How Bad is the New Year’s Eve Deal to Avoid the Fiscal Cliff?

Tim Noah makes the case that is so bad that we should kill it. Tim also provides an update from Sam Stein and Ryan Grim:

The preliminary fiscal cliff deal being negotiated by Senate Minority Leader Mitch McConnell (R-Ky.) and Vice President Joe Biden would achieve up to $790 billion in revenue over the next decade. Some of that money would be offset by extensions of tax credits and other stimulative policy, leaving roughly $715 billion in debt reduction over that same time period. Because the revenue is counted over a decade, much depends on a variety of inexact assumptions, which is why the White House calculation of the total revenue raised by the deal is only $600 billion … Under the framework, the Bush-era tax cuts would be extended permanently for individuals at $400,000 and joint filers at $450,000. A second Senate Democratic source familiar with the state of play confirmed those details. The top rate on ordinary income would go back to 39.6 percent and raise an estimated $370 billion in revenue over 10 years. The same thresholds would be applied for capital gains and dividends, with the top rates in that case going up to 20 percent -- a concession to Republicans (the rate on dividends was set to return to 39.6 percent) but not far from the president's position during the campaign. Left unaddressed, at the moment, are the $1.2 trillion in sequestration-related cuts that will be triggered on Jan. 1. The parties are arguing over how long to stave off the cuts, and whether and how to offset them.

So what if we do not get as much 10-year deficit reduction as some had hoped? Wasn’t the real concern how much immediate austerity we would get without a deal? The progressive complaint that the deal will not raise tax rates on those making between $250,000 and $450,000 under this idea that the “Bush-era tax cuts would be extended permanently”. Of course, the 1981 tax cuts were supposed to be permanent too but that didn’t prevent the 1993 tax increase. I realize how difficult it was for President Clinton to get that bill through Congress. And the current Republicans are even more stubborn than the Republicans some 20 years ago. But isn’t that why we have elections? The choice now is either this less than hoped for deal or to fall over the fiscal cliff and duke this out in the new Congress, which doesn’t appear to be that different from the outgoing Congress.

The Economic Consequences Of Banning Semi-Automatic Weapons

It is bad enough that we have to watch the Dow slip below 13,000 in fear of the impending fiscal cliff, but now our economy is threatened by all these unAmerican gun control nuts who want to ban sales of new semi-automatic weapons.  The danger from this is far worse.  Now, I know some might say that "We banned them from 1994-2004, and it was not so bad," but gun owners are extremely rational and therefore with their rational expectations could forecast that the ban would be overturned.  So, nothing bad happened.  A more relevant case involves the banning of sales of new fully automatic weapons in 1986 by that commie anti-gun nut, Ronald Reagan, which ban remains in place.  That is the case we need to consider, given that of course the Republicans in Congress clearly will go along with whatever our Commander-in-Chief says, even though he is not only a commie anti-gun nut, but a foreign-born Islamofascist.

So, after Reagan banned fully automatic gun sales, in 1987 we had the largest single one day crash of the stock market ever on Oct. 19!  I mean really.  Here we are, struggling to overcome the crisis of 2008, and these gun control nuts want to subject us to renewed danger on this front (on top of the fiscal cliff threat, oh wow).  It gets worse.  Careful observers of the current scene have uncovered links between mass shootings and the LIBOR scandal.  It appears that the fathers of the mass murderers in Aurora, CO and in Newtown, CT both had connections with the scandal.  If you do not believe me, well, check out http://www.pakalertpress.com/2012/12/19/two-mass-shootings-connected-to-libor-scandal .  This is a high quality source, and what this tells me is that if these gun control fanatics get there way, not only will we have a stock market crash, but probably an all out full blown international financial collapse that will make 2008 look like 2007!!!  Believe me.

Now, another likely outcome of such a ban would be a major decline of the gun producing industry.  I know, record sales are going on right now.  But this is our freedom-loving-red-blooded American gun lovers rationally anticipating what is to come, and they plan to be armed so that nobody will take away their arms.  After the ban, there will be all these layoffs in the gun industry, right when we are still trying to get unemployment down from our bad recession!   And these people might have access to heavy weapons and go nuts on gun shooting rampages! 

Of course, Reagan had an answer to this when he banned fully automatic weapons sales.  In order to keep demand up, he began shipping guns to Iran.  Given his Islamofascist identity, clearly Obama might try to do the same thing, indeed, he has probably been itching to do just this all along!  It is bad enough that he is letting the Iranians build nukes, but now he might ship them guns as well!  This is a very serious threat, I can assure you.

Yet another likely terrible outcome is that we shall all  die from lyme disease.  It is our patriotic hunters who keep the deer population in check since we got rid of their natural predators.  It is impossible to shoot a deer unless one is using at least a semi-automatic gun.  So, this ban will lead to a population explosion of Bambis who will litter up our streets and spread lyme disease.  Maybe this is what the Mayans were warning us about with their calendar!

Yet another threat to public safety involves suicides.  After all, 18,000 people a year in the US kill themselves with guns.  One can only do that with a Glock semi-automatic, and we know from what the NRA tells us that if somebody wants to commit suicide, well, by golly, they will find a way to do so!  Therefore, if there is a semi-automatic weapons ban, we shall have an epidemic of frustrated suiciders throwing themselves out of windows high in buildings.  I cannot imagine what this will do to the safety of God-fearing pedestrians just trying to get to the store to do some shopping to keep America from falling off the fiscal cliff! 

And this is only the tip of the iceberg of all the terrible consequences for our economy and society that this threat to ban semi-automatic guns presents, :-).

E. Cary Brown on Recent Fiscal Policy

While E. Cary Brown died in 2007, any intelligent commentary on fiscal policy should consider his 1956 paper - Fiscal Policy in the Thirties, which reminds us that the actual deficit may be rising even if fiscal policy has turned contractionary. Evan Soltas (with hat tip to Paul Krugman) follows in the tradition of Cary Brown:

The right way to evaluate the U.S.'s current fiscal condition is not to look at at its budget deficit, which fluctuates sharply due to economic conditions. Rather, it is to calculate the structural budget deficit, the difference between government spending and revenues when the economy is normal. (More technically, it is when the "output gap," the difference between actual and long-run potential economic output, is zero.) … For fiscal year 2012, the annual structural deficit was $325 billion, or 2.1 percent of GDP. (See the first graph accompanying this post.)

