Archive for Economics

Equality of Opportunity vs Equality of Outcome: The Manufactured “Debate”

Claim: Social safety nets are intended to provide equality of outcome. What really matters is equality of opportunity.

Fact: Social safety nets are intended to provide equality of opportunity (or at least narrow the gap), not the outcome (which is impossible anyhow). Touting “equality of opportunity” often implies that the market provides such equality, and this is demonstrably false.

It’s become commonplace to hear dismissal of social safety nets and other government programs intended to provide assistance to the poor and/or alleviate growing economic inequality by implying something along the lines that equality of outcome and equality of opportunity are not the same. The implication here is that social safety measures are attempting to achieve equality of outcome and that markets left to their own devices provide equality of opportunity. Neither of these is true. Read more

Free Market Failures

Many have an exaggerated opinion of what markets can achieve. They mistakenly think of markets (and more so, free markets) as some magical force that acts in the best interests of society and makes us all better off in the end. The problem with this assessment is that it is unrealistic and misunderstands how markets work. The market is a compilation of interactions between individuals and organizations who, in general are looking out for their own best interests. Some of the actors have access to more/better information and have far greater leverage than others. Often times the best interest of these actors aren’t aligned with those of the rest of society. And this is when we have a market failure.

The Free Market fails to protect our air and water quality

Think for example of a corporation with several factories. It is in this corporation’s best interest to reduce costs by simply dumping toxic waste down the river. However, such actions are not in the best interest of those influenced by the toxic river. Furthermore, those who buy products by these corporations are acting in their own best interests by saving money on these items and likely won’t know about the toxic waste being dumped into the river. And of those who do know, these moral sentiments may not be enough to offset propensity to save money. This is where regulation comes into play.

This is why the world’s most polluted cities exist in countries without EPA-like organizations.

free market and pollution

The Free Market fails to provide for basic worker’s rights

Under a truly free market, workers have little/no leverage as its employers who are able to pick and choose among workers much easier than workers can pick and choose amongst employees. What we call minimum wage would seem like a pipe dream and many basic worker safety and compensation for work-related injuries would be virtually non-existent as employees chose from the lowest bidders who worked for the least amount with the least amount of protections. We have an example of this; before the modern age of basic worker protections, children could be employed in sweatshops with virtually no protection and a 40 hour work week would be a part time job by comparison.

This is why the pre-New Deal era in the United States was a time of child labor and rampant poverty.

Free market worker's right

 

The Free Market fails to provide Energy Independence and Clean Energy

Left to its own devices, the free market favors established dirty fossil fuels that have decades worth of advantage over newer clean alternatives that have yet to develop a similar economy of scale. This is why government subsidies are essential to helping newer technologies get up to speed. Furthermore, the rules need to modified to make clean technologies a favorable investment for the private sector. Raising MPG standards and implementing a cap and trade system will motivate the private sector to invest in more efficient fuel standards and cleaner technologies.

Many free market advocates unwittingly point to Japanese car manufacturers and China’s ability to largely outcompete with the US in clean energy sources. What they don’t realize is that Japan has implemented and maintained much higher MPG standards than the US, and China has invested more money in alternative energies than the US. Nevertheless, the solar industry has grown quarter over quarter in the US.

Free market and clean energy

The Free Market Fails to provide affordable health care

Private sector health care continues to run its course. Private sector health insurance companies make money by charging premiums and deductibles and lose money by actually providing service. As medicines and medicinal technologies continue to advance, they become more expensive to administer. What’s more, private sector health insurance companies spend money on researching prospective policy holders in order to determine how much to charge them or whether they are too high risk to cover. This is all money that gets tacked on to policy holder’s premiums as these costs are shifted on to policy holders. In fact, the public insurance (Medicare/Medicaid) not only spends more money per dollar on providing actual health care than their private sector counterparts, but costs have risen slower for Medicare/Medicaid than it has for private sector insurance companies.

The Free Market Fails to cure diseases that afflict low income people

The free market is adept at solving problems that afflict many people, or people with money. It is not so great at addressing problems for lower income people, or problems that affect a small number of people. Why? Because there is no hope to recoup their R&D investments. A perfect example are the infamous “Orphan Diseases.” This is why the Orphan Drug Act, once implemented resulted in the cure for many of these previously untreated diseases.

