Humpty-Dumpty Redefinitions, Magical Thinking, and False Trade-offs
I am on the road and Gene Sperling's book did not reach me, so this post will be respond only to Gene and Jason's earlier posts. It may also be my only intervention as I have to leave the country Thursday to give a lecture in Germany. I apologize in advance if I don't follow up
1. Against Humpty-Dumpty Redefinitions
Gene begins by defining "progressive" in terms of the values of responsibility, upward mobility, and what for short I'll translate as "meritocracy." But the word progressive already has a clear meaning. It is not open to being redefined and limited in those terms.
"Progressive" in American politics has two historical meanings. The first relates to the Progressive era, which was the period in the early 20th century of anti-trust legislation and the rise of public regulatory agencies, such as the Interstate Commerce Commission and the Federal Trade Commission.
The Progressive Era established the principles that private corporate power should be limited, if necessary by busting the trusts, and that even where its existence is tolerated, private corporate interest is subordinate to the public interest. Gene's expressed position against "market interventions" may or may not be good policy -- and in my view it is poor policy in many important areas, including financial regulation, the environment, occupational safety and fair labor standards. But to call it "progressive" is to hijack the plain meaning of a term in use for more than a century.
The second meaning of the term "progressive" relates to the New Deal and its aftermath, and particularly to the coalition that supported labor rights in the 1930s, full employment legislation in the 1940s, and civil rights in the 1950s and 1960s. A hallmark of these movements is that they all stressed the right of collective action, in the defense of rights and the pursuit of justice. Again, this meaning is entirely lost in the way that Gene appropriates the term "progressive values."
In saying this, I do not mean to make an argument either for or against Gene's particular positions. My objection is to the misuse of words. It would be equally wrong to describe the values behind the Wagner Act, the Full Employment Act, and the Civil Rights Act as "market libertarianism." But it would be more accurate to describe Gene Sperling's values as "market libertarian" than it would be to describe them as progressive.
2. Against Magical Thinking
Let us now consider the merits of Gene's basic position. Gene's argument is that certain changes in the U.S. tax code--favoring savings and flattening the rate structure--along with free trade and fiscal responsibility, would be "pro-growth."
By this, I believe he means that these measures would bring about a sustained increase in our economic growth rate ? an increase that would lead to continuing and cumulating improvements in our productivity and living standards.
To begin with, there is no economic theory--not even the neoclassical theory--that can support Gene's apparent argument that flatter taxes or free trade would lead to a sustained rise in the growth rate. The strongest claim that even the most dogmatic advocate of free trade can make, is that it there are some one-time efficiency gains from a reallocation of resources according to comparative advantage. As Paul Krugman himself has stressed, the "dirty secret" of free trade advocacy is that these gains are estimated to be small.
A similar argument holds for flat taxes, or poll taxes, or any of the other textbook thought-experiments beloved by economists. At best, by removing "distortions," they may lead to modest increases in efficiency, and a one-time gain in output. They cannot lead to a permanent increases in the growth rate. It is therefore incorrect, and misleading, to characterize them as part of a "growth strategy."
Gene is not alone in making this mistake; Jason Furman also makes it in his post.
Taking these steps might still be a good idea. But then again, it may not be. The general objection to flat taxes is that there is, actually, no concrete evidence that they work to improve efficiency in the real world, let alone generate a permanent increase in the growth rate. Meanwhile, their imposition may impose unacceptable costs.
Is a crash of the American housing market, and the bankruptcy of millions of middle-class American homeowners, worth a small, hypothetical, one-time efficiency gain from, say, eliminating the mortgage interest deduction? In my view, it is not. (Call me a progressive conservative, if you want.)
But in proposing the radical revamping of our tax structure, I do not see either Gene Sperling or Jason Furman proposing the restructuring of household debts that would be indispensable to effect such changes without inflicting almost unimaginable damage.
