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Debt – Part One: Personal and Business

Saturday, January 5th, 2013

People like to argue about the national debt as if it were the same thing as private or business debt. That does compare apples with oranges and bananas. But let’s assume for a moment that all these fruits can be rationally compared.

Personal debt typically consists of three things: a home mortgage, a car loan and credit card debt. But let’s start with a home mortgage. Suppose a family with an income of $50,000; that is slightly below the U.S. median income. Suppose that they somehow have been able to accumulate $36,000 for the down payment on a $180,000 house – again slightly less than the median. They will have a $144,000 debt. That is 288% of their income. Typically such a family will also have other debts – a car loan and some credit card debt. Now we don’t really regard such a situation as “unsustainable.” And, in any event, the “issue” is whether or not they can “service” the debt – i.e., make timely payment over the life of the mortgage, loans and other credit. The real “risk” involved is if they should experience either loss of income – through loss of job – or catastrophic loss – such as a major illness or accident.

Businesses also typically carry some debt. They may borrow money for capital equipment, inventory and even some operating costs such as payroll. They may even carry debt incurred when private equity capitalists bought them with money borrowed against business’ assets. A business may borrow for inventory, the ability to repay depending on the eventual sale of that inventory. A manufacturer may borrow to make payroll because the revenue to pay the workers will not be realized until the goods produced by the workers are sold. The revenue produced by capital equipment also will not be realized until after the equipment has been bought and put into operation. Again, the issue is whether or not the business will be able to service the debt from revenues. It will, of course, happen from time to time that revenues do not meet expectations. When that happens over a long period of time the consequence is bankruptcy.

Debt isn’t a problem for either individuals or businesses as long as they can service that debt. That is the real issue – not whether debt, as such, is a bad thing. Yes, if a business or person runs up such a level of debt that they cannot service that debt there is a problem. If a person or business is spending more than they take in, there is a problem. In either case, the solution is twofold – increase revenue and decrease spending. Cutting expenses may or may not be a good idea. For the person, foregoing certain kinds of expenses is actually a bad idea – for example, foregoing medications, dropping health or disability insurance, even cutting food expense. Such measures may actually reduce revenue – you may not be able to work if you are sick and your expenses would go up more than the savings. The person might also increase income by taking a second job, turning a hobby into revenue, holding a garage sale, or even finding a better paying job.

There are similar examples for business. A retail store might cut expenses by laying off sales people or reducing inventory. But that could actually reduce revenue as customers find service affected or a poor selection of goods.  Or the business might actually go further in debt to open another store in another town. In other words in business, going into debt can actually increase revenue and sometimes reduce expense (e.g., a new machine might be less expensive to operate and maintain and increase output).

Generally speaking a growing economy helps both individuals and businesses deal with their debt. As the economy grows, individuals find it is an “employees’ market” – it is easier to get better paying jobs when the economy is enjoying full employment. When workers are fully employed and earning good wages, consumer demand for goods and services translates into more sales and revenue. All this good economic news can trigger inflation – which is actually good news for debtors, if not creditors. A shrinking economy (i.e., an economy in recession) has the opposite effect. It adversely affects individual income and business revenue. And, if it results in deflation, that is bad news for debtors – and good news for creditors (at least up to the point where defaults occur).

So many of the assumptions made about personal and business debt actually turn out to be misleading if not simply false. People are quite able under normal economic conditions to have debt that is two or three times their income. Businesses use debt to operate and to grow their businesses. But what about government? One major difference between individuals and businesses is that a government’s central bank can increase the money supply to pay debt. (Incidentally, that is a major difference between the U.S. and Greece, which has no central bank and whose debt is held by German and French banks so it cannot increase its supply of euros.) Yes, increasing money supply can trigger major inflation – which actually helps pay the debt! Central banks can deal with runaway inflation by shrinking the money supply; that was how the Federal Reserve under Volker stopped the runaway inflation that occurred in the U.S. in the mid-1970s.

Coming soon: Part II: U.S. Public Debt

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On Debt and the Scope of Government

Tuesday, September 11th, 2012

A Response to William McKenzie of the Dallas Morning Nees

McKenzie wants us to focus on the $16 trillion federal debt ( “Let’s make right-sizing government the goal”). First, remember that the United States has never been out of debt. We came close in 1835. The historical trend from the beginning of the Revolutionary War to the present has been a growing debt. The size of the national government has been growing since the adoption of the Articles of Confederation. In fact, the adoption of the Constitution was a significant growth in federal government.[1]

So, let’s talk about debt in terms of presidential periods, remembering that fiscal policy involves Congress as well as presidents. I will also begin with Wilson because that era first saw a billion dollar debt. The Wilson era saw a 722% increase in the national debt, largely attributable to WWI. The last two years, as we demobilized the debt was actually reduced. That reduction continued under Coolidge (-14%) and Harding (-17%) and into the first two years of Hoover. Those debt reductions ended with the beginning of the Great Depression; the Hoover years saw the national debt increase 33%, accumulated after the 1929 crash.

