If raising the retirement age can save Social Security, the nation owes huge thanks to Ronald Reagan and Alan Greenspan. They raised it a generation ago, and retiring at 65 with full benefits is now history.

The rise to 66, where it is today—and a scheduled rise to 67—were buried in plain sight in the Social Security overhaul of 1983. President Reagan had set up a commission, chaired by Greenspan, to put the system on sound fiscal footing. Almost unthinkable in today’s Washington, the panel became a model of bi-partisanship. Its report formed the core of a bill that Congress approved overwhelmingly.

The bill raised the retirement age by two months a year for anyone turning 62 from the year 2000 through 2005. As a result, the age for retiring with full benefits reached 66 in 2009. It will stay at 66 through 2016. The second pushback, again at the rate of two months a year, will affect anyone turning 62 from 2017-2022. For those born in 1960 or later, it will mean a full-benefit retirement age of 67.

And that’s it. The law “maintains age 67 for people reaching age 62 after 2022.” Recapping: 65 is toast, 66 is the new 65, and 67 arrives in 2027—unless Congress decides to revisit a classic political compromise.

The lawmakers of 1983 signed away two of the golden years, but they might have considered it a golden tradeoff. They acted like adults to shore up the system. Among its provisions, the reform taxed benefits for the first time and sent the revenues to the Social Security trust fund. The tax applied to half of total benefits, and was structured to exempt those most reliant on Social Security. Ten years later, President Clinton raised the portion of benefits subject to taxes to 85 percent. Once again, an income threshold restricted the levy to better-off beneficiaries.

With the health of Social Security again at issue, there’s good reason to make all benefits taxable. The levy on the last 15 percent would apply to taxable incomes of, say, $200,000 or more. Low-income recipients would continue to pay no tax on their benefits. Few middle class families would pay the new levy either.

In the spirit of ’83, Congress could also eliminate or at least raise the cap on the amount of salary subject to the payroll tax. Most workers pay the tax all year long, on every dollar they make, but not high earners; for them the tax stops at a given income, which in 2012 is $110,100. Those making more effectively pay Social Security at a lower rate. Someone earning $220,200, for example, will pay at half the rate of those making $110,100 or less. By law, an increase in average wages triggers a like increase in the cap. While both have risen modestly, incomes at the high end have gone into orbit. Record amounts of income lie beyond the payroll tax—just when Congress wants the tax to do double duty.

The payroll tax has always paid for current beneficiaries. Through a series of hikes starting in the late 1970s, Congress gave it another job: building up the Social Security trust fund for the baby boomers. Besides paying current benefits, workers for years have essentially been pre-paying on boomer benefits too.

Social Security shows America at its caring best. It’s embraced by people of every stripe and pinstripe, Left and Right, coast to coast. The numbers-crunchers can calculate the system’s benefit projections and revenue needs. Then it will be up to Congress to do the right thing.

Another Congress long ago bumped up the retirement age. If Society Security needs more sacrifice, plain fairness says the revenue should come from the top. A 2010 report from the Congressional Research Service (CRS) agrees—and suggests that everybody could win.

The CRS ran the numbers on raising or ending the cap, finding that either one could reduce the system’s long-term deficit. Crucially: “If all earnings were subject to the payroll tax, but the [taxable] base was retained for benefit calculations, the Social Security Trust Funds would remain solvent for the next 75 years.” In other words, not only would Social Security be on firm ground; the benefits paid to high earners would no longer be capped, and would rise along with their taxes.

Congress is often berated for kicking the can down the road. Here’s a case where it could create a stunning political triumph.

Jason Scorse

Presidential elections in America are strange: the one element that the president has the least control over, and yet looms largest in the minds of the electorate, is the economy. A staggering economy in 2008 helped then-candidate Obama win the White House; President Bush was blamed for the financial crisis, and McCain’s clear lack of economic know-how undercut his campaign. Obama likely would’ve won anyway, but these factors certainly made his task easier and increased his margin of victory.

But today, after three years in office, continued high unemployment and the still-sputtering economy are the biggest threats to Obama’s re-election. The European debt crisis—which could be the biggest single influence on the U.S. economic recovery—is completely out of Obama’s hands. A collapse of the Eurozone, coupled with defaults in one or more EU countries, could spiral out of control, create another global crisis, and throw the U.S. into yet another recession. The chances of this happening have diminished in the last couple of months (largely due to aggressive monetary policy by the European Central Bank), but they are still significant.

This is why every week that goes by with the Eurozone intact is a big victory for the President. The closer we get to November, the less likely that events in Europe could negatively impact the U.S. economy enough to influence the election this fall. Nine months is still lots of time, and European leaders have demonstrated a high capacity for poor policymaking, but at least the situation seems stable for now.

Another event that could derail both the U.S. and the global economic recovery would be a major increase in the price of oil. With global demand easing the price actually fell over the past week, but Iran has become the “elephant in the room”. The Iranians have threatened to close the Strait of Hormuz if the U.S. takes additional steps to restrict Iranian oil exports (steps America began to take in response to Iran’s efforts to develop a nuclear bomb). Closing the Strait would approach an act of war and would certainly draw a massive U.S. response. The price of oil could skyrocket to $200 a barrel, a shock that could rattle investors around the world and set off a global economic contraction.

Given that closing the Strait would be a form of economic suicide for the Iranians—they export most of their products through Hormuz—the chances of their following through are low. Even so, the threat itself could be enough to send prices higher. Along with the EU’s woes, this is one more issue that could significantly impact the U.S. economy and imperil a second term for Obama. Every week that goes by with calm in the oil markets is a boost to the President and his team.

As the clock runs down towards November, the election should be about the issues and the candidates’ positions. Obama has a record to run on and his Republican challengers have policies that can be evaluated. As Andrew Sullivan pointed out this week in Newsweek, Obama’s record looks remarkably impressive, especially when matched against his campaign promises. In addition, as Ezra Klein pointed out, politicians hold to their campaign promises to a surprising degree (despite the conventional wisdom that says they don’t).

If voters were more rational and reasonable, candidates would be judged more on the things they can control—their policy agendas—and less on things beyond their control, like the economy. Sadly this isn’t the case.

Given this reality, every week that goes by without an economic calamity outside the U.S. gives America’s economy another week to chug along and gain momentum. Nothing could be better for Obama’s re-election prospects.

Jason Scorse

To really appreciate how inefficient, ineffective, and ultimately cruel the U.S. healthcare system is, you have to experience its deficiencies firsthand. Unfortunately, someone close to me has been suffering mysterious and debilitating ailments for the past couple of months. The person is in the prime of life, but has been forced to quit working and life has lost much of its normal enjoyment.

I had my first hint of how bad the system is when we went to a gastroenterologist who joked during the visit how hard some ailments are to diagnose, and suggested seeing a psychiatrist since Western medicine had little to offer. This came in response to complaints of severe nausea and stomach pains, and the doctor was the head of this particular clinic.

As I accompanied my friend from doctor to doctor, I noticed the lack of coordination and the requirement for the same paper forms with each visit. The doctors all had their pet theories and ordered redundant tests, including the head of the GI clinic at one of the most prestigious hospitals in the country. They recommended all sorts of expensive tests, including an endoscopy and abdominal and head CAT scans, before anything else. All came back negative.

It wasn’t until visiting a naturopathic doctor that my friend finally starting getting information that seemed more reasonable and hopeful. The doctor ordered detailed allergen tests and blood and stool work to try to get to the root cause of the problem. These showed an intolerance to gluten, dairy, and pecans (of all things), as well as some adrenal issues and imbalances in intestinal flora. The naturopath recommended a regimen of supplements, avoiding all intolerant foods, and meditation to decrease stress. It’s only been two weeks since these changes have been made, but the signs are promising and my friend is starting to feel better. We can only hope that a full recovery is underway.

The lessons from this experience have big implications for healthcare policy (and more importantly, people’s health). For starters, our system is entirely backwards. People are given the most invasive and expensive tests first. And sadly, even doctors from the top medical schools lack any training in diet and nutrition, which are the root cause of so many ailments.

I can’t tell you how many stories I have heard from friends in the “alternative” medical community (including dieticians, naturopaths, acupuncturists, and physical therapists) whose patients had been suffering for years (or even decades) with easily treatable conditions that dozens of Western-trained doctors were unable to identify. The resulting human misery, as well as the costs, are staggering; no wonder Americans spend nearly twice as much per capita on healthcare as other developed nations, and obtain worse outcomes. I can only imagine how many millions of Americans are out there, unaware of the alternatives, continuing to suffer and wasting untold thousands of dollars.

My friend was lucky enough to have excellent health insurance. Ten of millions of Americans have none, and find themselves adrift in a world of even more suffering, anxiety, and financial hardship. It is simply unacceptable, especially for a country as great as the United States.

Fortunately, things are changing for the better. Once it’s fully implemented in 2014 Obama’s healthcare law covers more than 30 millions of those currently uninsured (even though tying health insurance to employment, as the system currently is constructed, makes little sense in the 21st Century workforce). In addition, major headway is being made on creating electronic medical records and expanding the role of technology to both decrease inefficiencies and empower individuals to take control of their own health. And as more and more people seek and find relief with alternative medical techniques (most of which are cheaper, safer, and have myriad co-benefits), mainstream Western medicine will be forced to change. Assisted by the internet and social media, Americans will no longer be forced into a system that focuses on disease management instead of on health and wellness promotion. There are many brilliant, caring, and dedicated students, enrolled in the top schools, who deserve an education (and ultimately a healthcare system) that allows them to devote their talents to far better things than simply prescribing expensive tests and working for a system that ultimately puts profit over people.

Those who claim that the American healthcare system is the best in the world are either blindingly ignorant or shills for the insurance and drug industries and medical providers. Our system is broken, and fixing it is the greatest challenge we face. Failure will lead to deficits that dwarf any we have ever experienced, and the moral consequences are even worse; needless suffering that simply unconscionable.

Jason Scorse

Redistribution is a dirty word in politics, thanks mostly to 30+ years of Republican propaganda, but it has always been a facet of modern democracies. Even with a perfectly flat tax system, those with more money would contribute more to government coffers and thus provide more public goods to society.

In addition, a profound trend in the workplace will increase the need for income redistribution at exactly the time when strong political forces most oppose it. Blue collar manufacturing jobs have been shrinking due to automation for decades, despite continued U.S. growth in manufacturing output. These same forces are now threatening white collar jobs that were once thought immune to technological advances. Professionals like computer programmers, lawyers and doctors all face potential replacement by machines, decreasing the demand for these lucrative occupations.

Where, then, will our new jobs come from?

Developed industrial societies have gone through periods of innovation when whole professions have been swept away by machines. Even so, the pace of today’s innovation is so fast, and the effects so profound, that job creation may no longer be able to keep pace with increases in the labor force. The financial collapse coupled with the treasonous behavior of the GOP has already given us three years of historically high unemployment, with no end in sight.

The jobs that seem most impervious to innovation and automation—at least for the foreseeable future—tend to be service industry jobs. There’s nothing wrong with these jobs, but by and large they’re low- and middle-income jobs with little upward mobility. With continual increases in the costs of education and healthcare, it’s almost impossible to raise a family on the incomes these jobs provide.

This is why income redistribution is going to become increasingly necessary to prevent ever more Americans from falling into poverty. Redistribution doesn’t have to come in the form of direct handouts, but we are going to need larger subsidies for healthcare, education, preschool, and increased tax breaks that allow those at the bottom to increase their discretionary income. This money has to come from somewhere, and there’s no better place than the top 1%–who, over the past 30 years, have gained almost all of the increases in national wealth.

Increasing taxes at the very top will hardly decrease incentives to work, since taking a few extra percentage points out of the 10th, 100th, or 500th million dollar is unlikely to affect behavior. The people who make these exorbitant sums are motivated by many things other than money, and relatively meaningless changes in their after tax income is not a primary driver.

To those who argue that any diminished incentives on the entrepreneurial class will make all of our lives poorer (after all, who would want to dissuade a Steve Jobs from pursuing the Next Big Thing?), the truth is that few of the top 1% are entrepreneurs. They’re CEOs, financial service executives and the like, and they contribute few if any direct benefits to society. More than anything, they’ve gamed the system to pay themselves outsized sums (helped along hugely by a tax code that favors capital gains, dividends and stock options over wages).

America’s fiscal and employment problems can’t be solved simply by taxing the rich, but it surely would help. It’s simply immoral to cut college tuition grants, funding for Food Stamps and healthcare for children, while those at the top continue to reap unimaginable sums. As Senate candidate Elizabeth Warren so eloquently put it, no one in America gets rich on their own; it’s the institutions and structures we all pay for that provide them the opportunity to amass great wealth. Asking the wealthy to chip in a little more, after decades of having almost all of the nation’s income gains for themselves, is eminently fair. It’s not socialism, nor is it class warfare. It is simply updating the social contract to reflect the realities of the 21st century.

As usual, the Republican Party and a handful of Democrats beholden to Wall Street are on the wrong side of the issue. The Republicans not only want to shield the ultra-wealthy from additional taxes; the plans put forth by all of the presidential contenders would actually cut taxes for the rich and raise them on the poor and middle class.

Fortunately, a wide majority of the American people realizes that increasing taxes on the ultra-wealthy is both necessary and just. They might not like to call it income redistribution, but that’s what it is.

Given the employment projections of the next decade, it’s going to become increasingly urgent.

Jason Scorse

(This first appeared as an op-ed in the Los Angeles Times, where it provoked dozens of angry comments. The author understands, but his viewpoint remains the same.)

The day after Congress passed health care, an opponent called it “a fiscal Frankenstein.” In fact those are fitting words for Roth Individual Retirement Accounts (IRAs). Roths are great for holders but grim for America. They’re wired to cost the country billions a year in lost revenue. It’s time to retire them.

Congress created retirement accounts to spur saving for the golden years. Let’s compare Roths to other accounts, and see why they’re fated to drive up the deficit.

In the other accounts, nest eggs grow tax-free until money is withdrawn. Taxable payouts can begin after age 59 1/2. Payouts must begin by age 70 1/2 and continue annually thereafter. The accounts strike a two-way bargain: years of tax deferral, followed by years of tax-paying withdrawals.

Then, in 1997, Congress set up the Roth IRA.

In a Roth, taxes are treated the other way around. There’s no tax break on contributions. From that point on, taxes simply vanish. There’s no taxable required distribution. There’s never a tax on gains. No withdrawals are required. Withdrawals, if any after age 59 1/ 2, are tax-free.

All of which makes Roths a perfect “fiscal Frankenstein”. In return for little more than ordinary upfront taxes, Congress waived untold billions in downstream Treasury receipts. Roths are also a likely drag on the economy. Since withdrawals aren’t required, assets can sit idle indefinitely.

For holders, Roth accounts become a permanent, federally-sanctioned tax shelter. For America, they’re a bit like toxic instruments on the nation’s books. Worse, Congress has them on steroids—and President Obama wants to up the dosage.

The limit on annual Roth contributions has risen from $2,000 to $5,000. Persons over 50 can add another $1,000 to “catch up”. That’s a $6,000 per-year maximum, $12,000 for a married couple, triple the original limits.

Conversions from regular IRAs to Roths ballooned starting in 2010. Conversions, set up in the 1997 law, are routine paperwork exchanges. Holders of regular IRAs cash out, pay any taxes due, and convert the proceeds to Roths. (Other retirement accounts convert in two steps: first into a regular IRA, then into a Roth.) Originally, only those with adjusted gross incomes of less than $100,000 could convert.

But Congress—in yet another Bush tax break for the wealthy—erased the income limit. In “The Rise of the Super-Rich,” financial journalist Teresa Tritch condemned the change: “Under previous law, Roths had been off limits to wealthy Americans, precisely because the government did not want to help people amass big estates under the guise of saving for retirement. That sound principle has now been turned on its head.”

The affluent rushed through the Roth open door. Fidelity Investments handled 22,000 conversions in January 2010, roughly quadruple the year-earlier level. The Vanguard Group had close to 30,000 Roth conversions for the month (nearly 70% of its total for all of 2009), and conversions through May were five times greater than the year earlier. A December surge capped Fidelity’s fourfold increase, lifting its 2010 conversion total to about 220,000.

Roths could also multiply overnight. A provision making Roth IRAs the default retirement plan for employees at certain companies is in the 2012 budget submitted to Congress by Obama. The president, says Howard Gleckman, is being seduced by “the Siren Song of the Roth.” Gleckman is the editor of Tax Vox, a blog published by the non-partisan Tax Policy Center in Washington. Here’s his take on unlimited Roth conversions:

“Congress adopted the tax change in part as a fiscal gimmick. That’s because, within the 10-year budget window (all that matters in Washington accounting), the conversions raise revenue. At the time the law passed, CBO [the Congressional Budget Office] figured it would generate about $6.5 billion from 2010-2015. But in the long run, turning billions of dollars from tax-deferred to tax-free savings will be a huge loser for Treasury. My colleagues at Tax Policy Center figure that, through mid-century, allowing unlimited Roth conversions will reduce federal revenues by $100 billion.” (Keep in mind: that’s for conversions alone).

Roths may be right for individuals, but they’re wrong for America. Tax-deferred accounts are more than generous, and build up the nation’s fiscal future. Tax-free Roths gnaw away at it.

For the good of the country, it’s time to retire Roth IRAs.

Gerald Scorse

The past decade was supposed to represent the triumph of rightwing economics—marginal tax rates at record lows, massive deregulation of the financial sector, no new environmental laws to hamper business—and the result was supposed to be robust economic growth and job creation. Instead we had a decade from which America has yet to recover. Economic growth has recently been revised downward, unemployment is over 9%, and there are increased fears of a double-dip recession.

You might think that the conservative charlatans who peddled this economic voodoo would feel chastised, and would no longer be taken seriously. Failures of this magnitude are rare, especially ones that so clearly invalidate a particular ideology. Instead the opposite has happened. The people who were so spectacularly wrong are doubling down on their ignorance, insisting that the only way out of our current crisis is to lower tax rates, lessen regulation, and cut government spending.

There is not a shred of evidence to suggest that they are right; in fact, all of the evidence points to how damaging their ideas are. But the rightwing no longer believes in evidence or facts, and even its intellectual defenders with credible expertise are left grasping for straws.

They say that businesses are stymied by a “climate of uncertainty”. This is nonsense. Uncertainty is a constant in business; new technology is always being developed, new products created, new regulations imposed. Businesses adapt and evolve; this is what they always do. Currently, corporations are sitting on over $2 trillion in cash because they don’t see significant demand to warrant additional investments. It’s that simple. Cutting back on government purchases (and government jobs) will only further reduce aggregate demand.

The economic Right also claims that increased government borrowing will “crowd out” private investment and lead to higher interest rates. Again, this is nonsense; interest rates are currently at 60-year lows, with the U.S. government able to borrow almost unlimited amounts of money for virtually nothing.

Then there were the predictions that the Federal Reserve’s quantitative easing (QE1 and QE2) would ignite inflation. The predictions were wrong; inflation has stayed below 2% annually since 2007 and there are no signs that it will exceed 2%, despite turmoil in oil markets and the rising demand for commodities from emerging markets.

As for the burden of excess regulation, very few additional laws have been enacted and no surveys of businesses point to regulation as a primary cause of the lack of hiring and expansion. Even the healthcare law, which will require new commitments by businesses, is years away from full enactment; additionally, no data indicates that concern about how the law will eventually impact business is affecting current demand.

As Paul Krugman continually notes, those who have argued against the basic tenets of Keynesian economics have been wrong about everything. But they are still routinely invited to write op-ed in major newspapers, and to appear on major television and cable news shows. (In contrast, those who argue for more government stimulus are practically shunned.)

All the data in fact indicate that the recession was much deeper than previously thought, and that the stimulus was much too small to make up for the demand falloff. Cumulatively so far, the U.S. economy has produced almost $3 trillion less in economic output than its potential. This is wealth we can never recover, leading to economic suffering that has significantly diminished the life prospects of millions of Americans. The political response to their plight has been a disgrace, bordering on criminal.

Unfortunately, the Obama Administration shares much of the blame. Not only did it predict that unemployment would peak at 8% after the stimulus passed (the worst messaging mistake of Obama’s presidency); it never focused directly on job creation, and continually oversold the tepid recovery that did occur. As I’ve discussed over the past weeks, Obama has chosen to mimic the GOP economic narrative—that deficit reduction is our primary short-term problem—when demonstrably it is not.

One of the goals of Voices of Reason is to help defeat bad ideas, and promote good ones. The idea that supply side economics and austerity are the solution to our lingering recession is one of those bad ideas. It has been thoroughly discredited by all the available data, and needs to take its place permanently in the dustbin of history.

Jason Scorse

Obama is set to make a major address on jobs in September. Besides being three years too late, there is little chance that his ideas can pass the Republican-controlled House. Worse, Obama is tying his jobs agenda to deficit reduction—saying that we need one in order to do the other. This plays right into the GOP’s talking points, and it’s bad economics.

Despite the S&P downgrade of U.S. debt, America can currently borrow money at the lowest interest rates in more than half a century. This means that the government could finance new stimulus measures without doing a single thing to cut the deficit, and pay close to zero percent on the borrowed money. Deficit reduction is in no way a prerequisite for more stimulus.

Those arguing against stimulus claim that the government is incapable of making any investment that promises a positive return. This is ridiculous, and the President should be stating the obvious: borrowing money at near-zero percent and using it to repair roads and bridges, expand internet access, invest in green energy R&D, medical R&D, or increased early childhood education makes economic sense because all of these investments have high rates of return.

Americans can understand that if you spend $1 million to fix a bridge, and this saves you from spending $5 million if the bridge failed, this is a good investment. And doing it when you can borrow that $1 million at the lowest rates in decades makes it a great investment. It’s like homeowners fixing their ailing roof, saving them from much greater future damages, at a time when they can borrow the money almost for free.

With 25 million people out of work or underemployed, we should be using the current low rates to make the investments that will put people to work and have positive rates of return. This is how we “win the future”—which was Obama’s slogan last year, but has now faded as he increasingly adopts a spurious, right wing framing of the issues. An important teachable moment has been missed, and the President has no one to blame but himself.

Long-run deficit reduction is a worthy aim, but for now Obama is peddling bogus economic reasoning. The major reasons for our growing national debt are the explosion in healthcare costs and the continuing erosion of revenues stemming from the Bush tax cuts and the recession.

Obama should be focusing on our dysfunctional healthcare system, highlighting the good that the Affordable Care Act (ACA) is already doing and pushing for additional reform. Instead, he’s talking up cuts in entitlements that will do little to reduce the deficit and will further harm those who are already hurting. He’s also calling for discretionary spending cuts that will mean less environmental protection, medical R&D, and other important government functions.

The Administration also appears ready to take the wrong course on housing. I wrote in an earlier VoR piece that Republicans have a better policy than Democrats on housing, especially the role of Fannie Mae and Freddie Mac. While the GOP is wrong to blame the financial meltdown on Fannie and Freddie, they’re correct that the government should privatize the home loan industry and get out of it completely.

The economic case for government intervention in the housing market is weak to non-existent. In fact it’s a policy that distorts incentives, makes it harder for people to be mobile, and largely benefits the wealthy (since they get the biggest tax breaks). It also costs the Treasury hundreds of billions a year—and U.S. taxpayers have already lost over $150 billion bailing out Fannie and Freddie, with the number almost certain to grow larger.

Unfortunately, all indications are that Obama is pushing for a continued dominant government role in the housing market. His policy would leave the same incentives in place, continue to cost the Treasury dearly, and once again put taxpayers on the line should we have another housing bubble. There were early signs of a willingness to unwind the government’s role in Fannie and Freddie. It now appears that pressure from housing groups (including many liberal lobbying arms), as well as from Republicans not as committed to their principles as they claim, have convinced the Administration to change course. Reducing government subsidies for housing now seems to be off the table, when it should be near the top of the list.

Since the GOP has gone (at least temporarily) insane, rational voters will have no choice but to support Obama in 2012. It’s extremely troubling, however, to see his economic message go from bad to worse. The President either doesn’t have a firm grasp of economics, or because of political expediency and/or cowardice refuses to propose the serious economic reforms that will help the economy. It’s hard to know which explanation is worse.

Jason Scorse

The economic remedy now being touted is comparable to a situation in which doctors demand that leeches be used to cure illness, claiming that when people are sick the best thing to do is to bleed them to get rid of their toxins. Government austerity—when the private sector is sitting on $2.5 trillion in cash, unemployment is over 9 percent, and economic growth is dwindling—will definitely bleed the economy, and could kill off a recovery that’s never been more than tepid.

But this is the “solution” we’re now facing, both because the Republican Party has put defeating Obama ahead of the suffering of the American people, and because Obama and the Democrats have let the rightwing fanatics frame the debate. It is a tragedy largely of our own making, and one that could have been avoided.

Across the Atlantic, the situation is no better and possibly even worse. Great Britain and many European nations have not only embarked on severe austerity programs; in addition, the European Central Bank (the equivalent of our Federal Reserve) has decided to raise interest rates, electing to fight phantom inflation rather than promote growth. The likely result, of course, is to further choke off Europe’s economic recovery. Sometimes it seems as if the wealthy nations of the world are competing to see which can be more irresponsible and oblivious to basic economic truths.

Fortunately, many emerging economies (while not immune to the downturns in the wealthier countries) continue to grow strongly, and to lift millions out of poverty. Brazil, profiled in Saturday’s New York Times, is a case in point: after almost a decade of economic policies that have driven down inflation and attracted increasing foreign investment, plus significant government investments in social programs, the country has become a model for Latin America. And in Asia, even though China has run into higher-than-expected inflation, it too continues to enjoy rapid growth, and its investments in infrastructure continue to pay large dividends.

What will happen in America over the next couple of years is anybody’s guess. If we somehow manage to avoid a double-dip recession, luck will have more to do with it than sound policy. Despite the terrible economy, Obama still has a decent chance of being re-elected given the quality (or lack of it) of the possible GOP nominees. The fact that Michelle Bachmann has any chance at all of winning the nomination shows how crazy the Republican Party has become; she is truly a lunatic who has no business anywhere near the presidency. The new entry, Rick Perry, is the governor of one of America’s largest states; even so, he’s probably too conservative, fiscally and socially, to have any real chance of reaching the White House—no matter how bad the economy.

I never liked Obama’s emphasis on hope, which we rely on when things seem out of our control. I have always preferred human agency, and a strong conviction that we can be the masters of our own destiny.

But I do hope that one day I will be able to write a piece entitled “The Age of Reason,” when we actually get around to tackling the tough challenges we face—instead of pretending the problems will go away, or intentionally making them worse.

Jason Scorse

Every time I have thought President Obama was on the verge of making an unwise decision, I have assumed that since he is privy to a lot of information I don’t have that I should trust his judgment. But now, on the verge of an epic defeat that may very well harm his reelection prospects, I realize that he is as fallible as all human beings and quite capable of making foolish decisions.

Before I outline why his handling of the debt-ceiling debate has been a complete debacle, let me be clear that I do not share the general view that Obama has betrayed progressives and liberals. Obama always campaigned as someone on the center-left, and much more on the center than on the left.

Recall that his healthcare proposal was the most conservative of the three major Democratic candidates; it didn’t even include an individual mandate. Many liberals oppose his escalation of the Afghanistan War, but he promised to do exactly that multiple times during the campaign. And never once did Obama come out in support of gay marriage despite the obvious parallels with the Civil Rights movement that he so often referenced.

Up until now Obama’s governance style and legislative accomplishments have been remarkably consistent with his campaign promises (those on the right who characterize him as some sort of Marxist are simply delusional).

After the 2010 midterms Obama found himself in extremely challenging political territory. Most current members of the Republican Party have in effect become economic terrorists, willing to sink the U.S. economy in order to promote their extremist agenda (in a rational world their behavior would be characterized as treasonous). And the general level of ignorance promulgated by the media regarding economic fundamentals is at an all time high. In this atmosphere reason is in short supply.

This is where Presidential leadership comes in. The GDP numbers released last Friday were abysmal and indicate that we are on the verge of a double-dip recession. And the reason the situation is so dire is as simple as basic arithmetic: GDP=C+I+G+NX. Consumption has plummeted due to huge losses in wealth and income from the recession, and people are saving a lot more of the income they do have; investment is down because businesses do not see increased demand on the horizon (and they are sitting on record amounts of cash); net exports are doing okay but because the rest of the world is in such bad shape the value of the dollar has not fallen sharply enough to make our goods much more competitive. That leaves government spending as basically the only thing standing in the way of falling GDP.

The revised numbers from 2008-09 show that the recession was even worse than previously thought, with the economy contracting by almost 9% at the nadir. The 2009 stimulus package helped to bring the GDP back from this trough to positive territory, but as it winds down the economy is once again sputtering. This is not rocket science, and yet it is almost unanimously believed that the stimulus failed. This is akin to complaining that water doesn’t put out fires if you use a bucket to put out a burning building.

With joblessness still near record highs for the past 50 years, we are now on the eve of enacting a draconian austerity package as part of what was once a routine debt-ceiling vote. This unprecedented capitulation to the most extremist elements of the rightwing will not only further embolden them, but further weaken the economy and prolong our economic misery. Not only was Obama unable to wrangle any tax increases out of the deal, he didn’t even manage an extra dime of stimulus for anything, not infrastructure, green energy, jobs training, a new payroll tax cut, nothing.

