Under Educated Secretary of Education

Margaret Spellings has recently made a statement which proves that she is, as is usual for the Bush administration, unqualified for the job she holds (Secretary of Education). She asked, why do college tuition costs outstrip inflation?

The answer is simple economics. The inflation rate reflects both the cost of goods and services which are subject to productivity improvements and those that are not. The two offset each other in a way that keeps the rate of inflation lower than it would have been in the absence of productivity improvements. Educational delivery. although new methods have been developed, has proven resistant to productivity improvements. When schools use large lecture hall classes taught by senior faculty, aided by recitation sections taught by graduate students, parents and students complain. When courses are taught via TV or the internet there are also complaints.

All of this leads to costs that outstrip the rate of inflation. The same holds true in the public schools where parents want smaller class sizes, more counselors and increased extra curricular activities.

If MS. Spellings does not understand these simple facts of Educational Economics, perhaps, she should give up administration and become a teacher of something that does not require economic understanding.

Hypothesis vs. Theory

Once again, we are faced with people trying to foist an Hypothesis upon us claiming that it is a Theory. An hypothesis is an unsupported statement of what you believe to be an explanation of a phenomenon. It does not yet have supporting evidence in favor of it. After significant research and evidence an hypothesis can become a theory. In order to reach this stage there has to be significant evidence that the original hypothesis can explain and often predict. In the absence of this proponderence of evidence an hypothesis never becomes an accepted scientific theory. The fact that a theory does not appear to explain every phenomenon does not invalidate it.

It is clear that Intelligent Design does not have the body of evidence to honor it with the title Theory. It is an hypothesis. Evolution, on the other hand, has developed a strong body of evidence which supports its basic tenant. It is, therefore, an accepted scientific theory.

If we were to give credence to every unproven hypothesis we would still believe in the sunspot theory of economic cycles and, like Lysenko, that acquired traits can be passed down through the generations.

We should ask ourselves if we would want our scientists trained in a country that rejects scientific evidence in favor of “Intelligent Design.” Let us put ID where it belongs: In the philosophical and religeous realm. Let us keep it out of science.

Godless? Christian? What?

I've always had a problem when people say that we need to put G'd into our public life. Given the diversity of our population, are we talking about the G'd of the Hebrew Bible, the G'd of the Christian Testament, The G'd of the Koran, or the Multifaceted Hindu G'd? The fact is that any of the holy writings can be used to justify almost anything we want. All we need is to pick and choose.
When some claim that the US is a Christian nation, again, we have to ask: what kind of Christian? There are old line churches such as the Episcopal or Presbyterian churches, the new line fundamentalist churches, and of course the oldest churches: the Roman Catholic and Greek Orthodox. They all interpret Jesus' teaching in a different way.
It appears that those who want religion in government are really saying that they want their religion in government. Just look what is happening at the Air Force Academy. Do we really want the USA to be as narrow minded and prejudiced as those academy bigots?

A Change in direction

When I started this BLOG I had intended to keep all of my comments in the economic realm. However, as I survey the political landscape and the social changes that are being proposed for the USA, I believe that I must speak out in the name of reason. As a result, I wrote the "Ask the Framers" piece. From time to time, I will also be writing other pieces which have nothing to do with economics, but everything to do with social justice. Please bear with me and if you agree or disagree, post your comments so that I can respond.

Ask the Framers

On a recent trip to Washington, my wife and I were fortunate enough to stop at the Jefferson Memorial. While reading the writings etched into the walls I realized that the answer to the arguments regarding the strict construction of the constitution based upon the intent of the framers was written by the framers. We only need to read what they said and wrote. For example: When the strict construction people say that the constitution needs to be interpreted according to the 18th century standards that existed when it was written, we can reply with Jefferson’s statement “…laws and institutions must go hand in hand with the progress of the human mind. …institutions must advance to keep pace with the times… [or] …we might as well require…civilized society to remain ever under the regimen of their barbarous ancestors.” When the it is pointed out that the constitution does not use the phrase separation of “church and state” and school prayer should be allowed, we only need to look to Jefferson for guidance. He wrote: “No man shall be compelled to frequent or support any religious worship…” We progressives can go back to the basics by framing our own moral arguments using the words and intent of the framers of the constitution.

We Own The Government

Conservatives have, in the minds of many Americans, been able to draw a line between the people and the government. They use phrases such as “It’s your money not the government’s”, “Ownership”, and “Do you want bureaucrats making your decisions” to draw a distinction between government and the citizenry. In foreign policy they tout democracy while at the same time using language that implies we don’t have it at home.