Roosevelt (whom McKenzie mentions) saw the biggest debt run up – a whopping 1,048%. Some of that was the New Deal attempt to end the Great Depression; most of it was the cost of WWII – which big, deficit spending most economists agree ended the Great Depression. Yes, you can spend your way out of a depression.

Truman saw the deficits fall dramatically and even surpluses that reduced the national debt in 1947, 1948 and 1951. This era saw an increase in the national debt by 3%.

Eisenhower was the last president who saw a reduction in the national debt in 1956 and 1957, but in the entire period the debt rose 9%.

Kennedy/Johnson saw the debt rise by 22% — partly due to Great Society programs and the Vietnam War.

Nixon/Ford saw the debt rise by 98% — partly due to the Vietnam War and sharply rising inflation in Nixon’s second term.

Carter saw the debt rise 43% as inflation continued.

Reagan saw the debt rise by 186%; G.H.W. Bush by 54%.

Clinton saw the debt rise by 32%. In 2000 it rose less than 1%.

G.W. Bush saw the debt rise 105%, attributed to the tax cuts of 2001 and 2003, the prescription drug program and the Iraq and Afghanistan wars. The sharpest rises occurred in the last two fiscal years – 11% and 18%.

The first full full year of Obama’s presidency saw the increase fall to 14%.

I can only conclude that since the days of Truman, Democratic presidents have seen more fiscal restraint than Republicans. Truman 3%, Kennedy/Johnson 9%, Carter 98% and Clinton 32% compared to Eisenhower 9%, Nixon/Ford 22%, Reagan 186%, G.H.W. Bush 54% and G.W. Bush 105%.

But absolute debt isn’t a particularly useful number. If you are considering taking out a mortgage (i.e. increasing debt) to by a $500,000 house, there is a difference if your income is $50,000 or $500,000. All else being equal, the debt load for the higher income is less than for the lower. The closest comparison is national debt as a percentage of Gross Domestic Product, which serves and an indicator of the ability of the nation to service the debt.[2]

At the end of Fiscal Year 1946 the national debt stood at 121% of the GDP. That is the highest I have found going back to 1900. That debt represents the debt accumulated by the U.S. government during the Great Depression and WWII. In 1981 it had fallen to 32% of GDP. Remember this is not a reduction in the dollar amount of the national debt — that had risen by $79 billion.

Beginning with FY 1982 we see the debt as a percentage of GDP rising every year except for FYs 1996 through 2001. Thus from Truman through Carter, the trend was for the debt to GDP ratio to fall; and from Reagan through Obama, except during the Clinton years, for the debt to GDP ratio to rise.

It is generally said that the fiscal policies of the federal government during WWII created the modern middle class. That may be an exaggeration, but it is certainly true that the size of the middle class grew in those years. The debates in the early postwar period were whether or not that middle class could be sustained in a postwar economy. The remarkable thing is that it was, and it grew. Certainly things like the G.I. Bill contributed to that. Returning veterans were often the first in their families to get a college education and become “white collar professionals” instead of “blue collar laborers.” Veterans could obtain ownership of homes, cars, refrigerators, TVs, etc.

We also see in that postwar period an increase in median income and, in fact proportional increases for low, middle and high income groups. Virtually all Americans were enjoying increased prosperity. That phenomenon does seem to have slowed some in the 1970s. But beginning in the 1980s we saw something new (or rather more like what we had seen in the 1920s and even the 1890s. High income groups saw their income soar, middle income workers saw their incomes stagnate, and low income workers saw their incomes fall. The result was a radically changed income disparity and wealth disparity. Many economists do not believe this bodes well for the future. The economic precedents (e.g., 1920s and 1890s) suggest grave dangers.

