The Tyranny of Continual Warfare

Our Founding Fathers considered standing armies “instruments of tyranny.”  So, to defend us “against foreign danger” they drafted the 2nd Amendment.

The 2nd is the only Amendment that states its purpose: “A well regulated militia being necessary to the security of a free state, the right of the people to keep and bear arms shall not be infringed.”

Two hundred and more years later, we have a standing army and there is no connection between a “well regulated militia being necessary” and “the right of the people to keep and bear arms.”  But, as I discussed here, the downside of a standing army is greater than ever.  As James Madison explained:

In time of actual war, great discretionary powers are constantly given to the Executive Magistrate.  Constant apprehension of War, has the same tendency … Of all the enemies to public liberty war is, perhaps, the most to be dreaded, because it comprises and develops the germ of every other … No nation could preserve its freedom in the midst of continual warfare.

Yet we are now in the midst of a “war on terror” that can by definition never end and, in our fear of terror, we are abandoning our freedom.

Comforting Lies

We have no Madison among this year’s Presidential candidates and never will get one if we don’t heed what he and more recently Eisenhower warned:

“Only an alert and knowledgeable citizenry can compel the proper meshing of the huge industrial and military machinery of defense with our peaceful methods and goals, so that security and liberty may prosper together.”

Now, Presidential candidates and our media have, as this Gallup poll reveals, persuaded 24% of Republicans, 9% of Democrats and 15% of independents that terrorism is our most important problem.

But an “alert and knowledgeable citizenry” would know car accidents kill far more of us.  Twice as many Americans die every year from texting or talking on the phone while driving as died even on 9/11.

An average of just 32 Americans per year died in terrorist attacks in the next twelve years, fewer of them killed by Islamic terrorists than by disgruntled workplace and school shooters.  Meanwhile, over 30,000 of us are killed by firearms every year, one thousand times as many as are killed by terrorists.

President Eisenhower spoke of the need for balance, for a sense of proportion.  He would be gravely disappointed in us.

We plan to spend $70B-$90B a year, over $1,100B in total, on new weapons in the next 15 years (see Defense Modernization Plans Through the 2020s) “59% of [it on] just 10 programs–all of which are … primarily intended to support high-end conventional and nuclear conflict.”

Defense Modernization Plans

Nuclear weapons are not usually considered appropriate against terrorists although one of our Presidential candidates did joke about nuking the Islamic State.

Our Unmanned Systems Roadmap FY2011-2036 to reduce American casualties will make warfare less troubling and more exciting for voters.

There will be few complaints about spending $1,100B+ on new weapons.  It is, after all, little more than our overall military spending every year.

So here we go.  We provoke hatred by killing innocents — of 2,500-4,000 people killed in drone strikes in Pakistan, 400-1,000 were civilians.  Some were “collateral damage,” some the result of a flawed algorithm that analyzes cellphone usage to assess likelihood of being a terrorist.

And we are provoking our only nuclear rival by building a new generation of nuclear weapons and quadrupling our forces on Russia’s border.

We’ve not just lost all sense of proportion — we’ve lost our senses altogether.

Pros and Cons of Income Inequality

 

Income inequality is a good thing but, as is proverbial, one can have too much.

We like having more and because working makes that possible, we’re motivated to work.  That’s a good thing because, although having more won’t necessarily make us happy, the way our society works requires us to work.

When there’s too much income inequality, however, when a tiny minority has most of the money, the others can’t keep buying enough and consumption drops.  Businesses start shedding workers, and money that would have been invested in production moves to secondary assets like stocks whose prices increase because of the new demand.

But enterprises underlying those secondary assets depend on the economy and because that is shrinking, those assets become increasingly over-valued.  When the discrepancy is recognized, the speculative bubble bursts.  Then all but the very rich are in trouble.

That happened in the Great Depression 80-odd years ago and, starting 8-ish years ago, it is happening again.  Our government contained the collapse more effectively this time although its effects continue, but we are now also experiencing a worsening systemic problem.

Our society depends on jobs to supply income, but jobs are disappearing.

What revived our economy from the Great Depression were economic policies that redistributed some of the wealth from the top.  Restoring buying power restored consumption, that restored investing in production, and that created more jobs — a virtuous spiral.   Those policies included Social Security, Medicare, high minimum wages, high marginal tax rates, and strong enforcement of financial regulations.  Eisenhower and Nixon supported and even extended parts of the system Roosevelt initiated that kept investment and consumption in balance.

Then economic policy reversed direction in the 1970s following dramatic cuts in the supply and corresponding increases in the price of oil.  The economy was wounded, according to the new theory, because there was not enough investment and too much consumption.  The indicated new policies included cutting the real value of the minimum wage, cutting welfare spending, cutting taxes on the wealthy, and deregulating the financial sector.  Inequality began to rise again.

That new policy direction was and still is embraced by both Democrats and Republican.  The political shift is detailed in this post but my aim here is to point not to a political but a fundamental change.

I included the leftmost chart below in my 2013 Economic Consequences of Inequality post.  We must also consider the one beside it from the World Wealth and Income Database.  Today’s income inequality and under-employment was brought to us by leaders of both political parties, none of which see that we are experiencing a second industrial revolution as momentous as the first.

Extreme Inequality

change-in-top-1-income-share-us-presidentsWhat has already happened is jobs previously done in America went where wages are lower.  What is happening at an increasing rate now is jobs done by humans are going to machines.

Economics researchers studying US Census Bureau data say half of current jobs (47%) can soon be done by machines and this study suggests 81% in the next few decades.  The schedule is arguable but the future of routine jobs is clear — they’re going away.

Routine vs Non-routine jobs

RobotsResearchers employing the quadrant chart tool I wrote about here assure us that non-routine jobs will remain beyond the reach of machines.

