Tag Archives: political economy

What’s in it for the New Year?

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Irwin Stelzer, of The Weekly Standard, offers some excessively realistic predictions for 2012.

Some examples follow; their accuracy, as Stelzer points out, depends on the likelihood of some things occurring—whether you believe in certain “ifs,” in his terms.  Stelzer mentions certain possibilities in Europe, but I’ve dwelled on the doings of that continent several times already; I’ll just mention some of his “ifs” for the US.

If you believe that the recent jagged but downward trend in claims for unemployment insurance foretells a drop in the unemployment rate that will be reported on Friday, and if you give weight to recent cheery numbers such as the uptick in regional indices of economic activity, you will stop worrying about the possibility of a renewed collapse in the jobs market.

If you read the recent upsurge in consumer confidence and spending to be suggesting that the demand side of the economy is ready to contribute to a more rapid recovery, you will murmur a word of thanks to the sainted John Maynard Keynes, and face 2012 with equanimity

You’ll also be, I think, ignoring the spike nature of the hiring, as it was primarily for temporary labor to man the retail stores and related endeavors as retailers and suppliers ramped up for that part of the year—Thanksgiving through New Year’s—when consumer shopping itself spikes for holiday buying.  You’ll also be ignoring this same season’s normal spike in optimism as the Christian optimism that underlies the two holidays dominates, as does the festive nature of the season, at least for a little bit.  And you’ll be ignoring three years of belt-tightening under these difficult economic conditions that produced what economists call pent-up demand: buying has been put off, and put off, and put off, until necessary things absolutely must be bought—or the feeling of too-tight living must be relieved at least a little.

The holidays are over.  The next few jobs and spending reports and consumer confidence readings will be interesting.

On the other hand,

If you believe that the continued fall in house prices—down in October for the 13th consecutive year-over-year decline—is more significant a harbinger than the recent modest pickup in sales, you also believe experts who guess that the bottom of the housing market will not be reached until 2015. That bodes ill for the jobs market….

If you believe that the recent spurt in consumer spending will prove unsustainable because it has come at the expense of savings…you believe the demand…will remain too weak to sustain [growth.]

See above re jobs and spending.

If you believe that the new round of regulations being readied by the Obama administration for the new year will frighten businesses, especially job-creating small businesses, you also believe that business investment is unlikely to provide much of a boost to the economy.

See above re jobs, and think about an ability to continue spending, even were a desire to do so present.

Stelzer then concludes, in keeping with the rump of the holidays, on an optimistic note:

…longer term the outlook brightens. America is still the world’s largest source of major innovations. It remains the home of risk-taking venture capitalists, deep and liquid securities markets, and a labor market so flexible that thousands can flee, and indeed are fleeing high-tax, regulation-heavy, union-ridden California for booming Texas. It is a safe haven for investors and the country of choice by immigrants.

But given the state of our educational system, for how much longer can we innovate?  Given the state of our economy, for how much longer can our jobs engine—small and medium businesses—afford to pay for innovation, or take risks involving innovation—or any other risks, come to that?  Given the present administration’s drumbeat of attacks on business—regulations Stelzer also mentions—for how much longer will small and medium businesses be willing even to try?  Given the present administration’s steady drumbeat of attacks on right to work states (vis., NLRB’s attack on South Carolina via its suit against Boeing for the miscreancy of wanting to build airplanes in that state), for how much longer will there be states that are sanctuaries for business, for innovation?  And he misses the fact that, in this economy, immigration is way down.

I’m not as sanguine about the coming year, or the years after, if we continue on our present course.

Free Market Capitalism And Democracy

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I want to spend a little time talking about the relationship between free markets and democracy and about how closely connected the two are to each other.

A free market in this context is a market in which the participants—buyers and sellers, producers and buyers, businesses and customers, i.e., any pairing you’d care to think of involving people exchanging items of value—are free to determine for themselves both what it is that’s of value and the terms, if any, by which they’re willing to exchange those things.  Moreover, since the participants are free to bargain among each other, their collective choices, summarized into a general supply of and demand for goods and services and money determine general—and since voluntary, constantly fluctuating—terms of exchange: what can generally be expected to be available for buying and selling, and at what prices.

Capitalism in this context means private ownership of property, including money, and of the means of production: one’s body, including labor output; one’s thoughts, including intellectual property and output; and physical plant, including the entire gamut from individual hammers and screwdrivers up through whole plants and companies that use plants and employ physical and intellectual labor.  Further, capitalism occurs within the framework of a free market, and it facilitates accumulation of capital in a broad variety of forms for profit, for future expansion, and for development of new products and/or means of production.  Thus, capitalism underpins free markets.