To argue that a one-time change in tariffs or internal taxes can permanently increase the growth rate is magical thinking. It partakes of the view that policies you happen to like, or that your friends happen to support, are good things for everyone and for all time. This is a mistake that economists should
scrupulously avoid.
3. Against False Trade-Offs
By the most conventional economic analysis, only three things can permanently raise the growth rate. They are: (1) an increase in the supply of labor, (2) an increase in the rate of capital formation, and (3) an increase in the rate of technological advance.
Setting aside the plainly mistaken arguments about free trade and tax efficiency, Gene and Jason concentrate in their posts on measures that they argue would achieve a higher rate of capital formation. Both would do this by encouraging private savings. In Gene's post, the encouragement would take the form of a tax incentive, what he calls a Universal 401(k). Jason makes a more general argument, that maybe it's a good thing for rich people to have a larger share of the income pie, because they save more of their incomes.
The problem with Gene's proposal is that his inducement to private saving comes straight from Uncle Sam, in the form of a tax break. To use terminology that Gene himself is identified with, it subtracts from public saving to increase private saving. There is no path to any serious increase in total saving here.
Second, even if there were, it is a fallacy (known as Say's Law, and dating back to 1802) to argue that a desire for increased private saving leads directly to increased total investment. The problem is that when you save more you spend less. And when consumers spend less, the economy tanks, incomes fall, and the desired savings isn't realized. Gene and Jason have forgotten this proposition of elementary economics.
Jason's argument has its origins in the Victorian era, when the rich saw themselves as the guardians of frugality and public virtue, while the poor were viewed as feckless and improvident. This view collapsed a century ago with the First World War, except of course among the rich themselves for whom it has always been a favored self-image. But can anyone, looking out today at America's wealthy and the captains of Enron, Tyco, WorldCom, or for that matter Delta Airlines or General Motors, can anyone looking at these people and their companies tell me who, exactly, does this vision refer to?
Back in the real world, we can assess the relationship between inequality and living standards. And there is no reason to accept Jason's premise that the progressive value of equity is in conflict with the value of efficiency or growth. Egalitarian societies outclass unequal ones in many dimensions of economic performance; they do not suffer any deficit in growth rates. For general research on this issue, please feel free to consult the working papers on the web-site of the University of Texas Inequality Project at http://utip.gov.utexas.edu
Do you want higher growth? If so, please recognize that population and technology are much more important than the rate of investment. And that being so, by the terms of the basic theory, here are your choices: (a) have more babies; (b) admit more immigrants, (c) support scientific research and technological innovation. To this one can add that running the economy at full employment is far more effective than either free trade or tax policy in exhausting the potential for one-time efficiency gains. The experience of the late 1990s -- when Gene and Jason held high office -- was ample proof of this and they should be prouder of that achievement than they are.
Finally, what about fiscal responsibility? Another long story, but to put it briefly, if Gene thinks that he can recreate the internet-technology boom, the full employment and the budget surpluses it generated just by jiggering the tax codes and trimming some public spending programs, he is dreaming. I do not begrudge Gene, Jason and their colleagues the success story of the late 1990s. But it can no more be replicated in 2005 than Coolidge's Roaring Twenties could be brought back in 1933. Times have changed, folks, time to move on.
Readers seeking more on this topic may wish to read my paper, "Breaking out of the Deficit Trap: The Case Against the Fiscal Hawks" on the Levy Economics Institute web-site at http://www.levy.org.
I would have liked to see a discussion of progressive economic policy that dealt with our most serious actual problems: low wages and job loss, the decay of infrastructure, our energy dilemmas, the challenge of planning the future of the Gulf Coast after Hurricane Katrina. Apart from a mention of the EITC (which I support, of course) and of job training (which is a joke), I didn't see any of those issues discussed seriously so far.
Perhaps they are dealt with in Gene's book. But if so, they deserve a higher priority in our discussions than they've been getting.
James Galbraith teaches at the University of Texas at Austin.