The Free Market Fails to allow for a Middle Class

What we’ve come to think of as a middle class didn’t actually exist until the late 1930’s, after certain New Deal programs were put in place. Through higher rates of unionization and higher taxes on the corporations and the wealthiest Americans (along with investments into the economy that created opportunities for average Americans), incomes became compressed. Since the late 70’s/early 80’s however, many of these policies have been reversed and what we’ve seen a return of pre-New Deal wealth and income disparities. In fact, the United States now has the greatest income disparity of any advanced nation. Countries with smaller governments tend to have greater disparities in wealth.

 

free market middle class

Free market inequality

Unions and middle class

 

Tax rates and middle class

The Free Market fails to provide trustworthy news sources

News companies generally rely on revenues from advertising and subscribers, and compete with entertainment sources for this revenue. The effect: The news itself becomes an entertainment medium in order to compete. What we are left with are decontextualized sound bytes and rhetoric that play on our emotions and have us coming back for our fix instead of long, drawn out and ‘boring’ facts that would render the news too boring to compete with sports, reality shows and TV drama.

What’s more; because of the dependence on advertising revenue, these news sources are less likely to report stories or facts that would alienate their sources of advertising revenue (often large corporations).

The Free Market fails to protect nature/wildlife – There is no profit in conservation/preservation.

Unregulated fishing and hunting leads to population depletion (which actually hurts the fishing industry in the long term—an example of how unregulated Capitalism is self-cannibalizing). But aside from food production, there exists a market for things like ivory, blubber, timber and other natural resources.

Freemarket wildlife

Privatization of national parks leads to over-hunting and deforestation. There is no real business model in “preserving nature” and hence, this is something that must be taken up by the public sector.

 

free market deforestation

 

Privatization and nature

The Free Market fails to stabilize the banking industry

Prior to the FDIC (Federal Deposit Insurance Corporation), bank runs were common. Negative speculation (whether accurate or not) resulted in massive bank runs. People would run to the banks to pull their money out, which would cause more panic, which would cause more people to run to the bank to pull their money out. Banks never kept enough cash on hand to pay everyone out, so they too had to call in their money from other banks. What’s more, employers reacted to these panics by not hiring or even laying people off which course, caused more panic.

Thanks to the FDIC, depositors who are covered are assured that their bank accounts are secure and are therefore not enticed to withdraw all of their savings at the first sign of panic.

The Free Market fails to provide market confidence

Thanks to agencies like the SEC, investors can have a certain level of confidence that they are investing in credible companies. This is why companies who are in fact under SEC regulation make their SEC disclosures easily accessible to investors (or potential thereof).

A perfect example of the market failing to regulate itself are the role private sector ratings agencies like Moody’s, Fitch and S&P played in the recent financial bubble by giving AAA and AA ratings to subprime RMBS and CDOs. The need of these agencies to maintain/increase market share was easily exploited by major banks choosing agencies with lower standards.

Middle Class America & The Government

income disparity

It’s not uncommon to hear that “we are losing the America we used to be,” and that we are evolving into this socialist nanny state where hard work and innovation are punished and failure is rewarded.  That we are doing away with the ethic that made America the place of opportunity that it is/was/is ceasing to be.

The problem with this as that it ignores some glaring historical contradictions. The golden age many of these people refer to came about after the creation of a strong social safety net (which has slowly eroded and has become underfunded), a string labor union movement, and a tax increase on the rich that would sound Marxist in today’s political newspeak.  The late 1970’s and early 1980’s actually starts a trend away from this paradigm, and with it we see a period of union busting, lowered taxes on the top income earners, and slowly eroded social safety net.  There also appears to be a change in the American ethos.  What used to be understood as “there go I but by the grace of God” has become to seen as subsidies for “welfare queens” and the enabling of an “entitlement mentality.”

What does the data show?  It shows that a viable middle class makes its debut after the implementation of said nanny state.

