When I studied the results of my national surveys of public opinion one week before the Massachusetts special election, I felt a wave of panic--a strangely familiar feeling. The results showed that the public’s hope had given way to disillusionment; that Democrats had come to embody political gridlock and big spending; that conservatives were energized and Democrats demoralized; that the country was in revolt against elites. It was beginning to look like, gulp, 1994 all over again.
During that last electoral debacle, I was conducting surveys for President Bill Clinton, asking some of the same questions and getting the same answers. After one survey in May 1994, I wrote President Clinton, “The administration, the Democrats in Congress and the party face a disaster in November unless we move urgently to change the mood of the country.” Even then, I couldn’t imagine that Democrats would exacerbate the disaster, ending their decades of hegemony in the House.
President Obama and the Democratic Party need to urgently revisit 1994. By paying close attention to the lessons of that year--lessons about presidential leadership, the consequences of congressional melodrama, the need for an economic narrative and for a defining choice in the election--the worst can be avoided.
At about this stage in the electoral cycle, in midwinter, we were feeling pretty satisfied with ourselves. The State of the Union address on January 25 hailed the previous year’s passage of the Clinton economic plan, nafta, and the Brady Bill. Health care reform was still supported by half the country. Clinton’s approval rating stood at 58 percent.
Then, it all went tragically and almost comically downhill. The State of the Union glow was blotted out by a media frenzy when a special prosecutor subpoenaed White House officials to testify before a grand jury on the Whitewater land deal--and the president was forced to defend his wife’s honor at a prime time press conference. The president’s job approval plummeted eight points--and support for health care dropped ten. Paula Jones kicked off May with her sexual harassment suit. And, by the June publication of Bob Woodward’s The Agenda--and his characterization of the Clinton White House in a word, “chaos”--the president’s approval had fallen to 45 percent.
The Democrats had depended on being viewed more favorably than the Republicans--and that had been true in every election since 1962, as well as when President Clinton took office. But, during Clinton’s first term, congressional Republicans came to understand that opposing the president bolstered their own numbers. The battle over the president’s economic plan left the parties at near parity. During the spring of 1994, Republicans alarmingly began rating higher than us.
By mid-June, I was so distressed about the diverging graph lines depicting the Republican and Democratic numbers that I convened a meeting of prominent political scientists to get their reactions. The political scientists were bemused by my worries about disaster and predicted a loss of 15 to 18 seats, if the president’s approval held at 50 percent--where it stood at the time.
Alas, nobody anticipated the next act. There was the inglorious defeat of the president’s crime bill by his own divided party in the House. With the Congressional Black Caucus rebelling against the bill’s death-penalty provisions and the conservative Democrats standing against its assault-weapons ban, the popular measure was defeated just before the August recess--only three months before the election. Reporters battled to capture their own astonishment. USA Today called it a “shocking” loss that “plunged” the White House to what could be “its worst political defeat.” In a hoarse voice, the president gathered reporters and upbraided his congressional opponents and vowed to “fight and fight and fight until we win.” After a frantic ten days of campaigning against Congress, followed by high-wire negotiations, he finally won the vote on a Sunday night.
Clinton’s approval fell to 39 percent after this fiasco--which voters interpreted as further evidence of Democratic incompetence and fractiousness. Congress’s approval plunged, and voters warmed to the Republicans, who had moved to about a four-point advantage in party sentiment.
Six weeks before the election, on September 26, Senate Majority Leader George Mitchell announced that Congress would no longer try to pass Clinton’s signature health care reform initiative. A stubborn 41 percent of Americans still supported the plan, but the president never provided his interpretation of the battle or any hope for future progress.
On Election Day, Democrats lost 54 seats in the House and eight in the Senate; they lost eleven governorships and 16 state legislative chambers. Republicans took control of both houses of Congress for the first time since 1952; they controlled a plurality of state legislatures for the first time in 40 years. I recall the pained meeting in the cabinet room of the West Wing--with the president seething, upset about the many friends who were defeated, and angry with his team and himself. When I saw my pre-Massachusetts poll, you can be sure I relived that meeting.
Will this election be that ghastly? For all the problems of this last year, President Obama’s approval rating is at 48 percent--and has been stable since November. Assuming that the economy makes gains over the next eight months and Congress does not make a spectacle of itself, Obama’s approval could easily be ten points higher than Clinton’s was. That would pull us back from a landslide, at least in the theoretical models of the political scientists.
To be sure, the six-month battle in the House and Senate for the passage of health care reform has shattered the Democrats’ image and taken their popularity to just above that of the Republicans (and, more important, taken the Democratic Congress’s to just below). While serious reform has been tantalizingly close, the public views the process as rife with Democratic division, incompetence, big spending, and taxed health care benefits.
But, through it all, the Republicans have remained amazingly unredeemed. Unlike the party of Newt Gingrich and Bob Dole, which gained standing with each battle with Bill Clinton, today’s Republican Party looks like a cult. During the 2008 campaign, the Republican Party fell to its lowest level in the history of our thermometers measuring the party’s popularity, and it has not improved its standing since Election Day. The Republicans’ widely held conviction that Obama has a hidden “socialist” agenda, and the ascendancy of Sarah Palin and Glenn Beck as ideological spokespeople, indelibly defines the party. At the same time, Tea Party candidates are contesting mainstream Republicans in primaries--dividing their base.
If I were writing a memo to the Democratic leaders, this is where I would begin. Put aside the rancor and gridlock and show a very different face. Take Paul Krugman’s advice and quickly pass a version of the Senate health care bill. That will raise presidential and congressional approval ratings, just as Clinton bucked up Democrats by passing nafta and tax increases for deficit reduction--neither of which were popular at the time.
They must put the Republicans on the defensive. Make them an offer they can’t refuse on bipartisan legislation they dare not oppose--jobs measures that help small businesses and energy-independence legislation. Then, force Republicans to cast tough and defining votes--on Wall Street bonuses and bailouts and limiting corporate spending on elections.
The president must, for extended periods, turn the spotlight away from Congress and show he is making progress. He must use the space to deliver his economic narrative. Unemployment is the inescapable subject of this election. The president has to offer a framework that explains the grave difficulties people are experiencing, how they happened, and his plan for fixing them. Even if the economy improves, voters will not credit him, unless he presses his case. Swing voters have resisted his assertions in the State of the Union that “[the Recovery Act] has helped save jobs,” and, “after two years of recession, the economy is growing again.” The voters we studied turned their dial meters sharply down upon hearing them. Unless voters palpably feel such improvements in their own lives, these types of assertions will turn them off.
Most importantly, Democrats must explain this election’s stakes and frame the choice that voters face. This is something we failed to get right in 1994. In the summer before the election, we began to see some power in a populist narrative--“[A] president trying to make a better life for ordinary people against Republicans who favor the wealthy and hurt the middle class.” But we could not define this choice in a way that similarly helped congressional Democrats.