What is even more shocking is that the President at one point offered to make cuts to both Social Security and Medicare as part of a $4 trillion dollar reduction package. He wanted to reduce the rate of increase in Social Security payments and raise the retirement age for Medicare to 67. These are both horribly regressive policies that would save little money, and weaken the Democratic position as defenders of the social safety nets. Social Security isn’t even contributing to the deficit, and as Obama knows it is rising medical costs that must be tackled, not reductions in Medicare eligibility (if anything, Medicare’s lowered overhead costs argue for lowering the age of eligibility).

So what was Obama thinking?

No one knows for sure and we will likely have to wait for years after the end of his presidency (which may well be in 2012) to get the full story. From everything I have read, it appears that Obama vastly underestimated the intransigence of the Republican Party, and in his desire to be the “compromiser in chief” was willing to embrace bad ideas as in order to win over so-called independent voters.

Like many Obama supporters I oscillate between profound disappointment, frustration, and anger. I feel that the President has sacrificed key Democratic principles for nothing. I never expected him to be a fierce partisan or a far-left progressive, but in my mind he has crossed a line.

One last note for those who are thinking of not supporting Obama in 2012; let me remind you that the next President will almost certainly have the opportunity to replace two additional liberal Supreme Court Justices, the fate of the Bush tax cuts hangs in the balance at the end of 2012, and the main provisions of the new healthcare law come into effect in 2014. Come 2016 I’ll be the first to support a true progressive candidate, but no matter how much Obama has let us down, we should support his reelection for the good of the country. That’s what true patriots do; they put country first.

Jason Scorse

I am not a huge fan of the Atlantic's Megan McArdle, but her article on the plight of the long-term unemployed is quite compelling. She was unemployed for a long period years ago and recounts the terrible toll it took on her life and her economic prospects. She was one of the lucky few who eventually found a rewarding career. But many of the long-term unemployed in America are not likely to be so fortunate, especially those in their 40s and 50s. Research suggests that the long-term unemployed suffer increased illness, along with significantly lower standards of living for the remainder of their lives.

This is a tragedy.

The millions of Americans who have been out of work for six months or more during the recent recession and its aftermath are out of work due to no fault of their own. The collapse of the financial system sent the global economy into a tailspin; at the peak of the recession the economy was shedding 3/4 of a million jobs a month. Today's jobless are capable of working and want to work, but because of depressed demand businesses don't want to hire them. And with the government shedding hundreds of thousands of jobs the situation in the public sector is even worse.

President Obama and the Democrats have provided the jobless with unemployment benefits for the past 2+ years, but they are about to run out (the Republicans have fought against providing the jobless with any benefits and routinely cast them as lazy and undeserving). With the economy barely producing any jobs at all their prospects continue to look bleak, and they will likely continue to suffer the toll of prolonged joblessness.

With the Congress and traditional media obsessed with long-term deficits, it appears that new assistance for the unemployed or new stimulus measures are a near impossibility. The Democrats, and particularly President Obama, share a tremendous amount of blame for the absurd situation we find ourselves in, because they have failed to draw attention to the plight of the millions of Americans who still can't find work.

Since the first day of Obama's presidency the Republican Party has not acted in good faith for the betterment of the American people; the GOP cares only about moneyed interests and catering to its extremist theocratic base. A strong leader doesn't simply accept the limits imposed on him by those who want to destroy him, and whose electoral victory is premised on the failure of the economy.

With the historic Democratic majorities Obama enjoyed for the first two years of his presidency he was able to pass excellent legislation that is and will continue to benefit ordinary Americans. For this he must be applauded and given credit. But his failure to fight for additional measures to boost the economy and help the jobless is by far his biggest failure. He should be using the bully pulpit that only the President has to express moral indignation at the Republicans for blocking additional stimulus measures. He should propose direct jobs programs for the unemployed that put them back to work right now building roads, bridges, and trails for our national parks.

There are those who argue that this is bad politics because the Republicans will likely block these programs and the President will then look weak and ineffectual. I disagree. A strong leader doesn't accept the status quo, but changes it through the force of their rhetoric, persistence, and moral suasion. I find it hard to imagine that if week after week Obama called on Republicans to finally honor their pledge to focus on jobs, that nothing would come of it. And even if this were true, what could be a better political message to carry into 2012 then Obama making the case for a greater focus on jobs and the Republicans rebuffing him at every turn?

Jason Scorse

Technology influences our lives in profound ways, and always has. Increasingly, today’s technology is leading to a vast expansion of individual empowerment across a wide spectrum of activities.

On the consumer level, with apps like GoodGuide and the Monterey Bay Aquarium’s Seafood Watch, consumers can use their smart phones to get immediate information on the social and environmental rankings of hundreds of thousands of products and make sustainable choices.

Other apps like marinedebris allow users to photograph and tag with GPS coordinates garbage they find at the beach, which can help both cleanup efforts and policymakers. Nothing gets people to enact tougher regulations against pollution more than documenting the amount of toxins and trash. Numbers and data matter, and consumers can now assist like never before in collecting this information.

Apps are also being designed to help track disease outbreaks and better coordinate emergency responses and preventative measures. We are just beginning to scratch the surface of welfare-improving uses generated by the data being stored and disseminated by our hand-held devices.

The fact that virtually everyone now carries on their person a digital video camera is making it easier to document abuses of all sorts, from policy brutality to voter suppression to illegal behavior in the workplace. While these devices pose legitimate privacy issues, there is no doubt that the transparency and documentation they provide is helping to bring an increasing amount of misconduct to light.

As we (finally) begin to change all our medical records from paper to electronic, the transition will usher in a more efficient system that should lead to fewer unnecessary procedures, better coordination among doctors, and better outcomes for patients. It will also allow us to get real-time updates on our progress, and tap into information networks that help us pick the best doctors and seek out the best treatments. Software is even being developed that will use massive databases to perform primary diagnoses at a level of accuracy higher than most doctors could ever reach on their own.

For the home, software is being developed to help people determine the best times of day to perform energy-intensive activities like laundry or dish washing so as to minimize electricity costs. All of this information will soon be freely available; as we create more “smart grids,” better battery technology, and more versatile electronic devices, we’ll be able to reduce our overall energy consumption. For example, a rooftop solar panel with a good battery system may one day make it possible for numbers of people to become net providers of electricity and never have to visit a gas station again.

At a time when our political process seems to be at a nadir, with progressives doing little more than damage control against a Republican assault on the environment, women’s rights, and the social contract, technology is coming to the rescue and putting more power and choices in the hands of individual citizens. Our greatest challenges still will require collective political action, but while that’s on hold we can at least improve our lives by making good use of the many new tools technology is putting at our disposal.

Jason Scorse

Tax-deferred retirement accounts were created under a law passed by Congress in 1974. They strike a bargain between taxpayers and the Treasury: money in the accounts grows tax-free, but taxable withdrawals must be taken yearly after age 70 1/2.

Both sides win. Roughly half of all Americans have gotten a jump on financial security, and now hold trillions in retirement savings. On its part, the Treasury gets an annual influx and is nearing demographic gold: the first baby boomers reach required distribution age in 2016, and a mother lode of retirement taxes should start streaming in.

Congress, though, has proven more than willing to help the affluent slip away from the tax payback. Two examples are the late-December renewal of a 2006 Bush tax break, and a one-year suspension of minimum required distributions.

The starkest instance—and the most costly for the Treasury—stemmed from the financial meltdown. With portfolios plummeting, Congress rushed to freeze mandatory withdrawals for 2009. Only the haves stood to gain. Anyone who actually needed the distribution had to take it and pay taxes; the haves took a pass and saved thousands.

The stock market recovered and the suspension was allowed to lapse. Nobody should expect an encore, but the precedent has been set.

As the clock ticked down on 2010, the lame-duck Congress passed an extension of the Bush tax cuts for the wealthiest two percent of Americans. Along with it, fitting right in, came a one-year renewal of the IRA charitable deduction.

It allows holders of Individual Retirement Accounts (IRAs) to give up to $100,000 of their required annual distribution to charities. No federal or state taxes are paid. In addition, because the money doesn’t count toward income on tax returns, high-income filers could avert hikes in Medicare premiums. According to one estate attorney, the bill is “good for about 10 different [tax-avoidance] reasons.”

What we have here is a siphoning away of public revenue to private charity. Money may go to good causes, but the transfer violates the payback half of the retirement bargain. In effect, the money is being stolen from the U.S. Treasury (and from every state that has an income tax).

Donors have their hearts in the right place and the law behind them. Charities are thrilled. The thieves are in Congress, always ready to jigger the tax code on behalf of the well-off.

Withdrawal formulas also stiff the Treasury by keeping a tight lid on required withdrawals. The formula that applies to most people calls for a starting minimum required distribution of under 3.7 percent. The rate rises annually, but ever so slowly; 25 years later, at age 95, the required distribution is only 11.6 percent. The formulas don’t overtly discriminate, but they heavily favor those in no need and no hurry. So-called stretch IRAs, an estate planning tool, can string out distributions—get ready now—into the next century.

Brokerage houses distort the tax payback in their own way. They’re making billions on retirement accounts, but they continually bash required distributions. A Fidelity advisory, for example, told clients that at 70 1/2 they’re “required to start raiding” the accounts.

Raiding? Not exactly. Minimum distributions mean it’s time to start paying back Uncle Sam for decades of tax deferral. Even after federal and state taxes, affluent Americans over 70 1/2 are likely looking at annual payouts in the healthy five figures. Whatever the number, it got there with a long tax-free ride.

How about a little gratitude. And instead of robbing Uncle Sam, let’s have distribution rules from Congress that are more sensible and equitable.

Gerald Scorse

Almost since the day President Obama was sworn in, liberals have waited for him to strongly defend progressive taxation and a robust social safety net.

For the longest time, he did neither. He let many core supporters down with his lukewarm support for a public option during the healthcare debate. Back in December he signed into law an extension of all of the Bush tax cuts, including those for the wealthiest, effectively breaking a central campaign promise.

But Wednesday, April 13th marked a turning point in the Obama Presidency, with his stirring defense of the social contract and his vow to never again extend the Bush tax cuts for those making more than $250,000 a year. More importantly, the President delivered a scathing critique of Paul Ryan’s budget proposal (which has since passed the GOP-led House of Representatives); the President called Ryan’s vision “deeply pessimistic,” and said it was neither “serious” nor “courageous”.

Since making this speech, Obama has been on a national tour consisting of town hall-style meetings in which he continues to hammer the Republican plan and offer his vision of how to reduce our long-term deficits while at the same time protecting key entitlement programs. The public supports his positions by wide margins. Approximately three-quarters of the electorate support raising taxes on the rich and protecting Medicare; virtually all the particulars of Ryan’s budget are deeply unpopular.

So if the election of 2012 comes down to competing visions of how to get the long-term U.S. budget in balance, Obama will clearly win. But that’s not necessarily what the election will be about. Unfortunately, most Americans vote based on much more immediate concerns, and the state of the economy is usually more important than any other factor. With high gas prices eating into consumer spending, people’s attitudes are becoming much more negative—despite many months of positive economic growth and recent signs of decent growth in new jobs.

The reality is that the economic recovery is extremely fragile; if gas prices remain high, which is likely, this could lead to anemic growth and more unemployment. And despite Obama’s stirring defense of liberal priorities, he is arguing on turf that the Republicans have defined.

In the run-up to the 2010 midterms, all Republicans could talk about was jobs, jobs, jobs. Since taking office they have done nothing to promote job growth, but instead have used deficit reduction as a cover for slashing spending on social programs. Instead of relentlessly attacking Republicans for betraying their campaign promise, the President allowed them to frame the debate. Instead of focusing on the need for immediate job creation, Obama conceded that deficit reduction should be the nation’s first priority. If the economy simply putters along for the next 18 months, he may pay a huge price for that concession.

Let’s say it was politically impossible to get a second stimulus bill through the newly elected Congress. Even so, if Obama had tried and failed he would’ve demonstrated his priorities to the American people. He would’ve forced Republicans to go on record opposing job creation. Instead, we have differing visions of how to overcome long-term deficits—visions that may ultimately have little bearing on the public’s mood come November, 2012.

At this point, the Obama team has to hope that the economy picks up and provides enough momentum to get the President over the finish line. If it doesn’t, there will be lots of second-guessing about whether he did enough to make the case for job creation instead of joining the GOP in putting deficit reduction first.

Jason Scorse

Today's piece is written by guest contributor, Gerald Scorse, who helped get this legislation passed through his tireless efforts for tax fairness.

Income from wages has been reported to the Internal Revenue Service ever since World War II. Starting in 2011, income from stock market capital gains will effectively begin to get the same treatment.

This closes a loophole that cost the Treasury billions every year. It takes a big burden off taxpayers. And it never would have happened without a man the Left loved to hate.

He’s Evan Bayh (D-IN), who retired from the Senate in January. His Blue Dog politics rankled liberals, and he was trashed for giving up a seat that would flip to the GOP. All the same, Bayh made tax reporting fairer than it’s ever been in America.

He did it by passing a bill that requires brokers to report basis prices to the IRS. Basis prices are what investments cost going in, and brokers didn’t have to turn over these numbers. They had to report proceeds, but not basis prices.

The only way to figure capital gains is to have both numbers, and do the arithmetic. For nearly a century, since the beginning of income taxes in 1916, capital gains income has been reported on the honor system. Now the IRS will get basis prices along with proceeds. Brokers won a gradual phasing in: new stock purchases this year, mutual funds in 2012, bonds and options in 2013.

National Taxpayer Advocate Nina Olson recommended basis reporting to Congress, and it was her proposal that prompted Bayh to draft his bill. The Treasury was losing up to $25 billion a year through capital gains misreporting, and states were being stiffed additional billions. The reasons were no mystery. As Ms. Olson told the Wall Street Journal, “It seemed that people who wanted to comply with the law were finding it too hard, while those who wanted to skirt the law were finding it too easy.”

It was easy faking numbers on tax returns. It was hard keeping records year after year, adjusting them for distributions and stock splits, even remembering where they were. Computers erased the problems; brokers are now required to maintain basis records and forward the final results.

Tax compliance for income that’s reported to the IRS far exceeds compliance for self-reported income. Wage earners essentially report all their wages, and the reason is written on the W-2 forms they get every year: “THIS INFORMATION IS BEING FURNISHED TO THE INTERNAL REVENUE SERVICE.” Compliance figures slump for every kind of self-reported income, including stock market capital gains.

When Bayh re-introduced his bill in 2007, he cited a study that found misreporting by more than a third of taxpayers with capital gains or losses. The Congressional Record for that day shows one other senator making the case for basis reporting. Let’s listen in:

“It is estimated that $345 billion of federal taxes goes uncollected each year. This bill doesn’t solve that full problem, but it is a step in the right direction. It reduces the federal deficit without raising taxes or cutting spending. It simplifies the tax filing process and reduces the chance of error or fraud. It applies what we know about the clear benefits of automatic reporting to the IRS—which is required now for wage income—to capital gains income as well.

“This bill makes sense. It’s good policy. And I urge my colleagues to join me in supporting it and in helping to improve our tax code.”

So said the junior senator from Illinois, Barack Obama, on February 14, 2007. Now, as president, his budgets (and America’s taxpayers) will benefit from the added billions that fairer tax reporting will bring in to the Treasury.

P.S. Next week the theme will be Obama's strong new defense of a center-left progressive vision, which stands in stark contrast to the extremist regressive and reactionary vision of Paul Ryan and the House Republicans.

P.P.S. Some commenters support raising the Social Security retirement age to 70. The reason this is a bad idea and regressive is because average life expectancy is up mostly because of reductions in child mortality. Life expectancy conditional on reaching age 65 has barely budged over the last decades, and the retirement age for Social Security has already risen from 65-67. Increasing it 3 more years will lead to a net reduction in lifetime benefits, hurt the poor and middle class the most, hurt minorities more than whites, and is unfair especially to people who work in physically demanding jobs. Raising the cap for Social Security taxable income above $106,000 is a much more equitable way to handle the projected 25% shortfall in 2037.

Gerald Scorse

When negotiating with hostage takers who are willing to kill their hostages, the negotiators are at a serious disadvantage. Such was the case with the budget talks that concluded late Friday, with the Republicans playing the role of the hostage takers. Ever since Obama came into office, the GOP has done everything it could to harm the economy and bring down the President. Republicans know that with a pliant and unserious media, they won’t be blamed; the more the economy suffers, the more votes they’re likely to get from a populace that pays little attention to facts and has a painfully short memory.

Republicans voted against the stimulus bill, tried to block unemployment benefits at every turn, and held both unemployment benefits and middle class tax cuts hostage to tax cuts for the rich. They voted against the financial regulatory bill, and have tried to defund it ever since taking control of the House. Over the last three months, despite all their talk about jobs, their agenda has been dominated by trying to take away women’s reproductive freedoms and deny gays their rights. Their policies are unambiguously job killing, since it’s harmful to take any money out of our still-fragile economic recovery. The party opposes the interests of the overwhelming majority of the American people; its base is dominated by religious extremists and supporters of crony capitalism. And now Paul Ryan has added insulted to injury by proposing to massively cut Medicaid for the poor and disabled, privatize Medicare and force millions of seniors into poverty, all the while dramatically ballooning the deficit and cutting taxes for the rich by trillions more.

Given that the GOP has essentially taken leave of its senses, President Obama and the Democrats were in a terrible bind. If they gave in to the GOP’s demands, it would harm the economy and the American people; if they didn’t, the GOP would willingly shut down the government—harming the economy and the American people. It was a no-win situation. Obama decided to give the GOP almost everything it wanted, agreeing to cuts totaling close to $100 billion compared to his original budget proposal.

This was a bad deal, but I understand the need to be pragmatic and the “grown up” in the room. What I don’t understand is why Obama legitimized the GOP’s position by almost bragging that the compromise included the biggest spending cuts in history. That was astounding. He should have explained to the American people that spending cuts are a terrible policy, with unemployment near 9% and the recovery far from assured; he should have said that he agreed to the cuts only to avoid a shutdown and even worse damage.

Instead he allowed the GOP to move the goalposts once again towards the far right. Bigger spending battles lie ahead, and the GOP will now be emboldened to push for even deeper cuts.

Many on the Left have claimed that Obama is a weak negotiator. They point out that he often concedes to the Right’s demands before negotiations even start, and keeps echoing their rhetoric instead of forcefully presenting the progressive alternative. I keep asking myself why he does this, and I have no good answer. He has completely failed to reshape the debate over energy policy, going so far as to entirely drop the use of the term “climate change” from his speeches; on fiscal policy, with millions still out of work and other millions under-employed, he has completely abandoned the Keynesian rhetoric he ought to be using.

Some say that Obama is saving his political capital for fights over entitlements, or ending the Bush tax cuts for the richest 2% of Americans, or for his reelection campaign. Personally, I’m starting to wonder whether he’s ever actually going to mount a full-throated defense of American progressivism in the 21st century. I’m starting to think he simply doesn’t have it in him.

Someone needs to stand up strongly for core progressive principles against the GOP onslaught. If they don’t, America’s middle class could quickly become only a memory—and American greatness will be something for history books sooner than we think.

P.S. Word is out that Obama is giving a major speech on Wednesday outlining his vision for entitlement reform and proposing steps to rein in our long-term deficits. We will soon know whether he has the backbone to stand firm against the Republican onslaught against the middle class.

Jason Scorse

The term “middle class” has an almost mythic quality in American politics, even though it’s extremely ill-defined. Some low-income Americans consider themselves middle class, while many of the affluent use the descriptor as well. The popularity of the term speaks to a general sense of equity among Americans, who believe the middle class represents the country’s “soul”.

One reason “middle class” is hard to define is because it’s a relative concept. The cost of living varies widely in different parts of the country, and what constitutes a “middle class” life changes from generation to generation. Averages are next to meaningless. A person making $40,000 in rural South Dakota will likely consider themselves middle class, and enjoy a reasonably high standard of living, while someone making the same salary in New York City or San Francisco would barely be able to get by.

That said, there is no doubt nowadays that what we consider a middle class lifestyle is becoming increasingly difficult to maintain. Median wages—by definition the middle of income distribution—have largely stagnated over the last decades, while the costs of healthcare and college education have risen significantly.

Besides rising costs, financial security is more precarious than before for the middle class. The days of defined benefit pensions are largely over; Americans need to save much more of their own money, and invest it wisely, if they want to retire in their mid-to-late 60s and maintain a similar standard of living. This at a time when the average American changes jobs every 4+ years as the days of the single career are effectively over.

By many metrics, the middle class is in worse shape today than at any time since the 1950s. Not all, of course, is grim. Life expectancy is up, and advances in medical technology are more widely available. Other technological advances have improved the quality of life in myriad ways for nearly everyone, e.g., the internet and cellphones. Most Americans can afford hi-tech electronic goods like laptops and flat-screen TVs, which not long ago were too expensive for all but the wealthy.

In addition, for many Americans the quality of something as basic as food has risen dramatically. When I was growing up on the Upper West Side of Manhattan in the 1970s, supermarkets were uniformly dreary and the selection paltry. The lone “health food” store had a small display case of wilted produce and offered little more than grains and vitamins. When I walk into a Whole Foods today, I am reminded (and astounded) at how affluent our tastes have become; we have high quality foods from the around the world that were beyond the reach of virtually everyone not that long ago.

All of this begs the question as to whether, on balance, the middle class is better off today—and what the future holds. Technology will continue to bring us new products that will improve our quality of life. At the same time, financial security will be increasingly hard to achieve for millions of middle class Americans. Individuals bear great risks in the modern economy, starting with 401k plans that shift the risk from employers to employees—not to mention global economic shocks, rapidly changing employment opportunities, and nasty, unexpected surprises like earthquakes, tsunamis, and nuclear calamities.

Some of these can be mitigated through public policy and social safety nets. But with the Republican Party bent on weakening or destroying those that already exist, this is going to be an extremely difficult challenge. Obama’s healthcare bill is a start, but it is unclear what its ultimate fate will be.

In order to enjoy the fruits of our potentially more prosperous age, the American middle class is going to have to be more nimble, more frugal when it counts, and more forward thinking—and take much better care of their physical health, to reduce future medical costs. Those who can’t or don’t adapt will likely find themselves working way longer than they had anticipated, and unable to leave much to their children and grandchildren.

Jason Scorse

One of the aspects of economics that I most respect is that we’re trained to give credence not to what people say they value, but to what they actually do—and to what those actions reveal about their real values and priorities.

Economists know that what people say they believe, and their motives, are often at odds with their actual behavior. For example, an individual who claims to care about the poor but who does nothing to help poor people, cannot in any meaningful sense continue to make this claim; they may “care” in some abstract sense, but this is hardly the same as someone whose care manifests itself in volunteer work, donations, or a voting pattern that reflects this care.

Paying attention to actual behaviors and choices is most important when scrutinizing political parties; it’s also where rhetoric and reality may not only be miles apart, but directly contradictory. Case in point is the modern Republican Party. For most of the run-up to the midterm elections, Republicans hammered the Democrats and President Obama for a weak economy and promised to focus on jobs if they were returned to power.

It’s been well over a month since the GOP took over the House of Representatives and gained several seats in the Senate—and what they’ve done shows that jobs are the last thing on their mind. They have focused on radical anti-choice legislation to strip women of their reproductive rights, opposition to D.C.’s legalization of gay marriage, and on budget proposals that, by all independent analyses, would lead to job losses in the hundreds of thousands.

Republicans want to cut funding for environmental protection, children’s healthcare, implementation of the Affordable Healthcare Act, college student loans, the arts, science research funding, funding for AIDs drugs, and long-term investments in infrastructure. They will do everything to preserve hundreds of billions in tax breaks for the affluent, but when it comes to the most needy they claim “we are broke”.

These actions, not the GOP’s words, show what the party values and prioritizes. Their priorities reflect an extremely pro-industry stance that would greatly diminish the quality of life for millions of low and even middle-income Americans, while doing almost nothing to address the nation’s long-term financial imbalances—which are driven almost exclusively by projected Medicare liabilities.

In truth, the GOP’s priorities are shameful, and if made into law would not only directly harm many Americans, but jeopardize the still-fragile economic recovery. It is a road map that should be lambasted and ridiculed by every serious person.

The reason the GOP has so far gotten away with these insanely misguided priorities (which they won’t ultimately get away with) is because the traditional media spends way too much time reporting on what Republicans say and not what they do. The leaders say they are focused on jobs and the media dutifully reports this, instead of pointing out the contradictions between their words and their actions.

A media that made educating the public (not entertaining them) its central role would hold our politicians to account, both Democrats and Republicans. They would relentlessly ask GOP leaders questions such as:

- After winning the elections based on a platform of increasing jobs, why have you focused on everything BUT jobs since taking power?

- Why the focus on divisive social issues that have nothing to do with your mandate, and are not what people voted for?

- Why are you proposing a budget that by all independent accounts would cost jobs and hold down economic growth?

- Why have you refused to address long-term fiscal issues, especially Medicare, and focused instead on parts of the budget that in effect are a sideshow?

- How can you claim to care about long-term economic growth when you’re proposing cuts to infrastructure, education, environmental protection, and science research that will harm long-term growth?

- You said that you wanted to “repeal and replace” the Affordable Care Act, but so far you have focused exclusively on repeal and offered nothing to replace it with. You even spurned Obama’s call for greater flexibility for the states in providing care. Do you no longer believe in providing affordable care to all Americans? If you do believe in it, how do you propose to actually achieve it?

Of course, on the Sunday talk shows all day today (and for the remainder of the week as well) these questions will barely be asked if at all. Republican leaders will continue to say one thing and do another.

Until the traditional media focuses more on politicians’ actions and less on their rhetoric, it will be up to us (on forums like this and thousands of others) to build an informed citizenry that will hold politicians to account.

Jason Scorse

Conservative politicians and commentators have been saying for the past two years that a major weakness of the Frank-Dodd financial reform bill was its failure to address the problems caused by the government’s involvement with mortgage giants Fannie Mae and Freddie Mac. The conservatives were right.

The Obama Administration believed that including the issue would have made an already large bill too large, and said they needed more time to come up with a plan. Now the Administration has released its recommendations, and we can appreciate the bind the government finds itself in.

Public anger at the bailouts was largely directed at banks, but those bailouts have largely been repaid and often turned a profit. Meanwhile, the cost of bailing out Fannie Mae and Freddie Mac is approaching $200 billion and will continue to grow. Between them, Fannie and Freddie guarantee 85% of all the mortgages in America; with a backlog of foreclosures and declining home prices, Uncle Sam will be on the hook for billions more.

The obvious solution is to get the government out of the market. The problem is that if Fannie and Freddie are sold off, and the government ends its commitment as the insurer of last resort, the housing market could crash again and lead to another recession. Hence the Administration’s bind: on one hand an unsustainable policy that needs to end, on the other the prospect of even greater economic pain.

The Administration’s plan would come close to eliminating government support of the housing market. But—even in the plans where Fannie and Freddie are eventually privatized—the government would still back certain mortgages, and support would be withdrawn gradually over many years. This makes sense, since the last thing we need now is another recession. It would still be best if the government got out of the housing market entirely within 10 years.

Congress will decide which if any of the Administration’s recommendations become law, and it is unclear how far lawmakers are willing to go to end a half-century of government-guaranteed home mortgages. If they really want to get serious, they could also address one of the “third rails” of American politics, the home mortgage interest deduction: it costs the Treasury billions a year, it’s regressive, and it increases suburban sprawl.

Whatever happens, the era of massive direct government promotion of home ownership is likely to end. This will probably lead to higher mortgage interest rates and, in turn, lower home prices. It’s something to keep in mind for people who look at residential real estate as an investment; the long-term trend for home prices is not favorable and could get worse.

Jason Scorse

Overall, President Obama’s State of the Union speech was received positively by both the public and the pundits; it was a sober speech outlining the economic challenges we face and the ways government investment can bring long-term prosperity.

I was pleased to hear the President use some of the language and framing that I too have been advocating in recent talks regarding environmental policy (long version; short version). Obama couched the race to develop green energy technology, in which the U.S. is currently falling behind, as less an environmental imperative and more an economic and security imperative. He played to economic nationalism by challenging Americans to rise to a new “Sputnik moment”.

This is exactly the way to talk about the green tech revolution. While I was disappointed that Obama failed to even mention climate change, the fact is that appealing to economic competitiveness could well be more effective—especially in a depressed economy, in which environmental goals have slipped way down in the public consciousness. Americans like being No. 1—or least thinking of themselves as No. 1—and in green tech, we’re losing.

It is always slightly dangerous to invoke nationalistic sentiment, but it’s better to use it to support renewable energy and economic dynamism than most anything else. (And with the Right stirring xenophobic nationalism, it is imperative to have an alternative that appeals to the best of America and not the worst).

Obama did a very good job of telling America the stark facts about our global position in the green tech arena; he also made clear that the race isn’t over, and that we can still win by making the proper investments. This was a way to propose more stimulus, especially infrastructure spending, which has considerable bipartisan support and is generally favored by the public.