This graph is instructive for other reasons. It not only shows that the reason why the deficit has exploded in the last 5 years is the recession and not fiscal stimulus. It also shows that last two significant episodes of fiscal stimulus were the Reagan years and the reign of George W. Bush. The fiscal stimulus of the Reagan years was entirely unnecessary as it was the actions of the Federal Reserve that drove the economy during those years. And the Federal Reserve tended in insure that this fiscal stimulus crowded-out investment, which led to less long-term growth. And we were told the 1981 tax cuts were supposed to be pro-growth. Greg Mankiw in his first edition of Macroeconomics not only refer to this Laffer crowd as “cranks and charlatans but also describe how the reduction in national savings from this ill-advised fiscal stimulus increased real interest rates and crowded-out investment. Interestingly, Mankiw defended the Bush43 tax cuts as needed to offset the weak economy during the period of time. Of course, Bush43’s other economic advisors (e.g., Glenn Hubbard and Lawrence Lindsey) claimed the tax cuts were designed to increase national savings rather than reduce it. We could also argue whether we needed assistance from fiscal stimulus at the time since the Federal Reserve was capable to lower interest rates even more than it did. But even if Mankiw was right with his Keynesian defense of the 2001 tax cut, there was never any excuse of making it a 10-year tax cut since its expiration might occur just when the economy did not need fiscal restraint – which is precisely where we are right now with that fiscal cliff.

Paul Krugman Puzzles Greg Mankiw

When I read the latest from Greg Mankiw, my initial reaction was to think he was being argumentative:

I often disagree with Paul Krugman, but I usually understand him. Lately, however, I have been puzzled about his view of the bond market. In a recent post, he takes President Obama to task for believing that the failure to deal with our long-term fiscal imbalance might cause a spike in interest rates

Greg contrasts Paul’s latest on this topic to something Paul wrote back in 2003 when Paul was worried that financial markets might quickly lose faith that the U.S. government would ever be serious about addressing its long-term fiscal balance:

I am having trouble reconciling these points of views. Has Paul changed his mind since 2003 about how the bond market works? Or are circumstances different now? If anything, I would have thought that the fiscal situation is more dire now and so the logic from 2003 would apply with more force. I am puzzled.

Paul has addressed his 2003 post before and I’ll invite him to remind Greg of what he has said about that. But yes – the circumstances now are clearly different from what they were as of March 11, 2003. First of all – we are currently further below full employment to the point where the Federal Reserve has clearly announced it would not initiate monetary restraint until the labor market significantly improves. Does Greg remember that the Federal Reserve started raising interest rates a little over a year after Paul wrote his piece back in 2003? But I guess the key portion of Paul’s 2003 post that troubled Greg was this:

How will the train wreck play itself out? Maybe a future administration will use butterfly ballots to disenfranchise retirees, making it possible to slash Social Security and Medicare. Or maybe a repentant Rush Limbaugh will lead the drive to raise taxes on the rich. But my prediction is that politicians will eventually be tempted to resolve the crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt. And as that temptation becomes obvious, interest rates will soar.

Greg is emphasizing the fact that the debt/GDP ratio is higher than it was 9 years ago and the deficit is also quite high. But let me protest by arguing that the long-run fiscal situation depends more on what markets expect future fiscal policy will be. Paul was likely worried that the Grover Norquist pledge imposed on most Republicans never to raise taxes combined with their willingness to load up defense spending (after all – Paul wrote on the eve of the Iraq invasion) would tell financial markets that our fiscal folly was doomed to continue forever. Note, however, that the Obama Administration is much more willing to both raise taxes and cut spending than the Administration that Greg served in. Then again – the Grover Norquist crowd still has a strangle hold over Congress so maybe Greg is right to be puzzled.

Norquist and LaPierre: Emperors Losing Their Clothes?

Two figures have held near-dictatorial sway over a majority of members of Congress for several decades: Grover Norquist and Wayne LaPierre.  However, both may be losing their grip to some extent at this time, although it is too soon to count them out yet.  Both may yet get their ways to some extent despite appearances to the contrary.

Norquist's schtick has been the pledge he has foisted on largely Republican members of Congress never to raise taxes in any way, shape, or form.  This effort dates to the Reagan presidency and has only gradually gained the nearly universal submission that it currently has among Republican politicians at both the state and national levels.  In the face of the current huge deficit and the oncoming "fiscal cliff" (curb, slope, whatever), some are now making noises about abandoning ship on this.  Indeed, this past Thursday saw House Speaker John Boehner proposing to raise income taxes on those earning more than $1 million per year.  While this was a cutoff higher than the $400,000 President Obama was demanding (which is in turn higher than the $250,000 he successfully campaigned on this year), it was a significant break for Speaker Boehner.  However, in the end he was unable to convince his caucus to support him.  The rank and file of Republicans in the House are simply not yet willing to go against their pledges to the will of Norquist.  Norquist's clothing may be getting pulled at and a bit messy, but he continues to seem pretty fully dressed.

Wayne LaPierre has not made Congressional members sign a specific pledge, but he has demanded that those the NRA supports do exactly as it requests on pain of facing primary or other opposition backed by strong funding and advertising.  Whereas Norquist's group largely focuses just on Republicans, LaPierre has worked his ways on polticians of both parties, although increasingly his focus has been on Republicans as Democrats have begun to thumb their noses at him.  This movement has accelerated since the massacre at Sandy Hook Elementary School in Newtown, CT just over a week ago, and the reaction to LaPierre's speech a week after it calling for armed guards at schools has been ridiculed widely.  Nevertheless, despite a lot of discomfiture, at least Republicans continue to appear to be completely obedient with not a single GOP member of Congress expressing support for any movement to control guns in any way.  One can expect my own representative, Bob Goodlatte, to prove to be the ultimate blocker of any efforts to change gun laws in his new position as House Judiciary Committee Chairman, as he has strongly stated opposition to any changes in gun laws.  So, LaPierre also  appears to be keeping most of his clothing on as well for the near term.

A curious details is that this authoritarian pair has a curious mutual connection.  Norquist is on the board of the NRA, and both are closely connected to John R. Lott, Jr.  Lott has most recently coauthored a book with Norquist, and he has long been the most prominent pro-gun rights advocate in the nation, much relied on and praised by LaPierre.  His book, _More Guns, Less Crime_ has been cited repeatedly by those pushing to loosen gun laws in many states and also at the national level, such as when the NRA succeeded in blocking a renewal of the assault weapons ban in 2004.  Curiously, Lott's effort to step forward to defend gun rights at this time has brought much focus on his long record of data manipulation and outright fraud, most notoriously in his creating a sock puppet named "Mary Rosh" to praise himself on the internet over a decade ago.  His studies have come under strong criticism on multiple grounds by many, such as Mark Duggan in his "More Guns, More Crime," Journal of Political Economy, 2001.  His recent claims that mass murders happen only in gun free zones, except for the Gabby Giffords tragedy last year, appear to be false, with at least three this year happening in non-gun free zones: the Clackamas OR shopping mall attack, the Sikh Temple attack in Oak Creek WI, and the Accent Signage attack in Minneapoli, MNs.  For more detailed discussions of the various fraudulent activities Lott has engaged in see http://www.tnr.com/blog/plank/111063/meet-john-lott-the-man-who-wants-teachers-carry-guns  and http://mediamatters.org/research/2012/12/17/who-is-gun-advocate-john-lott/191855 .  Ironically, while Norquist and LaPierre may just barely be able to keep their clothes on, it looks like it may end up being Lott, who may finally lose his. 