That changed when Newt Gingrich announced his Contract with America. I wrote to the president in October that my research showed the Contract to be “a gift that should now form the centerpiece of Democratic communication.” Our choice became: “The Democrats want to go forward and address the problems of ordinary people. The Republicans in Congress want to go back to the Reagan policies of tax cuts for the wealthy, exploding deficits, and cuts in Medicare.” We could have tarred the Republicans as avatars of the status quo, if we had reminded voters of the “Reagan policies” that Republicans wanted to continue.
Unfortunately, we could not convince the president of this. Unknown to us at the time, he was taking advice from Dick Morris, who told him that Reagan and the Contract were popular. The president insisted on educating voters on our shared accomplishments, which made the election a referendum on the Congress, not a choice.
Fortunately, this election we are blessed with better timing. Democrats have already lived through their legislative nightmare. We have already had the benefit of Massachusetts to concentrate the mind. And, just as valuable, we have the lessons of history to guide our course.
Stanley B. Greenberg was a polling adviser to President Clinton and the author of Dispatches from the War Room: In the Trenches with Five Extraordinary Leaders.
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COMMENTS (22)
First of all. it's whopping, not whooping.
Second of all, assuming these guys do all that is recommended, the basic, house to house getting out the vote work has to be done in those districts where people do not vote in non-presidential elections. It's amazing what 1000 phone calls to remind people to vote can do in a close race. Democrats have been disgustingly enamored with their consultants who place their ads and such and they lose touch with the people who have to go into the booths. I live in a swing district where they barely elected a Democratic rep two years ago but have failed to win a single local race, which are held in off-years. I don't think these young poly sci and marketing ... view full comment
First of all. it's whopping, not whooping.
Second of all, assuming these guys do all that is recommended, the basic, house to house getting out the vote work has to be done in those districts where people do not vote in non-presidential elections. It's amazing what 1000 phone calls to remind people to vote can do in a close race. Democrats have been disgustingly enamored with their consultants who place their ads and such and they lose touch with the people who have to go into the booths. I live in a swing district where they barely elected a Democratic rep two years ago but have failed to win a single local race, which are held in off-years. I don't think these young poly sci and marketing grads know what it is to sit in an unfurnished room with florescent lights swinging from chains attached to the ceiling without any temperature control and go through a list and ask a single question— "Are you going to vote for my candidate?" I hope I am wrong.
You win, or minimize losses, in midterm elections with an energized base. Non-committed tend to not vote. Obama, his advisors, and many others should follow FDR's lead. Pass real health care reform that doesn't tie you into verbal knots try try to explain why it is better than doing nothing. Include the public option or make it Medicare part E. Pass real jobs bills... WPA, NRA, CCC were REAL easy to understand on how they directly created jobs. They put the 7 ball directly in the side pocket--- no three-corner-bank-shots that maybe put the white and 8 balls in the same pocket.
You win, or minimize losses, in midterm elections with an energized base. Non-committed tend to not vote. Obama, his advisors, and many others should follow FDR's lead. Pass real health care reform that doesn't tie you into verbal knots try try to explain why it is better than doing nothing. Include the public option or make it Medicare part E. Pass real jobs bills... WPA, NRA, CCC were REAL easy to understand on how they directly created jobs. They put the 7 ball directly in the side pocket--- no three-corner-bank-shots that maybe put the white and 8 balls in the same pocket.
I agree with everyone, bravo gdbittner.
Mr Greenberg, surely you're sending this to every Dem on the Hill? We'll pay you next paycheck, promise.
I agree with everyone, bravo gdbittner.
Mr Greenberg, surely you're sending this to every Dem on the Hill? We'll pay you next paycheck, promise.
Excellent piece, but not really new. I's just one of the better supported, more tightly argued, credible versions of what numerous pundits have been saying for months. I'd be interested in an explanation of what Obama, Reid and Pelosi are really thinking. They're smart, experienced politicians who are clearly thinking long and hard about how to avoid disaster -- even do well -- in November. Do they agree with this view? Or do they have a different analysis of how to approach November?
Excellent piece, but not really new. I's just one of the better supported, more tightly argued, credible versions of what numerous pundits have been saying for months. I'd be interested in an explanation of what Obama, Reid and Pelosi are really thinking. They're smart, experienced politicians who are clearly thinking long and hard about how to avoid disaster -- even do well -- in November. Do they agree with this view? Or do they have a different analysis of how to approach November?
Greenberg's is the perspective of an apparatchik. Reagan and the Contract WERE popular. Fortunately Clinton had a hard-earned connection with voters not available to the Vanguard of the Proletariat, and was able to subsequently save his presidency with the help of Newt by understanding why.
Hopefully Obama is smart enough to recognize that as in the case of Carter, Reagan, Bush, and Clinton, his own Congressional delegation is his biggest problem.
Greenberg's is the perspective of an apparatchik. Reagan and the Contract WERE popular. Fortunately Clinton had a hard-earned connection with voters not available to the Vanguard of the Proletariat, and was able to subsequently save his presidency with the help of Newt by understanding why.
Hopefully Obama is smart enough to recognize that as in the case of Carter, Reagan, Bush, and Clinton, his own Congressional delegation is his biggest problem.
Greenberg's is the perspective of an apparatchik. Reagan and the Contract WERE popular. Fortunately Clinton had a hard-earned connection with voters not available to the Vanguard of the Proletariat, and was able to subsequently save his presidency with the help of Newt by understanding why.
Hopefully Obama is smart enough to recognize that as in the case of Carter, Reagan, Bush, and Clinton, his own Congressional delegation is his biggest problem.
Greenberg's is the perspective of an apparatchik. Reagan and the Contract WERE popular. Fortunately Clinton had a hard-earned connection with voters not available to the Vanguard of the Proletariat, and was able to subsequently save his presidency with the help of Newt by understanding why.
Hopefully Obama is smart enough to recognize that as in the case of Carter, Reagan, Bush, and Clinton, his own Congressional delegation is his biggest problem.
Actually, it's whipping, not whopping. Or whooping. Whopping is an adjective. I know the author was there in '94 to advise his president and his advice sounds good today. Two problems: the Democrats are spiraling down because they have refused to do those things that Mr. Greenberg advises. There's no evidence that any amount of practical counsel will make them work together to win. Second, I was out in the Midwest when the Contract with America rolled out and, however much Dick Morris is discredited, Reagan and the Contract were very popular here. We felt a political tsunami that even October research did not detect.
Actually, it's whipping, not whopping. Or whooping. Whopping is an adjective. I know the author was there in '94 to advise his president and his advice sounds good today. Two problems: the Democrats are spiraling down because they have refused to do those things that Mr. Greenberg advises. There's no evidence that any amount of practical counsel will make them work together to win. Second, I was out in the Midwest when the Contract with America rolled out and, however much Dick Morris is discredited, Reagan and the Contract were very popular here. We felt a political tsunami that even October research did not detect.