I will definitely read more of your writing.
--Emma
November 8, 2005 7:12 AM | Reply | Permalink
Do you want higher growth? If so, please recognize that population and technology are much more important than the rate of investment.
I would have expected someone to comment on this little gem by now.
November 8, 2005 7:43 AM | Reply | Permalink
Hallelujah! Someone who doesn't let the fundamentals of progressivism and liberalism be redefined and co-opted! More like this, please.
November 8, 2005 7:51 AM | Reply | Permalink
I don't know if Gene and Jason quite meant all of what James said, but thanks a lot of re-setting the conversation in a direction that can produce a good discussion.
Talking about people and their lives is a better end that the vague term of "growth". And it's more advantageous to our side.
November 8, 2005 7:52 AM | Reply | Permalink
James Galbraith states that if we are to have economic growth, we can do it in only three ways:
If there is any virtue at all to economic growth, it is in increased standards of living. This means that only the third way is at all valid for the benefits of economic growth. In order to maintain our standard of living, economic growth has to match or surpass population growth.
Having more babies to produce economic growth is a fallacy akin to killing someone to prevent him from being murdered, or increasing violence and death to control the population, or establishing right-wing dictatorships to prevent communist dictatorships -- we get the result at the expense of any benefit from the result. People have to eat and otherwise use resources to live, and the overall standard of living includes the standard of living of those additional people.
In fact, as long as we have unemployment (including those who've given up and abandoned the work force, not counted in the official unemployment rate) then increased population cannot possibly produce increased growth sufficient to maintain the standard of living. The productivity of the new persons will be somewhere between zero and the prior productivity, leading to reduced productivity overall.
Leaving economics and going back to what should be basic math and common sense, population growth can only lead to disaster. Our current population depends on fossil fuels, resources that have taken literally hundreds of millions of years to form. We have consumed close to half the amount in the earth in only a couple centuries. Once we reach the halfway point -- Peak Oil -- the extraction of oil inexorably decrease. In the face of not only increased population, but also increased demand per person (in China and India, for example) Peak Oil is going to hit us hard.
Whether economic growth is a Good Thing has to be considered seriously, in the face of consumption of resourses. Unfortunately, influential factions of economics bury the laws of physics as mere technical detail irrelavent to the overall picture.
The one silver lining I see in the upcoming Peak Oil crash is that it may halt global warming before it generates a runaway greenhouse effect.
November 8, 2005 8:27 AM | Reply | Permalink
Talking about people and their lives is a better end that the vague term of "growth". And it's more advantageous to our side.
The word "growth" is clearly being overused and over-abused. It's quite clear (one of these guys finally made it even clearer in a post after Galbraith's) that what's being discussed here is wealth creation, not growth. Immigration doesn't create a whole lot of wealth, although it certainly will increase growth; it's just the wrong kind of growth. Talking about technology is also off the mark, because the question then becomes, "How do you foster technological progress?" I felt this section of Galbraith's otherwise informative post was a let down, even assuming the use of irony on his part. At some point you have to put forth an alternative vision, and "immigration and technology" doesn't do it for me.
November 8, 2005 9:06 AM | Reply | Permalink
Second, even if there were, it is a fallacy (known as Say's Law, and dating back to 1802) to argue that a desire for increased private saving leads directly to increased total investment. The problem is that when you save more you spend less. And when consumers spend less, the economy tanks, incomes fall, and the desired savings isn't realized.
Bingo!!!
I would have liked to see a discussion of progressive economic policy that dealt with our most serious actual problems: low wages and job loss, the decay of infrastructure, our energy dilemmas, the challenge of planning the future of the Gulf Coast after Hurricane Katrina. Apart from a mention of the EITC (which I support, of course) and of job training (which is a joke), I didn't see any of those issues discussed seriously so far.
