economics

I'm not familiar with Clay Shirky, but after this article in Wired, I want to read up on his work. I've heard his name frequently, but this article reminded me of the many many flaws with classical economics - flaws that led me to totally disregard the entire field of economics for many years.

Pink: Which is nonsense. Both of us cite research from University of Rochester psychologist Edward Deci showing that if you give people a contingent reward—as in “if you do this, then you’ll get that”—for something they find interesting, they can become less interested in the task. When Deci took people who enjoyed solving complicated puzzles for fun and began paying them if they did the puzzles, they no longer wanted to play with those puzzles during their free time. And the science is overwhelming that for creative, conceptual tasks, those if-then rewards rarely work and often do harm.

Shirky: You talk about the laws of behavioral physics working differently in practice from what we believe in theory.

Pink: Yes, often these outside motivators can give us less of what we want and more of what we don’t want. Think about that study of Israeli day care centers, which we both write about. When day care centers fined parents for being late to pick up their kids, the result was that more parents ended up coming late. People no longer felt a social obligation to behave well.

The faster we can move beyond outdated ideas of what motivates people to action, the better.

After I studied economics, I learned that most people who talk about the "free market" have no clue what they are talking about. Those who want government to operate exactly as would a business do not understand how the motivations of government are different from business, necessitating different approaches to solving the different problems that these entities are expected to resolve.

After visiting Africa and living briefly in the Middle East, I understood that there is no magical "free market." Markets result from infrastructure (provided by government or some other non profit-maximizing entity) and often anti-trust regulations.

This is background for an important article I highly recommend -- "Wealthcare" by Jonathan Chait in the September 23, 2009 The New Republic magazine... yeah, I meant to write about it last year.

Right wing radio hosts, Fox News, and a variety of other conservatives who grew up in Reagan's revolution have internalized a whole lot of talking points about "free markets" that they parrot at every opportunity - but they have no sense of the many well known problems of deregulation. The problems range from externalities like pollution to the natural monopolies of broadband and cable TV (that I spend so much time working on).

Chait, who is reviewing two books about Ayn Rand, tackles her legacy:

For conservatives, the causal connection between virtue and success is not merely ideological, it is also deeply personal. It forms the basis of their admiration of themselves. If you ask a rich person whether he ascribes his success to good fortune or his own merit, the answer will probably tell you whether that person inhabits the economic left or the economic right. Rand held up her own meteoric rise from penniless immigrant to wealthy author as a case study of the individualist ethos. "No one helped me," she wrote, "nor did I think at any time that it was anyone’s duty to help me."

But this was false. Rand spent her first months in this country subsisting on loans from relatives in Chicago, which she promised to repay lavishly when she struck it rich. (She reneged, never speaking to her Chicago family again.) She also enjoyed the great fortune of breaking into Hollywood at the moment it was exploding in size, and of bumping into DeMille. Many writers equal to her in their talents never got the chance to develop their abilities. That was not because they were bad or delinquent people.

If I were a right winger, I would likely attribute my success in sports photography to all the hard work I put in -- hundreds of hours of practice without being paid, being willing to go weeks without a day off, etc. But I recognize that in reality, many put in that hard work. I got picked up at the U as a shooter because I was incredibly lucky in timing. Without my hard work, the luck would have been worthless, but the luck was still required ... if I didn't run into certain people at a time they just happened to need a certain kind of shooter, I would not be the photographer I am today.

Getting my foot in the door was mostly luck. Keeping my foot in the door required skill and hard work, so I understand why conservatives harp on that. But to deny the luck factor missing a key part of the equation.

It is not socialism to enact policies intended to create equal opportunities for everyone (funding public education, rural electrification and broadbandification). In many ways, these policies improve the efficiency of markets. But talk radio wants us to believe the U.S. is the land of opportunity and left wing policies want to punish the successful. The truth is that decades of conservative reforms have greatly damaged our dreams of poverty-to-riches opportunity in the US:

In reality, as a study earlier this year by the Brookings Institution and Pew Charitable Trusts reported, the United States ranks near the bottom of advanced countries in its economic mobility. The study found that family background exerts a stronger influence on a person’s income than even his education level. And its most striking finding revealed that you are more likely to make your way into the highest-earning one-fifth of the population if you were born into the top fifth and did not attain a college degree than if you were born into the bottom fifth and did. In other words, if you regard a college degree as a rough proxy for intelligence or hard work, then you are economically better off to be born rich, dumb, and lazy than poor, smart, and industrious.