Finally, I would close with an observation. I suspect that the management of the Dallas Morning News, when considering going into debt to obtain a new press will weigh both its ability to service the resulting debt and the potential increase in profit resulting from the more efficient press. It would seem to me sensible that such factors enter into the discussion when discussing federal fiscal policy. As mentioned earlier, federal investment in education (via the G.I. Bill) resulted in increased productivity and prosperity for the American people. And, although it increased debt, it more than increased the capacity of the government to service that debt and also increased government revenues. Many, many other examples of this could be cited such as the government guarantee of home loans to returning veterans in the G.I. Bill, the construction of the interstate highway system begun by Eisenhower, rural electrification and so forth. It can similarly be argued that government investment in the health of the American people is such an activity, since there can be no doubt that healthy workers are more productive than unhealthy workers.

 

[1] “Historical Debt Outsanding” In the discussion that follows I have begun the “Presidential Eras” with the first full fiscal year of their term – typically beginning in September – through the fiscal year that ends in the first year of the next president. While that may bias somewhat, I would argue that the roughly u.5 months that overlaps is more a consequence of the predecessor than the incumbent.

[2] “Revenue as Percent of GDP” I’m using the GDP figures here and the previously cited debt figures.

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Book Review: Corporate Takeover of America

Thursday, May 10th, 2012

Winner-Take-All Politics: How Washington Made the Rich Richer — And Turned Its Back on the Middle Class by Jacob S. Hacker & Paul Pierson

As Will Rogers famously said, “I am not a member of any organized party — I am a Democrat.”

Jacob Hacker and Paul Pierson detail how the U.S. Chamber of Commerce and the National Association of Manufacturers organized business interests to block progressive legislation in the 70s. This involved both the long affinity between corporate America and the Republican Party and intensive lobbying efforts to dissuade moderate Democrats from voting for progressive legislation in the Senate during the Carter administration.

The first part of the book outlines the contrast between the American economic and political scene after World War II and the 70s with the scene in the past 30 years. Most of this material repeats what has been shown in study after study. The authors counter the usual explanations of the change in a CSI detective style, showing that such things as education and technology do not explain the concentration of power and wealth that has occurred.

What has happened, according to Hacker and Paul Pierson  is the strengthen organization of corporate America led by the U.S. Chamber of Commerce and the National Association of Manufacturers and the weakening of organizations which represented a broad spectrum of middle America. The authors describe how the Chamber of Commerce and National Association of Manufacturers successfully lobbied to block labor laws and business regulations during the Carter administration when progressives thought that a Democratic President, Senate and House would enhance regulation of environment and work and product safety as well as eliminate impediments to labor organizations. They also describe how corporate America has transformed the Democratic Party from a pro-working class party to a pro-business party, albeit perhaps not quite as pro-business as the Republicans.

Part of the reason for corporate success in Washington is attributed to the decline in participation in labor unions and a variety of middle American organizations including the Veterans of Foreign Wars and service clubs such as Lions, Shriners and Rotary clubs all of which did provide middle America with a more unified voice in the 1940-60s.

The authors also detail the fact that, at least in the late 1970s it wasn’t necessary for the corporate interests to enact new “business-friendly” legislation or to repeal older legislation; all that was necessary was to block passage of progressive legislation. We have seen this strategy repeated both during the Clinton administration which was unable to get health care reform passed. Doing nothing was all that the health care segments required. We have also seen it in 2009 — the Republicans do not need to pass anything for corporate America. All they have to do — and they have been very successful in this — is to block progressive legislation either by threat of filibuster in the Senate, or in committee, or in the 112th Congress the House. And, in either case, we have minority rule.

Hacker and Pierson do not go into great detail about the role of corporate America money in political campaigns. For that side of the story you should read Republic, Lost: How Money Corrupts Congress — and a Plan to Stop It by Lawrence Lessig.

The authors conclude the book with a conclusion “Beating Winner-Take-All” which I must confess is rather disappointing. Having identified the problem as being the effective political organization of corporate America to oppose progressive legislation and even to roll back progressive laws, Hacker and Pierson focus more on the difficulties of getting the tens of millions of middle Americans organized to oppose the corporate takeover of the political system of America. The opposition will require that middle Americans once again organize themselves to speak in Washington — and I might add in their state capitals.

I recommend this book for those who want to have a better understanding of the American political scene today.

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Four Books to Read before November

Friday, May 4th, 2012

Forty-forty: Eras of American Political and Economic History.

Recent American political and economic history can be conveniently divided into two forty year periods: 1933-1972 (from FDR’s first term through Nixon’s first term) and 1973-2012 (Nixon’s second term through Obama’s first). The first period covers a spectacular recovery from the Great Depression dominated progressives of the Democratic Party. It was an era of an improving standard of living for all Americans and of an unprecedented absence of economic crisis. The second period is an era of economic stagnation, wildly widening income discrepancy and repeated booms and ever worsening busts, the latest of which still depresses the American economy, especially for low and middle income workers. What happened?