Progressives need to build on Lincoln’s “Government of the people by the people, and for the people…” comments to restore the American people’s faith in our system. We own social security, we own the congress we elect, we own the rules and regulations that enable us to breathe clean air and drink potable water.

Economic regulation is not designed to stifle growth but rather is used to ensure that we have the benefits that competition can bring. Regulations are not designed to ensnare but are written to stop those with economic power from using it to unfair advantage.
We are the government and our ownership society means we own the government

Free Trade Is Not Free

The problem with "Free Trade" and how it is devastating to so many developed and undeveloped economies is not the fact that it exists. The problem is that true free trade does not exist. The third world countries that are importing lower priced food from the first world are not suffering from free trade. They are suffering from the subsidies that the developed world's governments give to their farmers. The job losses to lower wage countries suffered workers in the USA and EU are to some extent the result of fixed exchange rates by China, South Korea, and India. Some have estimated that the Chinese currency is undervalued by as much as 40%. If properly valued, the cost of Chinese goods would be higher and maybe EU and USA companies could keep more jobs at home. Fixed exchange rates and subsidies are neither free nor supporting the gains to all that are obtained from comparative advantage.

Social Security and the Politics of Greed

The Social Security debate is bringing to light the Right Wing’s true colors; the colors that decorate the flag of the politics of greed. Just look at the President’s arguments every time he addresses groups of senior, and near senior, citizens. He looks at the crowd with bewilderment and says “What are you complaining about? This won’t have any effect on you!” He just doesn’t get it! He and his cohorts cannot understand anyone who looks out for anyone but themselves.

Greed permeates everything they do and everything they say. Tax cuts for the rich, refusal to look at elimination of the income cap on the Social Security payroll tax, elimination of the estate tax, and almost every other program they propose is based upon the concept that greed is good. To many Americans it is only in the Social Security debate that this is becoming obvious.

As progressives, we need to emphasize that greed and the market system do not go hand in hand. That is why Adam Smith used the term “Enlightened Self Interest” rather than greed. Smith, the holy god of the right wing, understood that greed led to self destruction of the system. He understood that “Enlightened Self Interest” meant that there was something more than pure greed involved with looking out for oneself. We need to look out for our fellow human beings, as well as looking out for ourselves.

Just as they pick and choose sections of the religious bible that support their arguments for repression of free thought, they select the portions of Smith that imply “…greed is good…” We need to use the same sources to show how the politics of greed is neither capitalist nor religious. It is, in fact, a method for creating autocracy with a spurious religious foundation.

Don't Reject Adam Smith

Too often, progressives make the mistake of rejecting the work of Adam Smith out of hand. This is a mistake. The problem is with both the Neocons and the libertarians in that they don't understand the assumptions underlying Smith's work. Smith envisioned a system of perfect competition. i.e. so many buyers and sellers of a good or service that not one had the ability to influence the market price. As a result, both capital and labor would be paid according to their contribution to the process. The problem arises from the fact that the real world is made up of less than perfect markets. In a less than perfect world, monopoly selling power allows for higher prices and monopsony buying power allows for below market wages.This combination allows the rich to get richer and the keeps the poor down.
In the words of Mel Brooks "It's fun to be King!!"

World Depression

Daniel Arnold [Personal Investor - February 2004] has forecast a future depression based upon a correlation between demographics and the Dow Jones Industrial Averages. Although I agree with his conclusions, I disagree with his methodology. Mr. Arnold seems to forget that correlation does not mean cause and effect. The real reason for a possible future depression is multifaceted.

First, we must remember that the economic engine driving the world economy is the American Consumer. If anything happens to this consumer’s ability to spend the whole world economy can go into a tailspin.

Second, middle class American Consumers are getting more and more hard pressed to meet their everyday obligations. They are relying on multiple incomes in households to a greater extent every day. If they cut back their spending economic shrinkage is inevitable.

Third, as manufacturing jobs move overseas we find that the economy is producing less in the way of real (tangible) goods. Tangible goods create real wealth. The service economy, on the other hand, produces only financial or paper wealth. We cannot have a thriving economy composed of Wal-Mart and Mc Donald’s employees. They don’t earn enough to keep even those low cost establishments going.

Fourth, real wealth can be generated through research and development creating new and innovative products. However, America’s best and brightest are not going into the sciences and engineering. They are going to business schools where their financial wealth can be manifested more rapidly. Just look at our engineering and science programs. They are generally populated by foreign students. But, foreign applications to our schools are beginning to fall. While there are many reasons for this, we should ask ourselves if we would want our scientists trained in a country that rejects scientific evidence and instead favors “Intelligent Design.”