But Obama did even more: he cleverly alluded to the perverse subsidies that government doles out to fossil fuel companies. After making the case for more investment in clean tech, he said that any new proposals wouldn’t add to the deficit because they would be paid for by eliminating breaks to oil companies. This is not only excellent economic policy—ending subsidies to polluting industries and using those monies to support clean technologies—but it puts Republicans in a bind. The GOP is supposed to believe in free market principles, and nothing violates those principles more than government handouts to extremely profitable industries. Obama was in effect daring Republicans to once again support corporate welfare for big oil, and violate the conservative principles that they champion only in the abstract.

This was my favorite part of the speech. As I’ve been saying in this blog, today’s Republican Party is anything but conservative. It favors a form of crony capitalism in which “limited government” means limited to their friends. Ironically, it is Obama and the Democrats who on energy policy have been proposing conservative solutions: cap and trade is the quintessential, market-based conservative policy option.

I hope Obama builds on his State of the Union narrative, and also includes more on the national security implications of a better energy policy. And I hope he keeps forcing the GOP to either stand up for conservative principles, or risk being exposed for the frauds they truly are.

Jason Scorse

(Editor's Note: Tax reform could well become a major issue in the closing half of President Obama's first term. With that in mind, a guest Voicer takes a look at a little-noticed proposal from the White House's fiscal commission.)

When it comes to taxes on capital gains, the emperor suddenly has no clothes. He’s been stripped bare, in bipartisan fashion, by the co-chairs of President Obama’s fiscal commission.

The chairs are Republican Alan K. Simpson and Erskine Bowles, a Democrat. Their initial report included a call for equal taxes on capital gains, dividends and ordinary income such as wages. This runs counter to the current tax code, and it contradicts almost the entire history of capital gains taxes in America.

Implicitly, it also rejects the K Street claim that tax breaks for capital gains grow jobs, grow businesses and grow the economy. If the claim had any truth, Messrs. Simpson and Bowles would never have proposed equal taxes on all income as a way to help cut the federal deficit.

Liberals instinctively attacked the right-leaning aspects of the report. House Speaker Nancy Pelosi, in full “no” mode, labeled its recommendations “simply unacceptable”. Not quite, Madam Speaker; apropos investment income, Simpson/Bowles was a Democratic dream come true.

Income from wealth and income from work were taxed at the same rate in only two widely-separated times in America—from 1916-21, and after Ronald Reagan’s Tax Reform Act of 1986. President Clinton restored the tax break on capital gains in 1997, cutting the rate on long-term gains from Reagan’s 28 percent to 20 percent. Six years later, President Bush lowered the levy to 15 percent and did likewise for dividends. The Bush cuts were written to expire in 2010, but of course they didn't.

The Simpson/Bowles recommendations never received enough support within the commission to force a vote in the Congress on the entire package. But their proposals remain on the table, so the genie is out of the bottle. President Obama and Congress just had one showdown on extending the Bush tax cuts. Now they face another on setting a course for the nation’s fiscal future.

They could start by revisiting the tax code and creating capital gains tax breaks that really would grow jobs and stimulate the economy. Small companies with big dreams raise seed money through initial public offerings (IPOs) and secondary offerings; larger companies sometimes do the same (e.g., the resurgent GM). In a move sure to boost the ailing new-issues market, capital gains on these investments could be tax-free. Interest on corporate bonds, now taxed as ordinary income, also deserves a tax break. Corporate bonds raise the money to build corporate infrastructure, much like municipal bonds raise money to build local infrastructure. Interest from municipal bonds gets tax breaks; why not corporate interest?

How to pay for these new tax breaks? Easy: the money would come from ending the unproductive tax break on stock market gains, along with the 2003 tax break on dividends.

In 1986, President Reagan essentially traded tax breaks on capital gains for another round of cuts in the marginal rates. A generation later, the initial draft from Obama’s fiscal commission holds the makings of a similar endgame.

One major milestone has already been reached. The notion that investments deserve a lower tax than wages has been vaporized. The emperor has no clothes, and really never did.

P.S. Shortly after the Simpson/Bowles report, the Bipartisan Policy Center weighed in with its own deficit reduction plan. It differed in many ways, but it too recommended equal taxes on all income.

Gerald Scorse

While the causes of the economic crisis are varied and complex, the way out is not. Currently, there is insufficient demand to fully employ the people and capital of the United States; it’s estimated that our economy is operating at approximately $1 trillion below its potential. This is why unemployment hovers near 10% and long-term unemployment at near Depression-era levels. (Those who deny that without government intervention we would be in the middle of a second Great Depression are simply not paying attention to the hard data).

Consumers have less money adjusted for inflation than they did years ago, and are hesitant to make big purchases given the uncertainty of their job prospects and the rate of the recovery. They are saving more and consuming less, which is exactly the sensible thing to do. The problem is that in aggregate this reduces GDP and reduces demand, which then reduces income in a self-perpetuating cycle. Businesses are sitting on near-record amounts of cash and are holding back on expansion plans because they’re unsure when demand will pick up again. This too is reasonable, but again makes it hard for the economy to achieve its potential.

Until resources are reallocated and the private sector begins revving up production, the government has two fiscal options. It can try to spur demand through increased spending, or it can sit by while the economy sputters and perhaps suffers a double-dip recession. The Right opposes government spending, contending that the economy will eventually fix itself without intervention; what they fail to mention is that this could take many years, leaving millions of Americans mired in chronic unemployment and misery.

The Obama Administration has done the responsible thing and passed an array of stimulus measures: funds to build infrastructure, middle class tax relief, loans to small businesses, extended unemployment benefits, aid to state and local governments to avert layoffs of teachers, firefighters, and other civil servants.

Monetary policy is another tool, and the Federal Reserve has reduced short-term interest rates to record lows, kept them there for an extended period, and now, through quantitative easing (the so-called QE2) is trying to reduce long-term rates as well. All these moves, in the end, are meant to increase demand and cause businesses to crank up their investment.

Slowly but surely these policies are working.

When Obama entered office, the U.S. was losing jobs at the rate of 750,000 per month; the U.S. economy had lost more than 5 million jobs before any of Obama’s legislation went into effect. In addition, GDP was contracting at an annualized rate of 7%. By contrast, GDP is currently growing in the 2-3% range and we’ve had several consecutive months of private sector job growth. The increase in output and private-sector jobs has yet to make a dent in the unemployment rate (partly, of course, because of government layoffs at the state and local levels), but clearly the economy is moving in the right direction.

No serious economist would contend that Obama’s actions have not significantly helped the economy. There are disagreements on specific aspects of his plans, but there is consensus that things would have been much worse without these efforts.

The Right likes to claim that Obama has overseen a rampant increase in government spending and a massive increase in the deficit, but this is a lie. He inherited a nearly $1.5 trillion deficit, which his administration has actually reduced to less than $1.3 trillion. Tax revenues are sharply down because of the recession, but Obama inherited and did not cause this situation. Government spending as a percentage of the total economy is roughly in line with past levels; the small increases under Obama have been driven by increases in safety net payments that always occur during hard economic times.

Moving forward, the obstacles in the way of full recovery are mostly political. Time is also a factor; there is simply no way for an economy to recover quickly from a shock of the magnitude that the U.S. experienced in 2007-08.

On the political front, the GOP has made it no secret that its primary goal is to defeat Obama and the Democrats—even, apparently, if this means harming the American people and depressing the economy. Republicans oppose any additional stimulus, extending unemployment benefits, the creation of an infrastructure bank, and a sensible energy policy (which could support new green jobs). The party even opposes the Fed’s recent moves to reduce long-term interest rates. All of this, plus their continued insistence on extending the Bush tax cuts for millionaires, makes their talk about fiscal responsibility and deficit reduction a farce.

Unfortunately, Americans just rewarded the Republicans with increased political power in the midterms. Rightly or wrongly, Americans were impatient after two years of near double-digit unemployment and lashed out at the party in power.

But the answer to our ills remains simple:

1. Continued government assistance for the unemployed and those hit hardest by the recession
2. Additional stimulus, especially for infrastructure and state and local governments
3. Expansionary monetary policy that keeps interest rates low

Only when the economy is well on its way to recovery, and the unemployment rate has dropped by a few percentage points, should efforts be made to reduce the federal deficit.

More on the long-term outlook next week.

Jason Scorse

This week I’d like to respond to two inquiries from VoR readers concerning the economic problems we face, and the role of the housing market in the larger economic picture.

To begin, there’s now general agreement that the housing bubble precipitated the financial meltdown. The bubble reached approximately $8 trillion, and when it burst it was going to have serious consequences for the economy even under the best of circumstances. The failure to recognize the bubble and act appropriately may go down as one of the biggest economic derelictions of duty in the history of the Federal Reserve. Alan Greenspan, the Fed chairman during most of the time the bubble was inflating, bears the largest share of the blame—but his successor Ben Bernanke, and other notable economists, were equally oblivious.

I have a Ph.D. in environmental economics, and I am no expert on macroeconomics or the housing market, but even I saw clearly that real estate was hugely overvalued and ready for a fall by 2005. I suspected the consequences would be severe, but I had no idea that so many different financial products had been created out of mortgages. It was these derivative products which would multiply the impact of the crash by orders of magnitude. (If I’d known, I could have made a lot of money and retired early.)

What occurred in 2008-09 was a perfect storm—a huge asset bubble, a huge class of highly complex financial products based on bubble prices, and so little capital required to back up losses that banks were leveraged at ratios of more than 30:1. When housing prices fell, the derivatives crashed as well; with so many hundreds of billions on their balance sheets, many banks became insolvent almost overnight. Added to this, the derivative products were so complex and their trail so convoluted that no one really knew how much the losses at any particular bank really amounted to, or how much any of this stuff would be worth once the dust settled (and it’s still settling, long afterward).

From a public policy perspective, the first question to ask is what caused the housing bubble in the first place; absent the bubble, there wouldn’t have been any crash. There are many reasons, but the biggest is the unprecedented low interest rates that persisted for so long. These kept mortgage payments low, continually drove up home prices, and encouraged home buyers to keep paying ever-higher prices (remember, it’s the monthly mortgage that people care about most). The thinking was that home prices would go up by double digits forever, so everybody and everything would be just fine.

Tax breaks and incentives that the government provides to make home ownership more affordable only exacerbated the problem. Government mortgage giants Fannie Mae and Freddie Mac backed many of the subprime mortgages, and had to be bailed out when everything crashed. Ironically, while so much public anger focused on the TARP bank bailouts and the stimulus bill, both were effective and virtually all of the TARP money is being paid back. In contrast, the rescue of Fannie Mae and Freddie Mac has already cost taxpayers $135 billion and the losses keep mounting—likely another $19 billion, possibly even another $124 billion.

Bottom line: an unprecedented era of cheap money, driven by loose monetary policy, created a supposed new norm—and then animal spirits and a poor housing policy did the rest.

To be fair, it’s not completely that simple. Low interest rates were necessary after the recession of 2000-1 to get the economy growing again. There’s no doubt that keeping rates low at that time was the right policy. In addition, part of the reason they could be so low was China’s appetite for U.S.-backed debt.

But once the housing bubble appeared, the Federal Reserve could have warned that the rise in prices was unsustainable. It could have put teeth in that warning by raising interest rates. Alan Greenspan did the opposite: he said there was no way there could even be a housing bubble, and he kept rates low well beyond the time the economy was growing again. When it mattered most, he blew it.

The Securities and Exchange Commission also fell down spectacularly. The commission is tasked with spotting systemic risks to the economy, precisely what derivatives and other fancy financial products posed. A couple of members made the connection, but they were ignored. Overall, this was a catastrophic failure by the nation’s main financial regulatory body.

The good part of the story is the government’s strong response, both during the Bush Administration and under Obama. Their actions—TARP, the bank and AIG bailouts, the stimulus bill—prevented a second Great Depression.

The fact that things could be a lot worse provides little solace to the millions of Americans who have lost their jobs, their homes, or both; still, it’s the truth.

Obama’s biggest mistake was under-estimating how bad things would get, and not giving himself the political room to adapt to new circumstances. In the report that accompanied the economic stimulus bill, the Administration estimated that unemployment would decrease to 8% by the end of 2009. That estimate doomed much of their policy going forward. All they needed to say was that the stimulus was critical to stabilize the economy, and that the prudent course would be to examine economic conditions at the end of 2009 and decide whether any additional stimulus was needed. Instead, they locked themselves into a position that left no room for error. And that was their biggest error of all.

Next week: How we get out of this mess and whether we’re up to the challenge.

Jason Scorse

A huge battle is shaping up in Congress over extending the Bush tax cuts, with Obama wanting to extend only the middle class cuts and Republicans wanting to extend all of them, including those for persons making over $250,000 in taxable income (which would add $700 billion to the deficit over 10 years, negating any claim that the GOP is serious about the deficit).

Obama should call the GOP’s bluff and agree to an extension of all the tax cuts permanently—but with a catch.

The president should propose new and higher marginal rates on incomes over $1 million, $5 million, $10 million, and $100 million, with the highest rate at 49% (so that the federal government never gets more than half). In addition, all stock options should be counted as income so that hedge fund managers don’t get to pay low capital gains rates on their compensation. Not only would this be a political winner—wide majorities believe the ultra rich should pay higher taxes, even Republicans—but it is likely (I haven’t done the math yet) that the additional tax revenue would more than offset the revenue lost by extending all the Bush cuts.

Making a bold move like this would put Republicans between a rock and a hard place. Obama would be giving them what they want—permanent extension of all the Bush cuts—but only in exchange for new marginal rates that make a ton of sense: it’s insane that a billionaire pays the same marginal rate as someone making a few hundred thousand. If the Republicans refused, Obama could go back to his original proposal, point out that he offered a reasonable compromise (one that would’ve reduced the deficit and improved the tax structure), and that Republicans killed the deal. I see no downside to this whatsoever.

On healthcare, calling the Republicans’ bluff will be a little trickier and take time, but it could turn out to be just as effective. Republicans lied egregiously about the actual contents of the healthcare legislation—with their talk about “death panels”, socialism, and a government takeover—but most of the specific provisions are popular with the public (e.g., allowing for pre-existing conditions, banning rescissions, eliminating lifetime caps, preventative care without co-pays, and allowing children up to age 26 to remain on their parents’ policies). The individual mandate is the most controversial part of the bill, but it’s the glue that keeps everything together: without it, there is no way the private insurance companies will be able to afford the additional regulations mandating and expanding coverage.

Republicans will never be able to revoke the popular provisions of the bill—and if they truly threaten the individual mandate, the insurance companies will be up in arms. So again, call their bluff: dare them to remove the individual mandate, and come up with the money to pay for the additional services that Americans want and have now been promised. The Republicans will fold. The only alternative is a public option, or true socialized medicine. (Keep in mind that Obamacare relies almost exclusively on private insurance. This was once a Republican idea, put into effect in Massachusetts under then-governor Mitt Romney and proposed in the Senate under former GOP presidential candidate Bob Dole.)

Governing is far more difficult than campaigning, especially when your base consists largely of people looking to vent their frustrations instead of thinking about how to solve problems. Now that the GOP has to actually govern, it’s time to expose their inconsistencies and contradictions and move forward with a serious progressive agenda. For Obama and the Democratic leadership, the only thing standing in the way is timidity.

Jason Scorse

Cutting the federal deficit is a hot topic on Capitol Hill, and some kind of action seems certain. Congress is due to take up taxes for the first time in President Obama’s term (including the expiration of the Bush tax cuts), and a report from the president’s national debt commission is expected come December. Both bodies should take a hard look at ending a needless tax break; getting rid of it would raise billions, and make the Tax Code a touch fairer in the bargain.

This little-remarked giveaway is the write-off which the IRS allows every year for stock market losses: when net losses exceed gains, taxable income can be reduced by up to $3,000. This is “I-want-it-now” tax law, and it turns a private loss into a hurry-up claim on the public purse. With the deficit soaring, it richly deserves repeal.

The same as now, capital losses could be written off dollar-for-dollar against capital gains. The same as now, losses could be carried forward indefinitely until they were wiped out. What the repeal would disallow is writing off stock market losses against ordinary income (which, as we shall see, was poor policy in the first place).

Let’s quickly take a look at who gains from this special write-off, and who pays for it. Then let’s look at the hefty inflow to the Treasury if the write-off were written off for good.

Roughly half of all Americans own no stocks, so losses in the market offer no tax advantages to them. While it’s true that more people than ever do own stocks, most have their holdings in tax-sheltered retirement accounts; the write-off doesn’t help them, either. It turns out that the benefits flow entirely to a privileged minority: those well-off enough to have non-retirement investment portfolios. There’s no defense for a tax break so skewed toward the affluent, especially one as gratuitous as this.

And who picks up the tab? Like any other tax deduction, it’s paid for by taxpayers in the aggregate; in this case, the many pony up to benefit the few. Far better for the Treasury, and better for tax fairness, if Congress shows some spine and calls a halt.

The result would be an annual drop in tax expenditures (the revenue the government foregoes via the tax breaks it hands out), and a corresponding uptick in Treasury receipts. Year after year, the deficit would be that much less. Nobody can predict Wall Street’s ups and downs, or individual investors’ either, so the actual numbers could vary widely. All the same, the market’s slump in 2008 and the first half of this year have almost certainly front-loaded the benefits of a repeal.

Portfolio values sank by the hundreds of billions during the sell-off; year-end figures showed that investors took a total hit of $6.8 trillion in 2008. Of course not all the losses were realized, and stocks went on to rally sharply for most of 2009. But by mid-year 2010 the markets had once again soured, and the major indices were nowhere near their former levels. So while it’s impossible to know hard numbers, it’s a safe bet that on-the-books losses hover near a record high.

Which means it’s an opportune time to disallow writing off those losses against ordinary income. It serves no purpose, the money goes to people who scarcely need it, and it’s an annual drag on the Treasury; the sooner it’s repealed the better for the federal deficit.

And everybody cares about cutting the deficit, right?

Gerald E. Scorse

Inequality in America has been growing for decades, and now rivals the gaps last experienced in the “Gilded Age” of the 1920s. There are many reasons for this—tax policy, trade impacts, shifts in industrial production, technological innovation—but the most likely cause is education levels. As society has shifted towards an information economy, those with higher education are not only getting the jobs but making a lot more money.

Wages for blue collar workers have largely stagnated for decades, while wages for white collar workers have increased (although they too have been hit recently). Most striking are differences in unemployment rates. High school dropouts have an unemployment rate of 14.1% and those with a high school degree 10.8%, but those with a bachelor’s degree or higher only 4.4%. Not only is the unemployment rate for the least educated more than three times the rate for the college-educated; the 4.4% rate for the most-educated is essentially full-employment. Despite anecdotal tales of highly educated workers unable to find jobs, and receiving low wages, the reality is that almost everyone with a college degree who wants to work is employed.

For the least educated the opposite is true. Millions with little or no education are now out of work, often for long periods—and with little or no savings, they’re least able to afford more education. As their few skills atrophy and their confidence decreases, many of them will find it ever-harder to get jobs.

There are policies that can help remedy this situation, and the Obama Administration has taken some important steps. By reducing subsidies for private banks in the student loan industry, the government is saving tens of billions of dollars, interest rates are lower, repayment plans are less onerous, and grants have increased as well. As part of the stimulus bill, the federal government is investing billions in broadband connections so that people in some of the most remote parts of the U.S. will have the same access to information and services (including online education) that the rest of us have. In addition, by providing a new safety net for the uninsured, the new healthcare bill will decrease medical expenses and help free up resources for more investment in education.

Nonetheless, the sad fact remains that the education system in much of the country is horrible and getting worse. Rightwing ideologues continue to fight against science and inject the culture wars into the curriculum (Texas being the most obvious example). The least educated tend to be the most easily swayed by the demagogues on the right (e.g., Glenn Beck and Sarah Palin), who manipulate them for their personal enrichment; it’s also the least educated who are quickest to blame all sorts of imaginary enemies for their ills, from immigrants to secularists to socialists. And with social mobility decreasing in America, the children of the poor and the uneducated too often stay that way, creating a permanent underclass.

There are no easy answers, but education is ultimately the key. Anything that can be done to increase college attendance should be a priority. Apart from that, we can all do our part by keeping reason and rationality front and center. We need it to combat the forces in the world who will always try to manipulate uneducated minds in order to gain wealth and power.

Jason Scorse

Just when the bank bailout is looking like it will cost taxpayers much less than previously estimated, the cost of bailing out the government-backed Fannie Mae and Freddie Mac mortgage brokers has skyrocketed to an estimate of over $350 billion. And yet, the government continues to provide all sorts of misguided tax breaks and subsidies for home owners to the tune of over $230 billion per year.

This is one area where I agree with the serious conservatives (and a few liberals) who say that these policies need to end.

In graduate school I teach about the five primary conditions under which government intervention in the market may be necessary to avoid “market failure” and promote better social outcomes (these conditions are common in the environmental realm, which is my specialty, and why even free market enthusiasts acknowledge that the government has a strong role to play in environmental protection).

1. Imperfect information

In areas where information is poor the producers and sellers of goods may not make well-informed decisions. With housing, the information is close to perfect; sellers know exactly what they are selling, and the buyers can get homes inspected, get their histories, as well as detailed information about the neighborhoods. There is essentially close to zero information asymmetry in the housing market and the information is close to perfect. (It is true that many consumers are poorly informed about special types of adjustable-rate mortgages, which is the impetus for the new Consumer Protection Agency being debated in the financial reform bill conference committee, but this has nothing to do with information about physical homes).

2. Externalities

In situations where the production or consumption of a good imposes costs or benefits on those outside of the transaction (pollution is the classic example), then the price may not fully reflect its true social cost and the government may want to intervene (to either raise the price of goods with negative externalities or lower the price of goods with positive externalities).

Some make the argument that homeowners take better care of their property than renters and therefore create positive externalities for their neighbors (thus justifying a subsidy), but this is based largely on anecdotal evidence and is vastly overblown. In the nations of Europe, where renting is much more common, there is little evidence that renters let their homes deteriorate anymore than home owners. In fact, artificially increasing home ownership may have negative externalities. Not only does it increase the likelihood of default, which then produces terrible blights in a neighborhood, but people tied to mortgages have a much harder time moving, which stalls economic recovery in down times when home prices are low and jobs may be more plentiful in other areas.

3. Lack of secure property rights

Where there are unclear property rights, investment is stymied because people can’t be sure of ownership (and natural resources will be subjected to a “tragedy of the commons”). Home ownership rights couldn’t be more secure in America; when you buy the house it’s yours as long as you pay for it.

4. Lack of competition

When there is lack of competition, monopolists can charge artificially high prices and price discriminate. The housing market is extremely competitive, with millions of buyers and sellers and no one with significant market power.

5. Lack of insurance markets

In areas where insurance is lacking this may lead to under-investment because people don’t want to risk losing everything. There are plenty of home insurance options in America (which are actually required for bank loans); and in fact, the government often perversely promotes the construction of homes in unsafe disaster-prone regions by subsidizing flood insurance where the private insurance market deems it too risky.

What all of this makes clear is that there is absolutely no economic rationale for subsidizing home ownership. Not only is it extremely expensive (at a time of record budget deficits) and has negative unintended consequences—which made the financial crisis much worse than it would’ve been otherwise—but it is regressive; the primary beneficiaries are wealthy people who buy even bigger homes.

Removing housing subsidies would be good policy in every way. But is has become a “third rail” of American politics for the simple reason that most people own homes and get huge benefits from the breaks; they will be up in arms if they are taken away. While it may be unfair to remove these breaks after people factored them into their decisions, we should gradually eliminate them. This will ultimately lower the value of housing, making renting more affordable as well as buying (for those who would live in a world with home subsidies).

If we want to help lower and middle income people, we can do so directly in much better ways. We could take some of that $230 billion and lower the income tax brackets, raise the standard deduction, increase the Earned-Income Tax Credit, or do a host of other things like increase grants for college education. But it is long past time to get the government out of the housing market.

P.S. Frank Rich nails it on how this week's news should prove a godsend for Obama and the Democrats.

Jason Scorse

The climate change bill that was supposed to be unveiled in the Senate on Monday is now on indefinite hold. Senator Lindsey Graham, the lone Republican supporter, walked away from the bill because President Obama and the Democratic leadership signaled that immigration reform may come first. Harry Reid responded immediately to Graham’s reasoning, stating that the American people expect the Congress to tackle both issues and there is no reason not to proceed. We’ll know within a couple of days whether the increasingly watered-down climate legislation has any chance of passing in the Senate this year.

That this legislation, which passed the House almost a year ago and was one of Obama’s main priorities, is so close to failure should be a wake-up call to environmentalists—especially with large Democratic Congressional majorities. The interests aligned against reducing our dependence on fossil fuel are legion; in addition to the climate change deniers in the coal and gas industry and the anti-science wing of the Republican Party, many Democratic lawmakers in states dependent on fossil fuels for jobs and cheap energy are also very resistant to change. Environmentalists need to be at the top of their game for any comprehensive energy legislation to have a chance of passing.

Last week I described why the animosity of some environmentalists towards mainstream economists (coupled with confusion about them) is wrong-headed: economists are by and large strongly on the side of environmentalists, especially with respect to climate change.

This is not just a rhetorical issue with implications limited to bragging rights on blogs; the stakes are extremely high. This is because the political right in the U.S. has mastered the art of messaging, and thoroughly dominated the public policy narrative over the past couple of decades. On the issue of climate change they have clearly dominated the left in every way, sowing widespread confusion that has led to declining public support for bold action.

Think how masterfully the Right has moved the goalposts on virtually every issue since Obama and the Democrats took charge: a healthcare bill similar to Mitt Romney’s is now socialism, closing Guantanamo (agreed to by Bush and McCain) is now appeasing the enemy, and cap and trade, once the mainstream position for addressing climate change that both Obama and McCain agreed on, is now vilified (and McCain, with boundless hypocrisy, joins the chorus against the bill). What we have left in the Kerry-Graham-Lieberman bill is extremely weak, and even this will face an uphill struggle to pass.

Writers like David Roberts and Bill McKibben, who routinely characterize mainstream economics as somehow antithetical to environmental concerns, are inadvertently spreading the exact narrative that the Right wants everybody to buy into. There is nothing that the coal, oil, and gas lobbies, the anti-environmentalists at the Chamber of Commerce, and the extreme libertarians at the American Enterprise Institute and the Cato Institute want more than for the public to believe that mainstream economics oppose sensible environmental regulations that are fair, transparent, and put a significant price on greenhouse gases. This makes it easy to characterize those in favor of tougher climate policy as leftists who are anti-business, anti-jobs, anti-economic growth, and anti-competitiveness.

But they are wrong.

The overwhelming majority of mainstream economists favor stronger environmental regulation on many fronts, especially climate change. It is the rightwing economists who are out of the mainstream, who believe, contrary to basic economic theory, that an unfettered market can solve environmental problems despite all evidence to the contrary. There’s is not the consensus view.

By routinely bashing mainstream economics, often through faulty reasoning, environmentalists play into the hands of those with an-environmental agenda. The public needs to know that most of the leading minds in economics come down squarely in favor of strong climate change legislation, as well as efforts to improve water quality, clean air, and biodiversity protection.

This will only happen when environmentalists better educate themselves about economics, and realize that it is actually one of their greatest allies.

Jason Scorse

Many eulogies have already been written for the worst decade in the post-WW II era, and we had better learn from the past if we do not want to repeat the same mistakes. The stakes couldn’t be higher: another decade like the last could permanently erode American power and prosperity.

There’s plenty of blame to go around, but the crises of the past 10 years center around five distinct episodes of collective insanity.

First came the dotcom bubble at the start of the decade. During the rise of the NASDAQ, companies with little or no revenue were selling at price-to-earnings ratios that defied all economic logic. The subsequent crash would not have been nearly as devastating if millions of average investors hadn’t dumped most or all of their retirement savings into tech stocks, trying to ride the bull market to riches.

This violated one of the key principles of investing: don’t make high risk bets when you are close to retiring. The trillions in savings wiped out during this episode disrupted the plans of millions of Americans, many of whom have yet to recover.

The second bout of collective insanity was the housing boom, where again millions of Americans were convinced that the laws of gravity no longer applied. Enticed by record low interest rates, and encouraged by supposedly knowledgeable economists, Americans from all walks of life took part in a frenzy akin to the Dutch tulip craze of the 1600s. (As someone who has recently been shopping for a house, it’s astonishing to see the absurdly inflated values that people paid for homes just a few years ago.)

Because of its impact on construction and the toll that it took on consumer spending, the housing crash would likely have caused a severe recession under any scenario. But it would not have led the world to the brink of a financial meltdown if home mortgages hadn’t been securitized, sliced and diced, and sold in the derivatives markets at insane leverage ratios.

This was the third episode, and it’s especially striking. Here were the very people who are supposed to be experts in financial markets—hotshot PhDs from the world’s top schools and CEOs paid scores of millions to manage risk—making bets premised on completely unrealistic and unsustainable assumptions. It boggles the mind that so much money was put on the line in ways that most people didn’t even understand.