Democracy is a means, often political, by which the members of a community decide for themselves a variety of matters, usually by voting in some manner.  A democracy may use a government as a mechanism for arriving at decisions, but in a democracy that government is subordinate to the people.  This is as opposed to a government originating decisions and handing them down to a subject people, with the people being subordinate to the government.

The aggregate of individual economic decisions is what makes up an economy.  In a free market, capitalist economy, individuals, at bottom, vote on what we want produced, vote on what we want to possess or to consume, with our economic property: dollars (which we earn in another component of the free market capitalist economy, the labor market, in which we sell our labor for a price voluntarily agreed on with an employer) and any other items we might offer in an exchange.

Every purchase we make, every sale we make, is the outcome of our voice speaking and the result of our choice made.  I’ve cited Adams before, but he’s applicable here, too: an individual’s happiness—the pursuit of which is one of those inalienable rights acknowledged in our Declaration of Independence—is this:

All men are born free and independent, and have certain natural, essential, and unalienable rights, among which may be reckoned the right of enjoying and defending their lives and liberties; that of acquiring, possessing, and protecting property; in fine, that of seeking and obtaining their safety and happiness.

Where we are free to choose for ourselves what we will do with our property, we there are free to develop our own lives toward our own goals.  And our economic property is founded on our natural right of property in our lives, our bodies, our minds, and the things we produce with those.  (As an aside, this natural right, among others, is acknowledged in our Declaration of Independence, as well as in Adams’ Massachusetts Constitution.)

It is this democracy of a capitalistic free market that enables us to manage our own ends, to reach for goals of our own choosing.  This is where we exercise our property rights in our own outputs.

And we must do so: if government exercises rights in our property, it also has control over our political property: it can give or withhold from us according to its approval of our voting.  Any time a government determines these things for us, even indirectly, by determining the terms of our exchanges, by determining the things we will be permitted—or required—to exchange, regardless of lofty motive, we individual participants lose our vote, we lose our voice: government is speaking, not for us and saying what we have instructed it to say; it is speaking, rather, to us and saying what its instructions to us are.

This is a two-way street.  Without political democracy, we cannot have the economic democracy of capitalistic free markets.  Within political democracy, we individually and freely vote with our political property for the things we need and want; it is through political democracy that we are able to act to preserve the freedom and capitalist nature of our markets.  The free market, our individual ownership of our property and of our productive facilities, are both demonstration and constructor of democracy.

In the end, free markets, capitalism, and democracy each needs the others; none can exist without the other two.  In fact, they are the same; they are merely economic and political sides of the same coin.

Lessons from Germany

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Spiegel Online International talks about a (relatively) strong German economic performance in the coming year, following on the heels of a strong performance for 2011.  It also draws a contrast, while outlining the jealousy of its European neighbors.

Germany’s economic success does not make the country more popular among its neighbors, though. After all, this is the same country that has been blocking all proposals to use the European Central Bank (ECB) to provide more generous financing for embattled euro-zone countries. Some European countries appear to be secretly hoping that Germany, Europe’s economic paragon, will also soon feel the brunt of the crisis.

How did the Germans achieve this?  One path is through the intermediate-term outcome of some economic and governmental reforms they put into place in 2003, in part to cure themselves of being the “sick man of Europe.”  They:

  • increased, from management’s perspective, the mobility of their labor force,
  • provided stronger financial incentives for the unemployed to go back to work, rather than paying them unemployment “benefits” for not working,
  • reduced taxes,
  • reduced government debt relative to their GDP.

One of the things the labor reforms led to was increased hiring because the reforms made it easier for employers to hire.  In 2011 alone, for instance, a half million new jobs were created in a population of 81.5 million.  Their reforms also encouraged more people to try to go back to work.  The resulting increased employment rate matched up with the lower tax burden to leave more money in the hands of individual Germans.  In short, Germany took steps to free up its economy, moving it closer to an open, free market, especially in comparison with their embattled euro-zone neighbors, and embarrassingly so relative to the US.

Their European neighbors, on the other hand, are not implementing similar reforms; indeed, although the embattled euro-zone nations are cutting spending, they’re actually raising the tax burden on their populations and businesses.  Moreover, they’re eschewing reforming their labor laws which leave unions with a decisive upper hand.