Winner-Take-All Politics: How Washington Made the Rich Richer — And Turned Its Back on the Middle Class by Jacob S. Hacker & Paul Pierson

This book briefly describes the economic contrast between Richistan and Broadland, two mythical countries, one of which sees the concentration of wealth in the hands of a few and the other in which economic growth is shared by all. Our second era is represented by Richistan, while Broadland is more like our first era. How did this happen? The authors use a CSI analogy to ferret out the causes, dealing effectively with the arguments for rapidly growing income and wealth disparity. They conclude that the “criminal” is government.

But how was the government transformed from a moderately progressive democratic institution to a regressive institution representing wealth? The authors provide a good historical analysis of how, at the end of our first era and beginning of the second, the American political parties came to be owned by corporate America rather than the people. This section of the book is worth the price of the book. We see the huge increase in lobbying, campaign contributions, political action committees and propaganda mills posing as think tanks in the 1970s and 1980s.

Republic, Lost: How Money Corrupts Congress — and a Plan to Stop It by Lawrence Lessig 

Lessig explains in depressing detail how money corrupts our Congress. Although dealing specifically with congressional campaign finance, it is applicable to state politics and presidential campaigns. He argues that quid quo pro bribery is actually very rare, but the need for congressmen to raise large sums of money to pay for campaigns makes them dependent on their contributors rather than on the people alone. He also details the problem created by the “revolving door” by which government officials move from the private sector and back — often to very substantial incomes — is part of the problem. Less helpful are his suggestion on how to fight this corruption, although some of his arguments have merit. The main problem is getting reform through Congress (and legislatures) dependent on corporate campaign cash.

End This Depression Now! by Paul Krugman

We know how to end this depression but our political leaders lack the will to do so. Lessons learned from the Great Depression, the New Deal, World War II, and the postwar economy in America show the way. Paul Krugman traces the causes of the current financial crises, not as an attempt to fix blame (there is plenty to go around), but so we can understand why it happened and what can be done about it. These lessons are also learned from other nations that have experienced similar conditions in the late 20th century. The reasons recovery has been so slow is that the stimulus was too little, too brief and in some cases misdirected.

The shift of focus on the deficits and debt misdirects our attention from what must be done. At the end of World War II, the national debt was 120% of Gross Domestic Product. It “fell” to about 60% by 1964, not because we had budget surpluses and paid down the debt, but because the economy grew significantly. The dollar amount of the debt had actually increased. The debt as a percentage of GDP did begin to grow in the 1970s, but did not really take off until the 1980s and following.

The slow recovery does aggravate the debt because revenues are suppressed and expenses increased. Government spending increases aggregate demand which creates jobs — which increases the GDP and revenues and reduces expenditures for unemployment compensation, nutrition programs, medicaid, housing assistance, etc. That in turn reduces both the deficits and the debt as a percentage of GDP. Prolonging the recession will have costly long term effects. Long term unemployment makes it more difficult for older workers to reenter the labor market at previous levels, much less at levels they would have achieved if employment had been continuous. Even more dire is the fact that the recession is retarding young workers entering the labor market which will have a negative effect throughout their lifetimes.

Krugman offers a way to bring the current economy up to speed and refutes the arguments of the naysayers.

The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too by James K. Galbraith

Galbraith provides economic data on income and wealth disparity in a readable manner. The major problem with “free trade” is that business really does not want it. What the corporate lobby has done in the past 40 years is to “unlevel” the playing board to benefit large corporate profit.

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On the Enumerated Powers of the Federal Government

Thursday, March 29th, 2012

The “enumerated powers” argument always strikes me as somewhat dubious. It seems that the argument treats the first and last paragraph of Article I, Section 8, as fluff and what intervenes as the meat and potatoes of Congressional powers. I seriously doubt that the authors saw it that way. I also doubt that the anti-federalists in 1787-8 saw it that way.

The very first power in that opening paragraph specifies the power of Congress to levy and collect taxes. That power is nowhere mentioned in the subsequent enumeration. Note also that this paragraph also places a limitation on the taxing power that was subsequently modified by the 16th Amendment.  (There is another in Section 9.) If the “general Welfare of the United States” is a “fluff” preface to the more specific and limited powers that follow, then surely the power to tax, to pay debts and to provide for the common defense is also “fluff.”