Watching our washing machine being repaired just now, I thought: “That’s something no machine could do. “  But the problem was diagnosed by phone, the part to be replaced was mailed here and washers could be designed to be serviced by robots.  In Japan where many are old enough to need assisted living, much of the care is already provided by smart machines.  Our physical, cognitive and emotional health care needs will increasingly be served by machines.  Robot waiters will attend us and security guards will protect us.  And so on.

Robots could even replace the guys on the freezing mud flats outside my window harvesting clams but it will probably not be worth the investment.  And there will always be jobs for thinking folks like us, right?  In fact, our lives will become ever easier as machines take over all our routine and physical tasks.

Work Sphere

Er… why do we imagine we can continue to out-think robots?   Could we not have told sagacious horses looking forward to similar benefits from the first industrial revolution that they never would learn to drive tractors?

Before that revolution 90% of Americans’ jobs were in agriculture, 3% now.  It didn’t happen suddenly.  Engines were used the same way as horses for fifty years before methods of farming changed at an increasing pace to exploit the new potential of engines.

We’re now in the second half of the second industrial revolution.  Computers began to be used for routine tasks more than seventy years ago and I was managing development of a communications grid based on the same technology as the Internet 45 years ago.  The great majority of jobs presently done by humans will again disappear.

What will happen when there are only jobs for a very few?  There must be a new foundation for the economy if there are too few new jobs for humans.  There will be no choice but to redistribute part of the profits from owners of machines to others so they can pay for the machines’ products and services.  There would otherwise be no profits.

Inevitable as it may be in the longer term, redistribution like that would, with good reason, be feared by the wealthy.  It could go too far.  The interim step, if the system dominated by “too big to fail” financial enterprises continues to collapse, will likely be a repeat of the Great Depression work programs.

We may at long last restore our transportation and other infrastructure on the way to an economic future whose structure we cannot yet discern.

Maslow Misapplied to Nations

I was excited 35 years ago to see the rewards for structuring data into quadrant charts.  That was for me!  And management consulting with those charts was fun, but I saw how misleading they can be and at last returned to product and business development.

The chart tool began as a guide for business and product strategy, the idea being that you’re in trouble in the bottom left where your competitive advantages are few and small.  You must develop more and stronger advantages to soar to the profitable heavens on the top right.

BCG Advantage Matrix

Learning how to use and not abuse that tool has continued to be useful.  What provoked this post is research from 1981 to 2014 that is well illustrated by this animation but misleadingly presented in chart in the Findings & Insights summary linked to on this page.

The religion-based labeling is accurate but, in the two-dimensional chart context where the goal is to move from bottom left to top right, it is misleading.

And in this article by a different researcher the data is naively misinterpreted to suggest that capitalism transforms national values toward the political left.

So this is an example of tool abuse.  The data points are real, the research is valuable and the animation of changes over time is meaningful.  But the complex underlying reality is distorted by a static chart labeled in this way.

Nations' Survival vs Self-espression

The World Values Survey (WVS) researchers describe the two dimensions as follows:

  • Traditional values emphasize religion, parent-child ties, deference to authority, traditional family values and national pride
  • Secular-rational values place less emphasis on religion, traditional family values and authority
  • Survival values emphasize economic and physical security, are relatively ethnocentric and feature low levels of trust and tolerance
  • Self-expression values emphasize environmental protection, tolerance, and participation in economic and political decisions

The researchers say the data show that as a country moves from poor to rich, it also tends to move from traditional to secular-rational.  The move is a tendency not inevitable because values are also highly correlated with long-established cultures.

And there is movement in both directions over time.  The USA, for example, is in 1989 a little toward the traditional end and quite far toward self-expression, then it grows more traditional over the next decade, less so in the next, then steadily less traditional and less concerned with self-expression.

The writer claiming that capitalism transforms national values so nations labeled Islamic will, if they embrace capitalism, naturally move toward Protestant heaven, confuses correlation with causation.

His explicit blunder is conceptualizing nations as people to which Maslow’s “Hierarchy of Needs” apply.

Maslow's_hierarchy_of_needs

Maslow illustrates how, if we have no food, all we care about is getting our next meal, but once we have that, we start caring about how to get the next meal and the one after that, and if we secure a reasonably dependable supply of basic needs we put effort into friendships, then start working for the respect of others, and finally devote effort to self-actualization.

Here’s a simpler way to see what Maslow was driving at (hat tip to Lexy):

Lexys-Version-of-Maslow

What Maslow’s hierarchy does not show is how circumstances impact the motivation of nations.  It can’t because nations are not people.  They are made up of people whose situations can be very diverse.

This comment on the naive article (click on the link and wait for it to scroll down) summarizes what the research actually illuminates:  “Economic and political systems, and culture/psychology interact with each other in both directions … autonomous individuals create capitalism, safety creates capitalism, peace creates capitalism.”

The top left is not unalloyed heaven because “increasing empathy and mutual respect [and] the breakdown in social capital go hand in hand with secularization and the domination of the market.”

And good governance is a prerequisite: “the state monopoly of coercion helped create the safety required for the large social networks of trust, and individual autonomy.”

According to the US Census Bureau, 15%, i.e., 47 million Americans are living in poverty meaning “a lack of those goods and services commonly taken for granted by members of mainstream society.”  That includes more than one in five of all chil­dren under age 18.

The WVS research, excellent as it is, can tell us nothing about the value those 47 million Americans place on traditional vs secular-rational values.

And we would be utterly mistaken to imagine they over-value self-expression relative to survival.

Beyond the Media Hype: Immigrants

I wrote in Ignorance, Fear and Imaginary Facts that we imagine facts to support what we fear, and that one of the things we greatly exaggerate is the number of immigrants.  I said that’s a problem because politicians tend to focus on what we believe, not the actual data.

So, what have they done based on our fear of immigrants?  First, a reminder.  We imagine that 32% of our population are immigrants while the actual number is 13%.  This means we have 60 million imaginary immigrants in addition to the real 41 million.