We know this intuitively - perhaps the best example is talk show hosts or pundits who are consistently wrong with most of their predictions and yet remain very influential. Those who pushed the Iraq War lies the hardest continue to get more TV and radio time than the doubters who have been proven right regarding the Iraqi threat.

Is income really a measure of productivity? Of course not. Consider your own profession. Do your colleagues who demonstrate the greatest skill unfailingly earn the most money, and those with the most meager skill the least money? I certainly cannot say that of my profession. Nor do I know anybody who would say that of his own line of work. Most of us perceive a world with its share of overpaid incompetents and underpaid talents. Which is to say, we rightly reject the notion of the market as the perfect gauge of social value.

But it is important to understand why some on the right remain outraged at how much the rich are taxed. They are not incorrect, but the reason they continue paying so much in taxes is that the U.S. has become so incredibly stratified on the basis of income that even as tax rates drop, the rich pay more because their incomes have increased so incredibly much:

The reality of the contemporary United States is that, even as income inequality has exploded, the average tax rate paid by the top 1 percent has fallen by about one-third over the last twenty-five years. Again: it has fallen. The rich have gotten unimaginably richer, and at the same time their tax burden has dropped significantly. And yet conservatives routinely describe this state of affairs as intolerably oppressive to the rich. Since the share of the national income accruing to the rich has grown faster than their average tax rate has shrunk, they have paid an ever-rising share of the federal tax burden. This is the fact that so vexes the right.

The entire article is well worth reading.

If there is something that Americans love to do, it is bitch about taxes. I have to wonder if Republicans would have the support of any non-evangelical Christians were it not for them positioning themselves as the party of reducing taxes (irregardless of their reckless fiscal record, they certainly act like they are the party of reducing taxes).

In Minnesota, Pawlenty cites his record of not increasing taxes (which is bullshit, he renamed some taxes to fees and raised them and he avoided raising taxes by cutting funds to cities who then had to raise taxes to avoid laying off cops and firefighters) as his greatest accomplishment. Of course, he didn't really reduce spending, that might have been unpopular. He just refused to finance the spending bills he signed, compounding problems for the future.

Let's address this problem head-on ... are we overtaxed? Do tax increases kill businesses and hurt the economy? In MinnPost, Dane Smith smartly asks, "If taxes are bad for us, then how did we get so healthy, wealthy and wise?"

Since 1909, and with big spurts in the 1930s and 1970s, the federal-state-local government's share (anti-tax types like to call it "take") of income in Minnesota and the United States grew steadily and sharply, from about 5 percent to 35 percent.

A seven-fold increase in taxes should have left us a howling wasteland, if one subscribes to the anti-government theory of anti-tax zealots. We should have less wealth, no creativity, diminished entrepreneurialism, little technological innovation, and no incentives to do anything but seek or wait for the next government check.

The exact opposite happened as government grew.

I have to assume that the whole less-government-is-good-government approach is only possible in a culture that does not know its history. Our government grew in reaction to the "excesses" of the unregulated capitalism.

The EPA was not a liberal conspiracy to limit corporate profits, it was a reaction to the poison that many businesses spewed into the environment. And, despite what I believe to be overly lax enforcement, it has greatly improved the environment. From air pollution to previously dead lakes, the environment around us (and therefore us as well) is healthier than it was before government forced businesses to stop poisoning us (because it really is more profitable to poison us that to mitigate pollution - we even have a name for it: negative externality).

I was fortunate enough to go to college when I was 18 in part because I was not working in mines when I was 8. My parents were not bankrupted taking care of my grandparents in part because of social security.

