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.

Will Politicians Doom Our Economy?

This Guest Post is a copy of comments by “Dryly 41” about Why the Economy Isn’t Doomed, an article whose theme is, “challenges have been with us before and have preceded eras of broadly shared prosperity?”

The article starts with the positives, “slowing health-care costs, rising college graduation rates, a shrinking federal budget deficit [and] we’ve finally become aware of just how lousy the past several decades were for the average U.S. worker.”   The greatest negative, it says, is intelligent technology from checkout machines to driverless cars that “may bring about profound declines in employment.”   But that technology might instead be the greatest positive if more of our workers have “the education to take advantage of these changes.”  The conclusion:  Economic growth could turn out to be high, its benefits could be felt throughout our society, and “government could promote such growth by spending on infrastructure, education, and research and development.”

There is at this time no prospect that our government will take the indicated action.  Dryly 41 has thoughtful things to say about that.


We had banking panic/depressions in 1819, 1837, 1857, 1873, 1884, 1893 and 1907 before The Great Depression. The prevailing approach to finance was “laissez faire”.

The New Deal under FDR put an end to “laissez faire” and adopted a “strict supervision” approach to finance. They kept the 1927 McFadden Act restrictions on interstate branch banking that President Calvin Coolidge signed into law. The purpose of that legislation was two-fold. They wanted to protect small banks form large bank competition. But equally important they wanted to curb the economic and political power of large financial institutions.

The Glass-Steagall Act introduced deposit insurance to curb bank runs that plagued otherwise healthy banks. But they recognized the “moral hazard” that bankers would have with the use of what Louis Brandeis called “other people’s money” with the government guarantee. To deal with the “moral hazard” problem they separated commercial and investment banks, and restricted speculative activities that banks could engage in. To meet the fraud in the stock market they enacted the Securities Act and enforcement legislation.

It worked. At least until Ronald Reagan started the march away from “strict supervision” back to “laissez faire” by deregulating the Savings and Loan banks. Notwithstanding the disaster of 1,000 of some 3.200 S & L banks failing, the march back to “laissez faire” continued on a bi-partisan basis. Clinton, Rubin and Summers, Greenspan with Gramm, Leach and Bliley repealed the “strict supervision” measures designed to deal with “moral hazard” in 1999. Legislation was enacted to repeal the McFadden Act and the Bank Holding Company Act of 1956 restriction on interstate branch banking in 1994, which paved the way for Too Big Too Fail banks.

The 78 years and 11 months between October 1929 and September 2008 was the longest period of financial stability in our history.

So which do you prefer: “strict supervision” or “laissez faire”?

One might be more optimistic if it were recognized that our economic problems were caused by self-inflicted policies and we corrected them.

First: In 1946, the Gross Federal Debt amounted to 121.7% of GDP. The Truman administration reduced it to 71.4%; Eisenhower to 55.2%; Kennedy/Johnson to 38.6%; Nixon/Ford to 35.8%; and Carter to 32.5%.

Then came Ronald Reagan with “supply side” tax cuts.  His Budget Director said they were a “Trojan Horse” to reduce the top rates for the wealthy. Inequality began. The class war was declared. Eight years of deficits raised the Debt to 53.1%. Four more years of deficits under Bush I increased it to 66.1%.

Clinton raised taxes, had 4% unemployment, balanced budgets, and reduced the Gross Federal Debt from 66.1% of GDP to 56.4%.

Then Bush II had two rounds of “supply side” tax cuts in 2001 and 2003. V-P Cheney explained to Treasury Secretary Paul O’Neill: “Reagan proved deficits don’t matter.” When O’Neill continued to object over the second round Cheney fired him. Eight years of deficits raised the Gross Federal Debt from 56.4% of GDP to 85.1%, and left a crippled economy.

No mention in the article of “supply side” even though since Washington in 1789 no political party has inflicted this harm on the nation. It was not for some great national purpose like the Revolutionary War, the Civil War, WW I, or, WW II. All those trillions were borrowed to fund tax cuts for the wealthy who were most able to pay their fair share of taxes.

The most mysterious thing is how members of the media call Ronald Reagan and George W. Bush “conservative”. This was the most radical departure from traditional Republican tax and fiscal party in history. There is no way Calvin Coolidge, Herbert Hoover, Andrew W. Mellon and Reagan and Bush II are “conservative”.