Sixty million is a lot of imaginary people!  It’s enough that we’d expect some big actions.  And even though 60 million people are imaginary, we caught 1.6 million entering illegally in 2000 and we do not know how many are already here.  There really is cause for concern.

Immigrants

But what do we mean by “immigrant”?  Everyone was an immigrant when the Constitution was established in 1787.

Our first citizenship law was established in 1790.  Any “free white person of good moral character” who lived here two years and in the same place for one could apply.  The requirement was increased to five years in 1795 with a three year wait, and in 1798 to 14 years with five years notice of intent to apply.

All children born here have been considered citizens since 1868 and African Americans could become citizens since 1870.  Asians could live here then, but not become citizens.

The first law restricting immigration was passed in 1875.  It prohibited any Asian coming to be a forced laborer, any Asian woman who would be a prostitute, and anyone who was a convict.  The labor provision was largely ignored but the ban on female Asians, especially Chinese, was heavily enforced.

Then the 1882 Chinese Exclusion Act prohibited all immigration of Chinese laborers (it was only repealed at the end of 1943).  Chinese immigration that started in the 1848-1855 California Gold Rush had continued for huge labor projects like the Transcontinental Railroad, but then came the 1870s post-Civil War economic slump.  Chinese workers were blamed for depressed wage levels.

We began deporting those who entered the country illegally in 1891, a year after the Wounded Knee Massacre near the end of when our ancestor immigrants finished dispossessing the Native Americans.

Small-scale deportations began five years before we dedicated the Statue of Liberty with its poem, “Give me your tired, your poor, / Your huddled masses, yearning to breathe free.”  We did little to stop illegal immigration, however, until Congress established the Border Patrol in 1924.

Our main focus until the 1950s was Canada.  The first large-scale deportation of illegal Mexican immigrants was Operation Wetback in 1954.  It was not until the 1990s that illegal immigration became a big issue.

At the start of the Clinton administration, Border Patrol had 4,000 agents.  That more than doubled to 9,000 by the end of his administration.  Border Patrol’s enormous growth followed 9/11.  It doubled again to 18,000 agents by the end of the Bush administration and to 21,000 in Obama’s first term.

When the Department of Homeland Security (DHS) was set up following 9/11, Border Patrol was reestablished as part of Customs and Border Protection (CBP) with a $12.4 billion annual budget and a staff of 60,000 that includes 46,000 gun-carrying Customs officers and Border Patrol agents.

We have spent over $100B on border and immigration enforcement since 9/11.

CBP is by far our largest federal law enforcement agency.  Its 250 planes, helicopters and drones make it the largest law enforcement air force in the world, as big as Brazil’s entire combat air force.

US Border Patrol

Border Patrol’s growth was far too rapid for quality hiring, and it has not been well led.  Until March of this year, it went five years without a Senate-confirmed leader.  An average of almost one CBP officer per day was arrested for misconduct between 2005 and 2012, and Border Patrol agents have shot and killed almost 50 people since 2004.

Not well led?  In Obama’s first year, Border Patrol was ordered to change its definition of “corruption.”  There would be “mission-compromising corruption,” e.g., bribery, narcotics- or human-smuggling, etc. and “non-mission-compromising corruption,” e.g., sexual or other assault of detainees or theft.  Only “mission-compromising” incidents were to be reported to Congress.  That did not cut corruption but it did cut the statistics by almost a third.

Border Patrol’s leader since March has his work cut out, and the October federal budget funds 2,000 more CBP officers, the largest single increase Congress has ever passed.

But no matter how successful BP’s new leader is, stopping people from entering illegally is only half the battle.  We should also make it easy to identify illegal immigrants and promptly deport them.

The high likelihood of being promptly deported would be the greatest deterrent against attempting to enter illegally.

That would require some form of national ID, which advocates of civil liberties oppose.  Because the Constitution grants all rights to the States that are not specifically granted to the Federal government, driver licenses and other identification cards are issued by each State separately.

The REAL ID Act of 2005 established standards for state-issued identification documents to make them acceptable for restricting entry to DHS headquarters, nuclear power plants, and other restricted federal facilities, and eventually to restrict boarding of federally regulated commercial aircraft.  Only 21 States were compliant at the beginning of 2014.

The REAL ID Act is not aimed at identifying who is and is not eligible to live and work here.  The State driver license and other such databases are neither uniform nor interoperable, and that is how State government officials and civil rights advocates want it to stay.  The States want to retain their prerogatives.  Civil rights advocates fear government abuse if we are all recorded in one big database.

There certainly is potential for abuse.  Hoover’s FBI kept files on enormous numbers of people he considered suspect and all of us are now in the NSA’s database.  Our emails, texts and phone calls are searched and stored.  Our travels probably are, too, if we carry a smartphone.  Our activities are captured by surveillance cameras and presumably searched with facial recognition software.

But civil rights advocates are misguided.  We already have far less privacy than we imagine, and we are rapidly losing more.  The protection we need is around the use of data.  We need to protect ourselves directly against government abuse and corruption, not hobble its ability to protect us.

What we need is a dependable way for everyone who has the legal right to live and work here to prove that, and for the form of proof to be very hard to forge.

Our passport system may be a good starting point for the identification documents all legal residents should have.   More than a third of Americans (35%) now have a passport.  That is up from 6% twenty years ago and passports issued since 2007 contain chips that enable facial recognition.

We could establish a system for checking who has the document and deporting those who do not.  We don’t consider it abusive that we must carry a driver license whenever we drive a car.  It would be little more burdensome to carry an identification document at all times.

What have I left out?  Stopping illegal immigration is not enough, we must also establish a just and effective way of deporting those who are here illegally…  Oh, yes, we must also decide who we want to have immigrate and make it easier for them to do so.