Agree with Greenberg's points generally, and agree with emccded and the estimable Mr. Powell that Reagan and the Contract were pretty popular in those parts of the country where Democrats were endangered in 1994 (i.e., pretty much everywhere outside big metro areas on the coasts, Midwestern industrial cities and majority-minority districts). But Greenberg is spot on with the observation that, whatever popularity Reagan or the Contract had in 1994, Bush/Cheney and whatever the public perceives as a Republican platform today are definitely not popular with the public. Dems better start pointing that finger now and keep pointing it until November, even if it dismays the high-minded Washington ... view full comment
Agree with Greenberg's points generally, and agree with emccded and the estimable Mr. Powell that Reagan and the Contract were pretty popular in those parts of the country where Democrats were endangered in 1994 (i.e., pretty much everywhere outside big metro areas on the coasts, Midwestern industrial cities and majority-minority districts). But Greenberg is spot on with the observation that, whatever popularity Reagan or the Contract had in 1994, Bush/Cheney and whatever the public perceives as a Republican platform today are definitely not popular with the public. Dems better start pointing that finger now and keep pointing it until November, even if it dismays the high-minded Washingtonians.
Of course the Dems will learn from history, from their past mistakes. LOL LOL
Of course the Dems will learn from history, from their past mistakes. LOL LOL
Greenberg is talking inside the beltway tactics as a way of getting his party out of a pickle. He is not talking about what is wrong with the country, let alone any solutions. Neither he nor most of the above commentators realize what is happening. The people are scared of the rising public debt, the weak economic outlook, the growing but feckless government and the realization that the day of atonement for past excesses is coming. They see the results in their personal lives and in the lives of friends and families. Nothing they hear is addressing those fears. Playing with words certainly isn't going to cut it and the very modest economic improvement - the optimistic case - will not help. ... view full comment
Greenberg is talking inside the beltway tactics as a way of getting his party out of a pickle. He is not talking about what is wrong with the country, let alone any solutions. Neither he nor most of the above commentators realize what is happening. The people are scared of the rising public debt, the weak economic outlook, the growing but feckless government and the realization that the day of atonement for past excesses is coming. They see the results in their personal lives and in the lives of friends and families. Nothing they hear is addressing those fears. Playing with words certainly isn't going to cut it and the very modest economic improvement - the optimistic case - will not help. A growing number of people sense that drastic measures are required and they fear the impact that it may have on them and their loved ones. For example, Social Security and Medicare need to be fixed now. Realistically, the retirement age has to be kicked out to about 70 years of age. This is just one example. The lies and self serving promises of politicians and their advisers (like Greenberg) have hit a wall. They are no longer believed by a growing majority of people
The big question: Is there a leader anywhere in the country who understands what is happening and how to fix the economic quagmire - an actual statesman who is a strong, convincing orator that the people will follow? This time it has to be in the right direction. I am not aware of such a person. I am aware that this person will not come from the main source of our problems: modern Progressives (Democrat or Republican).
Interesting thesis, kifostar. But I am aware that such a leader as you posit will not come from anywhere other than from among modern Progressives, for the simple reason that the remainder of the political spectrum, whatever its rhetorical and leadership skills, has no intention of solving these problems. Rather, the intention is to continue leading us straight over the cliff as it has been doing at least since Reagan.
With the advent of Reaganism, we stepped off the planet into a world of economic fantasy in which tax cuts are supposed to lead to declining deficits. When they don't, no matter, the rhetoric proceeds as if the fantasy were reality. Budget deficits don't matter to the fan ... view full comment
Interesting thesis, kifostar. But I am aware that such a leader as you posit will not come from anywhere other than from among modern Progressives, for the simple reason that the remainder of the political spectrum, whatever its rhetorical and leadership skills, has no intention of solving these problems. Rather, the intention is to continue leading us straight over the cliff as it has been doing at least since Reagan.
With the advent of Reaganism, we stepped off the planet into a world of economic fantasy in which tax cuts are supposed to lead to declining deficits. When they don't, no matter, the rhetoric proceeds as if the fantasy were reality. Budget deficits don't matter to the fantasists. Trade deficits don't matter. Indeed, nothing matters other than fueling ever greater income disparity and the hope of dismantling entirely the social safety net built over the course of the 20th century.
Despite some progress under Clinton, most of the country remains mired in these fantasies despite the fact that they have led us into a dramatic disaster and have been hollowing out our jobs base for 30 years. Yet, he only prescription of everyone other than Progressives is to do more of the same things that have brought us to this terrible pass, just bigger. We may indeed see a crypto-Fascist leader emerge from the right as Fascists are particularly adept at playing on and exacerbating people's fears to gain and hold political power. That is their special gift. But such a leader will be the ruin of us.
There is no succor on the right; only bigger disasters and ultimately the ruin of our country. And after the right ruins us, it will not then cede power, but will hold on by authoritarian means. You can pretty much count on it.
Nice to hear from you Roi. The Clinton Administration had a budget surplus because there was a conservative majority in Congress and Clinton had to move to the center to govern. Part of the explanation for the fiscal conservatism of that era is simple politics. The Republicans weren't going to approve any major spending bills put up by the Democrats. The "end of big government" was of course only temporary. Bush came to office. Bush was not a fiscal conservative and in many ways was a Progressive. The Republican conflict (or balance of power) with a Democratic President was gone. (Isn't it the case that Bush vetoed only one bill during his first term? Something like that.)
But this doesn' ... view full comment
Nice to hear from you Roi. The Clinton Administration had a budget surplus because there was a conservative majority in Congress and Clinton had to move to the center to govern. Part of the explanation for the fiscal conservatism of that era is simple politics. The Republicans weren't going to approve any major spending bills put up by the Democrats. The "end of big government" was of course only temporary. Bush came to office. Bush was not a fiscal conservative and in many ways was a Progressive. The Republican conflict (or balance of power) with a Democratic President was gone. (Isn't it the case that Bush vetoed only one bill during his first term? Something like that.)
But this doesn't really matter today. The bill is now coming due on decades of Progressive faith in the need for an ever larger role for government as a care taker and social largess, especially for Social Security and Medicare. (I include many Republicans in this group. I also include politicians qua politicians - people who make a business of buying votes with other people's money, which is a rather perverse form of generosity.) Even a Republican majority in Congress will not help that much. It is too late. We have to address the "non-discretionary" part of the federal budget. We are going to have to use some discretion, regardless of the silly notion that we cannot control parts of the budget. We also will have to incite private sector investment in order to generate strong revenue growth and employment.
I don't look to the simplicity of the Republican tax cuts as a solution, at least not in and of themselves. You are right that Reagan did not cut the budget deficit. He did face a liberal Congress though, which continued to spend and override his vetoes. (It seems that fiscal control requires the coincidence of a Democratic President and a Republican Congress.) I reread some statistics the other day and was reminded that the unemployment rate during the Reagan boom years was on the high side, which seems an odd occurrence in the midst of an economic boom. I don't know the exact reason for this but it may be that the Reagan/O'Neil social security fix that involved raising regressive payroll taxes may have had an adverse impact by increasing the cost of doing business.
I would like to present some food for thought. I read Judge Posner's summary of Keynes in TNR a few months ago. I was struck by the absence of any consideration of the cost of doing business as a major factor in reigniting investment and economic activity. Indeed, many of Keynes and his followers' prescriptions do exactly the opposite. I define the cost of doing business in a broad sense, to include direct and indirect costs as well as intangibles such as uncertainty. Why is this so important? We are in a world that Keynes did not know. We compete for investment capital with China, India and many other nations. Capital will seek the highest risk adjusted return.