The fourth instance of insanity happened between the dotcom bust and the housing bubble: the public response to 9/11. Faced with the terror of that day and the graphic nature of its violence, America slipped into a period of extreme paranoia. We unwisely elevated a relatively small band of cave dwellers to the level of Hitler, Stalin, and Mao. As a consequence we proceeded to mismanage not one but two wars, the second of which was completely unrelated to the threat posed by the jihadists. During this dark period, the press corps became sycophants for an Administration that used fear and hyperbole to pursue its radical agenda.

This led to the fifth bout of collective insanity: the “re-election” of George Bush in 2004. By this time it was clear that Bush was not only incompetent, but intellectually unfit for the challenges America faced. His Administration was marked by a level of cronyism and politicization almost unparalleled in modern American history. No matter how poor a candidate was Kerry, a vote for Bush was a vote to reward failure. Bush didn’t disappoint, leaving America in shambles.

In many ways, the election of Barack Obama was not only a repudiation of the Bush decade; it also represented a yearning for a more reasoned and cool-headed approach to the world. So far Obama has done a good job of creating a more stable economic climate, and projecting a sense of calm. While many in the traditional media foolishly criticize his cerebral approach to the issues, it’s exactly what the country needs.

But no nation can rely on its leader alone. Americans must look within themselves, and recognize their own contributions to the messes that we created over the last 10 years. Only them will we be able to resist the pull of the irrational forces that will surely tempt us once again.

Jason Scorse

While the success of most Administrations correlates highly with the unemployment rate, presidents, ironically, have relatively little control over the economy.

George W. Bush inherited a recession flowing from the dot.com bust of 2000, and the economy promptly took another major hit following 9/11. Bush’s Federal Reserve Chief Alan Greenspan then proceeded to lower interest rates and kept them low for way too long, oblivious to the gathering housing bubble. Bush also went wrong in stacking the Securities and Exchange Commission (SEC) with people enamored with deregulation, and either unable or uninterested in reining in the gross irregularities taking place in the derivatives market.

In addition, Bush’s signature domestic initiatives were tax cuts for the rich; these dramatically increased the deficit (which became Obama’s to deal with) and did little to stimulate the economy. Bush also failed to make any significant investments in green energy and prevented federal funds from being used for stem cell research, thus retarding these industries.

As a result President Obama inherited the worst economy since the recessions and stagflation of the 70s and early 80s. Unemployment would top 10% before the end of his first year in office. None of this was really his doing; nevertheless, as he predicted, in the public mind he’s become responsible for the current economic conditions.

During the past year the Federal Reserve has kept interest rates at essentially zero percent and flooded the financial system with hundreds of billions in order to prevent a crisis and a repeat of the Great Depression. New financial regulations making their way through Congress could do a lot to prevent another crisis in the future, but they have nothing to do with today’s jobs picture.

Obama was able to pass a massive fiscal stimulus plan in his first weeks in office, and he’s now expected to announce new jobs initiatives in the coming weeks. From all estimates his policies have prevented the loss of around one million jobs, but they have not led to a net jobs increase. Obama has also laid the groundwork for long-term employment by investing in green technology and new infrastructure, and by easing restrictions on stem cell research.

Due to luck as much as anything, the jobs picture is apparently improving faster than anyone had predicted; last Friday’s surprising Labor Department report showed that the economy lost only 11,000 jobs this past November, reducing the unemployment rate from 10.2% to 10%. If the trend continues and job growth turns positive in the coming months, it would be a huge plus for American workers and a tremendous political boon for Obama and the Democrats.

The lesson, for all presidents, is that with so little direct influence over the economy, they had better use wisely what little leverage they have. While Bush was not responsible for the initial conditions during his first term, he did nothing to shore up the economy and wasted trillions on regressive fiscal policies. Obama inherited an economy that could easily consume his presidency and his ambitions, but he acted aggressively with all of the levers of his power and it may well be paying off.

Jason Scorse

The continuing fanfare surrounding Sarah Palin reminds us that even stupid and detestable individuals can capitalize on populist outrage, which always seeks scapegoats and soundbites. At the core of the rightwing narrative that feeds on this outrage is the notion that America’s “elites” are oblivious to the needs and values of “ordinary” Americans, who are hardworking, law-abiding, and god-fearing, in contrast to an intellectual class that is secular and aloof.

While there are racial, class, and coastal v. inland undertones to this narrative, the predominant theme is anti-intellectualism. People with advanced degrees are frowned upon in favor of those who act based on their “gut” and the moral absolutes of religion. The number of people who disbelieve in evolution, question climate change, and are suspicious of rational argumentation is highly correlated with the demographics of the rightwing.

Unfortunately, because of the conservatives’ power to influence the media and therefore our political discourse, this anti-intellectualism has crept further into the mainstream. While Obama’s election victory was in some sense a repudiation of anti-intellectualism, the crowds that continue to fawn over Palin, and the entire Tea Party movement, are evidence that this pernicious strand is alive and well. It’s a dangerous strand as well: without our elites, America would no longer be a first-rate power.

From the Founding Fathers to the creators of Google, from the profound political insights that inspired the Constitution to the scientific insights that developed and expanded the internet, America’s prosperity has always been a product of our elites. It is America’s dominance in higher education that has generated the technology, and the wealth, that have made our economy No. l in the world (and our military as well).

I often pose this simple question to my students: Why is it that a secretary in the U.S. can live a middle class life, with a decent home, a car, and some luxury goods, while a secretary in India will likely live in poverty? Since they both do the same thing, how is it that one leads a relatively affluent life while the other lives in poverty? The answer is simple, but holds a profound truth. The secretary in the U.S. lives in a wealthy country, with a high overall standard of living. And why is that? It’s largely because of our elites, whose innovations have propelled our economy and our prosperity for decades.

Being able to produce elite thinkers and innovators, and to attract them from around the world, will only become more important as the new century progresses. Whereas much of America’s prosperity was once tied to our abundant natural resources, the share of our wealth that’s linked to this base is fast diminishing. As the economies of emerging powers like China, India, and Brazil continue to grow, America’s need to remain competitive and technologically “ahead of the curve” will be paramount.

Those who live in almost all of the “red states” (e.g., Palin’s Alaska) are net recipients of federal income from the “blue states”; similarly, they are huge net recipients of the fruits of the intellectual capital that is concentrated on America’s East and West Coasts (e.g., Silicon Valley and the Northeast Corridor). Instead of disparaging those at the forefront of U.S. science and technology, the rightwing should be trying to emulate them.

Ironically, if Middle America is going to remain prosperous in the future, it will be because the inland communities become hubs for new technology and manufacturing (like North Carolina’s Raleigh-Durham-Chapel Hill Research Triangle); clinging to romantic, pastoral, and illusory notions of what constitutes the “real America” may draw in the crowds for Palin rallies and Tea Parties, but it’s ultimately bad for the region and bad for America.

Jason Scorse

The value of the dollar has fallen substantially over the last 18 months, and some predict that it may again approach an all-time low. One result is that U.S. imports have become more expensive, as well as travel abroad. Since we’re in the tail end of a global financial recession, many products remain extremely cheap: consumers are enjoying large discounts on items ranging from cars to flat-screen TVs to cellphones. The price of oil has inched up after reaching lows in the 40s at the beginning of the year, and this is certainly correlated with a weaker dollar (since oil exporters get paid in U.S. dollars). But overall, the effects of the weaker dollar haven’t been felt very much by U.S. consumers; for tourists traveling abroad, it’s been a different story.

On the other side of the ledger, the weaker dollar has led to significant increases in U.S. exports, which are expected to increase even further next year. This is great news for U.S. industry and should ultimately be a key driver of new jobs. The rise in exports has not yet led to a reduction in the trade deficit because imports have also risen, mostly due to the oil price increases of the last few months. But longer-term, a weaker dollar bodes well for the U.S. trade balance.

There are some who believe that the fall of the U.S. dollar is a cause for concern; they are misguided. While a weaker dollar will no doubt lead to price increases for U.S. imports, and have an inflationary impact, this should ultimately prove beneficial. The U.S. has been living beyond its means for a long time—consuming more than it produces—and this was never sustainable. We need to get things back in balance, and a slow and steady decline in the value of the dollar will help accomplish that. In addition, the inflationary impact of a weaker dollar, while not trivial, is not likely to be as severe as some suggest. The combination of technological innovation, rising productivity and global competition will keep prices for most goods on a downward trajectory. The inflation that may result from a weaker dollar will help ease our debt burden; we’ll be repaying our creditors with cheaper dollars than we borrowed in the first place.

What is most striking is that many of the same people who make the case for a stronger U.S. dollar insist that China’s currency is seriously undervalued and a threat to American prosperity. By most accounts the yuan is undervalued by at least 20%, making U.S. imports relatively expensive and exports relatively cheap. The Chinese government actively manipulates the world currency markets to maintain this undervaluation as a way to drive its export-led growth. Immediately prior to President Obama’s trip to Asia this week, China announced that it was considering letting the yuan appreciate, which was welcome news.

But a stronger yuan by definition means a weaker dollar. And that’s a good thing. As the yuan appreciates, the Chinese will be able to afford more American products and thus narrow the U.S.-China trade gap. Bottom line: it’s inconsistent to bemoan the weak U.S. dollar and at the same time harangue the Chinese for not allowing their currency to appreciate.

Economist of all stripes have long known that closing the U.S. trade gap had to happen sooner or later; the question was always how quickly and at what price. A precipitous crash in the dollar would have terrible consequences for global financial stability and U.S. standards of living; but a steady depreciation over time, matched with an expansion in U.S. exports, is exactly what is needed.

We should be happy that it appears that so far the latter situation is playing out.

Jason Scorse

It’s increasingly likely that serious healthcare reform will pass by the end of the year, and even include some form of public option. This is great news for America, but bad news for Republicans who have been pinning their hopes on defeating the measure.

Yet many problems will remain, primarily healthcare’s ever-increasing costs. The final bill will likely improve efficiency, increase and improve preventive care, and decrease abuse and fraud. Nevertheless, costs will continue to rise if Americans don’t radically improve their health. Obesity and diabetes are skyrocketing, and preventable deaths from cancer and heart disease are still near historic highs.

If people were truly rational and not as susceptible to addictions and misinformation, the disincentives associated with sickness—pain and suffering, lost wages, shorter lifespans—would be sufficient to encourage Americans to stay in relatively good health. Unfortunately, in areas related to health, people are often highly irrational, cravings and addictions are extremely powerful, and knowledge is abysmally low.

If government is going to either provide healthcare for free or highly subsidize it, then it’s only right that it enact policies that try to incentivize good behavior and minimize long-term costs.

Some of the policy options in this regard are non-objectionable: better prenatal and early childhood care and nutrition, healthier school lunches, and a ban on candy and sodas in school vending machines. Other policies, such as “end of life” counseling, have stirred up a great deal of controversy. Such counseling could save lots of money, since a disproportionate share of healthcare dollars are spent in the waning months of life; yet, if consulted beforehand, many people would prefer not to have many of these procedures. Unfortunately, when they’re old and infirm, people are often incapacitated and unable to inform their healthcare providers of their true preferences. It’s one of the great scandals of the healthcare debate that a reasonable and sensible “end of life” policy was portrayed as a diabolical scheme and labeled “death panels” by unscrupulous Republicans.

Another policy that would go a long way towards promoting healthier lifestyles would be an end to agricultural subsidies for commodity crops, which act to artificially deflate the price of corn syrup, meat and dairy products. Unfortunately the agribusiness lobby backs many powerful legislators, both Republicans and Democrats; they hold tremendous sway, particularly in the Senate, despite the relatively low populations of the states they represent.

Better healthcare could also be encouraged by charging different premiums based on individual behaviors, e.g., diet, alcohol and cigarette consumption, and exercise. If people were charged higher premiums for engaging in unhealthy lifestyles, this would likely be viewed as too harsh by a majority of the public. But the same outcomes could be achieved by rewarding people who engage in healthy lifestyles with lower premiums, which is intuitively appealing.

Even with all of these policies in place, there may still be a need for either higher taxes or additional healthcare rationing. But those tough choices can at least be minimized, and the overall population will be a lot healthier, the sooner policies along these lines are put into effect.

Jason Scorse

One of the centerpieces of the healthcare bills currently being debated in Congress is an individual mandate, which would require everyone to buy insurance or face a penalty. A similar mandate would apply to businesses, requiring them to either offer insurance or pay a penalty.

Varying levels of subsidies and assistance are being proposed, including hardship exemptions, to help lower and middle income Americans and small businesses offset a significant new expense.

There is an even more basic argument as to whether anyone should be forced to buy health insurance at all. From a libertarian standpoint, such a mandate is an infringement of the first order.

Proponents have likened the mandate to car insurance, which everyone is required to buy if they own a car. But this is a specious argument: people are required to buy car insurance because of the harm they might inflict on others. The liability insurance that everyone must carry makes sure that drivers can’t impose costs on someone else without being able to compensate them.

Libertarians claim that no such externality exists in healthcare. If a person chooses not to buy health insurance, the argument goes, the risk will fall only on that person; ergo, it’s each individual’s right to decide whether health insurance is worth it.

But this argument too is specious.

For one, we as a society are not willing to let people go without care when they get sick. People are not turned away at emergency rooms if they don’t have coverage, even if they could have afforded it. It’s inhumane to let people suffer and possibly die because they miscalculate whether they’re going to stay healthy (like the law student in this article, who thought he could go without insurance in his early 20s but instead got a rare form of cancer). In addition, when a mother or father gets sick and does not have insurance, their children can become innocent victims. Last but not least, the costs of treating the uninsured are in fact picked up, in the form of higher premiums, by all those who already have insurance.

The bottom line is that most people who don’t have insurance are either too poor to afford it or are gambling in a foolish way. Since most Americans find it unconscionable to refuse treatment to sick people, the most obvious and efficient solution is to make sure everyone has at least basic health insurance.

A sizeable percentage of the people currently without insurance are young and healthy, and their premiums will be relatively low. Their numbers are large enough, however, that the income from their policies can help subsidize care for everyone else. Remember: It is only because insurers are poised to gain up to 45 million new customers that they’ve agreed not to turn people away due to preexisting conditions, and to accept caps on individuals’ total out-of-pocket expenses.

If we lived in a world in which personal responsibility was taken to the extreme, and people were left to die if they got sick or in accidents and either didn’t have insurance or couldn’t afford treatment, then a mandate wouldn’t be necessary. Fortunately we don’t live in such a world, and a mandate is a necessary component of good public policy.

All the same, there is an urgent need for more personal responsibility in healthcare, and for incentives that match behaviors to outcomes. I’ll address these issues in a future piece. First, by mandate, let’s make sure that everyone has at least a basic level of insurance.

Jason Scorse

The Republicans have all but given up offering any substantive ideas for healthcare reform; they simply want to kill it and harm President Obama and the Democrats. At the same time, there are critical areas of disagreement among those who sincerely want to get the job done. Let’s explore some of those areas.

1. Level of subsidies

A main provision of healthcare reform is likely to be an individual mandate, requiring everyone who doesn’t have insurance to purchase it. Since healthcare is extremely expensive, this could cause serious economic hardship to low and middle-income persons unless they’re given sufficient financial assistance. Nothing would be worse than instituting a mandate only to force tens of millions of people into spending almost all of what little disposable income they have on healthcare. Olympia Snowe, one of two Republican senators actually negotiating in good faith with the Democrats, has made it clear that she will not support any package that doesn’t include generous subsidies. House Democrats are in almost universal agreement with this position; with midterm elections coming up in 2010, nothing would be more politically damaging than passing healthcare reform without adequate funding. However, the bill reported out of the Senate Finance Committee last week contained notably less generous subsidies than those in the House bill; the differences will have to be reconciled.

I would err on the side of generosity, both because of the equity issue and the politics; middle-class families should not be burdened with a new mandate that doesn’t come with completely, or almost completely, offsetting government assistance.

2. Total cost

Various numbers have been floated, ranging from $700 billion to $1.2 trillion over 10 years; but, as I have noted earlier, the cost issue is largely a sideshow. The difference between generous proposals and those that would seriously harm the purchasing power of tens of millions of Americans is in the range of $30-$40 billion a year, which is little more than a rounding error in the federal budget. Compared to the cost of the Iraq War, Bush’s tax cuts for the rich, and the Medicare prescription drug bill, the cost of insuring all Americans is cheap, and certainly reasonable. Those who, after the last eight years of profligate spending, have suddenly become “deficit hawks” only want to derail President Obama and the Democrats. Instead of complaining about the costs, they should be applauding how relatively inexpensive the proposals actually are (and the extent to which Obama intends to pay for most of it through cost-saving measures).

3. Competition across states

This issue doesn’t get as much attention as it deserves. As the law currently stands, states are in charge of regulating private healthcare insurance markets and residents are not allowed to shop across state lines. This has created a large number of state insurance markets that are highly concentrated, and in which residents have only one or two providers to choose from. The results are predictable: high insurance rates driven by monopolies and an inability to create large pools with greater bargaining power. Any serious effort at reform must include national pooling so that an individual in, say, California can buy a policy from any market in the country; this would go a long way towards increasing competition and bringing down costs. It is unclear whether such a provision will make it into a final Democratic bill, but it should.

4. The public option

No issue is more contentious than whether to allow the government to offer a Medicare-like policy which citizens could choose instead of the private insurance options. Proponents contend that a public option is the only way to keep private insurance companies honest, force them to reduce administrative and overhead costs, and ultimately “bend the long-term cost curve downwards”. The logic is compelling: public programs like Medicare and Medicaid have far lower administrative costs than private insurers, and can use their leverage to negotiate lower prices with hospitals and pharmaceutical companies (though Medicare is specifically prohibited from the latter under the terms of the prescription drug benefit).

Opponents of the public option view it as a “Trojan Horse” on the way to a single-payer, Medicare-for-all system; they contend that a government-run plan would undercut private insurance because it wouldn’t have to operate at a profit, and would therefore drive private insurers out of business. Proponents counter that a public option that must operate strictly based on fees collected, absent government funding, would create a level playing field and would not have any unfair advantage.

Not all industrialized countries with universal coverage have a public option—some are single payer (Canada and the U.K.) while others (such as Switzerland) rely solely on competing private insurers. If private insurers are strictly regulated, almost like public utilities, a public option is not necessary to bring down costs. Without such regulation, however, a public option is necessary; private insurers have every incentive to maximize profits and find every means to keep costs soaring. Since it is unlikely that the Congress has the will to enact robust private insurance regulation, a public option will ultimately be necessary in the U.S. to bring down long-term costs.

Aside from the above issues, there is widespread agreement (even among many Republicans) on some core elements of healthcare reform—the elimination of exclusions for pre-existing conditions, the decoupling of insurance from jobs (i.e., a job loss would not mean the loss of insurance), hardship exemptions for the very poor and small businesses, caps on both the percentage of one’s income and total payments to insurance companies, and the need for universal coverage.

Reaching agreement on the last 20% will be difficult, but this is what politicians are elected to do. By Thanksgiving, probably, we will know if they are up to the task.

Jason Scorse

In a piece two weeks ago I mentioned that income inequality in the U.S. is at its highest in almost a century. The question naturally arises: Does this matter? I think it does, but not because inequality in and of itself is a bad thing.

Equality of opportunity is a core American value, holding that all citizens deserve the chance to achieve their full potential. Some will become doctors, some will enter the law and business, others will become car mechanics or retail workers. The “American dream” and basic conceptions of liberty in no way require that people’s wealth and status be even roughly equal. An America that lives up to its ideals will be an America with an unequal distribution of wealth and income.

But this inequality has limits, and I think the current levels of inequality point to a larger failure in American society and the body politic.

It is hard to make the case that if everyone in America were truly able to live up to their potential, we would have the rising levels of inequality that now confront us. There are many causes for this increasing gap, among them higher returns to education, the fact that you need money to make money, and the decline of unions. At the same time, public policies have contributed to widening disparities: decreases in tax rates have disproportionately favored the wealthy, while rising healthcare and education costs and relatively stagnant incomes have chipped away at middle-class prosperity.

In addition, the higher returns to education that account for a significant portion of the income gap are driven in large part by an education system that does a great job of serving the needs of the top 10% but a poor job at serving much of the rest. Some states, like California, have an excellent system of community colleges and top-notch state universities, but also have a dismal pre-college education system. Some states, particularly in the South, have mediocre education systems at all levels.

Inequality doesn’t just happen in a vacuum; the levels of inequality we are now experiencing have their roots in bad policies, including our failure to stem the costs of medical care and cover all Americans. Tens of thousands of our fellow citizens go bankrupt every year due to medical bills, and the insecurity bred by the fear of losing health insurance prevents thousands more from looking for better jobs and richer opportunities.

In rich countries like ours, inequality is admittedly less of an issue because relatively few people are starving or out on the street; it is a much bigger concern in developing countries, where so many people don’t even have their basic needs met. Nonetheless, the current levels of income inequality in America are signs of a collective failure that requires sustained effort at the national and state levels, and better policies focused on providing equal opportunity and more reliable safety nets.

Jason Scorse

Of all the lies being peddled about healthcare in America, none is more egregious than the claim that the American system is the “best in the world”. For the wealthy who can afford the most expensive procedures and the best doctors, and for the Beltway politicians who get gold-plated government insurance, the American system is pretty good: they get the best the system has to offer, and the cream of the crop in America is often the cream of the crop in the world.

But only a small sliver of Americans get this high-quality care; for the rest of us, American healthcare ranges from adequate to downright horrible. Over the last decade I have heard numerous horror stories about medical care in the States, and some of it I have experienced firsthand. Our fellow citizens are routinely misdiagnosed, given the wrong medicines, overcharged for emergency services, and treated rudely and unprofessionally. Only last week, an 84 year-old friend of a friend was refused admission to a hospital and left out in the cold by himself, only to die the next day; his family is now considering suing the hospital. On a national level, the end result is needless suffering and hundreds of billions of wasted dollars.

Bottom line: Overall, the American healthcare system is mediocre by the standards of developed countries.

Doctors are generally good people who invest a significant number of their best years getting extremely expensive medical training in order to practice their craft. How is it that so many of them end up supporting a broken system that doesn’t promote public health? For one, the incentives in the system are so skewed that even those with the best intentions can get caught up in a web of excessive testing, extreme levels of bureaucracy, defensive medicine based on liability concerns, and the stress that comes from a system that pits insurance companies against patients.

But more fundamentally, the American healthcare system is a private market that thrives off patients’ sicknesses; there is simply less money to be made from keeping people healthy. Some societies reward doctors for keeping their patients healthy. Not ours: a cancer patient who needs endless tests and therapy is the best money-maker, so even the most well-intentioned medical professionals have their priorities skewed (whether consciously or not).

The only way to even attempt to correct the perverse incentives in the healthcare industry is through greater government involvement. As Paul Krugman points out, the only reason healthcare in America works at all is because of government intervention. A purely private healthcare market will always be a disaster, not only at the treatment level but at the research level: money will pour into cures for baldness and impotence, not into proper nutrition.

Those who call the American healthcare system the best in the world are trying to defend a clearly broken status quo. In addition, they simply don’t realize the extent to which we need government to correct this unsustainable situation: a situation in which needless suffering is the norm, not the exception.

Jason Scorse

Many elements of the healthcare debate have been frustrating—the media’s continued attempt to trivialize the key issues and dumb down the dialogue (some commentators have gone so far as to criticize Obama’s recent press conference for being too serious), the depravity of Republicans who couldn’t care less whether the status quo persists, and the “Blue Dog” Democrats who continue to side with GOP obstructionists to stall reform—but the most ridiculous arguments have been over the cost.

Major reform that gets us close to universal healthcare will apparently cost taxpayers about $100 billion a year more than we currently pay; this is a 10% increase over the $1 trillion the government already spends annually on healthcare. Obama has identified cost-savings that can pay for about two-thirds of this $100 billion, leaving around $35 billion a year in new revenue that needs to be raised.

Bottom line: this is peanuts.

I have no idea why the Obama Administration, usually so adept at managing the narrative, has let the issue of cost become so contentious when it’s really a non-issue. The notion that Republicans, after squandering a major surplus and turning it into an almost $8 trillion deficit, now care about fiscal responsibility is simply not credible. Bush’s tax cuts for the wealthy would cost more than $2 trillion over a decade; they passed with no offsetting savings, and were added 100% to the deficit. The Iraq War has cost more than a trillion dollars and counting, to say nothing of the stepped-up war in Afghanistan.

It’s admirable for Obama to insist that healthcare reform be revenue neutral, yet instead of being applauded for this he gets criticized for needing to raise a modest amount of new revenue? And this to cover almost 50 million Americans who now lack any coverage whatever? It’s simply insane, but sadly it’s also indicative of contemporary political discourse and the media’s inability to focus on substance over spin.

But again, much of the fault lies with the Obama Administration for not doing a better job of putting into perspective how little the healthcare proposals cost, especially compared to the benefits. I am baffled at this lapse. Maybe the Administration knows something I don’t. The way I see it, it’s time to end the sideshow over cost and make the case loud and clear.

Jason Scorse

The scope of the irresponsibility and lack of accountability during the Bush years is legendary, and will only grow over time. It is both sad and maddening to see the airwaves full of the enablers of this legacy (e.g., Dick Cheney and Karl Rove, joined these days by the uber-hypocrite Newt Gingrich). The same for the intellectual architects of these failures, most notably neoconWilliam Kristol, who bounces from one major outlet to the other, from the pages of the New York Times to the Washington Post.

Ours is a culture that preaches accountability and responsibility, yet no longer practices it. This is probably our greatest national weakness; I have always contended that we get the government (and the media) that we deserve.

This culture of disregard for the consequence of one’s actions is nowhere more evident than in the public response to the housing and credit bust, and most recently in legislation aimed at improving the fuel efficiency of the cars Americans drive.

Millions of people who bought homes during the bubble now owe more on their mortgages than their homes are worth (referred to as being “underwater”). To hear them, you might think there is a god-given right that their homes would appreciate at double digits forever. If they were speculating, the downturn was simply the price of making a bad bet; if they bought their home to live in and could afford the mortgage, there should be no change in their behavior; if they bought a home they couldn’t afford, that was their mistake (and whoever gave them their mortgage).

But now tens of thousands are simply walking away from their homes and refusing to pay. This weakens the communities that have to deal with the abandoned houses, further weakens the banks, and helped lead to government bailouts that cost taxpayers tens of billions. The bailouts largely reward the most irresponsible; those who were prudent and resisted the housing hysteria are now subsidizing the foolish.

The same goes for credit cards. After running up huge debts, mainly on goods that are by no means a necessity, millions are now defaulting—and getting great deals in the process. They’re wiping out their debts by paying as little as 50 cents on the dollar. Wonderful for them, but it raises interests rates for everyone else (and depresses share prices for people like myself, who have banks in their retirement portfolios).

Perhaps most egregious, since it comes from a Democratic Congress under President Obama, is the new $1 billion “cash for clunkers” program. Owners of SUVs or trucks that get less than 18 mpg will be able to get up to $4,500 from the government to trade their old vehicle in as long as they buy one that gets at least 2 mpg more. People who own cars with less than 18 mpg get the money if they buy new cars that get at least 4 mpg more. This is another giveaway to the auto industry, it does almost nothing to improve fuel efficiency, and it actually penalizes the people who had the sense to buy fuel-efficient cars in the first place: if you have a car that gets 25 or 30 mpg, you’re not eligible for a single penny from the program.

There are serious problems when society views the government as little more than a trough at which to engorge themselves. This parasitic relationship reached its apex during the Bush Administration: lobbyists wrote legislation, jobs went to political cronies instead of the competent, the public was told they could have lower taxes and still fight two wars.

With Obama we were supposed to get “tough love” and a return to the true conservative principle of personal responsibility. Given the severity of the economic crisis, and the need to bail out the banks and the car companies, the president obviously feels he has to hold up on this message; one can only hope that it ultimately becomes central to his governing philosophy.

When those who play by the rules see irresponsibility being rewarded, they ultimately become dispirited and no longer believe in the system. They can easily become disengaged, leaving the system even more vulnerable to manipulation by those who are unaccountable and irresponsible. This is a cycle that America must avoid if it is to remain a great power.

Jason Scorse

Friday’s economic data point to a continuing recession, but one in which the worst may be over: job losses are beginning to decelerate, there are moderately encouraging signs in retail spending and consumer confidence, and some of the hardest-hit home markets are showing sales upticks. The stock market, a leading indicator typically six months ahead of employment and GDP swings, has shown the largest percentage gains in years over the last two months.

Whether the worst is really over is hard to tell. Still, since much of the nearly $800 billion in stimulus spending will only begin to impact the economy in the coming months, it’s reasonable to expect that things should get better; in that case, the country may be officially out of recession by the end of the year. Much rests on the health of the financial system, which is still shaky, but there have been encouraging signs in the banking sector as well; banks currently don’t need as much new capital as once feared, and a serious financial collapse now seems a remote possibility.

If there is reason for cautious optimism for the country’s economic health, there is no such (even qualified) good news for the GOP. In the opening weeks of the Obama Administration, the Republican Party appeared to stake its political future on the hope that Obama (and the country) would fail, and that they would be able to put the blame squarely on the President and the Democrats. This was always a risky proposition, made even riskier by the timing; the likelihood that the recession would continue through the 2010 mid-term elections was always dubious.