We no longer want other nations’  “tired, poor,  huddled masses yearning to breathe free.

Actually, as well as not wanting them, we also want to get rid of those like them who are here legally.

The US Conference of Catholic Bishops denounced Ryan’s proposed 2012 budget, which the GOP House passed, because it “fails to meet the moral criteria” of the Church, failing to help “the least of these as the Christian Bible requires: the poor, the hungry, the homeless, the jobless.”

Ryan is still chairman of the GOP’s House Budget Committee with more power now the GOP controls the Senate.  We are not likely to get a more Christian budget or immigration policy any time soon.

Our fears will be used to legitimize more violence.

Income Inequality Impacts Consumption

In this post I explore the great increase in income inequality during US economic expansions.  But does income inequality lead to inequality in relative consumption of necessities and luxuries?  Here’s an analysis by quintile since 1984:

http://www.clevelandfed.org/research/commentary/2014/2014-18.cfm

The data overall show (quote): “for lower and middle income quintiles, the share of total inflation-adjusted (real) consumption going to purchase necessities has contracted since 1984, while the share of the total going to purchase luxuries has remained fairly constant or slightly increased. For the highest income quintile, however, there has been growth in the relative consumption of luxuries.”

Wait – lower income folks are now spending less on necessities, more on luxuries?

Relative Real Consumption Shares by Income Quintile

We are not shown the trends for individual items by quintile but when we get to the end of the piece, “implications”, we do get one example of the impact of classifying items as “necessities” or “luxuries”:

Average Share of Total Real Consumption

Education is classified as a necessity although parents struggling to get by and/or maintain their customary enjoyment of luxuries such as “entertainment” and “public transportation” (!) might have a different view.

(Quote): “if the necessity “education” continues to decline as a share of real consumption for all but the highest income quintile, it may exacerbate the income inequality trend over the coming years; increased education is one of the most reliable paths to increased income. However, the lowest, second-lowest, middle, and second-highest income quintiles have all seen their shares of education decline significantly over the analysis period (8.1 to 2.6 percent, 2.8 to 1.2 percent, 2.5 to 1.1 percent, and 2.6 to 1.6 percent, respectively). The highest income quintile has seen its share of education consumption remain relatively steady, declining only slightly from 3.4 to 3.2 percent.”

The devil is famously in the details.

Capitalism, the General Welfare and Education

I’m blessed to have friends whose beliefs I do not share.  They make it so much easier to see that if I believe this, I cannot also believe that.

My ideas were well tested in a discussion of this New York Times article about income inequality analyzed in the context of US economic expansions by Ms. Tcherneva, an economist at Bard College.

In the 1940s, ’50s and ’60s, most income gains from the bottom of one recession to the start of the next went to most people, i.e., the bottom 90% got a majority of the increase.  But in each expansion they got a smaller share while the top 10% got increasingly more.

From 2001 to 2007, an extraordinary 98% of income gains went to the top 10% of earners.

In the first three years of the current expansion, the incomes of the bottom 90% actually fell, which meant the top 10% got a seemingly impossible 116% of all income gains.

Inequality Increased with Expansions

The top 10% now gets almost half of all income.  Just the top 3% got almost a third (31%) in 2013 and the next 7% got 17%.  The remaining half (52%) is shared by the bottom 90%.

Making life harder for the bottom 20%, they got only 36% of federal transfer payments in 2010, down from 54% in 1979.

The short term result of rising inequality is weak economic demand.  The longer term impact is lack of progress in education.

The USA is the only high-income country whose 25-34 year olds are no better educated than its 55-64 year olds.  College graduation rates for the poorest increased only 4% from those born in the early 1960s to the early 1980s while the rate for the wealthiest increased by almost 20%.

Upward mobility is very limited without a college degree so high inequality in education results in children of prosperous families tending to stay well-off while children of poor families remain poor.

Ms. Tcherneva focuses on the short term issue, weak demand, and observes that our fiscal policy – lower interest rates to increase demand to create jobs – is not working.  She suggests the Federal government focus directly on employment:  “The manpower of the poor and the unemployed can be mobilized for the public purpose irrespective of their skill level, which in turn will be upgraded by the very work experience and educational programs that the program would offer.”

When the discussion began, a different version of the income distribution chart by Robert Reich was dismissed as “bull crap.”  By the end, we agreed that income distribution really is highly unequal in the US and is growing more so.  We further agreed that the trend is unsustainable.  We came close to a consensus that if it continues too long, there will be civil strife. 

And we ended up agreeing that our economy is undergoing structural change.  Off-shoring and automation are eliminating many lower paid jobs.  AI software is also replacing many higher paid jobs.  Perhaps there simply will not be enough jobs humans can do better/cheaper than intelligent machines and we will in the longer term need a new economic paradigm.

When we discussed solutions for today, we disagreed about whether government should try to alter income distribution, directly create jobs, or do more to govern behavior in markets e.g., with stricter bank regulations.  We disagreed about whether government should ever try to influence society in any way e.g., by tax incentives. 

And we disagreed if education should be primarily private or public. 

Seeking a philosophical basis for our beliefs, we discussed the Constitution’s: “We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, … promote the general Welfare …”, and its section 8, which gives the legislative branch the power “… To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the the common Defence and general Welfare of the United States.” 

What, we debated, is the Federal government’s responsibility for “the general welfare” in a capitalist society?

Characteristics of all forms of capitalism include capital accumulation, competitive markets and wage labor.  Piketty’s research suggests the rate of return on capital is inevitably higher than the rate of growth of wages.  What government action does that suggest?  To what extent should government constrain behavior in competitive markets?  And is the freedom that comes with wage labor sufficient?

What preceded capitalism was slavery where slaves could not seek a better owner, and feudalism which also kept those at the bottom in place.  Capitalism has no such iron-clad constraints.  In pursuit of higher wages, a better boss, more interesting or safer work, we can try to get any job at all, anywhere. 