We’ve Been Falling Off That Fiscal Cliff

Brad DeLong is unhappy with how President Obama is negotiating with the Republicans on the wrong fiscal issue as he cites reporting from Suzy Khimm:

President Obama’s concessions to Republicans on taxes and Social Security have grabbed the headlines, but there’s another big area where the White House has shifted considerably in the GOP’s direction: direct stimulus to revive the short-term economy. In his original offer, Obama asked for $425 billion in stimulus through jobs measures and tax extenders, according to the Committee for a Responsible Federal Budget, including $50 billion in infrastructure spending and other stimulus measures; mass mortgage refinancing to boost the housing market; $30 billion in unemployment extension; a $115 billion extension of the payroll tax holiday; and the extension of a host of business tax breaks known as extenders. The stimulus measures are intended to counteract the impact of a fiscal cliff that would put major austerity into effect immediately. But they’re also meant to counter the fiscal tightening in a fiscal cliff deal, which both Democrats and Republicans have agreed should promote major austerity in the longer term through deficit reduction. Republicans, however, have argued that more explicit stimulus right now isn’t the answer: House Speaker John Boehner included no explicit stimulus measures in his original offer and has only proposed to extend a handful of business tax breaks since then. It’s clearly been a point of contention in the negotiations as Obama’s stimulus proposal has progressively shrunk over time: In his third offer, reported Monday, Obama dropped his ask from $425 billion to $175 billion in stimulus

Suzy’s reporting reminds us what Ben Bernanke meant by the fiscal cliff:

Even as fiscal policymakers address the urgent issue of fiscal sustainability, a second objective should be to avoid unnecessarily impeding the current economic recovery. Indeed, a severe tightening of fiscal policy at the beginning of next year that is built into current law--the so-called fiscal cliff--would, if allowed to occur, pose a significant threat to the recovery.

In other words, we need the stimulus that the President originally proposed to avoid the fiscal tightening that the Federal Reserve chair warned us to avoid. Our graph reminds us that the original Federal fiscal stimulus (FED) early during Obama’s first term has been dissipated over time. It also reminds us that state and local government purchases (S/L) has been contractionary over the past few years, a point that Bernanke also made in his June 7 testimony to Congress:

Another factor likely to weigh on the U.S. recovery is the drag being exerted by fiscal policy. Reflecting ongoing budgetary pressures, real spending by state and local governments has continued to decline. Real federal government spending has also declined, on net, since the third quarter of last year, and the future course of federal fiscal policies remains quite uncertain, as I will discuss shortly.

The Federal Reserve chairman has repeatedly begged Congress to reverse its unwise shift to austerity. We had hoped that President Obama in his fiscal cliff negotiations had actually started listening to Bernanke. But it seems he has stopped listening to him and most of us in the economics profession. If the President is not going to push for this fiscal stimulus, then why bother? Some might say we’ll fall off the fiscal cliff but it looks like we’ve been heading down that road for a while.

Chain chain chain . . .

http://www.huffingtonpost.com/ca-rotwang/chain-of-fools_b_2342679.html

To Hell With The Second Amendment And At Least Reinstate 1994 Ban on Assault Weapons Sales

Yet again we have had a nutcase engaging in mass murder in the US using semi-automatic weapons with massive magazine capacities.  We banned the sale of these in 1994, but let it lapse in 2004 under pressure from the NRA, who had managed to defeat such supporters of the ban as the late Jack Brooks, a longtime gun rights supporter and Congressional powerhouse who had the nerve to support this ban in 1994.  Nobody had the nerve to go up against them in 2004 (and the then president was certainly not in favor of renewing it).  All these people have the blood of innocents on their hands, even if they continue to protest that if only we had universal "open carry," these things would not happen.  I doubt that for the simple reason that most of these mass murderers have ended up killing themselves.  They are not to be deterred by the threat that they might die.

Over the last century we have had 25 mass murders in the US.  China is second with 10, Israel and the Philippines are tied for third at 8 each, and India is fifth with 7.  We are far ahead of other nations in terms of per capita gun ownership, at 88.8 per 1,000 population. Serbia is second at barely over 60, wth Yemen barely over 50.  Fourth place Switzerland is at 47.5.  Gun rights nuts often cite Switzerland, which has low rates of gun homicides, mass murders, and so on, although it has the highest gun suicide rate in Europe.  But guns are very strictly regulated there.  Most homes have them, but they are issued to those who served in the military through the draft and have been trained.  They are particular weapons to be kept under lock and key in the homes, with other types of guns simply banned, and only security officers allowed to carry guns in public.

Reading or listening to gun rights advocates one would believe that US liberty depends on the Second Amendment.  It does not.  Of the 48 rights advocated in the 1948 UN Declaration of Human Rights, gun rights are not among them (the other US constitutional rights not among them are the right to not self incriminate and the right to a trial by jury).  The only other nation with gun laws as loose as those in the US is Honduras, which competes with the US for providing guns to the Mexican drug gangs.

The Second Amendment is a historical mistake and should be repealed.  Short of that, the 1994 law should be reinstated.  Heck, if we had gun laws like Switzerland's we would be in far better shape, although there is unfortunately no way to get our guns per capita down anywhere near to where they are in the rest of the world, which means we are probably doomed to more Newtowns.

Kevin Drum on Why the Social Security Trust Fund is Real

Kevin Drum has a short and sweet analogy for the position that the assets in the Social Security Trust Fund are real:

Now, suppose this surplus had been invested in corporate bonds. What exactly would that mean? It means that workers would be giving money to corporations, who would turn around and spend it. In return, the Social Security trust fund would receive bonds that represent promises to repay the money later out of the company's cash flow. In effect, it gives workers a claim on the cash flows of the company at a later date in time. When that time comes, the company would have to pay up, which would make it less profitable. If the company was already unprofitable, it would make their deficit even worse. If that's what had happened, there would be no confusion about the trust fund. Everyone agrees that corporate bonds are real things, and that the corporations who sell them have an obligation to pay them back, even though it means less money for shareholder dividends.