By voting nearly unanimously against virtually all of Obama’s major spending initiatives, the GOP has put itself in a lose-lose position. If the economy turns around, Obama and the Democrats will be able to take all the credit; if things get worse, Democrats can make the case that things would have been far worse had we followed the GOP’s advice. While the government is running record deficits, federal red ink has never been a hugely motivating political force. In the midst of the worse recession since the 1930s, it won’t matter this time, either.

People vote their pocketbooks more than anything. By painting themselves into a corner on all matters economic, the GOP will have nothing left to fall back on but the culture war issues that have less and less resonance. The country is becoming increasingly tolerant of gays, and the stridently anti-abortion forces represent no more than 20% of the country.

To compound its problems even more, the face of today’s GOP consists of a discredited old guard (e.g., Cheney, Gingrich, and McCain) and a new guard (Rush Limbaugh, Michael Steele, and Sean Hannity) which speaks only to a sliver of angry, bitter voters: those not guided by reason, and who totally turn off independents and moderates. As many on the blogosphere have noted, the current spokespeople for the GOP are almost a dream come true for Democratic activists.

In the end, America needs a robust multi-party democracy. With the GOP seemingly bent on political irrelevance, perhaps it’s the time for the emergence of a new national party. Either way, as long as Obama and the Democrats don’t make any major missteps, the country appears to be theirs to govern for a long time to come.

Jason Scorse

This past week might not mark a turning point in the global recession (as Obama and the rest of us surely hope), but it did mark a turning point for international finance.

Just two years ago, when I was teaching International Economics to graduate students, we spent a week discussing the diminished role of the IMF and how it was fast becoming a mere advisory body. Many developing countries were flush with budget and current account surpluses, and were openly criticizing the OCED-dominated IMF as superfluous and out of touch with their needs.

How quickly things change!

At the close of the G-20 summit, the members announced an infusion of over $1 trillion into the IMF to help developing countries in the wake of a plunge in exports and a concomitant fall in GDP growth. The IMF, so recently deemed close to obsolescence, has become one of the pivotal organizations for steering the global economy through incredibly difficult times. Nations whose finances were in relatively good shape before the downturn—e.g., the Ukraine, Iceland, and Pakistan—are now in line for new loans.

Perhaps more importantly, the G-20 meeting was a success on additional fronts. The major players agreed that more global stimulus might be necessary (although no one wanted to appear to bend to American pressure right away), and there was widespread agreement on the need for tougher international regulation of financial services and investment banks. There was progress even on non-economic matters, with Obama and Russian president Medvedev agreeing to discuss a reduction of each nation’s nuclear stockpiles.

For a summit often noted for the ferocity of its protests and the feebleness of its collective action, this G-20 meeting gave encouraging signs that we could be entering a new era of genuine international cooperation.

Behind these signs lie trends that will have a huge impact on the world’s economic order. It is clear that the U.S. was living beyond its means, and must become a more frugal nation; America has to reduce its unsustainable debt loads, and its aging population has to put aside more money for retirement. But in order for the U.S. to cut back on consumption, and not send both its economy and the world’s into a tailspin, the developing nations need to increase their consumption. We are already seeing signs of this shift, with the Chinese government taking major steps to increase domestic demand (despite Hu Jintaos' recent statements that the Chinese savings rate is just right).

The challenge underlying this tectonic shift in the world’s consumption patterns is how to make sure that billions of new consumers don’t pollute and degrade the environment the way those in the West did during their transition.

But make no mistake: the people in these up and coming nations will not be denied refrigerators, washing machines, cars, and computers. They have waited long enough, and the 21st century is going to be their coming-out party.

Jason Scorse

The Bush years will be remembered for many things, but above all they represent a lost decade during which American economic might was squandered. The wealth that was generated during the first decade of the millennium was essentially illusory; except for some advances in computing and electronics technology, increases in the value of assets were strictly on paper, based on speculation and, as we’ve discovered, Ponzi schemes.

It didn’t have to be this way. Our current problems are the result of specific policy decisions made by the Bush Administration, and a public that let them get away with it.

The Administration’s all out disregard for scientific inquiry is legendary, and particularly damaging in the areas of stem cell research and energy technology. Some on the right argue that no major advances have come from embryonic stem cell research, and that if anything, Bush’s refusal to allow federal funding has led to advances in the less morally problematic realm of adult stem cells. This is wrong. With a federal moratorium in place for eight years, we have no real idea how much stem cell research may have been retarded. Many of the world’s top scientists in biotechnology have moved to other countries, and many competitor nations have used the past decade to catch or surpass us in this critical 21st century technology.

In addition, by deciding to make it harder to obtain student and work visas, the Bush Administration has significantly decreased the number of top students and researchers who come to the U.S. to study and work. At a time when America should have increased its outreach, we made the world’s best and brightest feel unwanted and unwelcome.

On the energy front, Bush’s reversal of his campaign promise to regulate carbon dioxide (and his all-out efforts to block states from doing so on their own) has led to another decade in which American dependence on Mideast oil has increased. As a result we continued our direct financial support of terrorist-sponsoring states, and lost precious time to confront climate change. China is now the leading solar panel producer in the world; while Silicon Valley is finally beginning to invest in green technology, a tremendous opportunity for America to take the lead in energy innovation was wasted.

The state of America’s infrastructure is appalling by industrialized standards, as anyone who drives on our major highways or visits our airports can attest. It will take many years and hundreds of billions of dollars just to make repairs, let alone major improvements.

The costs of education and health care have far outstripped the nominal increase in wages over the past decade. This has hampered productivity because many workers stay in jobs solely for the healthcare benefits, and many businesses are hiring fewer workers because of the burden of healthcare premiums. Many younger Americans are being dissuaded from pursuing advanced degrees at just the time when the premium on education is getting even higher. There is simply no way America can remain a major economic power if education participation rates continue to slip relative to other major powers.

The bottom line: in too many important ways, America is a poorer place than it was in 2000.

Fortunately, in only a little over two months, Obama has begun to put in place policies that will not only help us dig our way out of the mess we’ve made, but rebuild our human and physical capital for the long-term.

We’ve lost a lot of time, and it may take at least a year or two to get unemployment down to a reasonable level and growth rates up to a modest 2-3 percent. At least we’re now pointing in the right direction, away from the policies of Bush’s lost decade.

Jason Scorse

You think investors had it bad last year? You may not know it, but they’ll be turning to America’s taxpayers (as they always do) to help bail them out.

Every spring, thanks to a generous tax code provision, the Treasury picks up part of the tab for losing bets on Wall Street. Given last year’s historic plunge, these personal bailouts could rival the $700 billion TARP bailout—and for investors, there’s no dollar cap or cut-off date.

It all adds up to a fiscal hit on the Obama Administration. No matter how large the losses realized in 2008, no matter how long it takes to recoup, Uncle Sam will be sharing the pain. Deeply sharing: up to 35 percent depending on the loser’s tax bracket, or 39.6 percent if Obama ends the Bush tax cuts for higher-income Americans.

Capital loss offsets are the tax code provision that soothes investor wounds. When the year’s trades are reported on tax returns, losses offset taxable gains dollar-for-dollar. If net losses exceed gains, the loss offsets taxable income—by up to $3,000—and provides another tax saving.

Offsets never lose their tax-reducing power. Losses greater than $3,000 (as last year’s probably were) are carried forward indefinitely until they’re used up.

At 15 percent, the tax on long-term capital gains is low compared to the rate on ordinary income like wages. With capital loss offsets, the deal is even sweeter on the downside. While gains are taxed at less than half the top rate, losses are written off at 100 percent across the board. Could losing come any closer to winning?

Yes, say Senator John McCain and Michael Boskin, a former chairman of the Council of Economic Advisers. Senator McCain proposed raising the capital loss offset against ordinary income from $3,000 to $15,000 per-year for 2008 and 2009. Boskin would up the number to $20,000.

All of which raises some interesting questions. Who profits from these write-offs? Is there good reason for the government (read: taxpayers) to subsidize investment losses? Might the tax system be fairer, and rates perhaps lower, if these subsidies were curbed or even ended?

The first question is easy. Roughly 50 percent of Americans own no stocks, so offsets hold nothing for them. Of the half who do own stocks, most have their portfolios in tax-sheltered retirement accounts. They don’t get those write-offs, either.

That leaves a fairly narrow layer, those affluent enough to have non-retirement stock portfolios. Putting it another way, the benefits of capital loss offsets flow solely to those who already have ample capital. (If this hints at class warfare, here it is served neat by Warren Buffett: “There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning.”)

As to whether subsidies for investors are a sound government policy, sure they are—but it’s foolish to hand out tax breaks just for playing the market. Real investors, a thimbleful of the total, put seed money into initial public offerings (IPOs) and follow-on offerings. They grow jobs and grow businesses. The rest of us play the game at the tables down on Wall Street: we grow portfolios (if we’re lucky), nothing more. Real investors have a strong claim to tax breaks. “Investors” have a frail claim, and it’s time that Congress caught on.

Tax fairness—as always—is in the eye of the 1040 filer. Still, facts matter. Capital loss offsets benefit the few at the expense of the many. Like all tax deductions, they’re paid for by taxpayers in the aggregate—through higher rates, fewer government services, or both. Taxes would be fairer without offsets. Short of repeal, Congress could set a dollar or percentage limit (a form of which was on the books years ago). At the least, the offset against ordinary income should be stricken.

Except for real investors, who are 100 percent deserving of 100 percent offsets (and an income offset too). If they lose more than $3,000 in a year, Michael Boskin’s $20,000 income offset is a starting point.

Now for President Obama, whose Tax Fairness Plan during the campaign opened on this note: “For decades, America has been victim to an anti-tax sentiment that has led to tax cuts that favor wealth, not work.” Two prime examples are offsets and higher taxes on wages than on capital gains. When Congress finally takes up tax reform, the president’s instinct for fairness should be his one true guide.



The author helped pass a bill that tightens the rules for reporting capital gains on tax returns. His op-eds on investment taxes have appeared in several major dailies.

Gerald Scorse

Lost in all the discussion of toxic assets, bank insolvencies, and CEO golden parachutes is the real reason we’re in a financial crisis: there were no limits on how much investment banks could borrow against the assets they held. This led some of the high-fliers to leverage, or borrow, up to 30 to 60 times as much capital as they had, and use it to invest in financial derivatives based largely on mortgage values; when home prices went into free fall, this led to such huge losses that the banks went belly-up (or will, once their remaining assets are properly valued).

Traditional banks can at most borrow (or lend out) approximately 10 times the reserves they hold. This ensures that they will always have enough capital on hand to meet withdrawal requests (except during financial panics). The derivatives market at its peak was estimated to be “worth” about $60 trillion; to put that number in perspective, it’s more than the entire global economy and should have been a red flag to anyone paying attention. If investment houses, like banks, had been required to hold the same percentage of reserves, the market would have been significantly smaller and the damage from its collapse more manageable and containable.

We no doubt would still have experienced major losses in the financial sector, large overall stock declines, and large decreases in home values, but nothing approaching what we are now facing. It also needs to be said that the sharp decline in home prices is really a blessing; it’s always good when bubbles burst, the sooner the better. What’s happening now isn’t a crisis, it’s prices beginning to return to their long term trends. The real crisis was the ridiculous rise in home prices in the first place, and the numerous government policies that helped make it happen (e.g., those lax reserve requirements for investment banks).

But home ownership is sacrosanct in America, and it’s politically incorrect to question the (usually regressive) tax subsidies that help make it attractive: deductions for mortgage interest and property taxes, and a capital gains deduction of at least $250,000 on a home sale (which means there’s no capital gains tax at all on most sales). The elimination of preferential tax breaks for home ownership would be a step towards greater fairness, and it would remove one of the drivers of any future real estate bubbles.

The real culprits in our financial crisis, however, are the Democratic and Republican lawmakers who passed the legislation exempting non-traditional banks from traditional capital requirements. This includes many in the Clinton team, some of whom are now in Obama’s Administration. Former Senator Phil Gramm (R-TX), a top economic advisor to John McCain, is probably the most culpable on the GOP side.

These men were blinded by ideology into believing that the market for fancy financial products would regulate itself, and that the benefits these instruments would provide was so great that no rules should get in their way. Fortunately, Obama has made it clear that anything that operates like a bank must be treated like one, and he will not tolerate an unregulated, rogue financial sector.

In the meantime we need to clean up the mess that has laid to waste almost the entire U.S. banking system. This will cost a lot of money; but if the Obama Administration can get over its aversion to nationalization, and structure the plan in the interests of the American taxpayer, the government may be able to recoup much of its investment in the medium term.

Jason Scorse

When I first heard that the “Big Three” automakers were teetering on the brink of bankruptcy, my reaction was good riddance. The automakers, in conjunction with the United Autoworkers Union (UAW), have blocked environmental legislation for decades because cheap oil spelled big profits with gas-guzzling SUVs. There’s something to be said for allowing market forces to weed out inefficient producers and reward the Asian car manufacturers who had the foresight to develop fuel-efficient fleets.

But after some reflection I realized that this was too simplistic. Part of the reason the Big Three are so close to insolvency is because of the credit crisis, which is no fault of theirs. Currently it is simply difficult to get car loans, and even Toyota and Honda are experiencing huge sales downturns. In addition, because the U.S. is the only major industrialized nation without universal healthcare, U.S. automakers are at a competitive disadvantage vis-a-vis their overseas rivals.

Bailing out Detroit might not be a great option, but it appears to be the lesser of bad options; letting the mainstay of U.S. manufacturing go down in the middle of a major recession would reverberate throughout the economy, and make things significantly worse. In comparison to the $700 billion so far pledged to bail out the financial sector, the $15-$34 billion that is being discussed for the Big Three is a relative pittance; there’s also a good chance that the government (aka we taxpayers) will eventually recoup the investment, which happened when Chrysler was bailed out years ago.

Enter the Senate Republicans.

At the weekend the GOP, in yet another show of class warfare and ideology trumping the public good, seemed intent on derailing any auto bailout because the UAW would not agree to immediate and major cuts in wages. That the GOP’s anti-union stance would blind them to the repercussions of letting this modest proposal fail shows all too well that when it comes to the middle class and blue collar workers, the Republicans could care less. Where is their outrage over the compensation of corporate CEOs and investment bankers who pull down more in a year than autoworkers make in a lifetime? Their companies have already received tens of billions of dollars, many times more than the Big Three are asking for.

I hold no love for GM, Ford, and Chrysler and I’ve never owned an American-made car, but I never imagined the day might come when these companies went out of business. There is still time for emergency measures, but the window of opportunity may be about to close for good.

Jason Scorse

One of the things I am most hopeful about in a potential Obama Administration is the chance to finally strike the right balance between personal responsibility and government assistance. For too long America’s political landscape has been polarized by two unhealthy extremes that have dominated both government policy and our national conversation.

Many on the Left and in Democratic circles, while rightly focused on some of the key structural inequities in American society, have often been too quick to view government as the solution to all problems, and too quick to believe that those who find themselves in hard times are necessarily victims of some injustice. Many Americans simply make bad choices—taking too much credit, investing too little in education, saving too little for retirement, and taking too little time to invest in their children—and they and their families suffer for it. One doesn’t have to be insensitive to the racism that still lingers in society or the stagnating median wages of the past decades, to also acknowledge that many Americans would be a lot better off if they exercised greater caution and care when making major decisions.

Many on the Right and in the Republican circles, while justifiably focused on values of hard work, sacrifice, and personal responsibility (even if not practiced by their leadership) have often been too quick to ignore the lingering systemic injustices that keep many people from achieving their full potential, and too quick to abandon the most vulnerable segments of society, who are often stuck in hard times through no fault of their own.

What we need is a leader who makes it clear that the government is there to meet the American citizens half way. For everyone who works hard and strives to improve their lot in life the government will lend a helping hand with college tuition assistance, basic daycare and preschool, healthcare, and a safety net during serious economic downturns when firms aren’t hiring.

At the same time, the citizenry have a responsibility to do their part by being seriously engaged in their children’s education, updating their skills continually throughout their working lives, living within their means, doing their best to save, and taking care of their health so as not to burden the healthcare system.

I think Barack Obama is capable of creating this new social compact in America; many of his speeches are already tinged with hints of such a worldview, especially in the realm of education. America will likely never move all the way towards some of the more strongly socialist economies of Europe, such as Sweden and Germany, because we so greatly value our unique dynamism and put a large premium on individuality. Obama’s social programs may move us in this direction, but not all the way, and with an American flavor that will retain both greater choice and a greater role for the private sector.

Hopefully, in less than 10 days we will begin this journey towards a more responsive government that works in concert with a more disciplined and engaged citizenry.

You know what to do to make it happen—send money, make calls, and talk to friends and relatives so that we run through the finish line. Also, you can help out the down ticket races here.

Jason Scorse

This is an odd moment for optimism: we’re facing the likelihood of a serious recession, and the global equity markets have already lost trillions. Yet I believe there are several silver linings beneath the current crisis.

Here are my reasons why America will ultimately be much better off:

1. Obama’s victory is almost assured, along with larger Democratic majorities in both the House and the Senate.

A focus on the economy usually favors the Democratic candidate. This time around, John McCain’s bumbling and craven response to the financial meltdown seriously eroded what miniscule credibility he had on economic matters.

The most important thing needed to get America back on track is an Obama Administration with solid Congressional backing. It’s the only way that major institutional reform can be undertaken; any legislation drafted by a McCain Administration would take us in the wrong direction. Want proof? Just look at the dictatorial-style powers Paulson asked for last week.

With Obama at the helm and the adults back in charge, legislation will begin with the public interest front and center. Thanks to the Democratic left, the legislation might get even better in the Congressional negotiations.

2. Progressive legislation may be easier to pass given the Wall Street bailout

In the first debate, Jim Lehrer tried to get Obama to state which programs he might need to cut because of the worsening budget situation. I think this is exactly wrong. By bailing out the fat cats who got us into this mess, it will be easier for Democrats to spend on social programs and give tax cuts to the middle and lower classes. The Congressional refrain in 2009 is likely to be: “If we had enough to help investment bankers, we have enough for health care, universal preschool, college tuition relief, etc.”

In addition, I think it will be easier than expected to let Bush’s tax cuts for the top 5% expire as scheduled. There is widespread outrage that those who have done the best under Bush are being bailed out. This added revenue, plus the savings from ending the Iraq War, should allow the Democrats to fund significant new programs.

3. The bailout is not likely to cost $700 billion

While the final outlay may total $700 billion, proper safeguards and oversight should enable the government (and taxpayers) to get back most if not all of the money. This will only reinforce Point No. 2, since the public’s perception will be that $700 billion went to the fat cats and it’s time for Main Street to get its share.

4. New investments and real regulation will strengthen America

For years, America has been on an unsustainable path and living beyond its means. Our infrastructure has aged; we trail much of the world in broadband access and other requisites of today’s digital age. We need a serious push to upgrade our infrastructure, to develop new industries in green technology and biotech, and to modernize our financial system. We need all of these things to maintain our competitive edge in the global economy of the 21st century.

This will take some time. Obama plans $150 billion of federal spending over 10 years on alternative energy, and he will immediately open up federal funding for stem-cell research. I am confident he will also put our best minds to work on updating our financial regulatory apparatus, as he called for back in March. Wall Street may not see the growth in asset values that we have experienced in other periods; at the same time, a steady growth rate of 3-5% without as much volatility would be a great development. It is certainly within reach.

In summary, while things may get worse before they get better (which is quite scary), I think America’s best days lie ahead. The country is on the verge of self-correcting, even if the process is going to be painful.

P.S. Once we send Palin back to Alaska, we can all laugh (or shudder) at the fact that someone with so little knowledge about virtually anything (and seemingly proud of her ignorance) ever got anywhere near the vice-presidency. She didn’t deserve to be on the same stage with Joe Biden.

Jason Scorse

The definition of free trade is relatively straightforward: trade in which prices are not distorted by tariffs and subsidies, or restricted by quotas or other forms of non-tariff barriers (besides those necessary for public health and safety). The logic behind free trade is also simple: it results in lower prices, which benefit the world economy.

Countries throughout history have avoided free trade in order to bolster certain sectors of their economy at different stages of development. Today’s developed countries once employed high tariffs to protect domestic producers, and still rely on various subsidies. Developing countries feel the need to protect their industries from more efficient outside producers.

There is healthy debate about the extent to which protectionist policies have helped developing countries. Some researchers point to the interventionist policies of today’s Asian powers as evidence that free trade is not the best path for developing nations. Others point out that the protectionist policies employed over many decades in Latin America have had at best mixed results.

There is a general consensus, however, that over time the world should move in the direction of freer trade. The transition will not be painless; there will be many losers, especially the unproductive agricultural sectors of the developing world.

Even though agriculture’s share of GDP is decreasing throughout the world, in many countries agriculture still employs a disproportionate share of the workforce. Developing countries, particularly China, are worried that more imports of cheaper food will put their farmers out of work and lead to massive unemployment. This is a legitimate fear, and explains why phased-in commitments and assistance for the transition period have been part of the WTO Doha negotiations. In addition, developed countries have agreed to cut their agricultural subsidies in exchange for lower tariffs abroad.

In the latest round of the Doha negotiations, China wanted to include a safeguard to raise tariffs significantly if imported food starting flooding their markets. The Chinese suggestion was refused because it went against the reason for lowering tariffs in the first place. This led to a deadlock which has derailed the negotiations for at least another year.

From an economic perspective, these trade talks have been bizarre because they rely on a mercantilist mindset: countries will only agree to reduce their protectionism if others do so as well. In reality, each country would be better off if it unilaterally moved towards freer trade.

Agricultural subsidies in the U.S., the EU, Canada, Japan, and South Korea are a particularly egregious form of corporate welfare. They artificially depress world prices, lead to over-production, and degrade the environment. All these countries would be better off if they eliminated subsidies regardless of what other nations do.

High tariffs force China, India and other developing countries to pay higher prices for food. Lowering their tariffs would reduce both food prices and inflation. If done slowly over a period of time, dislocations could be minimized and investments made in more productive agriculture and other forms of employment.

I would venture that 90% of Americans lack a basic understanding of free trade. Increasingly, they seem to believe that freer trade (particularly NAFTA) is responsible for many of America’s economic ills, e.g., lost manufacturing jobs and stagnating wages. Blaming “unfair foreign competition” is an old game in politics, and plays into other xenophobic fears.

Ironically, it is America that for decades preached the benefits of free trade and free markets to the rest of the world. Now, with our own economy hitting a bump in the road, Americans are lashing out in frustration. The truth is that U.S. consumers have benefitted tremendously from lower trade barriers; the average American probably saves several hundreds of dollars per year because of these lower prices.

Stagnating wages and job losses have not been caused by freer trade. They have been caused by technological innovation, increasing returns to education, and, in the case of the U.S. auto industry, persistently short-sighted management.

More protectionism by the U.S. would not raise American wages or restore American jobs. It would only raises prices and weaken our economy further.

The fact is that in our increasingly globalized and technological age, people without college educations (and more advanced degrees) are going to fall further behind. We need to engage in a serious discussion about education reform, put in place public policies to assist with lifetime education, and work towards increased safety nets. It’s wrongheaded to evade the real issues, and blame free trade for our woes.

Jason Scorse

Academics use a number of election prediction models, and almost all rely on macroeconomic variables—GDP growth, inflation, unemployment, etc. Most of these models predicted a Gore win in 2000 (which was actually correct since he won the popular vote) and a Bush win in 2004. At the moment the models predict a resounding Obama win in 2008, based on dreary economic news as we head into the election.

Obviously these models are not 100% accurate; their architects freely admit that factors such as wars, disasters, and issues of character also influence voting patterns. But they stick by their fundamental insistence that it is the economy which ultimately dictates election outcomes.

In aggregate, there is little to dispute about these models. If Americans are feeling good about their economic prospects, by and large they can be expected to vote for the candidate who represents the party in power; if they think their economic prospects are dim, they will vote for the opposing party.

But hidden behind the national numbers are huge state-by-state and regional disparities that can’t be explained by economics alone. In huge swaths of the South as well as parts of the Midwest (e.g., Utah) the GOP has consistently outpolled Democrats by margins that correlated poorly if at all with economic factors.

It is these areas where “culture war” issues and race play a major factor, often turning economics into a secondary and even a tertiary issue. Large numbers of voters in these regions are genuinely more concerned about gay marriage, the government taking away their guns, abortion, the perceived dilution of American culture because of illegal immigration, and fears of an even more secular America. While the economy may still influences these voters, their ballots often end up going to the candidates who promise a kind of cultural security which they feel is slipping way.

Some political observers, like author and WSJ columnist Thomas Frank, take this as evidence that people have been duped into voting against their economic interests, when in fact it is evidence that these people simply give priority to issues other than economics.

When rich investment bankers in New York vote Democratic, nobody says they’ve been duped, even though they may very well be voting against their immediate economic interests since Democrats generally favor higher taxes for the rich*. If asked to justify their votes, these well-off Democrats might cite the party’s liberal social positions or less belligerent foreign policy; in exchange for these positions, they’re willing to accept higher taxes.

But when poor whites vote Republican because they oppose gay marriage or abortion, they’re assumed to be gullible. Unfortunately for Democrats and economic progressives, the disproportionate electoral sway of America’s Deep South and Midwestern states hands these “values” voters extra weight both in the Electoral College and the Senate.

In the end, it’s hard to accept any uni-causal case for the election of a U.S. president. There are too many factors, too many cross-currents, and it’s impossible to sort them out. The economy ultimately may swing the election, and certainly it will be more important than it was in 2004; but there are many motivations that can sway people on the margins, and have large electoral impacts.

As the Democrats have learned, in order to truly be competitive in certain parts of the country they have had to tone down their gun control rhetoric, speak more openly about faith and religion, and walk a fine line on gay rights (opposing gay marriage while supporting civil unions). This is what many voters in these regions want to hear, and the strategy has begun to pay dividends: Democrats are winning elections for state offices and Congressional seats in once-solid GOP territory, and Obama is competitive in states that haven’t voted Democratic for 40+ years.

The Republicans are in a much more difficult position because America overall is more socially liberal and economically progressive than the mainstream GOP. The party’s success this decade in some sense represents an anomaly; Bush actually lost in 2000, and won in 2004 largely because of a fearful citizenry that wanted to support a “war-time president.” Looking forward, it is hard to see how the far right’s message will resonate with voters, especially younger voters whose only taste of GOP rule has been an administration characterized by epic incompetence, cronyism, anti-intellectualism, and economic downturn. It will be interesting to see how the GOP retools, especially if they lose big in November.

Stay tuned….

*Wealthy individuals voting Democratic might be right to think that their long-run economic prospects under Democratic rule will be better than under Republican rule even if their immediate economic interests take a hit.

P.S. See here for a very interesting analysis of economic performance under Democratic and Republican administrations; it may surprise you.

Jason Scorse

Americans are feeling pain at the pump; gas prices going into the July 4th weekend hit a record high national average of $4.09 for regular unleaded, up $1.14 from a year ago and roughly triple what it was when Bush took office. Oil has topped $145 a barrel and high fuel costs are leading to price increases across a wide swath of products.

But in truth, U.S. gas prices are low by world standards. As this chart shows, there are many developed nations where the average price of a gallon of gas is between $7 and $10.

Most of these nations are not being hurt as much by the current oil price shock because their governments were smart and made gas expensive long ago. This created incentives for better public transit, more fuel-efficient vehicles and industrial processes, and shorter commutes. For decades, many U.S. economists have been urging higher gasoline taxes for exactly these reasons; unfortunately, their advice has fallen on deaf ears.

As the price of oil plummeted in the 1990s, the SUV craze took hold and Detroit automakers ignored the lessons of the 1970s and 80s. Not only did these behemoths lead to more urban sprawl and less automotive safety, America’s carbon footprint grew enormously. Politicians of both parties took the myopic, short-term view. They could have seized on this period of low gas prices as an opportunity to phase in a higher gasoline tax, and move towards a more fuel-efficient and less oil-dependent society. They didn’t.

Fast forward to September 12, 2001.

Of the 19 hijackers who changed the world the previous day, 15 came from Saudi Arabia. We knew then that Saudi oil money financed extremist groups. Iran and Iraq, two other nations that represented serious national security challenges also relied on oil money, as well as Russia and Venezuela.

Given the growing threat of global warming, any serious U.S. effort in 2001 to reduce its oil dependency would have been warmly greeted by the world community, especially the Europeans. The massive investments in technology required for such an endeavor would have helped reinvigorate manufacturing in the U.S. and the American auto industry.

Instead, an administration run by oilmen told us that conservation is for hippies and that all America needed to do was go shopping.

Fast forward to the present.

Virtually all of the worst-case scenarios of 2001 have come to pass. Rogue, terrorist-sponsoring oil states are awash in cash, which they are using to fund groups hostile to America. Here at home, there’s a long list of problems: the economy is teetering on recession, auto sales are slumping sharply, with GM and Chrysler headed toward bankruptcy, and the U.S. has recorded its sixth straight month of job losses; at the same time, not coincidentally, the threat of global warming continues to accelerate. And while Bush and Cheney continue to beg the Saudis to open the taps a little more, the Saudis are putting pressure on us to raise interest rates (in order to strengthen the dollar) at a time when the financial sector would be further weakened by such a move.