Furthermore, capitalism requires property rights and other laws while in slave-owning and feudal societies, laws are the whim of the slave-owner or land-holder. 

We did not dispute the ideas in the preamble to the Constitution; that central government must enable us to live in peace under the protection of the law.  Hamilton in the Federalist Papers was emphatic about “a more perfect union” and “common defense”.  States must not have armies, he wrote, because they would go to war with each other if they did.  The nation as a whole must defend itself. 

Where we disagreed was on Section 8, about the meaning of “the general welfare” and the Federal government responsibilities it implies. 

My thoughts were clarified by the discussion.  I believe the central government of any nation is responsible for establishing the infrastructure, broadly defined, that is necessary for the general welfare.

Infrastructure means basic facilities, services, and installations necessary for a society to function, e.g., transportation and communications systems, water and power lines.  Infrastructure also includes public institutions such as schools, post offices, and prisons. And it includes protection of “the commons”, things we all need that nobody owns such as the air.

Different combinations of public and private involvement can create and maintain infrastructure, but the central government is always responsible for ensuring that current and future generations will have an infrastructure that enables the nation to remain competitive and viable.

I have long thought, for example, that our central government should lead us from dependency on Middle East (or other) oil by establishing a suitable electricity grid.  What struck me in this discussion is that I think a well educated and healthy work force is also part of our infrastructure. 

And I want nobody to be prevented from fulfilling their potential by the circumstances into which they are born.

That led me to two conclusions about education.  First, it must be funded from the center because if it is not, welfare cannot be general.  Some will be privileged by accident of birth while others who may have high intellect and/or other gifts will not get an education that enables them to fulfill their potential.  Second, the curriculum must be set at the center because if it is not, our workforce will not have a dependable base of skills.

I do not mean specific work-related skills, almost all of which now have a short shelf-life because technology is advancing so fast.  I mean the ability to seek out and recognize facts, to reason from facts to conclusions, and to communicate effectively with people whose ideas are different. 

We are not born knowing how to do any of those things or how to act as members of society, just as we are not born knowing how to read or do arithmetic, and that’s important because we can’t have an effective democracy if voters can’t recognize facts or reason from them. 

In fact, we do not have an effective democracy, and I want that to change!

My views, taken as a whole, seem to fit no label.   I believe, among other things, that:

  • Markets should operate as the engine of creative destruction (i.e., I’m a capitalist)
  • Which means, for example, that too-big-to-fail financial institutions must be broken into smaller entities that can go bankrupt
  • And (almost?) all tax incentives should be eliminated
  • Individuals should be held accountable for their actions
  • Which means we must strengthen regulation and enforcement of individuals’ behavior in markets (i.e. prosecute criminal behavior)
  • Everyone should have a reasonably good opportunity to fulfill their potential (i.e., I’m a progressive)
  • Which means we need a progressive income tax code and high inheritance taxes
  • And Federally funded education with a uniform national curriculum
  • A reasonable amount of health care and etc should be available to all (i.e., I’m a socialist)
  • Which means we need a universal single-payer health system
  • Infrastructure investment by the central government is necessary and can be funded by borrowing (i.e., I’m not a fiscal hawk)
  • But spending programs should be funded with current revenue, i.e., taxes (so maybe I am a fiscal hawk)
  • Our misguided spending on wars should be invested productively, e.g., on an electricity grid that helps us overcome our dependency on oil and coal (i.e., I’m a peacenik) 

My education left me unable to accept an entire package of ideas from anyone else, but it’s hard to avoid cognitive dissonance when you assemble your own set.  It’s almost impossible to spot every inconsistency.  This is why I’m so grateful to my diverse friends for helping me see more clearly.

Protecting the Opulent Against the Majority

A few days ago, billionaire venture capitalist Tom Perkins wrote that the way progressives are starting to treat the super rich reminds him of how the Nazis treated the Jews.  Soon after his letter was published in multi-billionaire Rupert Murdoch’s Wall Street Journal, he had to apologize for his politically incorrect phrasing.   He would have done better to quote James Madison, “Father of the Constitution” and author of the Bill of Rights.

When the Federal Convention of 1787 turned to the question “whether the republican form shall be the basis of our government,” Madison pointed out: “In England, at this day, if elections were open to all classes of people, the property of the landed proprietors would be insecure.  An agrarian law would soon take place.” 

The implication, he continued, is:  “If these observations be just, our government ought to secure the permanent interests of the country against innovation.  Landholders ought to have a share in the government, to support these invaluable interests, and to balance and check the other.  They ought to be so constituted as to protect the minority of the opulent against the majority.”  (emphasis added)

A widely held belief has developed that the US Constitution offers protection for all minorities.  That was not its intent.  Madison’s much more limited aim was to protect the wealthy minority.  Whether or not we like the result, we should recognize that our Constitution is working as intended.

How does it work?  A republic is where power is held by elected representatives whose actions are bound by a Constitution.  People in a republic vote for candidates who promise changes they like.  The risk is that a small majority could make changes with unacceptable negative impact on the rest of the population.  That’s why a Constitution is necessary, to prevent such changes by defining ‘unacceptable.’

I’m thinking about this because I’m reading Noam Chomsky.  His diagnosis of why our government acts as it does, regardless which party is in power, feels spot on.  He shows example after example of actions by our government that benefit the opulent minority and work against the interests of the majority here and throughout the world.

But Chomsky’s proposed solution is misguided.  His central beliefs are that power corrupts and capitalism concentrates wealth, which, based on long first-hand experience and close study of history, are truths I hold to be self-evident.  The question is, would his solution, anarcho-syndicalism, be better?  Could it even work?