Things certainly could be better. Health insurance providers should not be allowed to just drop people or refuse to fund necessary medical treatments because they want to maximize their shareholders' dividend.

I can just imagine that if anyone still reading this disagrees with me, they are fuming that I would choose to encourage policies that will just drive all the rich people out of the state or country or whatever. Fortunately, Daniel Gross just tackled this at Slate with "Who is Killing America's Millionaires?"

In May, the Wall Street Journal op-ed page argued that millionaires fled Maryland after the state legislature boosted the top marginal state income tax rate to 6.25 percent on the top 0.3 percent of filers. "In 2008 roughly 3,000 million-dollar income tax returns were filed by the end of April," the Journal notes. "This year there were 2,000, which the state comptroller's office concedes is a 'substantial decline.' " The Journal uses this small sample to warn the federal government and states with progressive tax structures and lots of rich people—New York, New Jersey, California—to heed the lesson. Tax the wealthy too much, and they'll leave.

Such logic makes sense to the Journal's op-ed page staffers, who inhabit an alternative universe in which people wake up in the morning and decide whether to go to work, innovate, or buy a bagel based on marginal tax rates. But if people were motivated to choose residences based solely on high state income taxes, then California and New York wouldn't have any wealthy entrepreneurs, venture capitalists, or investment bankers—and the several states that have no state income tax, which include South Dakota, Alaska, and Wyoming, would be really crowded with rich people.

He tackles the question from multiple angles, explaining how this particular argument (rich people move from tax increases) is based entirely on specious data and an extremely lazy approach to causality. Having debunked some right-wing stinktank reports myself, I am shocked at just how lazy they are. It is a truism that you can pretty much convince some journalists of any argument and once it is in print in a supposedly neutral source, it becomes fact.

However, if there is evidence that rich people move to avoid taxes, I have yet to see it. Moving takes a lot of effort and there are many variables to consider. I think it more likely that rich people will move to areas with rich cultural life and a high quality of living because they will want to enjoy their wealth rather than say, living in a state like Mississippi where they will have to ship their kids across the country to give them a decent education.

None of this is to suggest that taxes should be constantly increased - there is a point when increased government is not worth it. In the U.S., probably most of us that support a strong role for government in regulating things like pollution and providing health care are less supportive of continuing to spend more of the discretionary budget on the military than any other program. So we recognize tradeoffs. We would rather use our tax dollars to protect our citizens from Medica and Enron than protecting Exxon's business interests abroad.

Further, I believe in some deregulation. For instance, I believe that government deregulation of the airlines and trains (since the 1970's) has been positive on the whole. Again, there are clearly tradeoffs, but I prefer making it cheaper to fly than getting a meal on the flight. That said, there needs to be some regulation - ticket prices to many destinations are again approaching those high prices from the era of massive government regulation because of increasing concentration among the airlines (it is competition that keeps prices low, and competition flourishes from the right policies, not an absence of them).

However, we should be clear about who caused the problems we are currently attempting to resolve. Daniel Gross addressed this in "War on the Rich?.

The Bush team and congressional supporters had seven years to manage fiscal affairs in such a way that they would be able to extend the tax cuts in 2010. But they screwed it up. Instead of controlling spending and aligning tax revenues with outlays, the Bush administration and its congressional allies ramped up spending massively—on two wars, on a prescription drug benefit for Medicare, on earmarks, etc. Oh, and along the way, they so miserably mismanaged oversight of Wall Street and the financial sector that it required the passage of a hugely expensive bailout. Even before the passage of the TARP, the prospect of extending all the Bush tax cuts was a nonstarter. Once Bush signed the $700 billion bailout measure into law, extending tax cuts was really a nonstarter. The national debt nearly doubled during the Bush years. So if you want to blame someone for raising taxes back to where they were in 2001, don't blame Obama. Blame Bush, his feckless Office of Management and Budget directors, his economic advisers, and congressional appropriators like Trent Lott and Tom DeLay.

The Republicans (with some help from the Democrats, but clearly the R's deserve most of the responsibility) pushed the policies that have bankrupted the country.