Are there lessons here for us?  Let’s see: those half million German jobs would work out to nearly 2 million new jobs in the US in 2011.  Germany cut taxes, but like the failing nations of Europe, our government insists on raising taxes.  Our tax increases aren’t even intended to close any budget gap, or to pay down any national debt, either—they’re for supporting even higher spending.  And here we are, just as are the embattled euro-zone nations, mired in a three-year-old recession in all but name—stagnating away with high unemployment, rapidly increasing budget deficits, and exploding national debt.

Hmm….

False Choices

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This article in The Washington Post centers on falling municipality revenues due to falling housing values and so falling property tax valuations, but it contains an item that wants attention.

The Post cites Thomas Fitzpatrick, of the Federal Reserve Bank of Cleveland, making this remark in a study he co-authored titled “Municipal Finance in the Face of Falling Property Values:”

It appears that the dramatic fall in property values across the country will accelerate the financial distress of municipalities in the wake of the Great Recession.  If creative ways to make up for this lack of revenue are not found, local governments may face the undesirable choice of either raising property taxes or reducing funding for essential services.

But this is bad logic.  It proceeds from the false assumption that whatever a (even local) government does is perforce “essential.”  Further, Fitzpatrick presents the false dichotomy that the only two options available to such governments are either raising taxes or curtailing “essential services.”

In fact, most of what government does is highly desirable, in the short term, but very little of what government does actually is essential.  Moreover, much of the “essential services” displaces the moral responsibility of individual citizens and arrogates that morality to government, to the long term detriment of individual citizens, the local communities which are made up of them, and to society as a whole.  The only truly useful, essential services are police and fire, and refuse collection.  All the rest are better handled by individuals, churches, and charitable organizations, with (even local) government stepping in only as a last resort, not as the first.  And so government always can cut back on its spending and reduce its nonessential “essential” services.

The article itself concludes with this remark:

Instead, towns across the map have relied on an array of maneuvers to cut costs—renegotiated pensions, furloughs, salary freezes, hiring freezes and layoffs. Many also are charging higher user fees for garbage pickup, recreation centers and other services.  And many cities have explored entering into shared service agreements with one another to save money.

These sound like good solutions, not “instead” solutions.  When government is acting in its proper role of “common good” and as a last resort otherwise, it gets a whole lot cheaper to maintain.

Progressives, RINOs, and Taxes

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Now that the Republican fiasco with the temporary payroll tax cut is sort of ended for a little bit, it’s time for these gentlemen and gentlewomen to recover their heads from rectal storage and get serious—and coherent—about tax policy for the US.

This last week has been a textbook example of a Keystone Kops failure to perform.  Others can run the post mortem on their failure; I want to look ahead to early in the next year.

When the new year dawns, and the “negotiation” over the payroll tax cut extension for a whole year begins, we can expect the Progressives to resume their hobby horse demand to pay for the tax cut with their class war-oriented tax increase on groups of Americans of whom they utterly disapprove.  The House Republicans and the Senate RINOs need to change the terms of that debate, rather than continuing to surrender the frame of the discussion to the other side.

The discussion needs to acknowledge, with gratification, the Progressives’ avowal that tax cuts are good for Americans and our economy.  The discussion needs to acknowledge, with enthusiasm, that the Progressives want a 2% tax cut for Americans, and that their leader, President Obama, wants a 3% tax cut on both employees and employers.

Then the House Republicans, and their nominal colleagues, the Senate RINOs (assuming the latter can find their principles anywhere at all nearby), need to push for an income and corporate tax cut of 3%—just as Obama has asked for.  And also acknowledging the need for stability and predictability for all Americans, these worthies need to push for the income tax cuts to be permanent—no more of this annual dual between talking point lists for personal political gain.  After all, as Obama himself said all week long, the $40 per paycheck that this small cut represents “makes all the difference in the world” to those who get it.  Of course, these $40 should be made permanent.

The Republicans and RINOs also need to push the Progressives, when the latter resist the income tax cut and its permanence, about the Progressives’ demand, instead, to reduce funding for an already dysfunctional Social Security system while they also refuse to allow reform of the system (or of Medicare or Medicaid, come to that).

I look forward to the Republicans and the RINOs getting their act and their message together, recovering their integrity and their principles, and arguing for a more serious, income, tax cut.  And after that, they need to push, for the same reasons, for the permanence of the Bush tax cuts (and not allow this also to be merely another periodic talking points duel).