And we have no one but ourselves to blame.

All of these outcomes were both predictable and avoidable. In April of 1977 President Jimmy Carter put forth a comprehensive energy policy that is amazing in its detail and prescience. In the speech Carter calls for collective sacrifice and warns us not to get sidetracked by the sudden drop in oil prices because of the need to plan for the long-run. Carter was largely scoffed at and ignored and now we have to live with the results (Nixon also devoted some of his 1974 State of the Union speech to energy issues, although he did not offer nearly as comprehensive an assessment of both the problems and the solutions).

Unfortunately, when it comes to sound energy policy the U.S. has been running on empty for way too long, and we’re going to have to suffer for a while before things turn around.

Jason Scorse

A spate of articles and books in recent months (e.g., Fareed Zakaria’s The Post-American World) raise the question of whether America will remain the dominant economic power in the coming decades; no one really doubts that America will remain the dominant military power. I just returned from a two-week trip to China, which got me thinking about the subject since one can’t fail to be impressed by the rise of this Asian power.

I am ambivalent about the issue. On one hand, as an American I want my country to remain strong and prosperous; but I also am an internationalist, and want to see prosperity spread across the world. Fortunately, it need not be a zero-sum game. American greatness can coexist with rapid wealth generation in the emerging markets.

In fact, an argument can be made that American wealth is partially dependent on the rise of the developing world: our historic low interest rates and (until recently) extremely low inflation are due in part to the high savings rates and low labor costs in Asia and the Middle East.

The key looking forward is to realize that American dominance is not some force of nature that is destined to continue. It is instead the result of specific policies and characteristics of the American economy and society that must constantly be revisited, revised, and maintained. Mistakes have been made that have weakened America’s economic position, but these mistakes can be rectified.

Here are four missteps, coupled with new opportunities, to consider as we look towards a new administration and getting back on the right economic track:

1. Nowhere has the failure of leadership been more damaging than in the U.S. auto sector. Both Republican and Democratic administrations have coddled Detroit; a combination of corporate mismanagement and intransigent, short-sighted unions has blocked all efforts at meaningful fuel efficiency for decades. Free-market advocates are finally seeing some vindication, decades late, now that high gas prices and tumbling demand for SUVs is forcing Detroit to see what thinking people have known for decades: fuel-efficient cars are the wave of the future. It is too early to tell whether Detroit will be able to recover, but there are encouraging signs: GM is pursuing plug-in electric vehicles, and both Obama and McCain support a cap on carbon emissions (although McCain oddly seems to forget that he does).

2. One way America has become so affluent is by recruiting the best of the best from across the world. Skimming the cream from countries across the globe has helped the U.S. to the highest living standards for any country remotely comparable in size. However, since 9/11, the enactment of anti-immigrant policies has slowed the influx of engineers, computer scientists, biochemists, doctors, et al. While tighter immigration controls are no doubt warranted, America should be expanding visa applications for the best and the brightest. This is an area that doesn’t make headlines, but it should be watched carefully.

3. Green technology, nanotechnology, and biotechnology are likely to be the leading areas for rapid growth and breakout products that dramatically impact global society. The U.S. nanotechnology industry seems in good shape, but our biotech industry has suffered under the anti-science policies promulgated by the Bush Administration at the insistence of the religious right. Legitimate moral issues related to cloning need to be addressed, but blocking embryonic stem-cell research that has the potential to cure major illnesses is both unwise and unconscionable. The embryos used in the process are already slated for destruction; in fact, a consistent “pro-life” stance would oppose fertility clinics, a fact which the right never mentions. Both Obama and McCain support lifting the ban on federal funding for stem-cell research (but given McCain’s numerous reversals and pandering to the right, I am not confident he will maintain this position; we’ll see).

4. The final issue is more long-term: America’s debt. America is the world’s most heavily indebted nation, both the government and the people. This has been possible because the rest of the world has sought the safety of U.S.-backed treasuries, but it will not persist indefinitely (especially as other countries begin to consume more and the emerging markets become more attractive for investment). High levels of American debt will inevitably result in higher domestic interest rates and lower economic growth. Higher taxes are also likely, especially if the federal deficit continues to rise. Neither Obama’s nor McCain’s fiscal plans make tackling the debt a priority, but McCain’s plan is much worse overall; it would increase the deficit by an estimated $5.7 trillion over the next decade. Regardless of what the government does, individual Americans should get their fiscal houses in order: we need to pay down our debts and increase our saving rates.

In conclusion, predictions of America’s economic decline are probably premature. At the same time, continued American dominance is in no way preordained. It will take hard work and sound policies; as always, a little luck wouldn’t hurt either.

Jason Scorse

An honest, non-ideological conversation about our current economic problems requires us to abandon the clichés of “big government” versus “small government”. The real issue is effective government: what should be done and what’s the best way to do it?

We cannot afford a laissez-faire attitude toward the banking sector. Banks cannot be allowed to fail for the simple reason that they can take the rest of the economy down with them. This means that ultimately the public sector (our tax dollars) acts as a final insurer for the private banking sector, and banks know this. Without adequate regulation they will always be tempted to take unnecessary risks, knowing that the federal government will eventually come to their rescue.

The conversation we should be having is how best to ensure that banks are not allowed to take risks of such magnitude that they can undermine the entire credit system, while at the same time allowing them to innovate and provide low cost capital to the general economy. While the details of this balancing act must be left to experts in finance and banking, the basic concept is not beyond the ability of the average voter to comprehend, nor of politicians to explain. There should be zero tolerance for anyone who simply spouts “the markets should be allowed to work things out;” the markets haven’t worked things out, and this line of reasoning ignores the “moral hazard” argument noted above.

On to another topic.

Barack Obama gave what many consider a brilliant speech on race relations in America last week, and it has already gone viral on YouTube. Obama is that super-rare politician who can take a serious liability (in this case an error in judgment) and turn it into an asset through his own rhetorical skills.

What Obama’s speech only hinted at should be the topic for a larger American conversation: the fact that social class and access to power divide us even more than race. Racism surely persists in America, as do sexism and homophobia; but the greatest drivers of American inequality are divisions between rich and poor, between the less educated and the more educated, and between the well-connected and the unconnected.

The millions without healthcare come from all ethnicities and racial backgrounds; coal miners who are dying by the dozens in the Appalachians are poor whites, and they have watched for generations as big coal companies have literally removed the mountains from their communities; the millions of manufacturing jobs that are leaving the Midwest are throwing blacks, white, and Latinos out of work; the corporations who flout all sorts of health and safety laws, aided by a Congress and a court system that caters to their needs above the public interest, do not discriminate in the harm they inflict.

The notion that class is the primary source of injustice in America was recognized by none other than Martin Luther King Jr., who vehemently attacked economic inequality in the last years of his life. While he is revered for his successes in the Civil Rights Movement, his positions on economic fairness and social class were not well received by the mainstream; at the time of his assassination he had lost much of his earlier support.

This is one of America’s “dirty secrets”: it is always in the interests of the powerful for the disenfranchised to fight among themselves for the crumbs (e.g., poor whites against blacks, Latinos against blacks) while those in the chips laugh all the way to the bank. This is not to suggest that there are no grievances with a specific racial or ethnic component, but that these are ultimately secondary to class interests. One doesn’t have to be a Marxist to understand this.

At a time when the federal government is once again bailing out the elite to the tunes of hundreds of billions of dollars, we have a clear choice: we can remain distracted by race, or take a moment to examine the concentration of power in this country and realize how it disadvantages whole swaths of people across all racial and ethnic categories. Greed sees only the color green, and all it really cares about is power.

P.S. Check out Paul Krugman on the topic of financial regulation making lots of sense and raising real concerns. And while I find most of Bill Kristol's columns offensive here I actually somewhat agree with him.

Jason Scorse

The terrorist attacks more than six years ago supposedly “changed everything”. They changed George Bush from someone who spoke forcefully against “nation-building” and foreign intervention into a president enamored with the idea of spreading democracy by force; they led the Administration to violate the Constitution on multiple occasions through warrantless domestic surveillance and the torture of enemy combatants; they provided cover for a far-right domestic agenda that the majority of Americans opposed.

But in one critical area 9/11 changed absolutely nothing: our dependence on Middle Eastern oil and the autocratic, terrorist-sponsoring regimes that benefit from this addiction.

Not only has the Bush Administration done nothing to diminish our reliance on Middle Eastern oil, Vice-President Cheney is on record mocking conservation as nothing more than a “personal virtue” (i.e., something only tree-huggers do), the GOP-led Congress passed energy bills that increased subsidies for oil companies (thereby further distorting markets against alternative energy), and the Administration sued the state of California for imposing a greenhouse gas reduction policy that would have resulted in higher fuel-efficiency mandates.

Let’s recap the results so far of this catastrophically misguided policy:

1. Oil prices (partly due to the effects of the Iraq War, which have crippled Iraq’s oil sector; see this NYT's piece on how insurgents are stealing Iraqi oil) are at records highs, which has helped stoke the highest inflation rate in decades and complicated efforts to deal with the coming recession

2. Oil-producing U.S. adversaries such as Iran, Venezuela, and Russia are awash in cash, helping to keep dictators in power and undermine democratic reform

3. So-called allies, such as Saudi Arabia, are also awash in cash, allowing them to stall on reforms and continue to funnel more money into the hands of terrorists

4. Our European allies are livid that we have not helped in any meaningful way to address global warming, which could be mitigated through comprehensive international efforts

5. Instead of tens of billions invested in alternative energy projects or tax rebates for the middle class, they’re going to the likes of Exxon-Mobil and Chevron (which routinely set corporate profit records every quarter)

Results like these all lead to the same conclusion. America’s long history of entanglement in the Middle East stems largely from our dependence on oil, and we will continue to be dragged into conflicts in the region until and unless we dramatically reduce the power of these regimes in the way that they would feel it most: their pocketbooks.

Following 9/11, a serious global push to reduce oil consumption would have sent a major signal to the Middle East regimes to either diversify their economies or witness their eventual decline. Ironically, having to face this reality would have provided significant incentives to liberalize their economies, which has proven to be one of the best paths to freedom and democracy.

Instead the Bush Administration took the low road, adopting policies guided by outdated thinking and its strong ties to the oil industry. Bush will leave behind many legacies of failure and incompetence, but this “lost decade” of wasted opportunity on the energy independence front may ultimately be seen as the most costly of all.

P.S. Check this article out in Sunday's WaPo for even more depressing analysis of how the Iraq War's impact on oil prices has hurt the U.S. economy and strengthened our adversaries.

Jason Scorse

Modern-day humanism owes a large debt to economists like Adam Smith and his contemporaries. As products of the European Enlightenment, they were both informed by it and moved it forward in ways that were revolutionary at the time.

Smith’s free-market economics rests on the simple, yet profound premise that people are better off producing and trading with each other than fighting over resources; that economics need not be a zero-sum game, but an ever-expanding source of shared prosperity.

This was a radical idea in an age when countries battled for colonies and the conventional wisdom was that whoever could amass the most territory and wealth was the most powerful.

Yet even a cursory look at current affairs demonstrates that more than 200 years later the old views can still dominate. China, Iran, and Russia take and consider actions that threaten global stability; ethnic and religious strife and deep-seated class divisions still inflame passions; early in the 21st century we see conflicts that can tear countries apart, as is now the case in Kenya.

The transition to open societies has always been paved with bloodshed. The United States not only fought the Revolutionary War, but almost tore itself apart in the Civil War. Large parts of Europe were destroyed in two World Wars. Imperial Japan brought devastation and carnage to China and other parts of Asia. In Africa, nations once thought to be stable are mired in civil and regional wars that have killed millions over the past decade and a half. The Middle East is a powder keg of epic proportions.

The bottom line: Billions of people still live in societies with fundamental obstacles to achieving sustainable economic progress, i.e., progress that does not come from oppressing large segments of their own population or threatening other nations.

Enter the conundrum: Is there any hope that these societies can make a peaceful transition to modernity and freedom?

The humanist in me thinks that this is possible. I want to reject the notion that violence is needed to “purify” a nation, and rid it of ill-conceived ambitions and prejudices.

But I am not so sure that I can; history does not seem to be on my side.

Change always brings conflict; it is essentially a maxim of human affairs. Even the ultimately successful non-violent movements for independence in India and for civil rights in the U.S. were met with brutal force. In Ireland and South Africa, peace only came after sustained campaigns of terror. If there is ever to be peace between Israel and Palestine, how many more thousands of graves will it take?

I know there is a better way. If they are willing, the leaders and citizens of any society can compromise, use reason, and find their way to freedom and prosperity without violence. The economist and humanist in me is confident of these basic truths.

At the same time, I wouldn’t be sitting here comfortably if earlier generations of Americans hadn’t put their lives on the line. I am forever grateful to them: to those who died fighting the injustices that once plagued American society, to those who fell in two World Wars, to those who perished in Korea, Vietnam, and now in Iraq and Afghanistan.

I wish these men and women hadn’t died, that peaceful resolutions could have been found.

But they weren’t. This gives me pause; it makes me see the world in ways that I find troubling, and contrary to my humanist worldview.

Jason Scorse

On my 39th birthday this past Monday, I was greeted with a nearly 10% drop in the international stock indices that are highly correlated with my net worth. Fortunately, I’ve never put much stock in birthdays (no pun intended).

Since then markets in the U.S. and abroad have taken a roller coaster ride that is not for the timid. I don’t have statistics handy, but I wouldn’t be surprised if these past six months have been the most volatile in world financial markets since the Great Depression. It is an amazing time on trading floors everywhere.

Speculation, greed, outright fraud, and lax oversight of the lending and mortgage agencies have generated a degree of uncertainty and mistrust that is toxic to economic growth. The capitalist system relies on credit; when people are suspicious and don’t know who is a credit risk and who isn’t, things can grind to a halt. This is why the Federal Reserve and other central banks have been injecting billions into the global economy.

Will the United States fall into a recession? Although my crystal ball is in the repair shop, I think if we have one it won’t be severe. U.S. economic statistics have been sending mixed signals: there’s evidence of a slowdown, but no negative growth as yet. The good news is that many developing countries are sitting on trillions of dollars of reserves, and their economies are still expanding at a rapid pace. Oil prices are likely to moderate. As bad as the U.S. housing bubble was, I don’t think the hit on consumer spending will be enough to derail global economic growth. So if things do get ugly, you have proof of my Pollyanna nature right here.

As to the causes and lessons of all this, here are a few thoughts:

1. Alan Greenspan was a terrible Fed Chairman

I know this goes against conventional wisdom, but consider some facts. He provided political cover for tax cuts that have swollen the federal deficit; he took the Fed discount rate to historic lows and kept it there far longer than necessary, ignoring warnings about a housing bubble; in the midst of a run-up in home prices that was clearly unsustainable, he even urged people to take out adjustable rate mortgages instead of conventional fixed rate loans. Greenspan’s behavior lends credence to the view that the Federal Reserve has too much power, and that too often its power is used unwisely. In a genuinely free market, interest rates would never have remained so low for so long.

2. The bond rating agencies engaged in stupid (and possibly criminal) behavior

Hundreds of billions of dollars of bonds comprised of the mortgages of low income people who could not afford their homes were falsely rated “AAA”. This is negligence on a scale not seen since the savings and loan debacle.



3. That being said, what happened to the “wisdom of the market”?

The logic of the “invisible hand” in financial markets is that huge sums of money create equally huge incentives both for fraud and its detection. Were the rating agencies in bed with the banks making the mortgages? What about the institutions that bought the bonds: how were they so easily deceived with so much on the line? Where was the oversight and regulation when it was needed? This is big-time egg on the face of those who preach the wonders of markets; things like this simply aren’t supposed to happen, especially on such a grand scale.

4. How inter-connected is the world financial system?

We’re about to find out. You may have heard the term “decoupling” a few times over the past week. It refers to the idea that foreign economies may no longer be as dependent on exports to the U.S. as they once were. The link between fears of a U.S. recession and plunges in overseas stock markets led many this week to pronounce an end to the decoupling theory. This is premature: the theory never assumed complete decoupling, only a decrease in the influence of the U.S market. I think the decoupling idea is sound, and that a mild U.S. recession will not have a major impact on foreign economies, especially those in emerging countries.

Final thought. One silver lining from the burst in the housing bubble is that no longer do I have to endure people bragging about what financial geniuses they were to buy real estate in California at inflated prices. Thankfully I was saved from having to eat that very expensive piece of humble pie.

Jason Scorse

Lululemon Athletica appeals to a demographic that can lay down fifty plus dollars on a pair of stretch pants for yoga classes. It advertises in New Age aphorisms and images of rock n’ roll rebellion, and refers to its customers as yogis (which should immediately raise eyebrows, since traditional yogis were aesthetes unconcerned with “yoga fashion”).

But their clothes are extremely nice.

After much shopping around I decided that Lululemon’s Elevation Jacket was just what I needed for the California winter. The only problem was the jacket’s wool sleeves; I will only buy wool products if the wool is guaranteed to have been harvested using the most humane methods (if you don’t know about inhumane wool harvesting check this). Given the Lululemon clientele and the image they try to maintain, I assumed the store’s workers would be able to quickly directly me to documentation certifying that the wool in Lululemon products meets the highest ethical standards.

The first worker I spoke with assured me that Lululemon only gets wool from “happy sheep” but couldn’t provide documentation to back this up. She gave me a phone number and an email address for the “Customer Education Center”.

I emailed and later spoke on the phone with numerous Lululemon employees over the next three weeks. They kept assuring me that the company adhered to the strictest ethical standards, but couldn’t provide specifics. This email from an employee sums up their “just trust us” position:

We don't have any "documentation" to show you that our wool was harvested in a ethical manner, but I can assure you that we would never associate with any form of animal cruelty.

A few days ago I received a follow-up email from the person in charge of sourcing for Lululemon. She informed me that they buy their wool on the open market in Australia and Asia, and cannot guarantee that the sheep are treated humanely. She informed me that wool from those regions had to comply with “local and federal regulations”, which is roughly equivalent to claiming that cows are treated well in America because businesses have to comply with USDA regulations. It’s a joke; in fact, in a difficult feat, animal standards throughout Asia are even more abhorrent than in the U.S.

Bottom line: The entreaties to simply trust that Lululemon’s wool products were obtained from ethical suppliers were false; I was lied to many times.

Instead of playing the New Age card to engage in deceptive practices, Lululemon would do better to follow the lead of a competitor. Patagonia, another clothing company, has addressed the issue of the wool in its products by going the extra yard to ensure that it’s done right.

After learning that I had been given false information for upwards of three weeks, I told Lululemon that I wanted to file a formal complaint and also that I would be contacting the federal authorities. I lodged a complaint for false advertising with the Federal Trade Commission; I also plan to submit some version of this article to Bay Area newspapers, and to use it in my college courses as an example of corporate greenwashing.

All of this could have been avoided if Lululemon employees had simply told me that they couldn’t vouch for how the wool was harvested. Better yet, the company could have lived up to its principles, sourced the wool from ethical farms, and showed me the documentation to back it up.

Instead they figured that I wouldn’t bother to actually make them substantiate their claims. But I’m not your average customer; I’m an economics professor who teaches this stuff, and I viewed this as a case study.

They tried to pull the wool over the eyes of the wrong guy.

The moral?

Simply put, we cannot rely on the voluntary actions of corporations to significantly improve social and environmental standards. Without stringent oversight, regulation and penalties, corporations will not do the right thing. I’m a capitalist to the core, but as Adam Smith noted more than 200 years ago, the “invisible hand” only produces positive outcomes within a strong institutional context that puts a premium on ethical conduct.

P.S. Here’s a nice video that expresses a similar sentiment.

Jason Scorse

The “war on drugs” will ultimately go down in history as one of the most ill-conceived, unjust, and plainly stupid set of policies ever enacted. It is a failure on every level and a black hole for tens billions of dollars every year (here's what Walter Cronkite has to say about it). While most of its failings are well known (e.g., absurdly high incarceration rates for non-violent offenses and the diversion of law enforcement from serious threats), there is increasing evidence that this misguided war is undermining democracy around the world.

From Columbia to Guatemala, from Mexico to the poppy fields of Afghanistan, the war on drugs is creating political chaos and empowering criminal elements that are literally ripping apart the democratic fabric of these nations.

Take Mexico for example, to which President Bush has just pledged $500 million for drug enforcement efforts. Ever since the U.S. began cracking down on Miami as a port of entry for drugs from Latin America, traffickers have switched to Mexico as the preferred entry point. This has led to the growth of drugs gangs that have unleashed a massive wave of violence and killed thousands of people over the last few years, including policemen, army personnel, and innocent civilians. As a result entire states in Mexico are now essentially under military occupation.

Much the same can be said for Guatemala and Columbia, where drug gangs routinely assassinate political leaders and have created such a culture of fear that the countries can aptly be described as “narco-states”.

But what is happening on the other side of the world in Afghanistan is particularly troubling. Not only did we unwisely divert resources from rebuilding and stabilizing Afghanistan to the war in Iraq, we now seem intent on doing everything we can to disrupt the booming poppy trade even if it enrages the Afghan farmers and drives them into the hands of the Taliban and Al Qaeda.

There is no doubt that the poppy trade is fueling these terrorist organizations, but the best way to dampen their influence is not to turn the farmers against us by destroying their livelihood. Instead we should buy the poppy directly from them at high prices. We could use the crops to help supply morphine to developing world nations which desperately need the drug for legitimate medical purposes; doing this would produce goodwill for the U.S. at a time when we could certainly use it.

Instead we are stubbornly maintaining our ideological opposition to illegal drugs and are preparing to spray the Afghan fields with herbicides, which will kill the plants and poison wildlife and humans alike. This is insane; it’s hard to imagine a better way to alienate the Afghan farmers and force them into the arms of our enemies. Unfortunately, this insanity is totally consistent with our irrational decades-long “war on drugs” policy.

Still there may be a glimmer of hope.

With national security concerns seeming to trump all else these days, maybe the glaring contradiction between pursuing the war on drugs and our stated aim of global democracy will lead to a reevaluation of the policy (at least in Afghanistan).

I’m not holding my breath.

P.S. Get a taste for how brutal Mexican drug cartels are and how the U.S. supplies them with their firepower here.

Jason Scorse

There are many debates about the best ways to address global warming, with most centering on whether a carbon tax or a cap and trade scheme is best (or some combination of the two). There are also some lively, though less extensive, debates about the extent to which we should balance our attempts to reduce global warming with attempts to mitigate its effects.

I propose shifting the focus and asking what to me is the key question: which policies would best promote technological innovation? This is crucial because simple demographics and economic trends make it impossible to significantly curtail greenhouse gas emissions without major technological advances.

By the end of the century the Earth’s population will likely be in the range of 9 billion, a roughly 50% increase. Even though most will be born in what are now developing countries, by century’s end these billions of people will have benefited from significant economic growth (as will those who already live in the developed world) and perhaps their now-emerging nations will have joined the ranks of modern economies.

These two facts alone mean that if we all we did was rely on today’s technology, the Earth’s population in 2100 would emit many more times the greenhouse gases than we do currently. And yet if we’re to tackle global warming we need reductions of 50-80% from current levels. Do the math and you’ll see that there are only two options: massive increases in technology or massive reductions in material living standards. This essential conclusion is inescapable (with one major exception--see below).

Technological innovations can come in many forms, including more fuel-efficient cars, greener buildings and new renewable energy sources. It makes sense to investigate whether the types of policies currently on the table are really the best at helping to promote innovations in these areas. We also need to think more creatively. For example, should prizes for discoveries play a bigger role? How can we best support the development of technologies that don’t even yet exist (but which history tell us will surely be a part of the mix)?

And we need to determine which policies can have the most direct impact on shifting consumption patterns. Along those lines, many experts have suggested that a reduction in per capita consumption of animal products might be extremely helpful.

Here’s why. When the price of carbon (and other scarce resources) is factored into the price of animal products, these staples of modern life will become much more expensive; as a result people’s ability to purchase them will likely decline sharply. Whereas most people would feel poorer if they couldn’t vacation as much or own as many playthings, they might come to realize that eating fewer animal products was in fact a blessing in disguise: it would dramatically reduce greenhouse gas emissions and improve people’s health as well.

I know that some might look at this as a reduction in living standards. To me it’s a win-win we could all look forward to.

Jason Scorse

A book has just come out with the above title, and it has sparked an interesting conversation on the different forms that capitalism can take and the proper balance between unfettered markets and state intervention. I would like to discuss this issue from a slightly different angle, drawing on some unscientific observations between the capitalism that predominates in Northern California (where I currently reside) and New York City (where I grew up and am now vacationing).

The economic engines in Silicon Valley (SV) are responsible for some of the most important and productive advances in history. Not only is SV still the driver of the computer industry, but it has been branching out into biotechnology and renewable energy; the next generation of technological innovations in these fields is likely to originate in this tiny space between Santa Cruz and San Francisco.

Bottom line: the people getting rich in SV are by and large getting rich by producing products that have tremendous benefits to people not only in America but all over the world. This is why I don’t feel so bad that I have been priced out of the housing market; even my own job is vastly easier because of the developments made by this generation of entrepreneurs, some of whom are my neighbors.

Contrast this form of capitalism with the industry that generates the most wealth in New York City: financial services and marketing. While Wall Street and the banking sector provide crucial services to the economy, including investment capital, risk management, retirement investing, and a host of other indispensable services, there are just as many brokers and financiers in the Big Apple whose main concern is finding ways for the rich to avoid taxes and looking for ways to “game the system”. Over the last decades the compensation for many top fund managers has grown out of all proportion to the risks they take and the returns they bring in.

In addition, Los Angeles aside, New York City is the center of the image industry. Here anorexic women who are famous for being famous are paid tens of thousands to show up at clubs, bars, and restaurants; at the same time, and unknown to most people, men are paid by companies that make alcoholic products to cavort with these women, litter tables with bottles bearing their corporate logos, and entice people to pick their brands. In New York City the art of media manipulation and spin is elevated to a science and everyone who lives and visits here are the guinea pigs. So it’s difficult not to feel a tinge of resentment that people such as this are turning New York City into little more than a playground for the rich and connected.

On top of all of this, in Northern California the standard of living is not as directly tied to income as it is in New York City. Of course money matters a lot; but California’s riches are mostly nature-based and there is a tremendous amount of public access, so even the less than well-off can enjoy a pretty nice life. In New York City it’s the opposite: little money means no air conditioning on hot summer days, long commutes from the boroughs, little or no vacation, and limited access to the city’s restaurants, theaters, and museums.

While there is no doubt that capitalism has its good and bad sides, public policy and our own choices can influence the relative weights of each. For example, if we moved to a simpler tax system that was largely devoid of deductions there would be fewer ways for the rich to both avoid and evade taxes. And if people stopped being swayed by mindless advertising, maybe Madison Avenue execs could turn their attention to improving America’s image in the world.

Now that would a great service to society, and might begin to rival Silicon Valley’s.

Jason Scorse

You probably don’t deserve what you have. Neither do I.

Despite what we like to tell ourselves about meritocracy, the greatest predictors of a person’s lot in life are things completely out of their control: where they were born and their genetic inheritance.

Let’s take my life as an example. I was born a white male into a middle class educated family in New York City with above average intelligence (at least according to standardized tests). From the day I was born a relatively prosperous life was almost guaranteed; it was laid out for me on a red carpet. All I had to do was go through the motions—elementary school, high school, college, career. At the same time there are tens of millions just as able as I, who were born in other parts of the world, who live their lives in squalor and misery for no other reason than the injustice of random fate.

None of this is to suggest that there aren’t exceptions to the rule; there are some privileged kids who experience tough times, and there are some who rise from poor upbringings to great success. (Even these individuals were likely hampered or helped by their genetic predispositions.)

My point is not to portray the world as a deterministic product of class and genetics; it is not. Individual choice and action are essential and societies must provide incentives for people to strive.

However, the fact that individual fortune is so much a product of things beyond a person’s control presents the greatest argument in favor of progressive government policies. The philosopher John Rawls long ago noted that if we had no idea where we were going to be born and with what attributes, the types of redistributive policies that we would favor would be much different than the ones that we currently employ.

As always, for all redistributive systems, the “devil is in the details”. Many utopian schemes (such as communism) can easily backfire and make life worse off for nearly everyone.

But the notion that individual merit alone should be the basis for society’s rewards should be laid to rest once and for all. Let us reserve praise for those who take their gifts and use them to do extraordinary things, and to those whose gifts and opportunities have been limited and yet against all odds have managed to succeed.

The rest of us deserve little praise or blame.

P.S. An article on the new "Gilded Age" in today's NYT shows how the basic points outlined above are still not universally understood.

Jason Scorse

We are nearing the end of the first decade of the 21st century and yet it is still true that the color of a person´s skin is probably the best predictor of their material standard of living. On my recent trip to Brazil I saw this firsthand and was struck yet again by the enduring legacy of slavery and racism.

