions if there is no reason to hire another worker.  In fact this logic is especially true for a small business.  If I mow lawns for a living and I get a tax cut on any new hire, why would I hire someone who I might need to pay $20,000 in order to get a $4000 credit if I am not going to have the work to generate revenues to cover the hire?  I won’t.

This is such basic stuff that a person has to question the sincerity or the intelligence – or maybe both – of the conservative class today.  What it looks like to many of us is conservatives leveraging economic hardship for political gain.  In other words, bad times are good for conservative politics – they scare and mislead the public – and change social and economic policy in the process.

But let’s get back to this demand argument and President Obama’s plan.

Again critics are showing a short-sighted understanding of the plans benefits.  A large part of Obama’s plan is putting construction workers on infrastructure projects.  One way or another, if they United States expects to remain an economic leader, we need to upgrade our 1960s era infrastructure.  The construction industry and all that supports it – suppliers, designers, engineers, financers – need work.  Put a solution to that need.  That’s what Obama’s plan supports.

Of course if you sell refrigerators this stimulus plan is not going directly to you.  You won’t be getting a contract that will enable you to hire new workers.  But your customers – your market base – will be getting jobs…and money.

Construction workers are more likely to spend their new or increased income (unlike the rich) and there is a ripple effect here, called a multiplier.  Dollars given to people who
will spend increases the value of those dollars.  (This holds true for tax breaks, too.  It would be better for the economy to tax the working class at a lower rate than the fortunate class.)

Ultimately everyone is better off.  The business owners now complaining about the state of the economy and arguing that they cannot hire will have legitimate economic reasons to hire.  It will be in their best interest – i.e., growth and profits – to add to their workforce.

Workers will be better off because they will have living wages again.  They can make investments and purchases consistent with what had become a traditional middle class
lifestyle.  (Unless, of course, Republicans get away with gutting education, social security, and healthcare programs, which they are eagerly trying to do now.)

President Obama’s Jobs Plan is a necessary investment and provides what the private sector cannot provide now:  Job opportunity.  In time the jobs created by our government investment will translate into demand and growth in the private sector.  It is the sort of spark we need to reunite our overall economic engine.

I am going to write more about this later, but it simply defies logic and reason to side with the complainers on the right.  NOTHING, ABSOLUTELY NOTHING WORKS FOR
THEM!  And unfortunately for us, too many Americans are not bold enough or smart enough to push them aside.  You want America to work again?  Stop voting for Republicans.