Anarcho-syndicalists are socialist libertarians.  Like capitalist libertarians who enjoy President Reagan’s signature joke: “The nine most terrifying words in the English language are: ‘I’m from the government and I’m here to help'” they oppose central power.  The difference is anarcho-syndicalists say the inevitable concentration of wealth by capitalism exploits the majority.

Attractive increases in freedom are promised by both kinds of libertarians.  In real life, however, the system does not scale.  A libertarian (i.e., unregulated) society cannot protect shared resources or universal needs: local societies often manage local resources (e.g., forests) sustainably but resources managed by non-locals are polluted and/or depleted.  And small societies cannot retain freedom: they cannot defend themselves against more powerful exploiters.

It is true that a fundamental problem for large scale enterprises is that central planning cannot work: there’s too much change to comprehend at the center.  An ingenious programmer I once hired was directed to model how many tractors Soviet factories should plan to build.  He tried combinations of many, many factors without success before at last seeing how to produce results that pleased the planners.  How?  By plugging the number of tractors that were going to be built, anyway.

Big businesses fail for the same reason – they lose contact with changes in their market.

Another problem is many things that start small seem destined to grow big but central planners too often fail to identify which are worth the investment.  Small societies with property managed at the local level would make better choices but they lack the necessary resources.  Today’s semiconductor and internet infrastructure, medical technology and etc required enormous investment.

So history tells us that democracies with a constitution tend to be better for people than autocracies, that market-based economies tend to deliver better results than centrally planned ones, and that capitalism seems essential to generate disruptive technology and deploy it on a large scale.

Speaking in Parliament in 1947, not so long after he lost the election following WW2, Winston Churchill famously said: “Democracy is the worst form of government, except for all those other forms that have been tried from time to time.”  The same looks to be true of capitalism in the economic sphere and nation states in the sphere of sovereign entities.  They do all tend to concentrate power and wealth but the alternatives are worse.

So, “if these observations be just,” how can the non-opulent minorities who make up the majority get protection?  Curtailing the inevitable abuses of power is achieved by incremental legislative changes that adapt Constitutional definitions to changes in society.

Because the fundamental structure of the system results in the wealth and power of the opulent minority always nudging the law’s evolution in their favor, other minorities must speak more loudly.

It is healthy that voices are now speaking loudly enough about too-high and rising inequality to be heard by Perkins and others.  It indicates that our system is working as it should.

Economic Consequences of Inequality

More than nine in ten Americans want the top 20% to have about one third (32%) of society’s wealth not 84% as they do now.  Is that a good thing to want?  Would a more equal distribution be bad for growth?  Is the current distribution a problem, anyway?

The instinct of those who think the middle 60% should have close to 60% of society’s wealth is good.  When the middle class has only a quarter of that share and it is shrinking, they cannot drive enough consumption of basic goods.  That’s a big problem because 70% of our GDP is consumer spending.

Percent Wealth Owned

Unequal wealth distribution results from unequal income income distribution.  The opportunity to become more wealthy is important for economic growth.  Is there an income distribution that maximizes growth?   Is there a point where the wealthy have too much?  I have found no definitive answer, but there has been a high correlation between extreme inequality and economic crises.

Extreme Inequality

Is that correlation just happenstance?  Probably not.  Our economy was strong in the 1950s and 60s when everyone shared in income growth.  It collapsed in the 1920s and 2000s when an extreme share of income growth went to the top 1% and a tiny percentage went to the bottom 90%.

Income shares

The reason seems to be that when the middle-class falls behind to the extent it did in the 1920s and 2000s, governments promote easy credit.  Both times, the middle class borrowed heavily as their earnings stagnated and the wealthy got more.   In the 1920s, it was farm credit, installment loans and home mortgages – mortgage debt was almost three times higher in 1929 than in 1920.  In the 2000s, it was home buyers putting no money down and investment banks lending $30 for each $1 they held.

When easy credit drives down the yield on traditional investments, investors become speculators.  The wealthy piled into stocks in the 1920s driving the Dow from 64 in 1921 to 381 in 1929.  In the 2000s the bubble was in seemingly safe but disastrous mortgage-backed securities.

The influential 1975 book, Equality and Efficiency: The Big Tradeoff, theorized that more equal distribution of incomes reduces the incentive to work and administrative costs waste some of what is taken from the rich for redistribution.  Contemporary research summarized in this 2011 International Monetary Fund paper, Equality and Efficiency, suggests the opposite – equality is an important ingredient in promoting growth, and inequality in less sustained growth.

Income distribution is strongly associated with the duration of growth spells along with well-established growth factors such as quality of political institutions and trade openness.  The chart below, which covers 1950 to 2006, shows the increase in expected duration of a growth spell for a given increase in several factors, keeping the others constant.  Some inequality is necessary in a market economy but too much results in financial crisis.

Growth Spells

Very few people saw what had gone wrong with the economy in the 1930s.  One who did was not an economist but an extremely successful businessman.  Marriner Eccles saw how his customers were reacting to the economic crisis and made recommendations to a Senate Finance Committee just before Roosevelt was sworn in as President in 1933.  FDR’s actions that year were much like his predecessor Hoover’s and equally ineffective.  Then he made Eccles Chairman of the Fed.  He remained there until 1948 and later summarized his observations, quoted in The Great Recession.

Eccles wrote (paraphrased for simplicity): “mass production must be accompanied by mass consumption.  That implies a distribution of income sufficient to provide buying power for the economy’s products.  Instead, a giant suction pump had by 1929-1930 transferred purchasing power from mass consumers to investors.  Investments were not made, however, because there was insufficient demand.  Income was concentrated in fewer and fewer hands.  Consumers could stay in the game only by borrowing.  When their credit ran out, the game stopped.”

In other words, too much income going to the top chokes the life out of the economy.  Now, for a variety of reasons, the same thing has happened again.  How does it happen?

Extreme concentration of wealth starts slowly, builds unobtrusively, gains first influence then power and if unchecked, results in extreme corruption.  As President Wilson wrote in 1913:  “If there are men in this country big enough to own the government of the United States, they are going to own it”.