In the elite neighborhoods of Rio de Janeiro and other Brazilian cities, the residents have almost entirely European features and the overwhelming majority of blacks are maids, street cleaners, or other service workers. The proportion of national income that goes to whites versus blacks has changed little in centuries and the concentration of wealth is even greater.

The same situation persists throughout Latin America, where the treatment of indigenous people also includes blatant human rights violations and virtual second-class citizenship. Whatever can be said about inequality in America and its racial component, we have come a long way and progressed much further than our Southern neighbors.

But we have a long way to go.

For four decades we have experimented with various methods of affirmative action based on raced-based preferences, which have resulted in significant upward mobility for blacks and other minority groups. That we have a fairly robust and sizeable black middle class and a rising Latino professional class is a testament to the success of affirmative action (which is not to say that many of these men and women would not have succeeded without racial preferences).

But there is a perception that racial preferences are un-American and amount to reverse discrimination. The perception has become widespread; there are too many examples of preferences being extending to the sons and daughters of the minority elite, and patience with affirmative action is wearing thin. Fortunately there is an easy fix that is starting to catch on. By simply changing preferences from race to economic status, we can lose the stigma of race and yet still lend a hand to those at the bottom of the economic ladder, who are disproportionately black and Hispanic. If we also happen to assist poor whites from Appalachia or the Pacific Northwest or anywhere else, all the better.

The second thing that should be done to help ameliorate the effects of racism is to wholeheartedly promote universal preschool education. For a long time educators have realized that a child´s cognitive potential is largely determined before the child ever sets foot in kindergarten. From birth until the ages of 3-4 a child´s brain is absorbing information at a staggering pace. Without significant stimuli, a child´s development during these years is severely handicapped and their potential significantly stymied. Increasingly, researchers are showing that investments in preschool are some of the best that individuals and society can make.

Neither of these policies will completely end the legacy of racism, but they represent improvements over the status quo. They are policies that all countries should adopt, especially those where slavery once reigned.

Jason Scorse

Today’s piece, in addition to discussing a tax issue that is sure to heat up after the 2008 election, illustrates a point worth exploring. The author has spent the past six years trying to close a loophole that allows taxpayers with capital gains to misreport their earnings; this loophole costs the government tens of billions of dollars in lost revenue each year. He has lobbied Congressmen, testified, and written numerous articles. It is thankless work: it’s not sexy, it doesn’t make headlines, and few people are even aware of the issue.

But it matters big time.

Through his efforts and those of many others, a bill closing that loophole is now before Congress. In contrast to this focus on capital gains taxes, I have become a generalist. On this site and even within my work as a professor of economics and policy studies, I am all over the map. Sometimes I wonder whether the world wouldn’t be better served by more people focusing on specific issues and sticking to them. So please read the piece below and feel free to offer comments on this larger question as well. Thanks.

These are heady times for backers of low taxes on capital gains. Presidents Clinton and Bush both cut the capital gains rate, bringing the current levy on long-term gains down to 15%. That’s the lowest in more than 70 years, “gloriously low” in the words of economist Ben Stein, and it means that profits on stock market transactions are now taxed at a lower rate than the wages of average Americans.

There’s no good reason for such preferential treatment, and powerful reasons to end it. Leading the list is the simple fact that stock market “investors” are almost never real investors in the first place.

The argument for a low rate on capital gains is invariable (and in recent years, invariably effective): it holds that investments in the stock market grow jobs, grow businesses, and provide vital fuel for the United States economy. Partly as inducement and partly in gratitude, the argument goes, it behooves government to reward investors with low capital gains taxes.

A potent blend of myth, propaganda and misimpressions. Let’s look instead at some truths.

It’s routine on Wall Street these days for trading volume to run in the billions of shares. On any given day, only a tiny fraction of those billions has any valid claim to growing jobs or businesses or the economy. On many days not a single share qualifies as a bona fide investment.

Almost all the time, all that’s happening is money changing hands as shares move from sellers to buyers. Not a cent goes to the companies whose shares are traded. No jobs are created (except in the financial community, which is not the point here). No businesses are expanded. Investments are really being made not in the economy but in personal portfolios.

The only genuine stock market investments are those in initial public offerings (IPOs) and secondary offerings. In those cases alone does the money move on to do the work it’s purported to do. All the rest is aftermarket noise as the players place their bets at the tables down on Wall Street.

Securities markets clearly play an energizing role in the American economy. All the same it mocks reality to claim that buyers of stocks deserve a tax break when they sell their shares at a profit. A tax break? For making money in the market?

Now for more reasons why this preferential treatment is poor policy.

There’s a fairness issue that stems from taxing one kind of income differently from another. Income is income and should be taxed at the same rates no matter where it comes from; what’s good for the goose is good for the gander.

There’s the issue of income inequality, which has soared in America in recent years. According to the David Cay Johnston book Perfectly Legal, the top one percent of taxpayers controls about half the nation’s financial assets. Two-thirds of the income of the 400 highest-income Americans comes from long-term capital gains. Undeniably, the benefits of tax breaks for capital gains flow overwhelmingly to the already-wealthy; undeniably, preferential rates on capital gains exacerbate income inequality.

Finally there’s a tax equity issue which our forebears even considered a moral issue. In 1924 Congress first differentiated between earned income (wages and salaries) and unearned income (e.g., capital gains and dividends), and taxed the unearned income at higher rates. It was deemed the right thing to do; old-timers would have shuddered at the notion of taxing wages at higher rates than capital gains.

Those were the days. Now it’s 2007.

Under the trumped-up cover of spurring economic growth, average American workers have to pay higher taxes on their wages than if they made the same amount of money in the stock market. They’re getting stiffed by carrying a heavier relative tax burden, getting fewer services or some of both.

The latest capital gains tax cut is set to expire in 2010, and the new Democratic Congress has indicated that it has no plans to visit the issue until after the 2008 elections. This gives them plenty of time to look beyond the propaganda, and to consider taxing capital gains at least as much as earned income. A political pipedream? It was the rule not long ago: from 1988 to 1992, long-term realized gains were essentially taxed at the same rate as other income.

Then the K Street apostles went forth and preached, and the spurious case became gospel.

By Gerald E. Scorse

The writer's articles on capital gains tax reporting helped lead to a reform bill now before Congress. The bill has bi-partisan support and seems likely to pass.

P.S. The Baltimore Chronicle ran this piece.

There has been a lot of discussion lately on a topic that often comes up in my economics classes: the use of prizes as incentives for innovation. Despite the long history of using prizes to spur technological development, the renewed interest in this tool is a good sign because it is underused and could yield tremendous global benefits.

The underlying reasons why prizes may represent one of the most effective and efficient ways to accelerate innovation are relatively straight-forward:

1. All entities, but particularly governments, are notoriously bad at picking technological winners, especially in emerging fields. For example, the energy or telecommunications technologies that may prove to be the best in the coming decades may not even be on the radar screen right now. Creating prizes for technological developments allows scientists and engineers wide latitude in figuring out the best ways to make advancements. For example, while directly supporting hybrid technology may help to increase innovation in this industry, a prize for the first group to come up with a 100 mpg car creates incentives for development within a much broader range of technologies, some of which may ultimately be superior to hybrid technology.

2. Prizes engage the broadest group of innovators possible because by their definition they don’t favor any group or industry. As we are all well aware, sometimes the best inventions come from people’s backyards or garages, or across borders and therefore, prizes are some of the most efficient generators of creative and competitive activity.

3. Prizes do not just confer money on the winners, but also prestige. Whereas direct support of industries or groups provides only a monetary reward, many scientists (who have egos just like the rest of us) may be extra-driven by a desire for the media attention and fame that accompanies winning a competition; the same amount of money spent on directly supporting given research may actually generate additional work if used instead as prize money.

The potential uses of prizes to help generate new technology are almost limitless, but there are a few areas where it would be especially beneficial to world society: new medicines and new environmental technology. Probably the best possible uses of prizes would be to encourage the development of a vaccine for AIDs or malaria or for new highly efficient and clean energy technologies.

Prize money must be sufficiently high to cover the costs of R&D by at minimum an order of magnitude; since most players have a small probability of winning they will only spend their own money to take the risk if the prize is very big. This might mean a prize of say $50-$100 billion for a major medical cure or $10 billion for new energy technology, but compared to the potential benefits to the world even such sums are a relatively small price to pay. In addition, these sums would only be paid if the desired technologies were developed, whereas most forms of subsidies don’t guarantee almost any desirable outcome.

Given the huge sums the world already spends on fighting disease and environmental regulation, I can think of almost no better way to commit resources than providing incentives for the best minds in the world to focus their attention on the world’s most pressing problems.

Jason Scorse

This week witnessed the collapse of negotiations over the WTO’s Doha Round, with no indication as to whether serious moves will be made to get the process back on track anytime soon. This is very bad news for global economic development, but particularly for poorer countries (although there is widespread disagreement on the extent to which this round of trade talks would have benefited developing countries, there is no doubt that they would have gained).

Fortunately, there is plenty that can be done to help developing countries, which doesn’t require a difficult round of multilateral negotiations; the priority should be a major revamping of development aid. This would include a paradigmatic shift in how aid is dispersed by all of the major aid institutions, especially the World Bank, USAID, and the United Nations. Aid as it is currently structured is not only largely ineffective and tremendously wasteful, but in many ways counter-productive. Here’s what needs to change and why:

1. Stop funding large development projects (just about everywhere)

Anyone who has taken Econ 1 can probably understand why funding large projects (such as energy projects or other large infrastructure) in almost all developing countries is an exercise in futility. The proper question to ask is why hasn’t this project been undertaken by the private market already? For example, if the private market has not decided to fund a large energy project in a particular country it is probably because the project is either unprofitable (given the low incomes of the population), the political climate is unstable, or the country lacks the proper legal regulatory institutions to ensure that their investment is protected. If this is the case the project is likely to fail or be unsustainable no matter who funds it. And in the cases of middle-income countries where the projects may in fact be profitable and sustainable, why not leave the private markets to fund such projects? It makes no sense for people in the rich countries to subsidize large projects in such up and coming nations such as Brazil, which have the markets and institutions already in place to fund such projects. There is a slight caveat, however, which brings us to point number two.

2. Focus only on projects where the social returns are much greater than the private returns

In a market system where profit is the ultimate motive there are some types of projects that may have huge social benefits but may not be initiated by private entities. For example: a water delivery system for poor rural areas or roads and bridges for which it would be difficult to collect toll revenue. Therefore, there may be examples of larger-scale projects, particularly in some of the most cash-strapped least-developed countries, where assistance is needed to build basic infrastructure, which is the prerequisite for sustained economic development. However, since many of the least developed countries suffer from immense political instability, civil strife, and corruption such projects should only be undertaken when there is a substantial chance for success (otherwise the money is likely to be captured by corrupt elites and further entrench their power). Major aid organizations should in general stay away from supporting major physical projects altogether, and instead focus on a class of intellectual property that I now turn to that has the greatest potential social returns.

3. Shift the majority of aid resources to the development of common intellectual property in key areas

The greatest gains to be achieved in the developing world are to be derived from new technologies in health, energy, agriculture. Just as with many large infrastructure projects in much of the developing world, private corporations do not find it profitable to invest in vaccines that afflict poor people, small-scale water purification systems, crops grown by households or small farmers, or small-scale energy systems for rural communities. Aid that is directed at developing new technologies in all of these areas for the masses in the developing world would yield benefits orders of magnitude greater than from most of projects currently being funded by the major aid organizations.

Creating new technologies and making them part of the public domain such that all entities– governments, NGOs, and private corporations– have equal access to them would lead to massive diffusion. For example, a vaccine for malaria or a bioengineered drought-resistant seed that was part of the public domain could be produced for pennies by any organization anywhere in the world. Since knowledge is easily transferable and allows for local production of the finished goods it creates much less opportunity for corruption and ensures a much higher probability that benefits will actually accrue to those most in need. (For an example of an organization that is a model for this type of development aid check out One World Health. Coincidentally, there is a great article on a recent success by the organization in Monday's nYT.)

Making a major shift in development aid will be extremely difficult because there are so many vested interests in the current system. The people who work for development organizations such as the World Bank are well-intentioned but the “poverty industry”, with its extremely high salaries and first-class perks, has enamored them to a failed system. It will require some very courageous employees as well as outside pressure to radically shift a bureaucratic culture that is stuck in its largely obsolete ways. In addition, since what I have outlined would decrease the coffers of the ranks of corrupt officials throughout the developing world, who are all too happy to continue failed models that line their pockets while their people continue to suffer, there would no doubt be fierce resistance from the rulers in many of the countries we are actually trying to help.

But in the end, it is only fair to the billions of people mired in undeveloped societies, as well as those in the developed world who are subsidizing aid projects to the tune of tens of billions a year that aid money be spent wisely. We know how; what we need is public recognition and the political will.

Jason Scorse

Utilitarianism is often called the foundation of modern economics. It is the belief that human beings try to maximize their utility (happiness), and that good social policy aims to maximize the sum of individual utilities. This idea is central to most economic analysis, notably cost-benefit analysis. Unfortunately, this sort of analysis presents problems that are rarely discussed in economic and political circles.

We all know, for example, that there are things we are forbidden to do to other people regardless of whether the loss of that person’s utility would be made up by increases in other people’s utility. A modern-day Robin Hood might increase society’s total utility, but theft is both legally and morally wrong. To imagine an extreme case, we could certainly increase overall utility if we infected a small population of humans with AIDS and studied them in labs; this would greatly increase our knowledge of the disease, but it would be morally abhorrent. War is one activity where we do explicitly trade off the death of innocents to achieve some “greater good” (and hide what we’re doing behind euphemisms like “collateral damage”).

I suggest that when cost-benefit analysis is used as a public policy tool, we often engage in actions that are in many ways equivalent: actions which meet the “benefit” goal, but which cross the divide into morally slippery areas.

For example, when new coal power plants are built the benefit (cheap electricity for large numbers of people) is weighed against the costs (for one, a certain number of premature deaths due to particulate pollution). The fact that these deaths are statistical makes it easy for us to accept the trade-off. But what if we could identify the people who were going to suffer and die because of each new power plant, and then had to ask ourselves whether it was alright to go ahead and build it? It would obviously be much more difficult and morally problematic.

In addition, utilitarianism is incapable of differentiating the root sources of utility. For example, some people may get utility from viewing beautiful scenery while others get it from performing sadistic acts. In the value-free world of utility theory, utility is utility no matter what it comes from. This is troubling since we clearly need to differentiate between the sources of happiness: in any sensible moral calculus, deriving pleasure from harming others cannot be equivalent to getting pleasure from helping others.

When it comes to the environment, utilitarianism runs into even greater problems. Humans are the sole deciders of what has value: paradoxically, any intrinsic value for non-humans can only be granted by humans. So if a hunter gains utility by killing an animal, or a person by eating that animal’s meat, cost-benefit analysis gives no weight at all to the animal’s interests (unless of course human beings choose to, and sometimes we care enough to do so.)

The notion that only human interests count is not based on reason or any ethical system. Taking this position is essentially no different than claiming that only one nation has value, or one religion: it is an arbitrary dividing line in a world of millions of types of living entities, many of which are animals, many of which are highly intelligent and social creatures with a great capacity for pleasure and pain. (As a side note, advances in genetics are making it harder than ever to support arguments based on a “unique species” claim. It now appears likely that a male monkey has more genetic similarity to a male human than a male human has to a female human.)

I was moved to consider this issue because of the renewed interest in whaling by Japan, Norway, and Iceland (a topic I specifically addressed in last week’s Voices). Some people in these countries (very few) desire to eat whale meat, and believe that this desire supersedes the right to life of some of the most highly evolved creatures on the planet. The fact that whales can be harvested “sustainably” points once again to the problematic nature of utilitarian doctrine. We could probably kill thousands upon thousands of all types of whales, dolphins, turtles, elephants, rhinos, lions, and tigers and not wipe out an entire species, but does our desire to eat these animals or kill them for sport entirely negate their right to exist?

The point is not that we should scrap utilitarianism or its accompanying cost-benefit analyis; we do need to be able, in some way, to calculate benefits and costs in the public policy arena. But I would argue that there are some actions that are wrong in and of themselves, and not subject to any utilitarian calculus. (Or perhaps that the utilitarian calculus should be extended to non-humans as well.)

The sooner that we think more broadly about the interests of animals and the environment, the sooner we might come to realize that many of our actions today are immoral and should be stopped: regardless of whether they or sustainable or not, regardless of whether they pass a cost-benefit analysis based solely on our wants and desires.

Jason Scorse

(With tax day coming up, it is the perfect time to put forth the type of reasonable, fair, and economically sensible reform that is laid out in this piece, which just appeared in the SF Chronicle on Thursday.)

Should capital gains, like wages, be reported to the Internal Revenue Service? National Taxpayer Advocate Nina E. Olson thinks they should, and she wants Capitol Hill to make it happen.

A legislative recommendation in the Advocate’s 2005 report to Congress calls for brokers to report basis prices and purchase dates for stock transactions to the IRS. This would effectively hold capital gains to the same tax rule as wages, which employers have had to report since 1943; under the Advocate’s plan, financial institutions would have to do the same for capital gains. Only the proceeds from sales are currently reported, and these tell the IRS next to nothing.

Few tax reforms could be fairer or make more fiscal sense.

It mocks tax equity that wages are reported by a third party to the IRS, but capital gains are not. What’s up with keeping a tighter tax rein on ordinary workers than on the high rollers?

And consider the hit the Treasury takes. Listen to the Advocate: “From the government’s perspective, the absence of information reporting enables underreporting by taxpayers who deliberately overstate their basis (thereby reducing their gain or even generating a loss), because they know the IRS generally cannot detect errors in basis reporting in the absence of an audit. One recent estimate puts the revenue loss…from such underreporting at $250 billion over the next 10 years.”

To which you can add the billions lost every year by states and cities that base their taxes on federally-reported amounts.

The Taxpayer Advocate is not alone in recognizing the merits of third-party capital gains reporting. Pamela Olson served as the Treasury’s acting assistant secretary for tax policy during George W. Bush’s first term. In May 2002, she answered my letter to Congressman Charles Rangel: “…Mr. Scorse believes that tax compliance would be improved if information reporting for capital gains included the amount of capital gains income that a taxpayer is required to show on his or her return. We couldn’t agree more! Information reporting is the most efficient, least intrusive way of helping taxpayers comply with their tax obligations to the federal government.”

Professors Joseph M. Dodge of Florida State and Jay Soled of Rutgers couldn’t agree more, either. Their paper in the tax policy journal Tax Notes called the potential for capital gains tax cheating “virtually unlimited,” particularly for stock transactions; in their opinion, it could virtually be eliminated with third-party reporting.

IRS Commissioner Mark Everson, speaking generally, told a Congressional hearing last April that “Average Americans pay their taxes honestly and accurately, and have every right to be confident that when they do, their neighbors…are doing the same.” It’s hard to have such confidence when capital gains are not reported to the IRS.

The Advocate’s recommendation takes note of financial institutions that do not keep track of basis prices, leaving clients the sometimes-daunting task of doing it on their own. Ms. Olson floats a remedy, a one-time tax credit to brokers for setting up a tracking system. Full speed ahead, and let the Congress work out the details. (In mid-March, Senator Evan Bayh (D-IN) introduced legislation that would do exactly what the Taxpayer Advocate recommends. Senators John Kerry (D-MA), Barack Obama (D-IL), Carl Levin (D-MI) and Tom Carper (D-DE) are co-sponsors of Senator Bayh’s bill, S. 2414.)

Look at the Advocate’s idea this way. It’s one tweak of the Tax Code, one large leap for tax fairness. Plus those billions for the Treasury.

Gerald Scorse testified on this issue in writing at Congressional hearings in 2003, 2004 and 2005. He has an MBA from Baruch College.

It’s inarguably true that while GDP has grown exponentially for the past half-century, human happiness has remained relatively flat. All the same, as an economist, it baffles me when these two facts are put forth as evidence that capitalism, markets, and economic growth are largely one big mirage, with only minor links to human welfare.

First off, the measures of happiness that most people refer to are self-reported measures that have been taken across countries over many decades. These reports typically rate people’s happiness on a relative scale from very unhappy to very happy. If in the 1950s people rated their happiness a 7 on a scale of 1 to 10, and happiness supposedly increases with per capita GDP, then by now happiness would have to be at least a 15 on a 1 to10 scale! Clearly, we can’t assume that when GDP increases, happiness increases right along with it.

Aha, but isn’t that what the critics of capitalism have been saying all along? No matter how wealthy we get, we ultimately think of our happiness in relative terms; therefore, we’re never really happier than before.

This may very well be true, but ask yourself: would you rather be “happy” in a society where people use outhouses, nobody ever leaves their village, and the average life expectancy is 40? Or would you rather be “happy” in the contemporary United States of America or European Union? I thought so. And the simple fact that life expectancy has increased so much over the decades points to an immense increase in overall happiness, since people have so many more years to enjoy whatever level they have; 40 years of being happy is only half as much as 80 years.

The basic point so far is that people tend to judge their happiness compared to current norms, so that happiness is continually dependent on greater levels of material comfort and well-being. This is far from trivial. In addition, while overall levels of happiness at a given point in time may not be much greater than in the past, happiness is not the only important metric in society. Opportunity, levels of knowledge, convenience, variety, and a host of other variables influence people’s lives in positive ways. True, my happiness might not really be too dependent on how many flavors of ice cream there are; nevertheless, given a certain level of happiness I prefer a world with more flavors than fewer.

As to what actually makes people happy, it is no mystery. Love, friendship, spiritual connectedness, a sense of purpose; these have been the keys to happiness from time immemorial. That money doesn’t buy these things is self-evident; therefore, to assume a linear relationship between GDP growth and happiness is patently ridiculous. Once again, however, this hardly means that economic growth isn’t good.

An example of where the logic of the anti-economic growth crowd becomes really perverse relates to marriage and lifespan. One of the many reasons divorce rates are higher nowadays is because people are living longer; it is simply easier to stay married when you only live to 50 than when you live to 85. (Since we know that divorce is often traumatic and associated with a deep sense of failure, if we really want to make people happier perhaps we should help them die sooner!)

There is another key misapprehension: that somehow happiness is the primary goal in life. While certainly worth striving for, happiness is hardly the only worthy goal; how about facing challenges, trying new things, sacrificing to care for others, expanding one’s intellectual capacity? These endeavors may bring happiness, or they may also bring frustration, sadness, longing, and pain; still, that doesn’t mean they should be avoided.

Unsurprisingly, it is always those in the most privileged positions (who travel the world and have every luxury at their disposal) who are the first to question the need for economic growth. More often than not, this is because of the supposed links between growth and the destruction of the environment, links which are tenuous at best. Wealthy environmentalists like to tell poor people in the developing world that there’s really nothing to be gained from having cars, TVs, supermarkets and all that superfluous stuff that doesn’t really make you happy anyway. There’s no need to consider developing into industrial societies because that might threaten all the pretty places they love to visit.

There are also those who rightfully point to the connection between global warming and GDP growth, but again, they tend to minimize the essential lessons: 1) it is the wealthier countries who produce much more output per unit of energy (i.e., growth doesn’t necessarily have to mean more physical throughput), 2) it is the wealthier countries who have the technological capacity to innovate to reduce CO2 output, 3) it is the wealthier countries that have the political institutions that are required for effective strategies aimed at combating climate change.

All of which means that environmentalists had better get serious about helping the poorer nations get a taste of all those “non-essential” material goods that we take for granted. Those nations are not going to listen to people who have it all telling others to forego the good life.

And when development occurs in those places, an amazing thing will likely happen. As their essential needs get met, the people in these countries will increase their demand for environmental protection. Such a confluence is only possible when people realize that while GDP growth may not make people all that much happier, it gives us our best chance of creating an equitable world where everyone at least has the potential to be happy, where the environment is protected, and where we can experience all of life’s adventures for a very long time.

So instead of campaigning against economic growth a much more constructive approach would be to campaign against perverse subsidies, protectionist trade barriers, and to promote technology transfer from rich countries to poor ones.

J.S.

P.S. Harvard economist Benjamin Friedman has come out with a new book, “The Moral Consequences of Economic Growth” that addresses a lot of these issues (what a coincidence!). One of the main points he makes (which I wholeheartedly agree with) is that median GDP growth, not per capita GDP growth, is the correct metric for a society’s well-being. Unfortunately, median GDP has been decreasing in the U.S. for the last six years, and surprise, surprise, with this decline has come increased anti-immigrant sentiment and a move towards religious extremism. For a great discussion with Dr. Friedman on NPR click here.

P.P.S. Another book on the history of happiness just came out as well; for a great discussion with the author and others on NPR click here.

Jason Scorse

A few weeks ago I was one of the speakers on a panel entitled, “Free Trade Agreements and Sustainable Agriculture,” at the Ecofarm Conference in Asilomar, California. The other two speakers were a representative from Oxfam and a representative from The Forum for Free Trade and Democracy. I knew that both of them, as well as the crowd, would favor the anti-globalization agenda, and I looked forward to making the case in favor of free trade. I put together a 20-minute talk on who would be the likely winners and losers if we truly made a shift to free trade in agriculture, and how the benefits both to people and the environment would clearly outweigh any costs (and even these would mostly come at the expense of special interests).

The panel began with the representative from Oxfam struggling to fill her 20 minutes. Somehow she believed that citing statistics about global poverty, and how most poor people work in agriculture, was a substantive critique of free trade. She added a few random statements about CAFTA being bad, but that “we” almost defeated it was a sign of the strength of the anti-globalization movement. She also made fuzzy statements about NAFTA having harmed farmers in Mexico, though this has largely been disproved (not that she thought evidence was necessary anyway).

Then came the man representing the Forum for Free Trade and Democracy, who spoke for almost 40 minutes (more on that in a moment). I don’t remember clearly what he said, since he immediately began fielding questions from the audience and got sidetracked on issues that had little to do with the topic. One thing that did strike me was his insistence that if you wanted people to work on your side of the free trade debate, there are none better than the South Koreans. I found this both disturbing and bizarre, since it was an apparent reference to the South Korean who committed suicide at the WTO ministerial meeting in Cancun; I didn’t realize that people were actually in search of martyrs for the cause.

Now it was my turn. To get people’s attention I announced that I was pro-WTO, pro-free trade, pro-markets, pro-NAFTA, and pro-CAFTA, and I think that did the trick. I then ticked off the winners and losers in our highly protected and subsidized global agricultural system, in which hundreds of billions of dollars are wasted every year on special interests, the environment is trashed, and on balance developing countries are hurt (for details of the talk please contact me). I also noted that the WTO is one of the most democratic institutions in the world, and that the problem is not that people are following its mandate, but that they aren’t following it enough. (It was around here, after only 10 minutes of my allotted 20, that I was told I was almost out of time; I joked that I guess you get less time if you’re in favor of free trade at an Ecofarm conference.)

I concluded with two observations.

First, that I believe it has been a terrible miscalculation on the left to jump aboard the anti-globalization bandwagon, and that helping to direct globalization in a way that helps people raise their standards of living and moderate the difficult transitions would be much more constructive. I asked the audience whether the world might be a better place if, since the Seattle protests in 1999, organizers had been working to end perverse subsidies and protectionist policies instead of trying to disrupt every WTO meeting.

Second, I used an example involving CAFTA to point out how to tell when you’re on the wrong side of a debate. Florida sugar producers receive about $1 billion a year in subsidies, and they fiercely opposed CAFTA because of the modest competition that the agreement would create (competition that would cut into the money they receive from American taxpayers). These producers have for decades had some of the worst labor violations and conditions in America, have almost single-handedly trashed the Florida Everglades (with damages in the billions), are directly impoverishing many Caribbean and Central American producers who could sell sugar more cheaply, and have forced many U.S. candy and soda manufacturers to move operations to Canada. If there was ever a progressive cause to get behind, it would be to decrease their power. But the anti-globalization crowd, in its blind opposition to free-trade, joined hands with this special interest to oppose CAFTA. This should cause all those who considers themselves liberal to take a long look in the mirror.

It was at this point when someone in the audience yelled out “who’s paying you?” I reminded him that free-thinking individuals can support free trade.

Many of the questions during the Q&A session that followed were directed at me. A number of people came up to talk and were generally supportive that someone had dared to break the “party line” and engage in a substantive debate.

But the fun wasn’t over. I decided to sit in on a discussion about the upcoming Farm Bill.

One of the speakers, a representative of the assorted Farm Bureaus of California, made his case that California farmers must unite as a caucus in order to get as much money as possible for California, including more money for every possible agricultural program. Keep in mind, federal farm support is already at record highs (budget deficits and other national priorities be damned!). He mentioned that discord between the cotton growers, who get a lot of subsidies already, and other California farmers has in the past hampered California’s efforts to get its “fair share” of the subsidy bounty.

I wish my students could have been there to hear it: it was the most blatant example of a corrupt special interest operating in broad daylight that I had seen in a long time (and at an Ecofarm conference no less!) During the Q&A session I asked him why, as a Californian, I should support cotton growers who have no business getting subsidized water to grow subsidized cotton with tons of pesticides in the middle of the desert. I could see his blush from all the way in the back of the hall. He made some vacuous point about representing all of his clients and moved on; I guess his clients don’t include the public interest of California.

