My Liberal Economic Philosophy, Sans Vitriol

I promised myself that I wouldn't spew political opinion in this World Wide Web log any more. Now that I'm breaking that promise, I'm at least resolved to do it in a calm, sane way. Restore sanity, as they say.

So I've been reading a lot about economics lately. It's obviously a big issue, as the economy continues to languish and the unemployment rate refuses to budge. I've come up with a lot of conclusions, but they're always subject to further changes as I learn more. It's complicated stuff.

Let's just start with the problem right now. It's not that the government is spending too much, or regulating too much, or whatever. It's that there's not enough spending, a.k.a. demand. An economy is fundamentally about spending. People buy stuff, and that money goes to someone who buys something else, and it keeps circulating through the system.

In the last decade, whatever you want to call it (the Aughts is still the only name I've found that's halfway decent), American consumers were superstars of spending. American spending was essentially keeping the world economy afloat. The national savings rate was in the negative numbers, meaning Americans were spending well beyond their means.

That's unfortunately not very sustainable. Now Americans' savings rate is at about 5%. That's great in a way, as it means more stability for individuals. But it also sucks in a way, because it means that the world economy isn't artificially propped up by profligate Americans.

The housing collapse was the spark that caused the meltdown, as it caused middle-class people's wealth to collapse. That spark then lit up everything else -- industries dependent on housing collapsed, people started spending less, etc. And of course, there was the banking industry, which made such complicated securities out of these mortgages that even they couldn't untangle them when their values plummeted. That just added fuel to the fire.

So when you have a chain reaction like this, what do you do, if you're a government? You of course try to stop the chain reaction. You can't let the banks collapse -- to extend the metaphor, that would be like letting a forest fire reach an oil well. Like it or don't, banks are at the heart of the whole economic system. I've gone through this part in a previous post, so I won't rehash it here.

And the other thing you can do is infuse cash into the system. That means stimulus spending. When there's not enough demand, there's not enough money circulating. If the government puts more money into the system, it can get more money circulating through the economy. This can at the very least forestall the freefall.

Basically, bad times are not the time to worry about budget deficits. Budget deficits are definitely not good things in the long run. Pile up too much debt and the whole system could collapse, as you might not have the money to pay off your debts. But when the economy is in freefall, you kinda have to worry about the short term, get things stabilized, and then concern yourself with the long term.

A good time to balance budgets is when the economy is doing great. Then, the government doesn't need to infuse cash into the system. That's what happened in the 1990s, and what should have happened in the Aughts. It's not what we should be doing now. Balancing the federal budget would mean removing a lot of demand, that provided by the government, out of the economy at a time when demand is most needed. Deficit spending (Keynesian economics, if you want to get technical) is the approach that we took in the 1930s, and it kept us afloat until the boom times returned.

The key phrase used then was "the government must be the spender of last resort." Note the "last" part. The government needs to step in when no one else is able to. Then, when the economy can run on its own, the government can step out. Essentially, the government has to do the opposite of what people are doing. It has to balance the rest of the economy.

If you don't the have the government smoothing things out, you end up with lots of huge booms and busts that cause a lot of destruction and make for a weaker economy overall. That's how the American economy was in the 1800s -- every ten years or so, a major panic would occur that wiped out all the previous gains. We learned our lesson, though: After the reforms during the Great Depression, we had a record 60+ straight years with lots of booms and only minor recessions until recently.

The recent Great Recession occurred because we abandoned those principles, during the Aughts in particular. The government should have balanced budgets in the Aughts, as I mentioned. And the Fed should have kept interest rates higher. By keeping interest rates low, they encouraged more and more people to buy houses, inflating the housing bubble. They didn't balance things out by doing the opposite of what the private economy was doing.

The mistake people make is to think of government spending like they think of household spending. "We're having to live within our means," they say, "and so should the government." But it's not a valid comparison, because you spend money on yourselves, while the government spends money on all of us. Only a small fraction of the money the government spends is on itself, and even most of that is to pay people who figure out how to spend money on us. Depriving the government of money means depriving our economy of demand.

That said, not all government spending provides the necessary bang for the buck. You don't want the government just randomly buying up businesses and property -- that would just provide a whole wad of cash to the owners of those businesses, who would likely just stash the money or sit on thrones made of million-dollar bills. And moreover, the government will be less motivated by profit in running those businesses, and thus will probably not create the best products.

Since I opened that can of worms, I should expand on it. Most businesses work best as private operations. The Soviet Union was a good test case for the opposite approach, that of having government run the economy, and it was a miserable failure. In an emergency, the government can and should step in and make sure a major, important company doesn't collapse, as it did with GM. As with the banks, a collapse of such a large company would have added much more fuel to the fire. But after the business is on its feet again, the government needs to sell it off. And the Obama administration is currently doing exactly that with GM.

This doesn't mean every single human endeavor is best left to private enterprise, however. You have to judge them on a case-by-case basis. Police are not best left to private enterprise. Only the people who could afford to pay the police bill would get protection. It would suddenly become a much more dangerous nation.