Fifth, an integral part of our economy is government spending. However, the engineered deficit which took Social Security surpluses and gave them to the wealthy as income tax cuts has made sustained government spending on worthy programs almost impossible. In the current environment where tax increases are rejected, the credit worthiness of the USA comes into question. This is made even worse by a President who points to the government bonds in the Social Security Trust Fund and calls them worthless pieces of paper. If the world begins to see this as America’s attitude towards its obligations, we may find ourselves unable to refinance our current debt let alone maintain an on-going deficit.

Sixth, any depression would be long and deep because the engineered deficit created a situation where a “New Deal” approach could not be financed. Without the infusion of federal money there would be no way out of a depression.

PROGRESSIVE INCOME TAXES EQUALIZE THE PAIN

Tax policy usually relies on either of two principles: The “Ability to Pay Principle” or the “Benefit Principle”. Both of these forget the fact that paying taxes is painful. If possible we would all like to pay as little as possible to the various levels of government. However, as long as we have to support our government we should make sure that when we pay taxes we are “equalizing the pain” to each of us. The problem with “Flat Taxes”, “Value Added Taxes”, and the various consumption taxes is that they tend to distribute the pain to the lowest economic levels in society. To see how this applies we need to look at the satisfaction people get from having income and/or wealth.

It is well known that as people obtain more and more of a good or service the satisfaction they get from the last unit of the good is lower than the satisfaction received from the immediately prior unit. In economics this is known as the Law of Diminishing Marginal Utility. This “law” applies to income and wealth as well as the consumption of goods and services. The more income or wealth you have, the less each additional dollar of income or wealth means to you in terms of your over all satisfaction.

Applying this to tax policy we can see that a 20% flat tax would cost $4,000 to a person with a taxable income of $20,000 per year and $20,000 to a person with a taxable income of $100,000 per year. In terms of the ability to enjoy the fruits of the economic system, the $4,000 to the low income individual is a much greater sacrifice than the $20,000 is to the high income individual. Equalizing the pain of paying taxes would require that the low income person pays a lower tax rate or the higher income person faces a higher tax rate or some combination of lower and higher rates.

Progressive income taxation is not a “soak the rich” scheme. It is the only system which has the capability of equalizing the pain of supporting government.

Ship Out Jobs and Ship Out Intellectual Property

Giving Away Intellectual Property

Recently, American businesses have been complaining that their production processes and intellectual property are being stolen by Asisn manufacurters. This is evidenced by the high volume of counterfeit goods coming out of China and, to a lesser extent, other Asian countries.

However their complaints have to be mitigated by the fact that when businesses decide to open their manufacturing processes off shore they need to assess the risk of having their proprietary processes stolen. Any business decision requires an assessment of risk. Complaining that they are being counterfeited means that they did not do a proper risk assessment, or they believed that the government would bail them out.

The choice of a manufacturing site must include an evaluation of the intellectual property protections at the off-shore site. Any company that did not know that China has limited respect for intellectual property did not do its due diligence properly and deserves what it gets.

Making Markets Work

The dominant form of economic philosophy since the 1980’s has been the market system. The problem with this approach is that its advocates assume that the market always produces the most efficient solution to problems. If all of the costs and benefits of an action were included in the market process they might have a point. However, markets do not take many costs and benefits into account. These excluded items are called benefit and cost externalities.

An externality is any cost or benefit generated by a market action that is not embodied in the market’s decision making process. For example, in the past Texas considered Polio immunization to be a private benefit to the person vaccinated. As a result, many children were not vaccinated. This led to the external cost of having children in Texas exposed to Polio. As we all know, no vaccine is 100% effective. This means that some vaccinated children would contract Polio even though they were vaccinated. However, if all children had been vaccinated the probability of anyone contracting the disease and passing it on would have been very low. There is a societal benefit from universal vaccination that is not taken into account by the private market. Private markets would not have eliminated the scourge of Smallpox.

In addition, business does not include external costs in the cost of production. For example: An electrical utility using high sulfur coal to produce electricity in Ohio doesn’t include the cost of dead fish in the Adirondacks or the reduced life of a Pennsylvanian’s car finish in its production costs. These external costs are bourn by New York sportspeople and Pennsylvania car owners.