I have a lot of thoughts on how to make the U.S. more competitive in attracting capital. One approach is to reevaluate our many regulations. The main goal of regulations is to achieve safety for the people. We should be open to the thought that we have purchased too much safety to the point that we have the unrealistic hope in the eventual extinction of personal risk. Perhaps some regulations (e.g., Sarbanes-Oxley) offer only a perception of safety at a great cost. Other regulations do not actually protect the environment because a manufacturer simply moves the contamination to China while continuing to sell goods in the U.S. My own biggest issue is the need to have real free trade by imposing tariffs on all imported goods from Asia that is equal to the estimated undervaluation of a currency that is unilaterally determined by a foreign government. (I have elsewhere proposed a floating tariff tied to a basket of market driven currencies.)
As you can see, I am looking in the direction of a solution that is much bigger than anything we have ever seen. Our economic problem is bigger than anything we have ever seen, even bigger than the Great Depression in many respects (because of the unprecedented levels of personal and government debt and our high cost of doing business in the context of a truly global market). Politically, this will require the emergence of a particularly wise and prudent statesman who can not only lead the people but who can lead politicians.
Sign me up foster.
Anyone want to offer odds that the new Deficit Commission will insist on moving the retirement age up? That the new Healthcare Conference will rejigger Medicare?
I'm looking forward to a Republican resurgence in Congress. History demonstrates that the most effective environment for reform is divided government.
Sign me up foster.
Anyone want to offer odds that the new Deficit Commission will insist on moving the retirement age up? That the new Healthcare Conference will rejigger Medicare?
I'm looking forward to a Republican resurgence in Congress. History demonstrates that the most effective environment for reform is divided government.
kifostar,
I am not buying his new conservative trick that any time the right screws up it is actually because it is being "progressive." Progressives were opposed to Bush's huge give-away to Big Pharma. Progressives were on balance opposed to his war in Iraq and they were sure as hell opposed to his upper-end tax cuts. So this business of suddenly deciding that conservative policies that produce disaster are really progressive is nonsense.
Reagan's policies were an economic mess, stemming from the tax-cut Kool-aid. No are our deficits due to entitlement programs, the whipping boy of the right. Those programs have problems in the future but have been running surpluses, albeit declining sur ... view full comment
kifostar,
I am not buying his new conservative trick that any time the right screws up it is actually because it is being "progressive." Progressives were opposed to Bush's huge give-away to Big Pharma. Progressives were on balance opposed to his war in Iraq and they were sure as hell opposed to his upper-end tax cuts. So this business of suddenly deciding that conservative policies that produce disaster are really progressive is nonsense.
Reagan's policies were an economic mess, stemming from the tax-cut Kool-aid. No are our deficits due to entitlement programs, the whipping boy of the right. Those programs have problems in the future but have been running surpluses, albeit declining surpluses with a demographic bulge on the way. That is a different problem. The reason we have deficits is that Republicans have developed this tax-cut mania that refuses to pay for the core functions of government. Your little political fairy-tale about divided government won't wash either. Clinton ran surpluses because he raised taxes. Bush blew the surpluses and ran up massive structural deficits because he cut taxes. The rest of the story is just economic nonsense. If you take away the surplus-generating medicare and social security programs (that actually allow the Republicans to underfund core functions by an even greater amount), the deficit would be even worse. In 2008, total discretionary spending other than for national security was LESS than the budget deficit. You could eliminate the entire Federal government other than national security (meaning the entire Justice Department, courts, Treasury, the works) and still not produce a surplus.
As far as entitlements go, the big threat is Medicare, not Social Security. The fastest way to solve the Medicare problem would be to eliminate it completely by integrating it into a single national health insurance program with reimbursements/costs controlled by the Federal government and the insurance premium built into the tax structure. In that manner, medical care would in effect become means-tested and the entirety of healthcare costs would stop devouring the US economy. Subsidies from low-wage earners to wealthy retirees would cease. Who wants to do that? Progressives. Who stands in the way? conservatives/reactionaries/Republicans.
As far as the rest of your narrative, the US is not short of capital. In fact, due to the combination of budget deficits and trade deficits produced by Bush, we had too much capital chasing too few goods, which is the short description of the reason for the asset bubble and bust. This business about "attracting capital" is an inappropriate description of the US economy that can produce all the capital it needs; you are describing Third-World countries.
But what is buried in your comment is the same Reaganite supply-side mentality that is just what has landed us in this colossal mess. Capital is not a magic bullet, this stuff that you just invest and, voila, you get growth. Capital is invested when there is demand for the output, and not otherwise, no matter what the fiscal-tax structure. No one builds a great big manufacturing plant in the hope that someone will buy the output. By starving demand and over-feeding capital, Reagan and his successors, Bush, and Bush, have deprived us of a generation of growth and trillions of value. Enough of this nonsense!
We are not poor, we are not short of capital, we are not short of labor, our cost of doing business is not too high because we enjoy the world's largest internal market. Our problems are entirely due to a whacked-out tax and international trade system. The last point is the one where we agree -- it is an insane version of the free-trade laissez-faire, free-market mentality that insists that this country is obliged to run trade deficits because that is the result of the consumption preferences of Americans and of the managed trade policies of competitors such as China. Sheer lunacy and ideological blindness. If we required our trade to be in balance, we could get rid of unemployment, pay for our retirees, and drive economic growth in the only way that it is actually driven -- tight labor markets and high wages that stimulate capital-labor substitution and innovation to that end.
Roi,
To begin with it’s “klfoster”. I am focusing on the Progressive belief in the need for an ever larger role of government in our lives. Republican Progressives (this movement started with Teddy Roosevelt) have followed the same path as the Progressive wing of the Democratic Party with the exception that they say “not so fast and not so far – yet”. Bush’s pharma plan is one such example (and is the only government plan to ever come in under budget as far as I know). The Dems wanted a much more expensive plan and one that cut out the private sector as much as possible. The uniqueness of Progressives is their belief that extensive regulations and social programs (as op ... view full comment
Roi,
To begin with it’s “klfoster”. I am focusing on the Progressive belief in the need for an ever larger role of government in our lives. Republican Progressives (this movement started with Teddy Roosevelt) have followed the same path as the Progressive wing of the Democratic Party with the exception that they say “not so fast and not so far – yet”. Bush’s pharma plan is one such example (and is the only government plan to ever come in under budget as far as I know). The Dems wanted a much more expensive plan and one that cut out the private sector as much as possible. The uniqueness of Progressives is their belief that extensive regulations and social programs (as opposed to the Socialist dream of outright government ownership of all productive assets) over an ever growing part of our lives is to be overseen and implemented by government employed “experts” (or bureaucrats). The Constitution is regarded as a relic to be changed through the raw exercise of political power (legislative, judicial or executive) by a select few rather than via the bothersome amendment process. Hence, liberty (individual rights) takes a back seat – along for the ride so to speak. (Progressivism is but one of many forms of historicism.) The incredibly close ties and interdependence between the Progressives and their dependent bureaucratic class has resulted in a level of political corruption that far exceeds the old spoils system. Bureaucrats, now organized into politically powerful unions, serve as caretakers rather than problems solvers. If a problem is ever solved, their job will disappear, so they are rational. This is the most perverse organizational design ever created in politics. These bureaucrats operate with next to no oversight from elected officials (if for no other reason than their massive size). Their objective is control and management – not the extension of liberty. Their hidden objective, really subconscious, is to grow in every way possible. Makes sense: there are more employment opportunities. The more they grow, the stronger the Progressive movement becomes.