This will open yet another large can of worms, but it's my view that health insurance doesn't work as a private enterprise. You have to look at where the business incentives lie. If you're selling apples, your incentive is to provide good apples at a reasonable cost, so that people will come back and buy more apples. With apples, the business's incentives work for the benefit of the consumer.

But if you're a health insurance company, your incentive is to become the one choice they can choose at a reasonable cost, i.e., the one offered at work. So that's a virtual monopoly right there. Granted, if enough people complain, the workplace might ditch you and go for some other plan. But it's difficult to make that happen -- it's not like just choosing a better apple at the store.

And then your further incentive, as a private health insurance company, is to not pay claims. You make more money when you pay claimants less. The unofficial motto of health insurance companies has long been "Delay, Deny, Defend": First you delay payment of the claims, hoping that the people will give up and pay out of their own pockets. Then you deny the claim, using whatever fine print you can as cover. Usually, people will give up at this point. If they sue, then you defend yourself in court. It works, and makes the health insurance companies loads of money.

Granted, insurance companies aren't this bad about every claim. They provide some payments without a struggle. But their incentive lies in providing just enough so that people don't revolt and charge your headquarters with torches and pitchforks. To me, that's not a system that best serves the consumer. A government-run insurance plan wouldn't do this. It might have other faults, but it wouldn't have perverse, anti-consumer incentives.

Anyway, before I derailed myself, I was going to go into the "bang for the buck" argument. The question of how best to help an economy gets down to talking about bang for the buck. Most anything you can do can help somewhat. You can throw a twenty on the ground and that could possibly help -- someone could pick it up and use it. But it's just as possible that it will be eaten by a dog. That's not a very good bang for the buck, as that money likely will not circulate through anything but the dog's digestive track.

Meanwhile, if you spend that $20 buying dog treats, that money will go partially to the dog-treat purveyor, partially to the dog-treat manufacturer, and they will all spend that money on Pixie Sticks or outboard motors or catheter delivery services or whatever else, and a-circulating we go!

The "bang for the buck" test is esecially relevant when you start talking about taxes. Any tax cut will keep some money circulating through the economy. The question is which will give you the most bang for the buck. Will a tax cut to the middle class keep the most money circulating? Or will a tax cut to the wealthy?

For the most part, the tax cut to the middle class will provide more bang for the buck. A middle-class person will more likely spend that money on a product or service. A wealthy person will more likely just let that money sit in the bank, because they're less in need of a product or service. The bank could possibly use that money on something that will help the economy. Or it could just leave it in there as cash reserves. Or it could use it for credit default swaps or one of these other complicated financial instruments that are really just bets among rich people, no more helpful for the economy than if Bill Gates bet Steve Wozniak a billion dollars that he could recite pi to a hundred digits.

But, you say, because you're a conservative congressman, tax cuts to the wealthy will spur investment in new businesses! Well, maybe. I'm willing to bet that a very small percentage of tax cuts to the wealthy actually goes to business investment. But regardless, business investment is not what the economy most needs right now. It needs demand. Businesses often need investment, of couse. But what what they need even more is customers. Without more customers, there's no point in investing in increasing capacity, which would mean increasing supply.

Sure, there are some businesses that need cash so they can grow and thus help the overall economy grow. And some great new businesses could be fostered. But we're talking bang for the buck here. You could give money to the middle class, which would almost assuredly increase demand, because they need to buy stuff. Or you could send that money to the rich, who might maybe invest it in a business that might maybe be able to expand a bit, which might maybe increase supply in a time when there's already too much supply and not enough demand. You see the difference? The percentage of money that ends up circulating through the economy is much higher when you just give the same money to a middle-class person.

This also gets at why it's important to have a strong middle class. If you concentrate all the money among a small group of indviduals, you end up with fewer consumers, and thus less demand. You see this in third-world nations. They don't have much of an economy at all, because only a few people can afford to buy stuff, and those few people can only buy so many of the basic staples that are the fundament of any economy. One person can only so many steaks, as my 10th-grade history teacher used to say.

You may have heard that the United States currently has a huge and rapidly widening gulf between the rich and everyone else. Unlike with third-world nations, this gap isn't because of corruption and oppression. It's more a case of capitalism working too well. I'll explain.

Capitalism is a marvelous thing, no doubt. But it's not perfect. Some people would have you believe that if everything were just left to the free market, everything would work out perfectly. If only life were that simple!

Capitalism channels people's self-interest into economic production in a marvelous way. But left unchecked, it overrewards the winners at the expense of everyone else, and sows the seeds of its own destruction. It gives all the spoils to those who own things -- businesses, property, what have you -- and almost nothing to those who just work hard but don't own anything. Ownership is valued above hard work.

In the early days of industrialization, this is exactly what you saw. You saw the owners of companies making billions upon billions and establishing trusts, a.k.a. monopolies. And they paid their laborers starvation wages, literally -- just enough to keep them alive so that they could come back and work the next day. These folks would live in company towns, make just enough to barely feed their families, and if they got sick, their families didn't eat that day.