We should consign “supply side” to the dust bin of history. It was quite harmful to the nation.

I wish I could be as optimistic as the author. Our political system is broken and it matters.

The Military-Industrial Complex

In The Federal Budget and GDP and The Canary and the Colly Bird I said I’d take a flashlight, calculator and canary to investigate the “Military-industrial mine-shaft that keeps us in a ruinously costly perpetual state of war”.  There’s a lot of camouflage but my flashlight shed some light on the business results of what I’ll call Military Operations Inc (MOI).  The canary was distressed at times but it’s OK now, maybe because I didn’t yet take it very deep.

What I mean by camouflage in this context is none of the numbers I found so far can entirely be trusted.  As the Congressional GAO repeatedly says: “serious financial management problems at the Department of Defense make its financial statements unauditable.”  Nonetheless, the following numbers are sufficiently OK to show relative sizes. To set them in context, DOD spending is 20% or more and DOD plus non-DOD military spending 30% or more of federal spending, i.e., around half of total estimated Federal tax revenues.  Military spending grew 9% annually since 2000, much faster than GDP, and now accounts for 5%-8% of GDP.

Our stated military spending, which exceeds the next 20 nations combined, is actually a lot higher than the $711B for 2011 shown below.  That number is said to include War on Terror spending but I doubt all those costs are included.  Additional spending on defense-related programs, e.g., Veterans Affairs, Homeland Security, and nuclear weapons maintenance brings the total above $1T and even to $1.4T with interest on debt incurred in past wars.   We have military bases in at least 150 countries, almost 1.5M active military personnel, an additional 100K DOD personnel and substantially more than 100K contractor personnel in Iraq and Afghanistan.

US and Other Nation Military Spending 2011

Spending dropped after the collapse of the Soviet Union but greatly increased following the 2001 terrorist attack that killed 3,000 US civilians.  The canary was distressed to learn that the War on Terror response to that attack, recast by the Obama administration as Overseas Contingency Operation, has so far resulted in over 6,500 US military personnel killed and 50,000 wounded.  The bird may not have recovered if I’d been able to find dependable counts of Iraqis, Afghanis and others killed and wounded.

Although the canary sees ratios, it is fundamentally innumerate.  It recovered while I returned to my calculator.  The numbers in the chart below are understated, as noted above, but they do correctly illustrate the spending pattern.  A 2011 Congressional report estimates the total cost of the Iraq and Afghanistan wars will be $1.8 trillion.  An academic report the same year that includes other areas of related spending estimates $5.4 trillion.

Total US Defense Spending since 1947

The canary showed new signs of distress when I examined the spending rationale.  When President Bush declared war on terror he said it “will not end until every terrorist group of global reach has been found, stopped and defeated.”  The canary was troubled because:

  • Such a war can never end
  • The justification for the first big operation was false – satellite images said to be of Iraqi factories for enriching uranium were not
  • That operation was followed by ones the public barely questioned in Afghanistan, the Philippines, Somalia, Trans Saharan Africa, Pakistan and Yemen
  • We are repeatedly told to be prepared for future actions against North Korea and Iran

The canary recovered while I looked at more numbers.  We can’t know for sure where the money goes, but the next chart gives a sense of the breakdown.  Pay and housing for military personnel fluctuates fairly closely around $100B.  Spending on weapons and procurement increased steeply during the Vietnam War, again toward the end of the Cold War and again from the start of the War on Terror.   Spending on war operations, in other words MOI’s revenue from conducting war, which also grew during the Vietnam War and Cold War escalation, increased dramatically in the past decade.

Defense Spending Composition since 1962

Defense R&D spending remains relatively consistent.  I’ll come back to this another day because it yields some civilian benefits, e.g., the Internet.  Most of the $700B to $1T we spend on defense is simply a burden on income tax payers, a tax whose only rationale is to prevent the possible occurrence of negative things.

What, then, have I learned on Day 1 of this exploration?  MOI’s Overseas Contingency Operation (OCO) product line is yielding greatly increased revenues.   The obvious next question is the OCO product line’s longer term potential in the “negative things” market.   How much further can OCO revenues be grown and for how long?  To approach answers, I will next explore OCO product strategy in the context of MOI’s overall business strategy and organizational structure.  I’ll carefully watch the canary for signs of distress.