Ron Paul - Middle Class - Wealth Disparity

The Obama Jobs plan vs Republican Jobs Plan

While outright rejecting the American Jobs Act, Republicans claim to have jobs bills of their own–bills which they complain are stuck in the Senate.  So what are these jobs bills?  They are a series of bills aimed at cutting regulations (mostly environmental).   So let’s compare the plans.

American Jobs Act (Democratic Party)

Robert Reich: Several Myths about Taxes and Economics

Robert Reich on the 7 biggest lies on taxes, the economy and more.

Below is an expansion of what Robert Reich so effectively stated and illustrated in an amazing 2 minutes.

1-Tax Cuts one the Rich Trickle Down to the rest of us
2-High taxes on the rich hurt the economy

This is one of the staples of the Republican parties.  Their claim is that cutting taxes on the rich (and for that matter, corporations) will free up capital that will magically find its way back into the economy in the form of investment and hiring.  Aside from being demonstrably false (see charts below), it also makes the false assumption that tax rates are what drive or divert hiring and other investments.  In reality, more important market signals like demand are what drive these, regardless of tax rates.  Cutting taxes on the rich and corporations has done nothing to boost GDP growth.  Rather, the added streams of revenue have simply increased profits and increased wealth disparity here in the US.

The middle class we we know/knew it was created during a time of higher tax rates on the rich and has largely disappeared with lowered tax rates.

wealth disparity  in america and taxes on the rich

There exists a correlation between tax cuts on the rich and a growing wealth disparity.

Wealth inequality - richest 1 percent

Read more

Economics: Democratic and Republican

A few years ago, when I first learned that economic history shows that the economy has fared far better under Democratic Presidents, I was stumped.  It went against everything I ‘knew’ about politics (in this case, that Democrats were tax-and-spend liberals who wanted to punish success and redistribute the rewards of said success and Republicans stood for responsibility and were far better at growing the economy).

Looking back now with a far better handle on economic policy, I see why this notion is so prevalent.  Democrats are accused of very tangible activities: imposing higher taxes and regulations.  It’s easy to see an increased tax rate or point to a regulation which, at face value, appears to serve no purpose other than to hamper business.  What’s not tangible is an economy with increased demand due to a strong infrastructure and rules than ensure fair play that everyone abides by.  The stronger economy is simply assumed to exist on their own and democratic policies receive little recognition.  Sure, every business owner wants lower taxes.  But low taxes are hardly an asset in a business environment where there is little/no profit to enjoy those low taxes on.

 

 

Obama’s Stimulus Package – Did it Fail?

Recently Barack Obama announced plans for a second stimulus package.  Known as the American Jobs Act.  The American Jobs Act website summarizes it this way (read the full PDF here).  According to the CBO

  • New Tax Cuts to Businesses to Support Hiring and Investment
  • Cutting the Payroll Tax in Half for the First $5 Million in Wages
  • Temporarily Eliminating Employer Payroll Taxes on Wages for New Workers or Raises for Existing Workers
  • Extending 100% Expensing into 2012
  • Helping Entrepreneurs and Small Businesses Access Capital and Grow

According to the CBO:

CBO estimates that enacting the President’s plan would increase the budget deficit by $288 billion in 2012 and decrease deficits by $3 billion over the 2012-2021 period. That estimated deficit reduction of $3 billion over the coming decade is the net effect of $447 billion in additional spending and tax cuts and $450 billion in additional tax revenue from the offsets specified in the bill.

http://cboblog.cbo.gov/?p=2875

It’s important to note that of the $447 Billion in “spending” $275 Billion of this comes in the form of tax cuts (if the idea of tax cuts amounting to spending seems confusing, read about deficit spending).  This is extremely important to note because Republican politicians will rail against the bill claiming “we can’t afford $450 billion in spending” all the while calling for tax cuts and claiming that tax cuts don’t equate to spending.  They won’t allow the Bush Tax Cuts to expire even though the lost revenue from those tax cuts (along with the lost revenue that came with the recession) have more to do with the deficit than any increased spending.  Ron Paul claims tax cuts don’t have to be paid for (and yet he still characterizes the Jobs act as “spending”).  This duplicity shows that Republicans are not really trying to get America their jobs back so much as doing what they can to cause Obama lose his job.