But the clauses that follow, which is what is usually meant by “enumerated powers” seen as limiting Congress to those specific items, have a history. Shortly before the Philadelphia Convention of 1787 convened, James Madison drew up a list entitled Vices of the Political System of the United States. This list enumerates specific deficiencies which had appeared under the Articles of Confederation between 1781 when the Articles were ratified and in force and 1787 when the convention that drafted the Constitution met. The convention was convened specifically to deal with “problems” that had arisen under the Articles. Madison’s list is a fairly detailed listing of those problems. The clauses that appear between “but all Duties, Imposts and Excises shall be uniform throughout the United States” and “To make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers” track those “vices” Madison listed fairly closely. In other words, in these clauses (and some elsewhere) the convention was addressing specific issues, albeit in a fairly general way, known to exist in 1787.

It seems rather odd to suggest that the framers of the constitution intended that only issues known to them in 1787 were subject to Congress’s power to address. I believe the sounder argument is that the framers intended for Congress, through the representative processes subject to election by the people, to be able to address taxation, the common defense and the general welfare of the United States as new issues in the republic arose. They were smart enough to know that issues would arise which they had not foreseen in writing Article I, Section 8, that must be addressed by the Congress.

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Eliminate the Income Tax?

Sunday, March 18th, 2012

In the course of a discussion with a supporter of Ron Paul, it was stated that we should eliminate the federal income tax. I pointed out that this was a campaign to destroy the United States of America because there is no way for the national government to pay its bills without the income tax. To this I received the response that would be a good thing because then the national government would be constrained to the powers enumerated in the Constitution. That is not a reasonable response. Here is why.

In 2010 the total revenues of the United States Treasury were $2.2 trillion dollars. Of that 42% or $924 billion was from individual income taxes, 40% or $880 billion was from payroll taxes, $198 billion was from corporate income taxes, 3% or $66 billion was from excises and  6% or $132 billion was from other sources. If you eliminate individual and corporate income taxes and payroll taxes, which are a dedicated tax on income, the government revenues fall to $198 billion.

If you take the very narrow definition of constitutional enumerated powers to exclude the general welfare and a restrictive interpretation of the commerce clause advocated by many on the right, you have some government expenses remaining, specifically:

  • Defense at $847.2 billion,
  • Interest at $196.2 billion,
  • Protection at $54.4 billion, and
  • General government at $24.7 billion

Or a constitutional expense of $1,122.5 billion – and a deficit of -$1,077.5 billion. That is almost the kind of deficits we are currently running. If we require a balanced budget, as do many on the right, we would have enough to pay the interest on the national debt with $1.8 billion left over for defense, protection (e.g., Homeland Security and border control), and general government (i.e., the executive, legislative and judicial branches of government).

Notice that this involves a default on the national debt in the form the termination of all current and future Social Security and Medicare benefits. That’s even without the balanced budget amendment!

It also would result in the termination of all federal grants to state and local governments for a wide range of things including health and human services, education, and transportation.

It would also eliminate all federal disaster relief for hurricanes, tornados, floods, fires, drought, and earthquakes.

Eliminated would be any subsidy to farmers and businesses. Cuts in subsidies to oil companies would drive up the cost of gasoline.

Maintenance of national parks would end. The Constitution says nothing about national parks. It would end payments in lieu of taxes on federal properties to states and local communities. For that matter, it makes no mention of the purchase of land from foreign nations. Were the Louisiana, Gadsden and Alaska purchases constitutional?

The income tax was agreed to by three quarters of the states in 1913 and by every state admitted to the Union since. It was agreed to because we, the people, recognized that duties, imposts and excises were insufficient to pay the costs of government a century ago. An income tax was first proposed in 1812 to pay for the costs of that war. The United States actually found the income tax necessary in 1861 to pay the expense of the national government. It was subsequently ruled by the Supreme Court to violate Article I, Section 9, which eventually lead to the 16th Amendment.

The United States has changed dramatically since the Constitution was first written in 1787. It has grown from a nation of around 3 million to nearly 400 million, from an area of less than 900 thousand square miles to over  3.5 million square miles. It has changed from a rural, agricultural society to an urban industrial and technological society. People are much more mobile now than then. The 50 states are far more interdependent and interrelated than the original 13, partly due to the success of the Constitution and national government promoting interstate commerce.