The strong economic growth that occurred during and well, well after the Reagan Administration was unprecedented. The tax reductions were in part a major reduction in the cost of doing business. They also freed up a considerable amount of capital for productive investments as opposed to tax shelters. I’m sure you would admit that the incredibly high tax rates on top earners amounted to confiscation rather than simple taxation. The result of the Reagan economic program was to direct monies to profitable, productive opportunities. The modest tax increases under Clinton did not disrupt this trend. The deficits, however, were the consequence of excessive spending during the Reagan years and the surpluses were the consequence of controlled spending (and apparently non disruptive tax increases) during the Clinton years. Reagan did not have the control he needed in Congress to reduce expenditures as much as he wished or needed. Congressional spending habits were in large part the result of the inflationary years in the 1970’s, when people were being kicked into higher tax brackets based on nominal rather than real income, but Washington loved raking it in. Of course, the lack of economic growth in the 70’s stemmed largely from these excessive real taxes at all economic levels of the economy. The sudden drop in inflation in the 80’s in and of itself robbed Washington politicos of the rapid growth in tax revenues that served as an economic foundation of government expansion. The Reagan tax cuts only compounded this situation. The healthiest way out for the budget would have been a combination of economic growth (which occurred) and a reduction in government expenses (which did not). We are now beyond the issue of health. Desperation lies ahead. This is the first of many years to come when social security inflows fall below social security outflows.
Your universal health care prescription asserts that universal healthcare will put an end to the threat of Medicare budget deficits (and other healthcare ills I assume) by government control of reimbursements and costs. The short-lived price controls in the 70’s introduced by the Progressive Nixon Administration resulted in scarcities (e.g. in oil) and a mythical reduction in inflation on paper. This was short lived. Universal healthcare cannot control costs without reducing the willingness of suppliers (doctors, nurses, pharmas, medical equipment manufacturers, etc.) to provide both the quantity and quality of services demanded. They will want to be rewarded for their investment of capital (money and time). Cost and quality pressures are intensifying in all countries that offer universal and quasi universal healthcare plans. Without a US market to provide returns for the pharmas, for example, there will be little incentive to take risks for drug development. I assume that the government will take this over under the Progressive plan. Perhaps it will be a subsidiary of the postal system. (There is a need for extensive healthcare reform but not in your prescribed direction.)
The US private sector is indeed starved for capital. I work in this sector and I can say with certainty that US investment funds have been and remain either too cash poor (can’t raise their own capital) or simply too reluctant to make investments. Lenders are not lending in significant amounts. Investors are waiting. One of the problems is general uncertainty on several points. Economic growth that does exist is largely coming from a build-up of inventories, which will not continue in a significant way because the lack of demand by the overextended consumer and the high unemployment and underemployment. The modest level of real growth is uncommonly low for coming out of a major (or even minor) recession. Such low growth is expected to continue unless the suggestions I made above to attract capital are implemented.
There is capital in the world. Much of it went into the plentiful supply of US treasuries. That supply is declining even as our financing needs rapidly rise. That may cause interest rates to rise and possibly a double dip recession. Capital is going elsewhere. Asia has been the main recipient. Unfortunately for the Asians and the foreign investors, much of this investment is creating asset bubbles throughout Asia, especially in China. The Chinese are quite concerned. They created much of their and our problems by having an artificially undervalued exchange rate. Perversely, many investors are taking positions in the Chinese renmimbi with the expectation that it will have to be revalued. This is very likely the case. My proposal of a market oriented tariff, however, complicates matters for such speculators, as it would slow the economic growth of China and undermine the investment of the speculator’s assets. I like to discourage speculation. It tends to refocus the mind on more sound, longer tem opportunities.
I am uninterested in the chicken and egg issue of supply side economics. My focus is on creating an attractive economy for global investors. We are competing for capital. We are competing for businesses to be located in the US rather than abroad. This would increase jobs, consumer demand and economic growth in the US. This really was the heart of my commentary. We probably agree on much of this. I simply think this is impossible to accomplish without reconsidering the benefits and costs of regulations and government programs that we have implemented for the last many decades. I would think that a serious Progressive would be open to such an examination. After all, pragmatism as opposed to ideological blindness is an underlying tenant of Progressivism, regardless of its turn to the left during most of the 20th century.
In Texican, its whooping -- not whipping OR whopping. It is what Republicans do to Democrats while they are primarily concerned about how to spell what's constantly happening to them.
In Texican, its whooping -- not whipping OR whopping. It is what Republicans do to Democrats while they are primarily concerned about how to spell what's constantly happening to them.
Sorry, klfoster, my eyesight in one eye is very bad (and uncorrectable) and I have trouble reading the screen, especially with the bold type-face they use for names in the headers that squishes the letters together. Nothing was intended.
You have everything plus the kitchen sink in that post so it is a bit hard to disassemble. Your basic assumption that we have to "attract" capital is wrong. Indeed, one explanation for our trade deficits is that we attract too much financial capital, that instead of investing the revenues from US imports abroad which would then create demand for US exports, everyone who sells to us is trying to invest the money here. That is Bernanke's thesis. I don't ac ... view full comment
Sorry, klfoster, my eyesight in one eye is very bad (and uncorrectable) and I have trouble reading the screen, especially with the bold type-face they use for names in the headers that squishes the letters together. Nothing was intended.
You have everything plus the kitchen sink in that post so it is a bit hard to disassemble. Your basic assumption that we have to "attract" capital is wrong. Indeed, one explanation for our trade deficits is that we attract too much financial capital, that instead of investing the revenues from US imports abroad which would then create demand for US exports, everyone who sells to us is trying to invest the money here. That is Bernanke's thesis. I don't actually agree with it in that I don't think he has causes and effects in the right order -- what is referred to as the "closure" of an economic model -- but it does highlight the fact that we are not short of capital, financial or real. We are short of infrastructure capital, but only because we refuse to invest in it and that is a core government function. To the extent that we are competing for global capital -- which we aren't really as we can produce the real capital we need and don't have to borrow from abroad to get it -- we are kicking the crap out of the rest of the world because all the financial capital is trying to get in here. We have too much financial capital, not too little. You can stop worrying about that. This is not Argentina.