He then substitutes treasury bonds for corporate bonds and draws the same conclusion. QED! While I agree, let me try to offer the rightwing rebuttal, which begins with the proposition that the general fund is essentially bankrupt. Is it and why? Well – it is true that the Reagan years cut taxes on the very rich just as it raised payroll taxes. It is also true that President Reagan increased defense spending. Although we had the peace dividend and some reversals of those tax cuts during the 1990’s, George W. Bush put us back on the path of high defense spending and low taxes on the rich in 2001. The Republican Party seems to believe that we must forever have high defense spending and low taxes on the rich. Well if that is true, it is analogous to paying high dividends to corporate shareholders even as corporate profits are well below the dividend policy. But do we really have to accept this Republican belief system? No we can honor these promises to pay Social Security benefits if we as a nation are willing to tell the rich to pay higher taxes and tell the military industrial complex that it gets less largesse. But I guess some Republicans see the promises of low tax rates for the rich and continuing largesse for the military industrial complex as sacrosanct, which of course leads them to conclude that the problem is those promises to Social Security beneficiaries.

Retiring On the (Price Index) Chain Gang

So, Very Serious People are pushing the chained price index as a preferred alternative to the CPI for indexing future Social Security benefit increases.  This is estimated to raise benefits per year by about 0.3% less than the CPI does, and is claimed to be more accurate due to allowing for substitutability of goods, along with reducing future expenditures, if not reducing the deficit in the immediate term.  Anyway, it is on the table as part of the ongoing fiscal cliff negotiations. 

However, an experimental price index for seniors estimated by the BLS finds them facing higher rates of price increase than the CPI measures, although this index needs further refinement and research and has not been officially released.  Nevertheless, it is quite believable that seniors do face higher cost of living increases, particularly as they spend far more on medical care than other people as a perent of their spending and income, and that is one of the two most rapidly rising components of the CPI (the other being higher ed).

A letter has been issued with accompanying documents, signed by 250 economists, arguing for more study of this senior price index and against putting seniors on a Cost of Living Chain Gang Index.  The entire set of documents and the signatures can be found at http://www/epi.org/publications/social-security-cola-changes-letter .  If anybody had asked me, I would have signed it as well...

Lowest Unemployment Rate Since Obama Took Office?

A lot of pundits this weekend were calling the latest news from the BLS as good news. Yes – the payroll survey showed a modest increase in employment but the household survey suggested a decline. But then the pundits also note the decline in the unemployment rate to 7.7%, which is lower than the 7.8% rate observed for January 2009. But is that really good news? No because the employment to population ratio fell last month with the decline in the unemployment rate coming from a larger drop in the labor force participation rate. It is true that the employment to population ratio has had a bumpy ride increasing from its low of 58.2% during the middle of 2011. While the unemployment rate has showed a more impressive decline, a fair amount of that decline over the past 18 months has been from a decline in the labor force participation rate. Furthermore, our graph shows just how far both series have declined on net since President Obama took office. To be fair, Obama inherited an economy in free fall and the economy has been recovering slowly since the Great Recession ended. But let’s stop cheerleading how great the labor market is and it is still awful. Which is all the more reason to pursue fiscal stimulus not rather than allowing this “fiscal cliff” to occur.

Sweatshop Realities

The New York Times has an interesting story today on the failure of social responsibility monitoring to prevent catastrophes like the garment factory fire that killed between 260-310 workers in Karachi a few months ago.  The factory was a death trap, with blocked exits, grills over the windows, and heaps of combustible material everywhere, yet it had been certified as meeting the highest standards set by Social Accountability International, a global industry-funded organization.

Incidentally, no one knows exactly how many workers died because they were off the books.  The lack of formal employment relations is typical of sweatshops and apparently not an impediment to getting the imprimatur of social responsibility from industry monitors.

Those with a taste for irony will appreciate that Social Accountability International defends itself on the grounds that they did not do the inspections themselves.  No, this work was subcontracted to an Italian monitoring group, which in turn outsourced the actual field investigation, such as it was, to a shop in Pakistan.  So it turns out that the social responsibility industry has a supply chain problem too.  How can SAI protect its brand while avoiding the messy and costly frontline work of actually doing the inspections themselves?

The core problem is obvious to anyone who looks past the propaganda and examines the situation objectively: the industries that depend on cheap, reliable inputs from their global sourcing operations are the principals and the monitors are the agents.  The branded garment producers want to protect their image, but they also want to keep their costs down.  (This is a ruthlessly competitive sector, after all.)  Their incentive is to generate the best possible set of appearances for consumers at minimum actual expense in terms of compensating workers and upgrading working conditions.  Anyone they hire to manage the social responsibility apparatus will be engaged on terms that transmit these incentives down the SR supply chain.

The fundamental problem is that the system is accountable to the wrong principal.  It is the workers in this industry who ought to be the ones accreditors must satisfy.  That, of course, requires worker organization like independent unions, something neither the companies nor the governments in export platform countries like Pakistan are eager to embrace.  In the end, however, that is the only path to truly responsible production systems.  As long as monitoring is for the companies, there will be loopholes, gaps and dark corners; workers will not complain for fear of losing their jobs.  The indispensable inspectors are the workers themselves, who are in the right place with the right incentives to determine whether conditions are adequate or not.

One final point: the story quotes Alice Tepper Marlin, the founder of SAI, making the stock defense of sweatshops.

“This type of trade and development has played an important role in bringing people out of poverty,” she said. “Do we really want to say that we should move away from it because there are some factories with problems?”

This argument is trotted out every time a workplace disaster occurs, or stories are written about 60 hour workweeks at subsistence pay.  It is always presented as a new insight, something the critics must not have considered.  But it is a red herring.  The same argument was used in the US at the time of the Triangle fire, where the victims were impoverished immigrants trying to get their first morsel of economic opportunity.  Aren’t any jobs, even dangerous ones, better than none it all?  But that was not the choice, either then or now.

The question is not whether global production systems can extend to developing countries, providing jobs for those who need them, but under what standard those systems will operate.  The alternative to a fire trap in Karachi is not protectionism in the US, but enough worker voice in Pakistan to ensure that production in that country meets the standards of fundamental human decency.

Sandy and the Fiscal Cliff

Andrew Taylor reports that the President has proposed what should be a no brainer:

President Barack Obama's proposal for $60.4 billion in federal aid for states hit by Superstorm Sandy adds a huge new item to an end-of-year congressional agenda already packed with controversy. The president's request to Congress on Friday followed weeks of discussions with lawmakers and officials from New York, New Jersey and other affected states who requested significantly more money, but generally praised the president's request as they urged Congress to adopt it without delay.

Is the controversy surrounding the question of what not more aid? Of course not:

Pushing the request through Congress in the few weeks left before lawmakers adjourn at the end of the year will be no easy task. Washington's attention is focused on the looming fiscal cliff of expiring Bush-era tax cuts and automatic spending cuts to the Pentagon and domestic programs set to begin at the end of the year. And tea party House Republicans are likely to press for budget cuts elsewhere to offset some or even all disaster costs.