In summary, I remain a steadfast supporter of the WTO and free trade. The benefits so overwhelm the negatives that I’m amazed there is even a controversy. The real debate should be over how to best manage the forces of globalization in order to balance the need for continuing national economic progress with individual economic security. The sooner we focus on these issues, the better. I’m prepared to go back to Ecofarm next year and repeat the same talk if need be.

J.S.

“The extreme left and the extreme right are in reality two sides of the same coin.”

P.S. The WTO has ruled that the EU’s ban on GMO’s is illegal since the EU has not proven that GMOs represent a public health risk, and that the labeling of GMO products is a less trade-distorting way to allow people to discriminate against GMO products if they chose to on an individual basis. This is clearly the correct ruling, and I say that as someone who pretty much buys 100% organic food, which is just about the only non-GMO food you can buy in America. While there are legitimate scientific issues regarding GMOs, so far the scientific consensus is that they are safe both from the environmental and health perspectives. If Europeans don’t want to eat GMOs they don’t have to, but for those who don’t care they should be able to purchase the (mostly) cheaper GMO products. This case also speaks to the larger issue of what should be done when environmental scare tactics go awry, such as the cases of poor African nations actually refusing food aid because the food contains GMOs. In cases like this the precautionary principle goes too far, and the environmental movement becomes a creature of hysteria rather than a sensible movement that wants to balance human and non-human needs.

P.P.S. This is the absolute best response to the Danish cartoon controversy imaginable. Check it out.

Jason Scorse

Communication is the foundation of any prosperous society. It is not only the backbone of the economy, but a steady flow of (accurate) information is necessary for both democracy and technological innovation. And if you want “proof” that capitalism and market-economies have “delivered the goods” you need look no further than the telecom/internet industry.

I remember back in the 1980s when it cost $.25 a minute to make calls within the U.S. during peak hours, $.10 a minute on nights and weekends, and international calls required a second mortgage. These days, thanks both to innovation and deregulation, it costs about $.05 to call within the U.S. at all hours, which accounting for inflation is a drop in price of over 90%. International rates have dropped even more, and now you can call Europe for $.03 a minute and China for $.02, which for all practical purposes is essentially free. Whereas cell phones initially cost over $1,000 (remember those huge clunky things?) and rates were upwards of $1 a minute now you can get what amounts to unlimited usage for around $40 a month with free phones that are pocket-size, complete with email, cameras, and all sorts of nice features. On the computer front, you can now get internet phone service (such as Vonage) which is even cheaper than land lines, and I just signed up for a new high-speed DSL contract for the outrageous price of, drum roll please, $15 a month. Unlimited email remains 100% free and customers get tons of additional free services like maps (some even with Satellite photos- see Google Maps), attachments, and photo-sharing.

Digression: Where I live in Central California, in close proximity to many of the architects of these wonderful consumer windfalls, the telecommunications and internet revolution has led to a record surge in real-estate prices (above and beyond the national increases). For property owners this has meant huge profits, while for renters like myself I have steadily watched my prospects for owning a nice house diminish (or at least become vastly more expensive). Putting aside whether or not I believe there is a housing price bubble, my attitude has remained largely unchanged. I am a believer in the merits of the free-market system and it would be hypocritical if I were to praise all the great services the telecom and internet revolution has brought the world (which allows me to publish this blog and has made my life as an academic vastly easier), while at the same time bemoan the fact that the people responsible for this innovation have become vastly wealthier, driving up home prices. I say good for those lucky enough to buy at the right time or who can afford the high prices; people like me will just have to be a little more creative and frugal with our money. Nowhere in the Bill of Rights does it say that all Americans shall have the right to buy beautiful beach front property in sunny California.

Back to communications…

I recently returned from a trip to Mexico where one can witness the opposite of the telecom revolution that we have experienced in the United States and the rest of the developed world. Mexico continues to suffer under the heels of one of the worst telecom monopolies in the Western Hemisphere (Telmex). Not only is service hard to get and spotty in many areas, but the prices are through the roof. It is not uncommon for households to pay $.20 or more to call within Mexico and since most people don’t have phones they must rely on calling cards, which are even more expensive (as much as $.50 a minute). The cheapest calling card I was able to get to call the States from Mexico was $.35 a minute. That’s a markup of an order of magnitude over standard international rates. DSL service in Mexico costs upwards of $100 per month and it’s slow. The monopoly rents that Telmex extracts from the Mexican people in reverse Robin Hood fashion are at minimum billions of dollars a year. In fact, the owner of Telmex owns much of Mexican industry and is one of Forbes richest men. His telecom enterprise is also predatory and criminal in every sense of the word. Rumor has it that when AT&T was allowed access into the country his company sabotaged AT&T’s lines so that it was hard to hear people using their service.

The telecom revolution that began in the developed countries has quickly spread throughout much of the developing world, as many poorer countries have allowed competition and solicited foreign direct investment in the telecom sectors. Public access to telecommunication services has skyrocketed in many areas, and cell phones have played an especially critical role since they allow countries to forego providing expensive land-line infrastructure (which has left most poor rural areas of the world largely isolated).

Unfortunately, countries like Mexico, which continue to allow a monopoly to blatantly exploit its citizenry, will find their economies falling further and further behind as the world globalizes. Telmex’s monopoly not only deters business investment, but acts as a hugely regressive tax on the already (mostly) poor Mexican population. Hopefully, some courageous Mexican politician will eventually challenge the status quo and build his or her candidacy around the promise of breaking up Telmex and reducing phone rates; there is almost no single thing that would help the Mexican people more over the long-run. Low-cost and reliable communication is truly that important.

J.S.

P.S. A while back I critiqued Thomas Franks’ What’s the Matter with Kansas. This article seems to lend credibility to my analysis.

Jason Scorse

If free trade benefited everyone all the time there would be no controversy. Unfortunately, along with the tremendous net gains from freer trade – higher productivity, lower costs to consumers, the creation of new industries, and the chance for poorer countries to earn foreign currency and develop economically – come large costs for the industries and workers that get caught in the transition as economies adjust.In order to get everyone to support free trade, workers who lose their jobs or have their pay cut deserve to get help from the government. Workers who are displaced need to feel that society takes their pain to heart, and that they are not simply cogs in the larger economic machine who can be sacrificed for the greater good. In effect, free trade presents a political paradox: it calls for hands-off government with respect to tariffs and quotas, but hands-on government with respect to increased worker benefits in times of economic transition. For example, wage insurance can be an effective way to protect the stability and quality of life for displaced workers at a reasonable expense. Workers in industries harmed by trade liberalization are paid a portion of the difference between their old salaries and those in any new job they get (if the salary is lower) for a set period of years.

The gains from free trade are too large to be squandered, but these days both the Republicans and Democrats are so beholden to protectionism and special interests, and are so committed to their own ideological biases that they are incapable of consistently supporting free trade and the policies that must accompany it.

Under the Bush Administration, Republicans have levied a number of significant tariffs on American goods, fought the WTO regarding the elimination of U.S. export subsidies, and are now threatening China with punitive tariffs or quotas because Chinese textiles are flooding the market. Think about that: the greatest and most advanced economic superpower in the world is turning its back on free trade in order to protect one of its lowest value industries that has been in decline for decades. In addition, the Republicans are so instinctively committed to a ‘less-government’ stance that they seem incapable of promoting the types of policies that will insure a long-term commitment to free trade within the United States. A case in point is the GOP’s continual stalling over the last four years on extending unemployment benefits for workers who couldn’t find jobs.

The Democrats, on the other hand, are so stuck in the protectionist mindset that they have completely lost sight of the potential wealth that can be generated from a freer and more liberalized global economy in conjunction with the promotion of labor rights and environmental goals. Instead of proposing wage insurance, increased retraining programs, or funds to combat labor rights abuses abroad, they are willing to fight against any free trade deals put forth by Republicans regardless of how perverse their arguments are. A case in point revolves around the proposed Central American Free Trade Agreement (CAFTA): the Democrats have teamed up with the Florida sugar lobby, probably the country’s most wasteful and environmentally destructive lobby that bilks the public for billions a year and trashes the Everglades, in order to defeat CAFTA. Anyone concerned with the environment should be aghast at this development.

This short-sightedness on the part of both political parties provides a huge opportunity for a courageous leader who is willing to extol the virtues of free trade, and at the same time, emphasize the need for government intervention to ameliorate the suffering of displaced workers. Free trade presents America (and the world) with a potential win-win situation, but only with the proper leadership that is not afraid to expand government policies where they are needed, and to stand up to the special interests who cry foul every time their government handouts are in jeopardy.

J.S.

P.S. A follow-up to my last piece on animal rights: Definitely check out this interview with Matthew Scully, author of Dominion (a book I highly recommend). Also, check out Scully's website that has excellent articles and links. For those who haven't heard of him, Scully is a conservative Republican who is a former speech writer for President Bush- not your typical animal rights activist.

Jason Scorse

The issue of taxes is fascinating because on one hand it’s a discussion about different policies, rates, and incentives (something economists love), while at its core it is a deeply philosophical issue: what right does the state have to take people’s money and use it for “social” purposes?

Let me begin by putting a few things on the table: I think there are many uses of our tax dollars that are indefensible (e.g. agricultural subsidies, maintaining a nuclear arsenal of 10,000 warheads, and export subsidies for corporations), and I also believe the tax code is a nightmare: little more than a hidden subsidy for accountants and lawyers. It is too bad that Bush and the GOP didn’t start with tax reform before pushing Social Security privatization since I think this is not only much more important (at least in the short-term), but it is something almost everyone could’ve gotten behind. More on this in the future.

While it is a truism that virtually everyone hates taxes, I would like to take a moment to assess what I, a middle-class man in his 30s, gets for his tax dollars. To begin, I have attended publicly subsidized universities for many years to the tune of at least $20,000 per year provided by the state. This alone is more than I have paid in taxes in my entire life. In addition, I get some of the best infrastructure in the world, my taxes fund a variety of worthy programs for environmental protection, poverty alleviation, medical care (though not for everyone), science research, international aid, and of course, I contribute to the national defense budget. Looking at a balance sheet it is obvious that I have received more in services than I have ever paid for and probably ever will.

Of course, the fact that I am paying less than I am receiving in goods and services means that someone else is paying more; notably the rich. While I may not ever enter their ranks, as my income grows I will no doubt pay more in taxes, but I will also get additional services when I have children and they attend public schools (another subsidy of at least $15,000 per child per year).

The bottom line: the wealthy do subsidize the middle and lower classes in American society, and while we in the middle and lower brackets have a right to complain about certain aspects of the tax code we are getting a great deal.

So is this wrong or is it morally justifiable?

This is a tough question and in some sense there is no “right” answer. Extreme libertarians will argue that tax is theft and there is no other way to view it; if you take someone’s money without their express permission you are stealing. I don’t subscribe to this perspective for a number of reasons.

First, if we are to live in a society and not in anarchy we must subsume some of our individual wants to the “greater good.” With regards to taxes, as long as they are not confiscatory the state has a right to levy them in order to promote social goals. Second, taxation for public goods (such as infrastructure, environmental protection, and national defense) is actually quite efficient. Imagine if all the roads were private and we had to pay each time we used them; picture those long lines at toll booths just about everywhere. It is much better for us to pay taxes and have these roads built for everyone; even the people who don’t own cars benefit from them since goods and services are delivered using the transportation system. Third, while wealthy people might not make use of public education or many of the goods and services provided directly by government, it is fair to say that the entire state apparatus disproportionately protects their interests. After all, the court system protects their corporate interests, the roads transport a disproportionate share of their goods and services, they get to enjoy the nicest physical environments in the country, and the military defends their financial interests disproportionately as well.

In summary, I think approaching the issue of tax reform and taxation in general would be greatly improved if people in the middle and lower classes acknowledged that the current system redistributes wealth from the top to bottom and that they get a very good deal. At the same time, the rich should acknowledge that while they pay a large share of the taxes, the state largely exists in order to protect their economic interests above all else. Approaching the issue in this manner might temper some of the harsher rhetoric and allow us to look at legitimate ways to improve efficiency (and hence reduce costs), while not tampering with the essential progressivity of the system.

Let me be clear that the perspective I have laid out should not be construed as support for the current tax system or the massive tax cuts made by the Bush administration; my point was simply to outline the philosophical starting points for the future discussion of tax reform, which is desperately needed given how inefficient our current system is.

J.S.

*Update on “A Tale of Two (Groups of Fanatics)”: Check out this very good article by the Economist.

Jason Scorse

If you haven’t read James Surowiecki’s The Wisdom of Crowds, get ready for a surprise.

In a book that’s part math, part psychology and part common sense, Surowiecki upends the popular belief that individuals are smarter than groups. Not so, he says. When it comes to solving problems, look to the group for dead-on answers.

Paying taxes, Surowiecki states, “is a classic example of a cooperation problem”. Everyone benefits from the services that taxes provide, but this is true whether or not they pay any taxes. Therefore, why pay?

In Surowiecki’s view, taxpayers ante up in large part because they believe that others are doing likewise. Americans, according to historian Margaret Levi, are “contingent consenters”. Few of us are thrilled to pay taxes, but we don’t mind paying our share as long as we’re sure that the folks next door are paying theirs.

But hold on. What makes us believe that our fellow citizens are giving the taxman his due? Are we being chumps, or does something in the system give us the assurance we need?

The answer arrives like clockwork every tax season. It’s the blizzard of W-2s and 1099s sent out by employers, banks, brokerage houses and mutual funds, telling us how much we made the year before in wages, interest, dividends and other forms of income. Each bears the reminder, “This information is being furnished to the Internal Revenue Service.”

It’s this third-party reporting that forms the linchpin of our “voluntary” tax system. It is the lodestar that keeps us on the straight and narrow, and tells us that we’re all in the same boat.

But hold on one more time. There’s a gold mine of unearned income that has its own set of rules, that isn’t “furnished to the Internal Revenue Service.” This rich vein is capital gains income from the sale of stocks, bonds and mutual funds. None of this income is reported by a third party to the IRS, though you could easily think it is.

To explain: The IRS does get reports of proceeds from stock, bond and mutual fund sales. But the agency isn’t told what these holdings cost to begin with, or when they were bought. In tax-speak, income from these transactions is “self-reported”; the figures don’t come from a third party, they come from the taxpayer.

This is unfair on its face, and porous tax policy besides.

A major IRS study found that misreporting rises sharply with self-reporting, climbing to more than 12 times the rate for income reported by third parties. Other government and scholarly studies have produced similar results. Kim Bloomquist, a senior economist with the IRS, makes the point the other way around: “One of the few generally accepted facts in the literature on tax compliance economics is the existence of a positive relationship between transaction visibility and reporting compliance.”

There’s no question that the self-reporting of capital gains costs the U.S. Treasury; the only question is how much. Unless we’re a nation of angels, the figure likely hits the double-digit billions every year. On top of that there’s the multiplier effect: states and cities which simply plug federal totals into their tax returns get short-changed as well.

The solution is only half a step away, staring us in the face and daring us to put it in place.
Brokerage houses and mutual funds routinely track their customers’ basis prices, purchase dates and realized capital gains, and report the information to them. With little more than the click of a mouse, the same data could be reported to the IRS at tax time.

Circle back to Surowiecki: “Getting people to pay taxes is a collective problem. We know what the goal is: everyone should pay their fair share….” Just last month, IRS Commissioner Mark W. Everson sounded a similar note when he told the National Press Club, “Average Americans pay their taxes honestly and accurately, and have every right to be confident that when they do, their neighbors…are doing the same.”

It’s time to put more reality into Everson’s rhetoric; it’s time to treat capital gains income the same as wage income, and have it reported by third parties.

Just ask any crowd.

This piece was in the Baltimore Chronicle on 4/20/05: Click here

G.S.

Side Note: I received some very interesting responses to my last piece on drawing the line between respecting culture and sanctioning oppression- some of which are in the comments section. I urge anyone interested in this issue (which I think is hugely important) to go and read the Universal Declaration of Human Rights; it is a document almost 60 years old that lays out the foundations for justice that transcend culture. Promoting these values can never be self-righteous since these are the foundations for human progress and dignity; that was my essential point.

Gerald Scorse

A recent editorial in the New York Times on the horrific conditions for workers in the U.S. meat industry sparked an exchange between a friend and I on one of the fundamental dilemmas inherent in capitalism, which is recognized on at least a superficial level by most people, but rarely made explicit and explored in detail.

The fundamental assumption underlying capitalism and market-based economies is that people trade goods and services, including their labor, voluntarily. Contrary to the rants of its most vocal critics, capitalism is inimical to slavery. If exchange is non-voluntary (i.e. achieved through coercion) it is by definition not a capitalist exchange. The power of this concept is not to be underestimated; it leads to a profound set of conclusions. The most important is that if exchanges are made voluntarily then all parties engaged are by definition better off after the exchange; after all, if they weren’t why would they have agreed to take part in the first place? Putting aside legitimate issues of perfect information and externalities that accompany this conclusion, the essential logic is sound and helps to explains why market-based systems are dominant almost everywhere in the world, even in places without political freedoms. It also explains why overall, no other system has been able to improve the standard of living for so many in such (relatively) short periods of time. The bottom line: Allowing people to freely trade and specialize amongst themselves is the most powerful driver of prosperity in the world.

There is a catch, however.

There are many situations in which people find themselves willing to do things voluntarily that are demeaning, obscenely dangerous, and deprive them of their basic human dignity because they are so down and out that they have no other options. For example, the meat workers in the NYT editorial are often poor, uneducated immigrants who don’t speak English and are therefore willing to work in conditions almost identical to what Upton Sinclair exposed in the Jungle almost 100 years ago. While it is true that these men volunteered for the job does that mean it is right to subject them to these conditions?

Economics as a science rarely differentiates between degrees of voluntarism, but you don’t need to be a moral philosopher to understand that this poses a problem. My deciding which high paying and fulfilling job to take is qualitatively different then a woman with no education and no money deciding whether to work in a brothel or a sweatshop in order to survive at some subsistence level. (I want to make sure to differentiate this example from someone in the U.S. who chooses to work in a dangerous occupation but is compensated with higher wages. In this case, the individual is not forced to choose the risky job because they have no other options, but they are willing to take the risk for the added reward.)

Once we acknowledge that not all voluntarism is the same, proponents of capitalism cannot take so much comfort in the fact that many of the worst jobs in the world are carried out by people who “volunteered” for them of their own free will. The next question naturally arises, what minimum standards do we as a society have an obligation to provide to workers even if they would willingly accept less? Even posing this question is contrary to the purest forms of laissez-faire capitalism, but it is this type of thinking that (ironically) has helped capitalism prosper into the dominant system it is today. Although the victories of the labor movement- the 40 hour work week, an end to child labor, safety standards- have greatly benefited the average worker, they also helped to quell widespread discontent directed at the entire capitalist system, which seriously threatened its very existence during the 20th century. Capitalism is much more universally accepted because advancements were made in labor standards above and beyond the bare minimum.

The purpose of this piece is to introduce the issue of voluntarism in the capitalist labor market and the moral question it poses, and I will end with some concrete examples.

There has been widespread condemnation against child labor in the developing world, in which hundreds of millions of very young children are forced to work long grueling hours, often in unsafe conditions. While the sentiment against child labor is to be commended, a widespread ban on child labor in many poor countries might actually worsen the plight of children since many would be forced into drug gangs or prostitution. A significant amount of financial assistance from outside countries would be necessary to prevent this, since the poor countries themselves cannot be expected to eliminate child labor altogether at their stage of development without adverse consequences. Certainly, child labor standards can be enacted in order to combat the worst abuses, and efforts should be made to provide education and other opportunities for these children, but it is unfair to expect these nations to overcome this plight immediately all on their own.

On the other hand, in a country such as the U.S. there is absolutely no legitimate excuse as to why any people, citizens or not, should be subjected to the conditions outlined in the NYT editorial. We are one of the wealthiest nations on earth and providing safe working conditions where people are allowed adequate rest and are fully compensated if they are injured is something that should be universal in all of our business enterprises since the cost is so small relative to our level of development.

This lens may also be useful in examining some of the current battles in the U.S. over increasing the minimum wage or in legislating that employees provide health insurance to all workers. Those on the Right typically oppose any such intrusions in the capitalist market, while many on the Left often view these as essential components of making the market more fair. Both sides raise legitimate issues, and since there is no perfect marker for deciding what standards are just or fair, there will always be room for reasoned disagreement. However, acknowledging that not all degrees of voluntarism are the same may help to expand the dialogue and allow a wider range of moral concerns into the discussion. For example, a single mom who chooses to work at Walmart may be choosing the best available option, but still find herself unable to provide her family with the basics such as adequate food, shelter, and medical care.

In summary, while the capitalist labor market is based on the exchange of labor for wages, these exchanges may be consistent with labor conditions that are abhorrent and don’t meet even basic minimum standards of human rights. In some sense, the fact that I can even say this stems from the fact that over time standards of human decency have improved as societies have become wealthier. Acknowledging this must lead us to accept that on some level labor standards are relative, but what they should not be is stagnant; the push should always be to improve them in conjunction with general improvements in the overall material standard of living. This isn’t contrary to capitalism, in fact it strengthens it, by allowing more and more people to enjoy dignity and the fruits of their labor, and therefore to become enthusiastic supporters of the system.

Jason Scorse

I recently returned from Ghana, a developing nation in West Africa. As the first African nation to gain independence from colonial rule, Ghana was well positioned for economic growth during the 2nd half of the 20th century. Still, Ghana was largely unable to fulfill its initial promise due to political instability and poor economic policy. While there have been development success stories around the world, policymakers and pundits are always cautious when it comes to Africa. The rich nations of the world have not figured out how to solve the African puzzle, despite spending millions of dollars in foreign aid and spending years formulating new policies.

There is a temptation among some observers to throw up their hands and declare Africa lost for the next generation, whether due to interminable war, the scourge of HIV, or incompetent leadership. Even among the idealists, it is difficult to know where to begin in addressing Africa’s problems. I interviewed many people about these issues, and they returned to the same broad themes again and again. I hope to explore these ideas in greater detail in future posts.

One Size Does Not Fit All
While it seems obvious that Africa is not monolithic with over 50 different nations, hundreds of languages and ethnic groups, and significant regional disparities in climate, economy, politics, and infrastructure, our media and our textbooks tend to lump all Africans together. If you are lucky enough to read a front-page article or watch a lead news story on Africa, when was the last time there was a report not having to do with war or HIV? Africa needs to be analyzed with its diversity in mind. The problems facing Ghana are much different from the troubles that plague Sudan or Nigeria. South Africa and Ethiopia have sharply different political, social, and economic histories and meaningful comparisons are hard to come by.

Institutions Matter
How do you buy a house in Africa? How can an entrepreneur start her own business? How does a student get a college loan? The answers to these questions are not clear because the institutions that support these endeavors are poorly developed or non-existent in most nations. I personally met a dozen potential entrepreneurs during my time in Ghana, some with innovative ideas, who were unable to pursue their dreams because they were capital constrained and lacked access to credit. Information is hard to come by in Africa, whether it is information about a prospective borrower or an emerging business. Without institutions to facilitate the spread of information and the efficient distribution of capital, it will be impossible for Africa to develop.

Technically Speaking, No
The Africans I met were surprisingly comfortable with new technologies. Even among poorer people, cell phones and Internet access were not foreign concepts. The problem is that technology alone, without complementary institutions like credit cards and venture capital markets, cannot inspire innovation, e-commerce, or other business applications. Technology is perhaps a necessary but not sufficient condition for development. While Africans are increasingly using technology to communicate within and between nations, the impact on economic and political development remains to be seen.

Africans Can Do This Job
Few Africans I spoke with considered lack of foreign aid to be the primary issue facing their people. Rather, many of them expressed the notion that Africans could solve Africa’s problems, if we simply gave them the opportunity. The rich countries of the world can work together with Africans to formulate strategies to combat disease, improve economic growth, and enact political reform. In the end though, Africans will have to execute these initiatives themselves. Smarter, more targeted, assistance to responsible regimes is an idea that needs to be tested and this concept is at the center of Bush’s Africa policy.

The Future Is Ours
When I walked into BusyInternet, Ghana’s best Internet café, I could not help but be awed by the number of young Africans using their services. As I looked around the room, surrounded by flat screen monitors, web cams, and streaming radio, I knew immediately that my future was inextricably linked to the future of Africans. As an American, I recognize that the nations of Africa represent trading partners, a developing market for our goods, and strategic allies in the War against Terror. As a human being, I know it would be tragic to let the potential of millions of young Africans be wasted on war, disease, and corruption. A stable, prosperous, Africa is in our interests as Americans and as citizens of the world.

R.C.

There are few institutions that have been more maligned than the World Trade Organization. The WTO is commonly viewed by the Left, as well as the isolationists on the Right, as an institution that puts profit ahead of the needs of the poor and the environment, all while facilitating the dominance of multinational corporations at the expense of American workers. Virtually any instance in which trade, environmental degradation, and poverty coexist is seen as proof that the WTO (and “free-trade” more generally) is driving global inequity and harming workers. Unfortunately, there are few misperceptions that are more damaging to global progress or farther from the truth. Let me preface my arguments by saying that there are legitimate grievances with the WTO, particularly its lack of complete transparency, and there are vast inequities, which can and should be ameliorated, between the resources and expertise that developed and developing countries bring to the negotiating table. However, overall the WTO is largely a force for global good and here’s why:

1) Contrary to popular belief, the WTO is one of the most democratic international institutions in the world. Each country has one vote and unlike the UN, where a select powerful few have veto power, no such concentration of power exists in the WTO.

2) Also contrary to popular belief, the majority of WTO rulings have not pitted the interests of rich countries over poorer countries. In fact, the majority of WTO cases brought before the judicial body have been between poorer nations. In addition, last year’s rulings against U.S. steel tariffs and the recent ruling against U.S. cotton subsidies makes the WTO one of the only organizations that takes on the world’s most powerful countries and wins.

3) Regarding the recent ruling against U.S. cotton subsidies, the WTO has made a historic step towards the eventual elimination of all agricultural subsidies, which are some of the world’s most environmentally destructive, trade distorting, and unfair to the poor. Environmentalists and labor activist should be celebrating in the streets. (As an added note, the EU announced on 5/10/04 that it was willing to dismantle its agricultural export subsidies if other developed nations did the same in order to revive the latest round of global trade talks- I doubt it is a coincidence that this declaration follows so closely on the heels of the ruling against U.S. cotton subsidies)

4) The WTO is one of the few international bodies with real enforcement power that can back up its rulings. When the Bush administration contemplated maintaining the steel tariffs, despite the WTO’s ruling that they were in fact illegal, it was the targeted retaliations by the EU sanctioned by the WTO that were largely responsible for our ultimate compliance.

5) Membership in the WTO is entirely voluntary and although some may argue that opting out of the international trading system isn’t really an option for nations in our modern inter-connected world, this is exactly the point. Since international trade is essential for a nation’s economic growth and prosperity it is far better to be part of an enforceable system with uniform rules than one in which countries find themselves at the mercy of arbitrary and variable trade protectionism that makes for a highly unpredictable and inefficient economic environment.

6) Although there are many legitimate labor rights and environmental issues that the world community currently faces, these will not be helped by moving away from multilateralism, but by further embracing and expanding it. The WTO has established a strong institutional foundation with which to begin to address these larger issues; even if in many cases they are not directly linked to increased global trade (more on this in a later piece).

Jason Scorse

If free trade benefited everyone all the time there would be no controversy. Unfortunately, along with the gains from free trade -- higher productivity, lower costs to consumers, the creation of new industries, and the chance for poorer countries to earn foreign currency and develop economically -- come large costs for the industries and workers that get caught in the transition as economies adjust.

In order to get everyone to support free trade, workers who lose their jobs or have their pay cut deserve to get help from the government. Workers who are displaced need to feel that society takes their pain to heart, and that they are not simply cogs in the larger economic machine who can be sacrificed for the greater good. In effect, free trade presents a political paradox: it calls for hands-off government with respect to tariffs and quotas, but hands-on government with respect to increased worker benefits in times of economic transition. For example, wage insurance can be an effective way to protect the stability and quality of life for displaced workers at a reasonable expense. Workers in industries harmed by trade liberalization are paid a portion of the difference between their old salaries and those in any new job they get (if the salary is lower) for a set period of years.

The gains from free trade are too large to be squandered due to protectionist fears and xenophobia, but this is bound to happen if the current Administration refuses to accept the expanded government role that free trade requires. Republicans are so instinctively committed to a ‘less-government’ stance that they seem incapable of promoting the types of policies that will insure a long-term commitment to free trade within the United States. A case in point is the GOP’s continual stalling over the last three years on extending unemployment benefits. Traditional Democrats, on the other hand, are too quick to use government policy to protect inefficient industries (which Bush did as well with steel tariffs) that they lose sight of the bigger picture.

This short-sightedness presents a courageous leader with a huge opportunity. By extolling the virtues of free trade and at the same time emphasizing the need for government intervention to ameliorate the suffering of displaced workers, he or she can become free trade’s greatest ally. Free trade gives America a potential win-win situation, but only with the proper leadership that is not afraid to expand government policies where they are needed.

Jason Scorse