Did the First Stimulus Fail? No, it saved us from a worse recession but should have been larger.

Adamant that the first stimulus package failed, Republican support for the plan is slim.  But data tell us that both the stock market and the unemployment situation reacted positively to the 2009 stimulus package (known as the American Recovery and Reinvestment Act–or the ARRA)?

The ARRA was signed into law on February 17, 2009.  Within a matter of days the DOW began recovering and would continue to grow until the highly compromised debt-limit deal was reached and rumors of the upcoming S&P downgrade would ensue.  So it would appear the the market reacted positively to the stimulus package.

Obama was inaugurated on January 20, 2009,  By the time he signed the stimulus package into law, the unemployment rate was above 8% and quickly rising.  Within 6 months, the unemployment rate peaked at just over 10% and would begin dropping and leveling off at roughly 9%.

Unemployment Rate and Stimulus Package
Stimulus Package and the Unemployment Rate
stimulus package and number employed
The Stimulus package and employment numbers

In fact, the private sector has actually added over a million jobs since the stimulus package went into effect (even accounting for net jobs being lost over the next few months as stimulus spending was barely being implemented.  The reason the unemployment rate has remained flat is because the number of jobs being added is roughly the same as new workers entering the workforce and previously discouraged workers coming back into the work force (more about how unemployment is calculated).

obama stimulus failed jobs added

While an unemployment rate of 9% is hardly great news, the point is that the economy was on the road to a much higher unemployment rate than what actually ensued.

Non-partisan groups (both public and private sector agree that the stimulus package averted a worse economic outcome).  Private sector agencies like IHS Global Insight, Macroeconomic Advisers and Moody’s Economy.com (all highly respected agencies, whose economic insights and forecasting are regarded as the industry standard) all maintain the position that the economy would have been worse without the stimulus package.

Economic stimulus Obama FTW

 

In addition to the private sector forecasters, non-partisan public organizations like the CEA and CBO also estimate that the ARRA prevented a far worse outcome.


ARRA Obama FTW

Wealth Inequality and its effect on the recovery

Over the last 30 years, we have seen a huge increase in wealth disparity in the US as more of the wealth has coagulated at the top (coincidentally, taxes on the top earners have been drastically lowered and union-busting has increased).  This loss of disposable income has made it more difficult to get the type of spending needed to create the demand needed to create jobs at a fast enough pace to effectively lower the unemployment rate.

Taxes top 1 percent and wealth disparity

CEO to Worker pay Ratio

 

The Stimulus Package was too Small

The need for a second stimulus package comes as no surprise to mainstream economists, who have said all along, that the stimulus package should be larger.  Politically, 800 billion is about as large a bill that could have passed (though Congressional Republicans argued it would break us).  But for mainstream economics not tied to political parties (and who don’t work for ‘think thanks’ like the CATO institute or Heritage Foundation–whose sole reason for existence is to argue that government is always the problem and an unfettered free market is always the solution), the answer was obvious all along.

Videos: Stimulus Package too Small

Articles: Stimulus Package too Small

“Obama promised the Stimulus Package would keep unemployment from reaching 8%”

One of the many misnomers Congressional Republicans and other Obama critics like to repeat is the claim that Obama claimed the stimulus package would keep the unemployment rate from reaching (or exceeding) 8%.  This isn’t true.  Rather, it was his economic advisers Christina Romer and Jared Bernstein who made this prediction, even before Obama was sworn into office.  It’s important to note that this bill was signed into law in mid-late February of 2009.  By this time, unemployment had exceeded that 8% threshold.  Christina Romer’s statement was based on data available at the time.  The economy turned out to be worse than she and other economists realized at the time.  In any event, the usual rhetoric about the stimulus package ‘failing’ because it didn’t prevent unemployment from reaching or exceeding 8% is nonsense, because it reached 8.5% the month it was signed into law.

More on the “8%” Myth

See Also: What Was the Unemployment Rate When Obama Took Office? (Updated for July 2012 HERE!)