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Ruminations of a Septuagenarian: Part Seven

Wednesday, November 16th, 2011

This may be more of a rant about the idiocy being paraded about these, than a 74-year-old rumination. Today’s topic is “government regulations.” If there is anything all of the GOP candidates seemed agreed upon is the evil of “government regulations.” “Government regulations” are why businesses aren’t hiring. “Government regulations” are why the economy isn’t recovering. I’m surprised that “government regulations” are blamed for cancers. If, according to the candidates government would simply stop regulating the economy would recover, businesses would start hiring and everyone would become millionaires (which is why we can’t increase taxes on millionaires).

Let’s be honest. Governments regulate. That is what governments do. Governments regulate on which side of the road we drive on. Different governments elect different sides–but nearly all governments say which side of the road you must drive on if you are going to drive in that country. Governments regulate all sorts of human behaviors–from whom one may kill how and when, to from whom you may steal, to whom you may assault, etc. The absence of government regulation is anarchy.

Does the government regulation of which side of the road interfere with my liberty? Well, yes it does. But the absence of such a regulation–where everyone gets to decide for himself on which side of the road to drive–constrains my liberty even more. What the regulation does allow is for all of us to drive in relative safety so long as everyone obeys the regulation. It is part of our social contract (a notion favored by our forefathers). Society (in the form of government) allows us to drive, so long as we agree to drive on a certain side of the road.

Former Federal Reserve Chairman, Alan Greenspan, is reported to have told Brooksley Borne, a former chairman of the Commodity Futures Trading Commission, that he thought government ought not to regulate fraud. His view, derived from Ayn Rand, was that the markets would regulate fraud. Somehow that mysterious “invisible hand” of markets would take care of fraud. Well, perhaps. One can suppose that in time, Madoff’s Ponzi scheme would have been unwound by markets. Perhaps shrewd investors would see through the scheme and withdraw their funds (some actually did) and eventually the scheme would collapse without government intervention. But the collateral damage caused along the way was would be horrendous. Meanwhile Madoff would have been able to keep much of his ill-gotten gains. The “invisible hand” has a strange way of punishing victims and rewarding villains.

Do businesses believe in government regulation. You had better believe they do. While they may have well paid lobbyists working at city hall, the county court house, the state capital and Washington to block some regulations, those same lobbyists are very busy at the same time urging other regulations. Let me take an example from American history. In the 19th century there was a railroad operating in a state that prevailed upon the state legislature to pass a law requiring tank cars operating in the state to be operated by railroads based in that state. That meant that Standard Oil had to use that particular railroad’s tank cars to ship oil to or through that state. This was a government regulation that tilted the “playing field” in favor of the local railroad. Standard Oil essentially got a federal regulation blocking the state regulation, thus leveling the playing field.

Unless the candidates start getting very specific about which government regulations they are about to repeal and the criteria for such deregulation, we need to be very, very careful. Government regulations protect children by preventing their employment. Government regulations deal with work place safety. Government regulations deal with with product safety. Government regulations deal with how banks are to handle depositor funds. The list goes on and on and on. Are we going to return to child exploitation, sweat shops, hazardous working conditions, dangerous products and crooked bankers? I hope not.

The U.S. Food and Drug Administration (FDA) was charged with insuring the safety of the food and drugs sold to the American public. For decades as a measure to control federal spending the funding of the FDA has been cut so that it is gravely undermanned. The consequence has been increasingly frequent widespread food poisoning, resulting in deaths, caused by contaminated food products. In many cases these can be traced to lax federal and state inspections. It is true that the food processors involved could save money by not dealing with unsanitary conditions in their plants. But the public cost for their profit is unacceptable.

In economics there is a concept called “externality.” An externality is a cost of an economic activity borne by someone who is not a beneficiary of the activity. A chemical plant may benefit certain individuals–notably the owners of the plant, those who work in the plant and those who buy the products of the plant. But the plant may emit toxins into the ground, water and air which result in sicknesses and death to people in the area who aren’t owners, who don’t work in the plant and who do not use the products of the plant. They bear part of the cost of the operation of the plant. This is an externality. Environmental regulations are aimed at reducing such exteranlities.

It undoubtedly increases the cost to the owners of the plant for its operation as the “external cost” is shifted from the general public to the plant. Yes, it may render the plant less profitable–even unprofitable. Yes, the plant might attempt to deal with this cost by laying off workers, increasing prices and even closing. But sorry folks, this is the “invisible hand” of markets at work! Believe it or not, it improves economic efficiency! In economics, an “externality” is inefficient. It is not efficient for owners, workers and consumers to profit from costs which other parties not enjoying the benefit must pay. It should also be noted that when companies do comply with environmental regulations, overall employment improves as workers must be hired to comply.