Again we see the confusion about what Ben Bernanke meant when he coined the term “fiscal cliff”. Mark Thoma has the latest for those who want to get their heads on straight as he highlights John Cassidy:

With all the theatrics going on in Washington, you might well have missed the most important political and economic news of the week: an official confirmation from the United Kingdom that austerity policies don’t work ... At every stage of the experiment, critics (myself included) have warned that Osborne’s austerity policies would prove self-defeating. Any decent economics textbook will tell you that, other things being equal, cutting government spending causes the economy’s overall output to fall, tax revenues to decrease, and spending on benefits to increase. Almost invariably, the end result is slower growth (or a recession) and high budget deficits ... With Republicans in Congress still intent on pursuing a strategy similar to the failed one adopted by the Brits, this is a story that needs trumpeting. Austerity policies are self-defeating: they cripple growth and reduce tax revenues. The only way to bring down the U.S. government’s deficit in a sustainable manner, and put the nation’s finances on a firmer footing, is to keep the economy growing. Spending cuts and tax increases can also play a role, but they need to be introduced gradually ... Having adopted the policies of Keynes in response to a calamitous recession, the United States has grown more than twice as fast during the past three years as Britain, which adopted the economics of Hoover (and Paul Ryan). Meanwhile, the gaping hole in the two countries’ budgets has declined at roughly the same rate, and next year the U.S. will be in better fiscal shape than its old ally.

BLS told us yesterday that our employment-population ratio, which was already low, dipped. Now it is the time for stimulus not austerity. Also consider the fact that the President’s request is less than 0.5% of current year GDP. Since would a one-time spending surge if enacted, the impact on the long-run tax rate should be calculated as $60 billion divided by the present value of future GDP – making this impact microscopic. And if we add into the analysis Cassidy’s “cutting government spending causes the economy’s overall output to fall, tax revenues to decrease, and spending on benefits to increase”, then the extra spending could be seen as self-financing. Public investment now rather than later has always been as a smart countercyclical move for several reasons. One if that the government can borrow at virtually zero real interest rates. The other is that residential investment is running at less than half its level witnesses in 2005 (in real terms), which means that construction workers are still looking for gainful employment. So yes – approving the President’s request so be a no brainer. Then again – we have to wonder whether some folks in Congress actually use their brains.

Time To End The War On Terror Says Fareed Zakaria

In WaPo of 12/7/12 Fareed Zakaria calls for an eventual end to the officially designated "War on Terror."  I fully agree.  He notes that the US has been since 9/11/01 in a state in which the president has wartime emergency powers, the limits of which remain undefined, even though the US Congress has not declared war since 1941.  The mastermind of 9/11 has been terminated, and the core of his organization has been decimated, even if a shadow of it remains.  While offshoots crop up here and there, none of them seem capable of attacking the US itself, and indeed none have since 9/11.  It is time to end this unpleasant state in which presidents continue to expand their ability to monitor and control the most private details of the lives of US citizens.

This peculiar situation reminds me of a story that many consider to be quite silly.  During WW II, one of the most brilliant people who ever lived became an American citizen, the logician Kurt Godel, who was at the Institute for Advanced Study in Princeton at the time.  Accompanying him to the final installation in Trenton were Albert Einstein and Oscar Morgenstern.  They were well aware that Godel was worried that he would fail the exam and be denied citizenship and had been carefully studying such matters as who were the Chairs of County Boards of Supervisors around the country.  At the swearing in, the judge made the required speech about the duties of citizens and declared that the US was a democratic nation that could not become a fascist dictatorship of the sort that the US was at that time in a legally declared war with.  Godel interrupted the judge to declare that it was possible under the Constitution for the US to be a fascist dictatorship.  What followed that declaration remains in dispute as his companions intervened.  In any case, Godel was granted his citizenship, but we have never learned why he thought this unpleasant outcome was possible.  However, the current situation of 11 years in a row of presidents possessing emergency wartime powers without any war being declared or any attack upon the US during this time suggests that whatever Godel's own ideas on this were, he had serious grounds for his concern.

More Abe

I had more thoughts last night on the politics of Lincoln.

1. My parents would have loved this film.  Their volumes of Carl Sandburg’s biography were prized possessions.  I am reliving a generational conflict.

2. Contrary to this film, the thirteenth amendment was not very consequential.  It was a nice piece of paper, but the fourteenth, for good and ill, was the one that counted.

3. In January 1865 the confederacy was prostrate; it would be just a few months before its surrender.  The main item on the agenda in Washington was what to do with it.  Much of the South was already under military occupation.  With the end of hostilities, what would be the mission of these occupying troops?  Was the purpose of the war simply to preserve the union, in which case the occupiers could pack their bags and go home?  Or was it to dismantle the political and economic order whose interests had proved to be incompatible with democratic government as understood by the rest of the country?  Lincoln hedged and straddled.

4. Much fun is made in the film of patronage as an instrument of political manipulation.  In fact, over time the Republican Party devolved into a clientelistic regime with little justification beyond the reproduction of its privileges.  This is why the Grant administration is regarded as a nadir of nineteenth century politics.  The lesson the film wants us to learn is that dirty ends have to be employed for noble means, but in reality the means became the end.

4. Even if you grant the legitimacy of the political fairy tale at the heart of the movie, what is its meaning for today?  Lincoln is portrayed as a practical idealist who bent every scruple, even dissembling on a peace overture from the confederacy, in order to remain true to his one inviolate principle, the abolition of slavery.  Fine.  Is Obama supposed to be our modern Lincoln?  We know his compromises; what is his guiding purpose?  To replace warfare with peaceful international adjudication?  To subdue the political and economic power of finance?  To rally the world to overcome the threat of catastrophic climate change?

The means has become the end today too.

Inflation and Government Deficit Accounting for the 1970’s

Let’s do a simple example of what Robert Barro meant by this:

one-to-one effect of expected inflation on nominal debt growth

as a follow to my and Brad DeLong’s critique of Donald Thorton who noted that the nominal value of government debt rose by an average of 2.1% of GDP during the 1970’s and that this nominal deficit showed variability. The 1970’s also had high and volatile inflation. During this decade, the GDP deflator doubled, which means the inflation rate average 7%. The nominal interest rate on long-term government bonds averaged 8% implying an average real interest rate equal to 1%. Our example will assume that GDP equals $5000 billion and the normally stated deficit equals $100 billion (2% of GDP). Let's also assume an initial debt/GDP ratio = 34% so the debt begins at $1700 billion. If the nominal interest rate is 8%, then nominal interest expense alone is $136 billion so the non-interest portion of the government accounts represents a $36 billion surplus. Now if you protest that we must also include interest expenses, economists such as Robert Barro and even Milton Friedman would note that real interest expense is what matters for the increase in the real value of government debt. In our example, real interest expense only $17 billion. So when Brad writes:

Why 1970--when nothing happens to derange either the pattern of deficits as a share of GDP or the trajectory of the debt-to-GDP ratio--rather than 1980, when the election of Ronald Reagan does change the pattern of deficits and the trajectory of the debt-to-GDP ratio?