Boushey and Hersh’s comprehensive 2012 review of research into what makes an economy grow or stop growing, Income Inequality and the Strength of Our Economy, comes to the same conclusion.  Extreme concentration of wealth corrupts the political and economic institutions that underlie economic success.  Acemoglu and Robinson offer compelling evidence of it from 15 years of original research which they summarize here.

Extreme income inequality leads to political instability.  That not only discourages investment, it also makes it harder to raise taxes or cut public spending to avoid a debt crisis, and it curtails poor people’s access to education.  Increasingly extreme inequality makes government ever more polarized as demonstrated by Poole’s research summarized in: Ideological Polarization and Income Inequality and illustrated in the following chart:

Polarization Correlated with Income Inequality

Income inequality in the USA is not on a par with other advanced economies, members of the OECD, but with Bulgaria, Iran and Uganda.

How can we re-establish a more equal distribution of income and the associated economic growth?  I’ve posted about changes to our financial (too-big-to-fail banks),  healthcare and defense sectors and our tax system, but how can we get any such changes?

It’s time to explore governance.  Every society is ruled by an elite.  Our elite is elected to represent the interests of all.  It does that at different times to a greater or lesser extent, substantially lesser at this time.  What factors make the difference?  What changes to our government should we consider?

Estate Tax and Fairness

What components must a tax and budget management system have to achieve the results we want?   I’ll start with a result and a candidate that illustrate a few large issues.

It seems to me now that what I said was my biggest surprise in this post, Qualities of an Excellent Tax System, should not have been a surprise at all.  The American Dream is that our freedom includes equal opportunities for all of us to achieve prosperity and success.  In that case, it makes sense that nine out of ten of us would say we want a relatively equal distribution of wealth.  What we mean is, we want relatively equal opportunities to become wealthy.

So, the system needs to to, “lead toward the distribution of wealth we democratically choose”.   By “lead toward” I mean propel the wealth distribution on average and over time, and by “democratically choose” I mean the distribution we want could change but it should at all times be in some way explicitly approved by the electorate.

Among the indicated requirements is to diminish, “unfair opportunity based on parental wealth”.  Estate taxes are a potential mechanism.  How much support might there be for them, and how effectively would they support the objective?

Estate taxes would not be popular at all.  The compendium of public opinion research I used for this post about our tax system shows on page 21 the results of a March 2009 Harris poll about the perceived fairness of various kinds of federal and state/local taxes.  Federal estate taxes are considered the least fair of all.  Two in five respondents (42%) consider them “not at all fair”.  Fully two thirds (67%) consider them “somewhat or not at all fair”.

Before exploring if estate taxes could nevertheless be effective, it’s instructive to set their unpopularity in context.  Every form of  tax has high “somewhat or not at all fair” ratings.

At the federal level, the combined “somewhat or not at all fair” ratings for each type of tax are:  estate taxes 67%, gas taxes 63%, personal income taxes 48%, corporate income taxes 42%, social security payroll taxes 40%, and cigarette, beer and wine taxes 36%.  At the state/local level they are: gas taxes 62%, local property taxes 50%, motor vehicle taxes 47%, state income taxes 44%, cigarette, beer and wine taxes 38%, and retail sales taxes 37%.

I’ll come back to those statistics in future posts.  One thing to consider is the seeming paradox that while gas taxes are almost as unpopular as estate taxes, retail sales taxes, which are also levied at point of sale and unlike gas taxes are shown separately and so are more visible, are considered the least unfair of taxes along with those on cigarettes, beer and wine.  I’ll also address why property and motor vehicle taxes, personal and corporate income taxes, and social security payroll taxes are all considered “somewhat or not at all fair” by 40% to 50% of us.  The overall message from these statistics is:

Large issue 1:  While everyone wants government services, many or most of us consider every way of funding them to be “somewhat or not at all fair”.  It will not be enough to establish a way of collecting revenue that is reasonably fair.  We must also routinely measure its fairness, publish the results and measure public opinion about that.  The long term result, if the system truly is fair, will be a steep bell curve of survey results toward the middle of the range from “Very fair” to “Not at all fair”.  I’ll explore this in a future post.

Meanwhile, why are estate taxes considered most unfair of all?  Because they’re associated with death.  That’s why opponents call them the “death tax”.  We’re pretty much terrified of death and we don’t like any taxes, anyway.  Also, opponents tell us it’s double taxation:  “First, they took your hard-earned money in income tax, then they want estate taxes on what’s left?!”  And while in theory we want equal opportunity for all to become wealthy, we probably in reality want our kids to have a better than equal chance.  The message from this statistic is:

Large issue 2:  We are vulnerable to powerful fears and desires that distort our judgment about government and taxes which cannot be soothed from within the tax system.  We would be happier and kinder if we accepted that we will die.  It would be better to prepare our kids to work for what they most want.  The tax system is powerless to help us accept and act upon such truths.

Would estate taxes nonetheless be an effective way to diminish the unfair advantage of parental wealth?  The answer is again, in normal circumstances, no.  Estate taxes are in reality levied on only a tiny fraction of US estates and they are easy to avoid altogether with trusts and provisions in your will.  If, that is, you act on the fact that you will die.

More importantly, revenue from estate taxes fluctuates because people with equal wealth do not die at the same rate every year. That means estate taxes are unsuitable for supporting ongoing levels of spending.   There is also:

Large issue 3:  Wealthy people can relocate their assets.  Not all US states levy estate or inheritance taxes and those that do, have different rates and thresholds.  You can become a resident of a different state if you expect to leave or inherit a large estate.  The same issue exists for state income taxes as this link suggests.  And if you want to avoid US taxes altogether, you can renounce your citizenship and move offshore.  This means tax systems must be appropriate to their competitive environment, state-wise and nation-wise.