But there is even more to this. Let us suppose two chemical plants. One plant is operated by owners who strive to pay their workers living wages, to provide their workers with a safe working environment, to provide workers with health insurance and a respectable pension, to install the necessary equipment to contain and to dispose of toxic byproducts safely. All of this increases the cost of that plant’s operation–a cost which must be passed on to consumers if the company is to be profitable. And profit is, after all, the bottom line in any private corporation’s operation. The other plant owners care more about that bottom line than any of the things that are important to the first company. Because they pay lower wages, fewer worker benefits, install less safe equipment and environmental protections they can operate at a lower cost and undercut the first company’s sales. Thus the good citizen company is at a competitive disadvantage with respect to the bad citizen company. One of the functions of government regulation is to level that particular playing field. (Might I note that it is precisely this good/bad distinction that causes irresponsible companies to “export” jobs to countries that pay extremely low wages, employ children, operate dangerous plants, pollute the environment and even ships dangerous products back to the U.S. for unsuspecting Americans to buy because they are less expensive.

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Ruminations of a Septugenarian: Part Six

Saturday, November 12th, 2011

Today I’m ranting about today’s news. The business section of the Dallas Morning News reports that Texas Instruments (TI) is cutting 350 jobs. Reading the article this is a result of “synergies” resulting from a $6.5 billion dollar purchase of National Semiconductor Corp. I’m sure that this makes sense for TI and its stockholders. It probably makes sense to TI employees, but not those 350 employees of National Semiconductor. The article mentions that TI will employ 35,000 workers, including 5,300 former National Semiconductor employees. So the cut is quite small (1%) given total employment.

But reading this, I see yet another reason why the Republican contention that taxing corporations and wealthy individuals “cost jobs” and that it is corporations and wealthy individuals who “create jobs.” What in fact happened in this case is that a $6.5 billion in expended corporate assets resulted in the loss of 350 jobs. That’s not a lot in the greater scheme of things, but it still is a negative in terms of getting America back to work. But it is symptomatic of the problem with the Republican argument.

What economists know is that substantial wealth and assets are not being plowed back into the American economy. Much of the couple of trillion dollars in corporate accounts will be used not to create jobs, but to underwrite corporate acquisitions and mergers. Even in the best of cases such acquisitions and mergers do not create jobs, they have the opposite effect–they destroy jobs due to “synergies.” In the worst cases, the “winner” of an acquisition or merger pumps the assets of the victim and then dump it. Generally speaking acquisitions and mergers do not “create” wealth or jobs; innovation is more likely to create wealth and jobs.

Don’t get me wrong. TI is a company with a long history of innovation. Among its pioneering firsts was the transistor and the integrated circuit. It still designs innovative analog and digital devices found everywhere from cell phones to automobiles, from TVs to washing machines. But acquiring National Semiconductor isn’t innovation.

The news did not say how many of those 35,000 TI employees were in the United States. I know that TI has shut down plants in the U.S. and moved operations to Thailand and other countries. That is another problem with the Republican argument. If American Widget moves its plant from the U.S. to Indonesia, it may mean more employment in Indonesia, but less employment in the U.S. When Boeing moves a plant from Washington to South Carolina it may not result in a net loss of American jobs, but it does result in better compensated union jobs going away and being replaced by lower compensated non-union jobs. That is a net loss the the American economy; it tends to exchange middle income workers with low income workers and lower the median standard of living AND to increase income to Boeing executives and stockholders.

The evidence over the past 30 years is that low taxes for corporations and the wealthy do not create jobs. If they did, then we would not have 8+% unemployment in the U.S. “Discretionary dollars” for corporations and wealthy individuals does not go to innovative investments that create jobs. It goes for domestic acquisitions and mergers which destroy jobs. But even worse, it goes to various forms of foreign speculation and investment–like moving a plant from the U.S. to a foreign country. It involves playing games with speculation in foreign currencies.

Let’s consider and example that is also in the news. The Italian government faces a debt crisis. Earlier this week Italian government bonds were getting 7+% interest. The Italian government introduced austerity measures which resulted in the interest on their bonds dropping about 1%. Yes, those bonds are still risky. But they also draw wealth from the U.S. to Italy. Currently U.S. Treasuries are going for about 3%. My bond mutual fund is drawing a bit less. Now if you are wealthy enough to afford to gamble, the return on those Italian bonds is far better than on American bonds. And, of course, for the wealthy, those earnings are not taxed at 35%, they are taxed at 15% or not at all if one leaves those profits in foreign banks. One of the things that is worrying U.S. bank regulators is how heavily invested in those Greek and Italian bonds are American banks–either directly or indirectly through holdings in French and German banks. The regulators acknowledge that should Italy default on its bonds, it would impact American banks and our economy.