Your thesis about government spending is also wrong. You have in your head what I am now calling the feudal model in which the peasants grow the corn and then the government takes it. That is not how a modern economy works. We experience effective demand, from government and consumers and productive firms. Some of the supply is generated directly by government, as when it employs everyone in the army. The balance is generated by the private sector. How we pay for everything without producing unacceptable inflation or destabilizing debt is an important question, but a separate question. At a macro level, the government demands consumption/investment, the consumer sector demands consumption, the business sector demands investment, and then we make it all. Although you might consider that the mix of goods and services that you get would be more to your taste if none of it were provided to you by government and you got to make all the choices, that fact goes to your personal utility of consumption, not to the level of output. The level of output is there whether the government is the purchaser and hands it out as goods and services (roads, schools, whatever) or whether individuals are the purchasers in the first instance.
As we as a nation are not having difficult in making stuff (except for the infrastructure investment that we refuse to buy), and could make much more if we employed all the people who want to work, the problem has to lie elsewhere, and it does. The problems are with our tax structure, that has been set up since Reagan so that it does not take adequate purchasing power from the people who having an increasing share of it, the wealthy, and from a truly benighted international trade system in which we run persistent deficits although we, unlike some Third-World country, do not need to import capital. That is nuts. If anything, we should be exporting capital to such countries. We have this problem because we have a radical free-market ideology in this country that insists, in the face of all evidence to the contrary, that unregulated markets can be relied upon to achieve equilibrium in everything, including imports and exports. But unregulated markets don't. We have had ample demonstration of this recently, but the free-market true-believers refuse to change their religious belief in the efficacy of markets for everything all the time. It gets even worse when some big participants in the unregulated market, like China, manage their trade with us, refusing to allow their people to buy our stuff so as to produce something closer to bilateral balance. We are patsies. We don't have to be, but we do have to accept that our external trade has to be managed to achieve balance. If we were Argentina, the unwillingness of the world to send us capital would force a current trade account balance. Because we have $100 trillion of real assets here, or more, and political stability, the world is willing to ship us financial capital. Hence, we can run trade deficits for much too long before our credit is cut off.
Finally, as to your notion that price-controls have no role in regulating healthcare, your analogy to the Nixon controls is misplaced. That was an effort to prevent inflation and inevitably led to prices getting out of date quickly. The problem in health care is that their can never be the sort of market prices that would equilibrate because we do not want individuals to buy medical services based on their willingness and ability to pay. That's the whole point of "insurance." It isn't insurance in the real sense. We pay a tax, privately to the insurance companies as a premium, and then we get an entitlement. It is not really different than a government run system except that is is hugely inefficient as insurers compete to deny coverage and care and waste resources on marketing and adverse selection of the client base. It is also singularly terrible at controlling prices -- being the surrogate shopper for the individual -- because all the insurer wants to do is pass on the costs and it cannot be a responsible allocator because every dollar it saves from your care goes into its own pockets. It is fundamentally conflicted.
If we cannot have a consumer market in health care -- and we cannot unless we are willing to accept that, like Cadillacs, some people will get them and some people won't -- then we have to have a pseudo-market in which the correct prices and the demand for consumption in the form of medical protocols are supplied by the government. If the prices are correct, we will elicit the right quantity of output. That's how price worka. The price-taking firm doesn't know where the prices come from. It just sees the price, figures out whether it can make an acceptable profit, and either enters the market or not. Whether the price comes from consumer demand or government demand or control is in this sense irrelevant.
In the case of healthcare, it is a matter of figuring out what quantity we want to buy and what resources are needed to supply it, and pricing things according to the costs of the resources. A standard cost system. These are the "correct" prices that a non-market, such as we have in healthcare, can never supply. This necessarily means setting a standard for the income of medical practitioners which is politically fraught but not difficult to do properly. Between curtailing useless services -- or rather re-allocating them so that they are useful services for those who now don't get them -- and setting limits on standard medical incomes, there is no reason to believe that we will not get sufficient services. And if we don't, the answer is simple, raise the price. In particular, if we are willing to pay for medical training as the flipside of controlling incomes, we would see a surge in supply. These are good jobs. They are just inaccessible to most people.
You keep talking about controlling and reducing government spending, but there is nowhere to get the money from. That is not the problem. As I pointed out, entitlements have not been a drain but a source of funding as they have been producing more revenue than they require. And entitlements just take money from Peter and pay it to Paul. The financial structure of entitlements is rickety, but it has no negative impact on output or competitiveness. The rest of the government simply isn't that large unless you want to reduce the costs of national security significantly. Do you? Your claim that spending is the problem is standard right-wing fare that is simply at odds with the facts which is why the right can never point to what it wants to cut other than the entitlements that have been producing surpluses. Yes, the financing of entitlement programs is a problem for a future that is rapidly approaching, but, as they have been generating surpluses, they cannot possibly be the explanation for deficits. The explanation for deficits is simply the unwillingness to impose taxes sufficient to pay for core government, an absurd and very non-progressive proposition that continues to enthrall the right-wing.
Finally, finally, your concerns about capital accumulation are just wrong. Sorry, but it is that simple. If there is enough demand for output, the capital will be there to supply the output, so long as it is not being diverted into Ponzi schemes by Wall Street which is a problem that urgently demands re-regulation. The demand for output will be there if we manage our trade to get rid of trade deficits and if we commit to a sustained project of rebuilding our crumbling infrastructure. Those are real effects. You are lost in the differences between the financial markets and the real goods and services markets. You have to resolve to think about real goods and services first and then think about what financial markets need to do to support them. If you try to shift back and forth between them, analytically that is, as you do, you (and everyone else who does the same thing) can only ever end up confused.
Ah, one more thing I should have mentioned, kl.
You made the comment that progressives just want bigger government. This is a right-wing, slightly paranoid fantasy and is a really a projection onto the left of the right-wing mania for unregulated markets and no government. Since you want everything allocated by the market, and believe it to be the optimal means of allocating everything, you project onto the left the inverse, that everything should be allocated by government.
Other than communists, of which there reported to be about five in this country, that characterization of the left is a canard. The general view is that the market should be allowed to allocate as much as possible. ... view full comment
Ah, one more thing I should have mentioned, kl.
You made the comment that progressives just want bigger government. This is a right-wing, slightly paranoid fantasy and is a really a projection onto the left of the right-wing mania for unregulated markets and no government. Since you want everything allocated by the market, and believe it to be the optimal means of allocating everything, you project onto the left the inverse, that everything should be allocated by government.
Other than communists, of which there reported to be about five in this country, that characterization of the left is a canard. The general view is that the market should be allowed to allocate as much as possible. However, where there is a problem that an unregulated market or the market as currently regulated doesn't solve, then some form of intervention, be it tax regulatory, or provision of government services, is necessary to solve the problem. That is a pragmatic view, not an ideological view. Contrary to what I have seen written on some of these blogs, Nancy Pelosi and Harry Reid are not sitting around cackling and rubbing their hands together at the prospect that the government will be larger. They want to assure all Americans access to good health care. That's it.
As for the assumption that consumer choice always achieves the best allocation, consider what would happen if we had consumers choosing their national security. We could give everyone a voucher to be used to designate what security force or asset they wanted. There would be a menu of tanks, aircraft carriers, boots, whatever, and each person would allocate his voucher to whatever national security capabilities he or she preferred. Do you imagine we would have a coherent system of national defense that way, without central planning? I rather doubt it.