We can read this as noting the path of the real value of the government debt. My problem with Thornton’s paper and the blog post from Tim Taylor as the money illusion distortion in the reporting of deficits during high inflation was widely discussed during the late 1970’s and should be part of any economist’s recognition when discussing fiscal policy during this era.

Lincoln, Blinkin’ and Nod

Out of misplaced civic duty I finally betook myself to the local cinemaplex and stared at the screen where Lincoln held forth.  I had successfully avoided Spielberg for a couple of decades now, and only the curiosity aroused by reams of online debate over whether this was a revolutionary or execrable cultural event brought me thither.  Perhaps also the hope that Tony Kushner would work some verbal magic every now and then.

On the positive side, I will say this: Tommy Lee Jones is one heck of an actor.  His character was mis-written, more to settle scores with present day radicals than to construct a credible representation of the real Thaddeus Stevens, but what the heck.  I would watch TLJ in just about anything.  David Straithairn too, although his role was impossible to do much of anything with.

Daniel Day-Lewis?  He was just what Spielberg wanted him to be.  That’s a professional achievement, but the film might have been better if he had screwed up in an interesting way.  And don’t forget the excellent cinematography.  When all else fails, admire the production values.

Better to watch than to listen: the score, even played by the Chicago Symphony under their actual conductor Riccardo Muti (Spielberg doesn’t cut corners, does he?), was truly dreadful, thinned-out, dumbed-down, reconditioned Aaron Copland.  (Lincoln said that.  Abraham Lincoln said that.)  Spare us, pleeeeease.

And now we get to the politics.  Yes, the film does not romanticize either the confederacy or the war that crushed it.  (The momentary exception: Ulysses Grant and his lieutenants tip their hat to the solemn, dignified Robert E. Lee before he turns his mighty steed and rides off into the distance.)  The scene where confederate bigwigs have to acknowledge armed black soldiers fighting for the Union is compelling.  The openness and ubiquity of racism, and sexism for that matter, is honest.  That’s on the plus side.

The other list is a lot longer and weightier.  The hagiography of the Great Man is mawkish and embarrassing.  I desperately wanted to close my eyes when the camera alighted, as it often did, on the dewey eyes of an admiring black servant so grateful for the gift of freedom that Lincoln was bestowing on him or her.  Seriously: how would Spike Lee have played those scenes?  I don’t know either, but I would have had more reasons not to doze off.

More to the point, the fundamental premise of the film is simply wrong: slavery in America was not eliminated by the thirteenth amendment.  It was dismantled above all by the slaves themselves, who used the opportunity of the war to flee their bondage and, in vast numbers, enlist in the Union cause.  This was ratified by the Emancipation Proclamation, which also served to encourage those who had hesitated to act.  Moreover, if the amendment had not been passed by the lame duck congress, it would have sailed through the incoming one—the congress that gave us a few years of radical reconstruction.

And that brings up the most important point.  In 1865 the central issue was not the legal status of slavery, but (1) to what extent would the North use military force to drive the slavocracy from power in the South, and (2) what economic and political support would be offered to enable ex-slaves to live independently, with opportunity to achieve equality in all aspects of life?  Thaddeus Stevens, the wild man whose greatest contribution, according to the movie, was to keep his mouth shut at the critical juncture, was in fact the man of the hour, the national politician who demanded a revolution in race relations.  His version of reconstruction, if it had been allowed to do its job, would have spared this country a century and a half of injustice, not to mention the debilitating influence of an entrenched, reactionary caste aristocracy ruling over a large portion of our reunited commonwealth.  From the vantage point of the present, the main importance of the assassination of Lincoln is that it may, but only may, have been a crucial setback to the cause championed by Stevens and his comrades.

I hated the way Stevens, in the end the most principled and clear-sighted character in the story, was ridiculed.  But like I said, Tommy Lee Jones is one hell of an actor.

A Few Critiques of Tim Taylor’s Historical Review of U.S. Government Deficits

Tim Taylor summarizes a review of our history of government deficits by Daniel Thorton. I’m a little surprised that neither referenced a 1979 analysis by Robert Barro:

This behavior implies a positive effect on debt issue of temporary increases in government spending (as in wartime) a countercyclical response of debt to temporary income movements, and a one-to-one effect of expected inflation on nominal debt growth.

Tim writes:

For starters, here's a figure showing U.S. annual budget deficits over time going back to 1800. There are five episodes of major budget deficits in the history of the U.S. government: the Civil War, World War I, the Great Depression, World War II, and the last few years. The deficits of the last few years don't match those of the major wars in U.S. history, but as a share of GDP, they do exceed the deficits of the Great Depression.

In other words, Tim is saying what Barro wrote back in 1979 – that the debt/GDP ratio spikes during major wars and severe recessions. Barro argued that US fiscal policy during other periods allowed the debt/GDP ratio to fall over time. My first critique, however, is an objection to this:

Thornton emphasizes that the roots of our current deficit and debt troubles go back well before the Great Recession of 2007-2009, and well before Bush tax cuts earlier in the 2000. Instead, Thornton locates the start of the problems back to about 1970. In the chart of annual deficits, for example, notice that after about 1970 a pattern of volatile but growing deficits emerges.

Brad DeLong was also upset with this passage:

Why 1970--when nothing happens to derange either the pattern of deficits as a share of GDP or the trajectory of the debt-to-GDP ratio--rather than 1980, when the election of Ronald Reagan does change the pattern of deficits and the trajectory of the debt-to-GDP ratio?

Barro and many others including Milton Friedman during the late 1970’s were aware of the fact that we had nominal increases in government debt but they also were aware that the real value of government debt was falling even in absolute terms. Hence Barro’s “one-to-one effect of expected inflation on nominal debt growth”. I would have hoped Tim would have remembered the discussion back then and not fallen victim to what some of us were calling “money illusion” back in my graduate school days. The other quibble comes from Tim’s discussion of the alleged explosion of Social Security spending:

My own take is that it's been clear since at least the 1980s, and arguably earlier, that the U.S. budget was going to run into severe difficulties when the baby boom generation started retiring. The leading edge of the boomer generation was born in 1946, and thus is just now hitting age 65 and heading into retirement in substantial numbers. This demographic shift was going to cause problems for Social Security, but those problems could be dealt with by phasing back the retirement age and tweaking formulas for payments and benefits.