The problem is not that markets do not work. The problem is that as currently constructed there are too many externalities. Attacking markets will, to the average American, appear to be an attack on our very way of life. This approach will not get anyone anywhere in the modern world. There is a need to aim policies and attacks at improving markets by finding ways to internalize the externalities. Markets need to be modified to place external costs into the costs of production and external benefits need to be incorporated in a manner that makes sure that the benefits are realized

Workers Are Falling Behind

Economic Recovery has become the latest claim to fame of our NEOCON government. They point to official figures showing a growth in the country's output (GDP). They talk about growth in the number of jobs measured by the numbers of employees that employers are reporting. If you listen to the minions of the right you would believe that we live in what Dr. Panglos call "..the best of all possible worlds.."

However, the rose colored picture takes on a different light when we dig a little deeper into the recovery. on January 5th of this year the Morning Call of Allentown, PA reported that wages were not keeping up with inflation. This means that people's real ability to spend on goods and services is falling. How are they then able to maintain their living standards? The answer is simple: They are dipping into savings and they are going deeper into debt. In many instances people are using Home Equity credit lines to maintain their current consumption spending. They are in fact mortgaging their homes to buy movie tickets, eat out, buy Christmas gifts, and go on vacation. Our NEOCON leaders keep saying that being stake holders will allow people to have a better future. However, if that stake holding is mortgaged for current consumption the retirement years will be even bleaker than the proposed cuts in Social Security would warrant. Re-mortgaging means that people who should have had their homes paid for at retirement time, will still have to pay debt while they experiencing lower incomes due to retirement.
NEOCONS tell us about job growth. However, the employment figures do not say how many of the jobs are full time and how many are part time. Several months ago the Philadelphia NPR radio station had a morning program where the guests talked about the growth in jobs. A listener called the program to find out how the number of employed people were counted. He stated that he had four part-time jobs with 4 different employers in order to make a full time income. He asked: "...How many times am I counted in the employment figures..?" After hemming and hawing and trying to distract the listeners with comments about whether the listener was paid on a W-2 or a 1099, the right wing guest admitted that the statistics would count the listener as four employed people. Given this situation, is anybody rally able to say that the country is better off?

The NEOCON Nirvana has turned out to be the 19th century. Workers' requiring multiple jobs to make ends meet, multiple income households, and falling real wages are leading the U.S.A to third world status. The third world is a place where the rich get richer and "...to hell with everybody else..."

Wall Street Welfare

The NEOCON approach to Social Security is to tell us that the current surplus in the Social Security Trust Fund is irrelevant. To some extent they have a point. Whenever pensions are invested in the very organization that is issuing the pension you have what is called an unfunded plan. Since Social Security funds are invested in US Government Notes and Bonds we can say that Social Security is unfunded. That is why regular pension plans have a limit on the percentage that can be invested in the company sponsoring the plan. Bankruptcy would leave you without a pension if all you had was the company's guarantee or investment in the company's stocks and bonds. Look what happened to the ERON employees who kept their 401k money in ENRON stock.

Governments have an easier time of it when getting out from under their obligations. They merely need to change the law. If you want to get away from paying the debt to Social Security you merely need to declare that there is a crisis and tell people that they can do a better job investing their own money than government can. Then change the law. Unfortunately, many younger people who do not know history seem to fall for this argument.

Privatization can be called the "Wall Street and Corporate Welfare Act". It will help brokers, investment advisors, and current shareholders. In addition, placing government (Social Security) funds into the stock market will tend to raise stock prices. This would help firms with under funded pension plans meet their obligations through higher stock prices. It will also help top executives meet the goal of rising stock prices and increase their incentive compensation. People, on the other hand, could find that their investments are withering due to high transaction costs and fees. This is what happened when Chile converted its Social Security to private accounts.

Immigration and the Anti-Market Right

Time and again the NEOCON right asserts that they are the defenders of "Free Market" ideas and the left are anti- market socialists. However, the right's support of the "Guest Worker" program and other measures to bring in cheap foreign labor is about as anti-market as any policy can be.

The claim is "Americans won't do the jobs that foreign workers are willing to do." This is a fallicy. The truth is that Americans are not willing to do those jobs at the prices (wages rates) that the employers want to pay. In a free market, this imbalance of the quantity of labor supplied and the quantity of labor needed would be accomodated through rising wages. This higher wage rate would bring out more workers. However, because the businesses involved can make higher profits through low wage rates, they ignore the immigration and hiring laws. In fact, they lobby to make their illegal practices legal.

The right seems to believe in free markets only when it suits them. They constantly emphasize the efficiency of free markets. They claim that there are no external costs that the market can't handle. However, when the free market says that they need to raise wage rates, they claim that there is a need to ignore the marketplace and change our immigration laws.