Medical care, like the construction of a military force, is mostly technical, not a matter of consumer preference. The goods and services should be allocated on technical grounds -- the best test or treatment or process given the available medical indications -- and not based on consumer preference. Sure, for ethical reasons we are not going to force treatment on people. Nor are we going to deny them treatments that want to pay for themselves even if the evidence in favor of efficacy is weak to non-existent. But there is no reason for society to pay for inefficacious or excessive care, and we should be willing to pay for care that a medical condition requires. The things that people choose above and beyond should be considered no different than cosmetic surgery -- consumption goods where we regulate only for safety, not medical care.
In the case of medical care, consumer choice cannot determine the correct consumption, cannot regulate price and quality, and cannot prevent insurance companies from gaming the system by denying care and coverage. That is a system that is hopeless; it can never work. Therefore, something else, that the unaided free-market does not provide on its own, is necessary. All this business about big government, small government, etc., etc. is a red herring, completely beside the point which is that the market alone has not and will not produce a socially acceptable outcome.
Roi,
You have basically reverted to the accounting approach to economics. Economics from a 100,000 foot level. More on that later.
Re socialized medicine. I don’t know why you wouldn’t recommend socialism for the entire economy, based on your arguments. Perhaps you do. I do not foresee the US adopting socialized medicine in my lifetime. Nevertheless, we do not presently have a truly free market approach to healthcare. There are major regulations, including tight restrictions and requirements on healthcare institutions at the federal and state level, that cause prices to rise unnecessarily. Nationwide competition without state involvement is certainly one component in solving the cost prob ... view full comment
Roi,
You have basically reverted to the accounting approach to economics. Economics from a 100,000 foot level. More on that later.
Re socialized medicine. I don’t know why you wouldn’t recommend socialism for the entire economy, based on your arguments. Perhaps you do. I do not foresee the US adopting socialized medicine in my lifetime. Nevertheless, we do not presently have a truly free market approach to healthcare. There are major regulations, including tight restrictions and requirements on healthcare institutions at the federal and state level, that cause prices to rise unnecessarily. Nationwide competition without state involvement is certainly one component in solving the cost problem. For starters, I would apply the Interstate Commerce Clause to healthcare.
I also would treat separately those who do not have access to the proper healthcare. We already treat most of these people but in a very inefficient, inadequate, inhumane and disruptive manner. This is a welfare issue. We should not mix the two.
Back to economics proper. Prior to the crisis, capital was flowing quite freely into the US economy, mainly in the form of investments in financial instruments that turned out to be of a much lower quality than originally perceived. The capital inflows were productive, in a manner of speaking. A great deal of real estate was built; but it shouldn’t have been built, so the value of the capital has greatly deflated. Not all capital flows are equal in terms of quality. Capital is flowing into the Treasury now, though a decline in demand at current rates seems to be waning. The cost of attracting capital inflows to fund our rapidly growing Government debt (you call it a component of demand) will continue to rise as the risk of a future default rises. Capital is flowing into gold and other commodities. It is erratically flowing into and out of the purchase of US stocks. It is flowing into Asian assets of all sorts, including the Chinese stock market. Most of these assets are not productive and will not add jobs. Money that has gone into the stock markets has not flowed in any significant amounts into IPO’s or new capital raising efforts. A lot of money is being printed globally in response to the financial crisis. This capital is being parked while the productive parts of the various economies get straightened out. Too much money is chasing too few goods (speculative assets) and this means asset bubbles are being created. Much of this capital will be lost. The IMF among others is quite concerned. Chinese officials are quite concerned.
When you talk about demand you are really talking about increasing federal government indebtedness. That is why you focus on infrastructure (which the private sector could undertake to a large extent; I know of funds devoted to this). Virtually all of the job production (really job saving) has taken place by funding deficits of States that have spent irresponsibly. These states are restricted from borrowing to fund their own expenditures so they go to the federal government, which takes great pleasure in growing the deficit to accommodate the requests. Who are the beneficiaries? The bureaucrats and teachers that are so closely aligned politically with the Democratic Party. It is a payoff to be paid for by unsuspecting future generations of people who have not yet even voted. I use the phrase “political corruption” rather than “jobs saved”. Such expenditures are for the short term only and are deleterious to the economy.
I want to see private capital flowing into productive assets in the US. My basic point is that our relative cost of doing business in this global marketplace is causing such capital to go elsewhere in good and not so good times. This is not a recent event. This is not just a function of the demand equation. Domestic demand is problematic given the over indebtedness of consumers and all levels of government. I am focusing on decreasing the cost of doing business in the US so that the many jobs that have left our shores and will continue to leave may in fact come back or never leave. You seem unaware of the vast amounts of private equity that has flowed from the US into Asia in particular to fund the movement of jobs overseas. The American people are not unaware.
One final point Roi: You include government expenditures in the demand equation as if it is equal to private demand. From an accounting point of view you are correct; however, there is a qualitative difference. The demand that comes from the government is, in some measure, equal to a decline in individual liberty. It is also unjust to levy taxes on those who have yet to have the legal opportunity to vote. This country was founded on the premise that taxation without representation is inherently unjust. Modern Progressives apparently don’t see it that way.
kl,
Re socialized medicine, that is a rhetorical strawman, apparently because you think yelling "socialism" is supposed to make everyone shriek with horror and runaway. We have a socialized military, socialized schools, socialized roads, socialized water supply, socialized sanitation. "Socialism" is neither inherently good nor inherently bad. Neither is market allocation. The pragmatic approach is to look at which approach works best or indeed whether some mixed approach works best. Simply declaring that x solution to a problem is "socialist" means nothing.
In the case of health care, there is a great deal of empirical evidence that the market approach has failed, particularly by compariso ... view full comment
kl,
Re socialized medicine, that is a rhetorical strawman, apparently because you think yelling "socialism" is supposed to make everyone shriek with horror and runaway. We have a socialized military, socialized schools, socialized roads, socialized water supply, socialized sanitation. "Socialism" is neither inherently good nor inherently bad. Neither is market allocation. The pragmatic approach is to look at which approach works best or indeed whether some mixed approach works best. Simply declaring that x solution to a problem is "socialist" means nothing.
In the case of health care, there is a great deal of empirical evidence that the market approach has failed, particularly by comparison to other advanced industrial economies. Further, there are very simple reasons why they not only have failed but should be expected to fail and no reason to expect the causes of this market failure to disappear without intervention. Whether or not that is socialism is really of no importance. In this case, most proposals, good and bad, involve socializing the demand side of the equation. The reasons are several as I have pointed out: regulating price by supply and demand requires medical care to be rationed by price and ability to pay, something most of us find increasingly morally questionable. In addition, there are problems of huge disparities of information between the suppliers and the consumers and agency issues that put the interests of insurance intermediaries in conflict with both suppliers and consumers. On the other hand, once the demand side is socialized, I haven't heard any current proposals for socializing the supply side, making suppliers of medical services government employees (in contrast to the military which is socialized on both the demand side and the supply side).