Have you noticed when pundits try to read the market to gauge political opinion? For instance, some right-wingers claimed that the stock market's dive on Obama's inauguration represented Wall Street disapproving of his policies. Leave it to Jonathan Chait in The New Republic to debunk the Obama-killed-the-market myth with style.

After election day, the stock market dropped. After the stimulus bill was signed, the market tanked. It must have been because Wall Street hates progressive policies.

Sure, unless you realize that those events just might have been priced into the market already. Obama, in case you forgot, was considered a lock before Election Day. (On election eve, Intrade had given Obama a 92 percent chance of winning.) Likewise, the vote that made the stimulus bill a fait accompli took place several days before the bill's signing. The real market-driving news came even earlier, when Obama unveiled his plan. Contemporaneous reports on the market reaction-The New York Times, December 9: "WALL STREET SURGES ON STIMULUS HOPES"-dug up little evidence of fears about socialism.

Continuing with more humor:

It's true! "The Dow fell 332.13 points on inauguration day," noted Barnes, holding this up as evidence that "The market's view is that an Obamanomics-driven economy looks grim." I'm trying to figure out the operating theory here. One possibility is that, before January 20, investors thought Obama would get cold feet, or that maybe President Bush would surround the White House with tanks and stay forever. Alternatively, the markets did know Obama would assume the presidency that day, but got really depressed when it actually happened. Neither of these possibilities speak well of the stock market as a rational gauge of the country's economic future.

But this is the reason it is worth reading: educating people on what the market means! Much like the religion-pushing political right-wingers who cannot recite the Ten Commandments, most of the right-wing pundits who talk about the "market" have no understanding of economics.

Start interlude:

In a recent conversation, I was explaining my theory of why Reaganism and conservatives are so out of touch with reality. It goes something like this:

From the start of this country to the Great Depression, we suffered a difficult econonimc boom and bust cycle where every 10-15 years or so, a whole lot of banks would fail. Enter FDR and his supposedly socialist policies. American capitalism never had it so good. For 40-50 years, the economy hummed along with a whole bunch of regulation from the government.

During this time, an entire generation of people is raised in a time of relative abundance and market-driven prosperity. These people, by and large, have no understanding of the previous boom-and-bust cycles. They just see markets working pretty damn well and start to think about ways of getting the stupid and stodgy government out of the way.

They start repealing some laws in the late 70's and lo - Savings and Loans go boom. This could not have been a market failure, right? Markets don't fail! Markets haven't failed us in decades! Time to remove more regulation.

This is all paired with an unprecedented rise in right-wing media from loosening of the laws governing radio (the Fairness Doctrine), as well as increasing media consolidation and a rise of pundits (who talk a lot more than they think). With Reagan in power, conservative ideology on the march, conservatives increasingly rely on talking points rather than actual knowledge, theory, and research (remember, they created a whole lot of think tanks to create all this theory originally).

Turn to today - many of these people honestly believe the government cannot do anything right because they cannot name anything the government does well (regulating banks to prevent a massive recession is not something you can easily sum up, and even if you could, it would be boring).

End interlude.

Now that we know why most of the pundits have no freaking clue what the "market" is, Chait will explain what the stock market is:

The larger fallacy here is to assume that the stock market is a proxy for the entire economy. Many people realize that the stock market is an imperfect gauge. But it's not just an imperfect gauge of the economy-it doesn't even attempt to measure the economy. Stock prices represent the market's guess at the profitability of corporations. While that's related to the health of the overall economy, it's not the same thing, and sometimes the two diverge sharply. During the Bush administration, for instance, corporate profits soared while wages for most families flatlined.

One clear instance where Obama hurt the stock market came when Tim Geithner announced the administration's financial rescue plan. Stocks dropped that day. Was this a fair indictment of the plan? Or a reaction to the possibility that the government might wipe out shareholders? In other words, was the market drop a signal that Obama's plan was bad for the economy as a whole or just bad for bank stocks? The two propositions mean very different things.

Markets are great things, and when used appropriately can benefit everyone. On the other hand, without regulations, you get shitty markets. Witness Somalia.