This is what led many people to think that communism or even anarchism was a better idea. More reasonable solutions came in the form of laws and regulations: ending child labor, 40-hour work weeks, minimum wage, unions, etc. All these things cut into company profits and stifled growth -- exactly the things that business organizations always decry when the government proposes anything having to do with any business. But they were the right things to do, and our country is stronger for it.

But I'm verging into a moral argument, and I'm trying to avoid those. I'm trying to focus instead on pragmatics -- what actually makes for a robust economy. Pragmatically speaking, having a few people own everything means having too few consumers, as you have in the third-world countries. John Rockeller can only buy so many steaks.

So in creating an ideal economic structure, you have to create a balance: Use capitalism in some arenas and regulations and/or socialism in others. I know, I said the "s" word. Socialism these days is being conflated with communism, fascism, Zoroastrianism -- basically everything that Americans think they don't like. But socialism is selectively placed throughout our system, and that's good thing.

Social Security, for example, is socialism. It's forced redistribution of wealth, from those who are working hard to create wealth (i.e., workers) to those who aren't doing anything but consuming (i.e., fogies). And it works beautifully. Before Social Security, half of the elderly population in the United States was basically starving to death. Now, elderly people are thriving so well that they can yell things like "Keep the government out of my Medicare!" at rallies that contradict the very principles that are keeping them alive! Hooray!

OK, I promised I wouldn't get all mean, sorry about that one. The point remains that if we had a perfectly free-market system, there would be no Social Security. There would be no Medicare either, and old folks would have to pay exorbitant rates just to have health insurance (another problem with private insurers -- they sure as hell don't want old people on the rolls) and a huge majority would go without it. Then they'd only come in to the emergency rooms, run up huge tabs, and those costs would then be passed on to the rest of us in the form of higher premiums, and so on.

Basically everything the government does is socialism. Roads are socialism. Everyone pays, the government does it, everyone benefits. Imagine if it were done by a private company. Everything would be a tollroad. If you didn't have the money, you don't get to go places. One company could buy up all your routes to work and charge you $100 per day. You'd have less incentive to even go to work, and your productivity would plummet. The road companies would make massive profits and the rest of us would be a lot poorer.

Adam Smith would agree with me on all this, by the way. I've read "The Wealth of Nations," (OK, I've read parts of it) and found a few very interesting passages. In one he says that there are many things that shouldn't be left to private industry -- parks are the example he gives. He also has disdain for people who own things but don't work to produce anything, saying they just leech from the system (I'm paraphrasing here). He would not like many of the investment class that think they're living according to his philosophies.

Of course, he was a strong advocate of the profit motive in many arenas, as am I. The trick is figuring out which arenas should be socialist and which should be capitalist. As I stated before, I think health insurance should be socialist. It works for Medicare and Medicaid, which both cover the most difficult people to insure (the poor and the elderly) and does a reasonable, if imperfect, job. If it can manage the most problematic customers, imagine what it could do for the rest of us. While private health insurance companies pay 15-20% overhead, Medicare and Medicaid have an overhead of about 3%, because it's not paying legions of claims adjusters and marketing consultants and lawyers. That could mean your premiums are 12-17% higher with private health insurance than it would be with public health insurance.

Anyway, I'm getting off-track again -- but I hope this illustrates the kinds of calculations that should go on when determining whether something should be publicly or privately controlled. Both sides should leave moral arguments and idelogical dogma out of it, because those just don't go anywhere. You might say that government control of anything is bad, because the government stinks. I might say that the government is awesome, and should control everything. When two different ideologies butt heads, nothing constructive results.

What should happen instead is to decide on a common goal and then evaluate each option in terms of how it meets that goal. In the case of the health insurance debate, it should be "What is best for the consumer?" Public health insurance would have its problems, to be sure. Governments don't tend to adapt very nimbly to changing circumstances, for example, and can be awfully bureaucratic. But I'd argue those are minor concerns compared to the fundamentally flawed private health insurance system, in which incentives work against the consumer.

If only public discourse could be like this. But this kind of thing bores too many people. They need fire, anger, emotion to keep interested. They need to be a good guy fighting against a bad guy. We all like to blame politicians for everything that's wrong with this country. But the politicians are only a reflection of their constituents. If we responded well to sane, reasonable people who make sound, measured judgements, we would be better off. But look at the Republicans: They spent two years refusing to compromise, filibustering everything, and demonizing Democrats at every opportunity. And they were rewarded for it. We say we want politicians who will work together, and then we elect people who refuse to.

It's not the politicans that are wrong with this country. It's the people. No one can say it, because the politicians have to suck up to us, and we have this mythology about ourselves that we are the best and most brilliant people in the world. But all that hubris is doing us in, as we do crazy things and then blame our minions, the politicians who grovel to our every demand.

OK, now I'm not only getting on a major sidetrack, I'm also spouting some major vitriol. Time to bring this one to a close. I'm sure I'm leaving some things out, because that's how it is with economic issues. It's extremely complicated stuff, and it requires that people be willing to embrace and explore complexities. Maybe some day.