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Ruminations of a Septuagenarian: Part Five

Friday, November 11th, 2011

Today I went to the Carrollton Senior Center where I led the New Horizons Band of Dallas in a Veterans Day concert. The program began with the Pledge of Allegiance. I’ll confess, I botched it. I learned it one way when I was a child during World War II. It was changed when I was 16; I’ve never really mastered the change–the “under God” part. Not that I disagree with the notion; as a Christian I believe we are “under God,” as is every nation of the world.

What does the “under God” entail? Is it some sort of abstraction which has no bearing on our national polity. The particular “brand” of Christianity to which I adhere holds that both the Old and New Testaments teach a morality which we are obligated to follow. That includes the Old Testament prophets who spoke against those who accumulated great riches at the expense of the poor and the wheeling and dealing of the rich and powerful. They also taught we are to welcome the stranger in our midst. And it includes the New Testament which reports Jesus as teaching that the rich have the obligation to feed the hungry, shelter the homeless, care for the widow and orphan and heal the sick. He taught we should “render unto Caesar” the taxes which were due the government. Isn’t this what it means for a nation to be “under God?”

The pledge also refers to “one nation … indivisible.” It does not speak of some sort of loose “confederation” of “sovereign states.” Nor does it admit to secession of states from the Union. Nor does it endorse the divisive partisanship which poisons our polity these days.

“With liberty and justice for all.” No just for the “successful,” but all. If you are unemployed, you are not free. If you are struggling to keep a roof over your head, food on the table and clothes on your back, you are not free. If you are unemployed, your are not free. But the pledge is for “liberty … for all,” not just a privileged few–or even a privileged majority!

And this is not just. It is not just for the laborer to toil for a minimum wage which qualifies as poverty while the CEO “earns” 400 times as much from the fruit of the laborer’s labor. It is not just for a “common thief” to draw a long prison sentence for stealing a few hundred dollars which the corporation steals millions and faces at most a minor fine if caught.

If we are going to say the Pledge of Allegiance, then let us take the words seriously.

Post Script: When I looked up the date for the change in the Pledge which I mentioned above, I learned something. The Pledge of Allegiance was originally written by–gasp–A SOCIALIST! How about that, Tea Party!! Did you know you were reciting a socialist credo?

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Pseudo-Conservatives

Sunday, September 18th, 2011

Much of what the pseudo-conservatives advocate is the overthrow of programs we, the people, have established over the past 78 years that formed the American middle income workers. There is nothing “conservative” about it. It is a radical program to overthrow unions, public schools, Social Security, Medicare, the social safety net and to concentrate wealth and power in the hands of 400 of the super-rich.

If it is a call to return to the “values” of the Founding Fathers, then we would see demands for a much smaller military. The Founding Fathers feared a large standing army. Nor were they inclined to be meddling in the affairs of foreign countries–much less engaging in preemptive military attacks on foreign countries. They did not seek to establish military bases around the world.

If it is a call to return to the “values” of the Founding Fathers, then we would have open borders. There were no restrictions on immigration from 1788 to 1882. Anyone wishing to come to the United States simply could come, no questions asked. The immigration laws simply provided that those who did come could, after a period of years could apply for citizenship provided they had been law abiding residents.
The Founding Fathers did involve the new national government in public education. One of the things that happened that summer was negotiations between the Philadelphia Convention and the Continental Congress then sitting in New York City. That resulted in the Northwest Ordinance, which set aside public lands for public schools. Furthermore, ever since the Civil War, the national government has enacted laws supporting public schools due to the large number of men during every major war who were not suitable for military service because of educational deficiencies. Many education bills over a century and a half have cited the national defense as the constitutional justification for federal action.

What is totally missing from the U.S. Constitution is anything dealing with a federal power to regulate family values.

It is to be remembered that prior to 1788, the United States was, in point of fact, a loose confederacy of sovereign states. Yes, the national “government” was “small”. Yes, it’s taxes were low (it couldn’t collect taxes); but its debt was huge for the time (that’s what happens when a government has low taxes). It didn’t work. It was a mess. It made commerce a nightmare. There was a real danger of civil war. There were, in fact, armed uprisings. That is why the Founding Fathers met in Philadelphia in the summer of 1787 to “form a more perfect union”–a NATIONAL government whose laws were to be “the supreme law of the land” to which all state officials had to swear to be bound to support.

 

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