As far as your description of capital flows, you are again confusing real flows and financial flows. I know that Wall Street is accustomed to talking in terms of capital "flowing into stocks" or "flowing into gold," but that is actually an abuse of language. Except for new issues, which represent a minor part of the market, or new gold output, when someone buys a stock, someone sells it. Same with gold. There is only a change of ownership; no capital has gone anywhere. In real terms, the average rate of non-residential investment over the last 80 years was 13.9%. In 2009 it fell to 12.3%, as one would expect due to the recession. Over the course of the Bush administration, it average 16.0%. Over the Clinton administration, it was 15.7% (and 16.6% over the latter half). Over the course of Reagan/Bush, 15.7%. That alone should be sufficient to put paid to phony supply-side economics.
As I told you, real investment is driven by consumption demand for the output, not by finance. There is no basis for your various claims about how capital has been "flowing." Nor are jobs disappearing overseas because of capital investment there. There is capital investment there because there is demand for the output being produced there, especially US demand. That is a function of cost because workers abroad get a fraction of what US workers do. For that reason alone, it is almost absurd to allow unmanaged "free trade." That is sure to depress the wages of US workers for no good reason other than higher corporate profits that don't even translate into higher domestic investment.
The US remains highly productive and competitive; we are not short of domestic investment. Our biggest problem is that our government finance system is in tatters due to years of Republican abuse (see, e.g., California) and we have not yet accepted that we cannot have US workers competing with foreign workers who make 20 cents an hour without some trade management to avoid deficits.
As far as "no taxation without representation," no, I don't see it that way. Children don't vote; non-citizens don't vote. For most of the history of our country, women didn't vote and for much of it blacks didn't vote. I don't see that has anything whatsoever to do with taxation. Nor is taxation an impediment to human freedom unless you take the view that rich and poor alike are free to sleep under bridges. Real freedom is not just a formality. It requires means and opportunity. We cannot have a reasonable distribution of means and opportunity without government supervision of, and intervention in, markets. The alternative is freedom for a handful and peonage for the rest. Not my idea of freedom.
Roi,
I only have time right now to focus on your fourth paragraph, which is the area that deals directly with my main concern of sustainable job creation. Your following statement is true though I’m not sure you appreciate its full upshot: “There is capital investment there because there is demand for the output being produced there, especially US demand. That is a function of cost because workers abroad get a fraction of what US workers do.” Yes. This is the standard - we might say natural - competitive advantage we find in countries such as China and India. But there are two other factors that provide competitive advantages overseas that attract real capital investment and the movemen ... view full comment
Roi,
I only have time right now to focus on your fourth paragraph, which is the area that deals directly with my main concern of sustainable job creation. Your following statement is true though I’m not sure you appreciate its full upshot: “There is capital investment there because there is demand for the output being produced there, especially US demand. That is a function of cost because workers abroad get a fraction of what US workers do.” Yes. This is the standard - we might say natural - competitive advantage we find in countries such as China and India. But there are two other factors that provide competitive advantages overseas that attract real capital investment and the movement of capital assets overseas. (This movement can be in the form of actual physical change of location or the destruction of a US facility that is replaced by one overseas. It can even involve the movement of a service that is mainly human assets, such as a call center.) One factor is a cost advantage derived from a unilateral decision by a foreign country to have an undervalued currency as a means of attracting real cash investment into the country to develop new industrial facilities that will produce goods that will be primarily exported. Another factor in the overseas cost advantage is actually driven by the US and that is the cost of regulations that we impose on ourselves. The President and Congress can act on the latter 2 factors and still maintain a policy of free trade. As I have mentioned, tariffs on goods and services provided by countries with artificially low currency rates is quite feasible, particularly if done in conjunction with other countries that have been adversely impacted. As for the cost burden of regulations, we should reevaluate our regulations, at a minimum. I don’t see this as a conservative or liberal issue. I do see it as an American issue of paramount importance.
As for the reality of financial cash flows, suffice it to say that if investors switch from holding one type of asset to another, the supply and possibly price of that asset will rise and either the supply or the price of the other asset will decline. This is true in gold production and real estate construction. They may be traded as financial assets but they are not mere paper transactions.
It is also true that if a large number of investors sell their stock holdings in a company and the demand for such quantity of stock can be found only at a lower price, the impact on that company to fund future growth will be adverse. This applies to global stock markets. If investors purchase stocks of companies in China rather than in the US, those Chinese companies will be better positioned for growth that will generate jobs. My point here is that financial transactions that involve only a change in ownership will have real economic consequences. It is not a zero sum game.
Perceived future demand and price are the primary drivers but this does not shut out the supply side economic perspective. For example, the availability of venture capital and private equity are necessary for creative entrepreneurs to realize their dreams of developing, producing and selling their heretofore non-existent or limited production of goods or services. Such capital is fairly scarce and cautious at this time in the US, though certain sectors such as clean energy appear to be overcapitalized, given the limited opportunities. Private equity to finance actual investments in Asia is more plentiful. It would be helpful to unemployed Americans if that capital could be redirected to the US to supply the same goods that are in demand here. I have outlined the steps above that would contribute to such a reallocation of equity capital and hence sustainable job growth.
I wasn't suggesting that changes in preferences of asset classes, and price changes that reflect those preferences, have no consequences, only that it is incorrect to describe what is occurring as if capital literally flowed into that class of investment. What is occurring, rather, is a price change that equilibrates a changed in the demand curve as supply is quite fixed in the near term.
It is a mistake to think of regulation as a comparative disadvantage or that we have to compete to the bottom on regulation -- making sure ours are as inexpensive as the least regulated jurisdiction. But it is likewise a mistake to imagine that we can have the regulation we desire without putting something ... view full comment
I wasn't suggesting that changes in preferences of asset classes, and price changes that reflect those preferences, have no consequences, only that it is incorrect to describe what is occurring as if capital literally flowed into that class of investment. What is occurring, rather, is a price change that equilibrates a changed in the demand curve as supply is quite fixed in the near term.
It is a mistake to think of regulation as a comparative disadvantage or that we have to compete to the bottom on regulation -- making sure ours are as inexpensive as the least regulated jurisdiction. But it is likewise a mistake to imagine that we can have the regulation we desire without putting something else on the scale to balance trade. You cannot have both. If we are not going to have universal regulations (and that won't be happening in the foreseeable future), then our trade will not balance until we run out of credit or recognize the need to manage it for balance. The huge differences in wages have the same character, but the effect is even larger as wages are a much bigger piece of cost than regulations. Only in the minds of radical free-traders are we obliged to suffer a trade imbalance if we refuse to conform our wages or regulations to those of the poorest and least regulated nations.
If we didn't have a $300 billion to $700 billion drain on our economy from demand lost to trade deficits, I think you would find the environment for investment improved. The financial capital sloshing around in Asia is the direct result of our trade deficits. We should not tolerate them, and haranguing the Chinese to let the yuan rise is not going to have any significant effect. A law that we will not import more than we export would.