President Reagan’s Social Security commission understood the implications of this “demographic shift” and chose to address it in part by increasing the payroll tax. Why Tim would adopt the Tea Party mantra about scaling back benefits is beyond me as we know that under the Great Recession, the increase in payroll taxes was sufficient to build-up a trust fund for future Social Security benefits. In the way Tim summarizes Thornton’s paper, the blame for Reagan’s shift from “tax&tax and spend&spend” to spend&spend and borrow&borrow (aka the 1981 tax “cut”) and Bush43’s decision to “cut” (more like defer) taxes in 2001 and 2003 appears to get lost. But as Brad notes – this is where much of the blame belongs.

Which Is The Real Doomsday Plan: The Fiscal Cliff Or The Debt Ceiling Showdown?

I agree with Ezra Klein and apparently the Congressional Republicans that it is the latter, see http://www.washingtonpost.com/blogs/wonkblog/wp/2012/12/05/the-gops-bizarre-doomsday-plan .  The former is just a slope, even if my state of Virginia will be hard hit if the full DOD cuts go through and are not offset, given that 10% of the VA GDP is DOD directly.  As for the tax changes, well, the fiscal cliff tax changes involve simply going back to the Clinton tax code under which the US saw its most rapidly growing economy in the last quarter century, certainly something worth freaking out about (eeeek!).  And has been widely reported, both the tax increases and the spending reductions will only come in gradually, so instead, to the extent it is anything all that awful at all, it will come in only gradually, a slope for sure, but not a cliff.  So far, the stock market has largely ho-hummed over all this, sliding sideways in a "fog of uncertainty," as CNN put it, upsetting such figures as Chris Matthews who thinks it should be crashing hard to teach us all a lesson (eeeek!), but is exactly what the EMH random walk theory tells us should happen if no news of any significance is arriving.  And to top it all off, apparently by 4 to 1 the public thinks that "falling off the fiscal cliff" means that budget deficits will rise rather than fall.  Oh my.

So, indeed, the real danger is that the Congressional GOPsters may be plotting to return to refusing to raise the debt ceiling when it seriously comes due some time early this coming year, just as they did in late 2011, leading to the infamous credit downgrade of the US, which was followed by a decline in interest rates on US government securities (eeeek!).  Klein reports that the "doomsday plan" of the Congressional GOPsters if there is no resolution of the fiscal cliff negotiations by the end of the year is to pass the bill to extend the Bush middle class tax cuts that was passed by the Senate and then wait to play chicken over the debt ceiling increase when it finally comes due, indeed attempting a repeat of their blackmail game of 2011 that gave us this hysterically absurd fiscal cliff pseudo-drama in the first place.

So, let us be clear.  Indeed, the doomsday plan is not the passage of this Senate bill by the House, which seems to me to be a total non-event.  It is the renewed threat to try to hold up the debt ceiling increase. Not increasing the debt ceiling could indeed lead to a real mess if actually carried out beyond some point, with rising interest rates that would put us back into recession and probably tank most of the global economy as well.  This is a real threat, and the Tea Party types really had fun with this in their efforts to try to wrangle out of Obama the sorts of cuts in Social Security, Medicare, Medicaid, food stamps, and so on, that they just dearly desire to have happen, just as long as it is Obama proposing them so that they can blame him for them after they are adopted and the public becomes infuriated about it (see their carrying on about his supposed Medicare cuts associated with ACA).  So, there is a real problem here.

Well, we have been to this one before.  A whole lot of us, including probably Bruce Bartlett first, but an increasing chorus since, says that the solution to this problem, which threatens to come up now every time the debt ceiling is approached, is to end the debt ceiling.  It was unconstitutional when it was first adopted in 1917, and it still is.  Nobody noticed it back then, only four years after the federal income tax became constitutional due to an amendment, and they continued not to notice it later as long as Congress did what it was "obvioius" it should do, which was to raise the damned thing every time it was approached.  But since the norm was broken in 2011, we now have to face it.  It is unconstitutional and incoherent.  It must go, and Obama must bite the bullet and make it go when the moment of attempted blackmail and doom comes.

Heritage Foundation on the Republican Offer on the Fiscal Cliff

As background, let’s turn the microphone over to Josh Barro:

It's not really a proposal -- it's just a set of headline numbers without specific policies. The letter says Republicans want to cut $900 billion from mandatory spending and $300 billion from discretionary spending, but they don't say what or how they want to cut … On the tax side, they agree to $800 billion in new revenue from "pro-growth tax reform that closes special-interest loopholes and deductions while lowering rates." But they don't endorse specific loophole closures or propose a new rate structure.

Josh has a lot more to say including how the President did offer specific proposals. But in the interest of fairness, let’s turn to Alison Acosta Fraser and J.D. Foster of the Heritage Foundation:

To be fair, the details of the Republican proposal are extraordinarily vague. Nor is much clarity or comfort gained from the three-page accompanying letter sent to the President and signed by Speaker John Boehner (R-OH), Majority Leader Eric Cantor (R-VA), House Budget Committee Chairman Paul Ryan (R-WI), and three other senior members of the House Republican leadership.

At first blush, they seem to be agreeing with Josh Barro! But read on and notice that the folks at the Heritage Foundation fear that the Republicans are engaged in “categorical, pre-emptive capitulation”. After all, they prefer that we slash and burn Social Security, Medicare, and Medicaid so as to avoid raising taxes on the very well to do. Not that I agree with their agenda in the slightest – but at least the folks at the Heritage Foundation are a lot clearer about the Republican agenda than is the Speaker of the House.

"The young will pay more and get less." More Nonsense from Robert Samuelson

Our old friend, Dean Baker at Beat the Press, does a good job of taking apart yet another screed by the execrable Robert J. Samuelson, faux economist for WaPo, whining about why nobody is jumping on board with cuts to "entitlements," and particularly his old bugaboo, Social Security.  Google "Dean Baker Robert Samuelson is upset" and the first hit gives you the link (Sorry, the link title is too long for me to read it and my trying to put what I saw in just sent one to the general CEPR site, bah! (Anybody out there able to tell me how to overcome this bit when urls are too damned long too read, please?).  However, I want to pound the nails in a bit more.

So, RJS provides this line that if there is not an adjustment to SS (and Medicare), then "The young will pay more and get less."  Dean quotes this, but does not go far enough in showing how totally ridiculous this is, even though he has pointed out recently that one reason there should be no adjustments for SS now is that the young are massively misinformed about what the not so bad fiscal situation of SS is.  Large proportions of them are fully convinced that they will receive no Social Security when they retire because it will be "bankrupt," when in fact that condition will amount to them only getting something like 120% of current retirees' benefits in real terms rather than more like 170% (a bit lower, actually).  They are totally out of it, and the main threat to them losing their future benefits is if they support the sort of dreck that RJS is pushing, to cut their future benefits now because otherwise they might have their future benefits cut in the future (eeeeek!).