There are, however, a couple of situations where estate taxes are effective.  One is when there is a widely accepted temporary need for exceptionally high government spending.  By the end of WW2, for example, the top marginal estate-tax rate, referred to as “equality of sacrifice”, was 75% in the UK and 77% in the US.  In WW1 when UK men were being conscripted, very high estate taxes were termed “conscription of wealth”. The other situation is when the domination of a wealthy hereditary aristocracy is overturned.  The sacrifice made necessary by WW1 gave UK social reformers that opportunity.

We should work diligently and hard to avoid the need and opportunity for such a remedy in our own society.

Taxes, Wealth and Fairness

‘Democratic’ in my previous post’s question: “What is the purpose of our democratic society’s tax system?” – means it leads to a fair outcome.  That post explores public opinion about tax fairness.  But what do we mean by a fair outcome?  Taxes are only the means; what about the end, a fair economic structure?  We now explore the previous post’s final question: “How should society’s wealth be distributed?  What do we actually want?”

Determining how to answer such questions was the life work of US political philosopher John Rawls.  His aim was to see how to establish the legitimate use of political power in a democracy; how a society with diverse worldviews can unify for action.  He developed a method (the “original position”) to proceed from our deepest ideas about justice to reach real agreement.  It works when people imagine themselves entering society in a fair position and answer using only factors their intuition considers fundamental.  Phrasing the questions is critically important.  Politicians typically phrase them not to promote agreement but amplify differences.

Professors Norton and Ariely used Rawls’ method to survey (see their Report and an Interview with Ariely) a random sample of 5,500 Americans to explore how we want society’s wealth to be distributed.  They used pairs of pie charts depicting the distribution of wealth from richest to poorest groups among pairs of nations.  They asked respondents which nation of each pair they would rather join:  ‘In considering this question, imagine that if you joined this nation, you would be randomly assigned to a place in the distribution, so you could end up anywhere in this distribution, from the very richest to the very poorest.’’

The pie charts shown to respondents were not labeled.  One showed the existing distribution of wealth in the USA.  One showed all groups having exactly the same.  The third showed another real world case, the distribution of income in Sweden.  They chose that because it is quite different from the others (income in Sweden is distributed relatively equally but wealth is not).

Presented with the pair of charts representing Sweden and the USA, nine out of ten respondents (92%) preferred the Swedish distribution.  The results were consistent across gender, political and economic divides: females 93% vs males 91%, Republicans 90% vs Democrats 93%, income less than $50,000 92% vs $50,001–$100,000 92% vs more than $100,000 89%.  There was a slight preference (51% to 49%) for the Sweden distribution over the equal distribution when they were compared directly and a somewhat larger preference when the choices were Sweden or US  (92% vs 8%) than when they were equal or US ( 77% to 23%).

Relative preference

Those answers are provocative; a huge majority of Americans appears to want a society with a relatively equal distribution of wealth.  But the question is abstract so Norton and Ariely tested the result.  Respondents were next asked what percent of wealth they believe is owned by each of the five economic groups in the United States, and what each ideally should own.  They were given the following definition: ‘‘Wealth, also known as net worth, is defined as the total value of everything someone owns minus any debt that he or she owes. A person’s net worth includes his or her bank account savings plus the value of other things such as property, stocks, bonds, art, collections, etc., minus the value of things like loans and mortgages.’’

The second set of answers is equally provocative, is consistent with the first, and is also consistent with my previous post’s findings about clarity.  Respondents vastly underestimated the actual level of wealth inequality in the US.  They said the wealthiest fifth of Americans holds about 59% of the wealth.  They actually have almost 84%.  They own fully a quarter more of the total than respondents imagine.

Consistent with the pie chart answers, respondents constructed ideal wealth distributions far more equitable than their estimates of the actual.  They want the top fifth to own not 59% of society’s wealth but roughly half that amount, i.e., 32% of the total.  They redistributed what they feel is too much from the top fifth to the bottom three, leaving the second group unchanged, making the third about the same as the second, and more than tripling the share of the poorest group.  As with the first question, the answers were highly consistent across gender, political and income groups.

Percent Wealth Owned

So, despite great disagreements over policies that affect wealth distribution, e.g., tax and welfare, a great majority of us appears to believe wealth should be distributed far more equally than we imagine it is, and we imagine it is distributed much more equally than the reality.

We have extraordinarily mistaken beliefs about the actual level of wealth inequality, and we probably have equally mistaken beliefs about our opportunity to move up in wealth.  Incomes of the lower 80% of the population have been dropping for the past three decades.  Only the top 1% has seen real growth in income.

inequality-p25_change in share of income

Furthermore, in the most recent three years the wealthiest 7% has enjoyed a 28% increase in their net worth, driven largely by the Fed’s successful efforts to boost the stock market, while the lower 93%, whose primary asset, if they have any at all, is typically the equity in their house, has suffered a further 4% loss in wealth.  The Organization for Economic Cooperation and Development (OECD) reports that among all 34 OECD nations, only Turkey, Mexico and Chile distribute their society’s wealth more unequally than we do.

unevenrecovery

Extreme inequality results when political power based on wealth shapes government policy.  That is the norm in autocracies.  It can also happen in a democracy.  Income inequality in Tsarist Russia was not so severe as ours is now.

Is the relatively equal distribution preferred by Norton and Ariely’s respondents optimal?   My guess is we would generate more overall wealth with somewhat greater incentives.  That would be good to know but we already do know our existing distribution is far from most Americans want.  And history tells us that when income from work goes disproportionately and increasingly to the already wealthy as ours does now, it can only, as my mom always said, end in tears.

I hope we will not wait for a revolution but take democratic action to better distribute the wealth our society generates.  I will explore changes to make that more likely in future posts about governance.  But first, I will explore changes that would make our tax system better fit its purpose.