Let me be more pointed.  RJS's statement is simply a lie.  The proposals to cut Social Security have generally taken two forms recently: imposing a chain price index and adding another round of retirement age increases in the future beyond those that were imposed by the Greenspan Commission nearly 30 years ago and which are still coming in.  The former is estimated to reduce cost of living increases by about 0.3% per year, and this would over the next few years indeed gradually reduce what elders receive in benefits, although it is not at all clear that this will lead to any reduction in what the young will be paying, unless this is accompanied by another round of fica tax cutting, or fica is restructured to have the same revenues come in but have it paid over all income levels, thereby reducing the burden for anybody under the upper cutoff for paying it.  However, the effects of this change in the CPI used means that the cuts will get bigger and bigger as time passes, meaning that those who will be most negatively impacted will not the evil baby boomers, but the current young when they finally retire, although since they think they will get nothing, presumably they will be grateful to get even a crust of dry bread.

More egregious for RJS's arguments, and where he really is just outright lying rather than merely stretching the truth is this matter of increasing the retirement age.  Nobody is talking about any further rounds of that happening anytime soon.  RJS poses as this defender of youth against his awful generation (he trumpets his baby boomerdom to supposedly give credibility to his regularly repeated nonsense), but in fact the baby boomers, or certainly at least the front end ones like me and him, will not be affected at all by these future increases in eligibility ages.  It will be the Gen Xers and the Millennials.  RJS is just lying through his teeth.  We old farts will not pay at all as a result of this change, but today's youth will. 

Fiscal Policy Bait and Switches

Sahil Kapur catches the Republican Senator from Utah living up to his reputation of being Whorin’ Hatch:

But what he proposed this week was a classic bait and switch on the American people—a tax increase double the size of what he campaigned on, billions of dollars in new stimulus spending and an unlimited, unchecked authority to borrow from the Chinese. Maybe I missed it but I don’t recall him asking for any of that during the presidential campaign. These ideas are so radical that they have already been rejected on a bipartisan basis by Congress.

Where to start with this nonsense? First of all, the Federal budget deficit is not the same thing as our bilateral trade deficit with the Chinese, but if Senator Hatch is so worried about government deficits – he should be supporting more tax revenues. Secondly with the economy still below full employment, short-term stimulus paid for by long-term tax increases on the well to do is precisely the type of policies a lot of economists advocate. Finally, you did miss it Senator – the President did campaign on these proposals. If Senator Hatch is so exercised over bait and switches, then he needs to explain his 2005 support for this:

Ryan’s fight against Social Security has been ongoing since he pushed President George W. Bush to privatize the program in 2005

And no – George W. Bush did not campaign on this proposal during the 2004. Mercifully, it failed back then but it does seem that the Republicans would rather sacrifice Social Security benefits than impose another penny of taxes on the very well to do. Update: Tax Policy Center notes that the President has put forth both a $1 trillion proposal as well as a $1.6 billion proposal so maybe this is where Hatch gets his “double the size” claim. Note two things. First – the latter was proposed by the President back and February. Secondly:

That figure includes the $968 billion noted above plus another $593 billion in tax increases. The largest of those, by far, is the president’s proposal to limit the value of itemized deductions and certain exclusions for upper-income taxpayers.

Wasn’t limiting deductions the Republican idea for revenue enhancement?

Primitive Accumulation: From Adam Smith to Angela Merkel

I am going to present this paper in Slovenia. Any comments would be appreciated.



The choice of Adam Smith as an introduction to a discussion of primitive accumulation might seem curious even though he inadvertently began the discussion of the concept. Like a modern astrophysicist trying to understand the Big Bang, he asserted that “the accumulation of stock must, in the nature of things, be previous to the division of labour” (Smith 1976, 2.3, p. 277). Smith, who often unintentionally raised important questions in the course of his confusion, was asking, what was the original accumulation that set off the ongoing process of capital accumulation.



I link the history of classical primitive accumulation to the contemporary ravages of neoliberalism.



http://michaelperelman.files.wordpress.com/2012/12/merkel1.docx

Mandated Employer Health Insurance Is Biased Against Small Business (in the US)

This morning’s story about the problems small business owners face in complying with the ACA doesn’t surprise me.  My first gig as an economist, way back in 1979, was a summer internship at the Small Business Administration, where, among other things, I prepared an analysis of the impact of health insurance mandates on small firms.  It was a pretty rudimentary piece of work: I was just a grad student and had not yet studied how to do applied micro analysis.  Still, I was able to see the main story line.

Actually, I got two out of the three pieces of the story.  First, I saw that there are economies of scale in group health insurance, and without some form of organization above the firm level, small employers will pay a higher unit cost.  Second, and quantitatively more important, small firms in the US are substantially more labor-intensive on average, so an increase in labor costs hits them harder.  The third piece, which I missed at the time, is that wages are lower in the small business sector, so a mandated benefit of given cost will constitute a larger share of the wage bill.

I concluded that, from a small business advocacy standpoint, a national health insurance program like Canada’s would be preferable to a system of employer mandates.

Since then I’ve learned that some European countries, like Germany, have employer mandates, but they don’t have the size-bias effect that ACA is likely to have in the US.  To take Germany, for instance, there are two reasons for this.  First, the Germans do have publicly-organized insurance pools above the employer level, which deals with the economy of scale problem, and SME’s are neither more labor-intensive nor lower-wage than larger firms in the same industries.  In other words, Germany doesn’t have (in this respect) a dual economy problem that mandated health insurance intensifies.

But the US suffers tremendously from duality*—the division in the economy between larger, better-capitalized, more productive, higher-paying operations and smaller, less productive sectors that offer crummy jobs.  (It isn’t entirely a division between firms because some large firms have established their own internal “secondary” sectors.)  ACA should be examined in this context, especially since the administration hasn’t proposed any measures at all to reverse the trend toward greater duality, which is one of the underlying factors behind the growth in inequality.

Just to be clear, I think it is a big step forward for workers in the secondary labor market to be able to get health insurance; this will lessen, for them, the impact of duality.  At the same time, however, we should not be surprised if ACA puts a differential burden on small business.  In the US context this might be a good thing in some respects, since jobs in small enterprises are generally pretty bad, but there are other aspects of size-bias to consider.

Ultimately, however, this is a dual economy problem, not a health policy problem.

*Duality should not be taken literally.  It is not about discrete separation but rather the tendency for size to covary with productivity and other related indicators.  Despite its moniker, it refers to a continuum.