I don't begrudge the wealthy for being wealthy and wanting to amass more wealth. But the amassing of wealth by a few doesn't benefit anyone other then themselves. There are serious unaddressed questions, especially low wages, job loss and the increasing burden of health care on the average American. This economy is driven by consumption of manufactured goods. The saving of wealth leads to neither consumption or the making of goods to be consumed.
November 8, 2005 9:54 AM | Reply | Permalink
Professor Galbraith,
I find the arguments in your post compelling because they articulate, for those of us who are not economic theorists, a pretty straight-forward and familiar perspective, both with respect to history and to the ways in which economic forces play out in the world most of us understand as real: that is, the world of home, work, and local economies.
As a participant in this discussion, I may be way over my head; yet there are millions of Americans who suffer from the consequences of the various manifestations of magical thinking that pass for sensible business practice in boardrooms around the country.
While I can only speak from the context of my own experience on the creative side of an old, and struggling, manufacturing industry, I'm acquainted with engineers and academics, as well, who know empirically the real consequences of cutting and reorganizing at the expense of sustained investment in intellectual and creative capital.
My understanding of progressivism has always supposed its embrace of possibility as value. A progressive system regulates market forces to the extent that it attempts to instigate as wide an array of possibilities - of new ideas, technologies, improvements - as possible. On my real world level, it means my CEO makes decisions that insure opportunities for creative staff, and indeed every employee, to generate new value, rather than decisions that solely define value according to the limitations of the (current) market, i.e., simply replicating what sells.
I think Progressivism assumes that the means to add value depends upon, but is not solely a function of, wealth or the control of capital. Progressivism recognizes that the means by which markets shape the accumulation of capital and yield value is ultimately self-limiting, without some means to insure broad and equitable access by every member of society to some portion of that capital, and the incentive to create something new, i.e., real value, out of that capital.
And from a political perspective, it also assumes that one consequence of that self-limiting nature is the concentration of political power that attends concentrations of wealth.
If most of us can't argue the more esoteric aspects of this discussion, it doesn't mean that we don't plainly see circumstances for what they are, and recognize fundamental human motivations at work undoing what, to my sensibilities, was a indeed a century of progress.
As I say, I'm way over my head here. But my adherence to a progressive perspective would seem to suggest that the discussion benefits, in the long run, from broader, rather than narrower, participation; and that TPM Café itself represents, in some sense, the very model I'm talking about. Thanks for the opportunity to comment.
November 8, 2005 10:36 AM | Reply | Permalink
I am a bit puzzled by your argument. One of the things that distinguishes the United States from the relatively sluggish European growth ahs been population growth not so much from birth rate but immigration. While the technological argument would suggest the means to great productivity but that is basically getting more out of the same resources or fewer resources. However, and I will agree that I do not have proof of this, but if immigrants are generally more productive that native born residents that increase of the population via immigration will lead to great economic growth.
November 8, 2005 10:37 AM | Reply | Permalink
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"I would have liked to see a discussion of progressive economic policy that dealt with our most serious actual problems: low wages and job loss, the decay of infrastructure, our energy dilemmas, the challenge of planning the future of the Gulf Coast after Hurricane Katrina. Apart from a mention of the EITC (which I support, of course) and of job training (which is a joke), I didn't see any of those issues discussed seriously so far."
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* Low wages - increase the minimum wage and not just by a quarter, by $3 dollars per hour. This will provide incentive for the poor to get off welfare as well as provide a better life for the lower class. I'll still buy tacos if they cost $1.05 instead of 95 cents personally, and I think the same goes for everyone else who buys tacos. And since America has no manufacturing jobs that pay minimum wage left, it doesn't affect the business class as much as they might try to make you believe, is my uneducated opinion. Raising the minimum wage by $3 is walking the talk of religion as well by the way. I do not advocate raising welfare benefits as then you get a flood of illegal immigrants just causing more of the problems you are trying to fix.
* Energy dilemmas - 200 billion in installing solar panels creates
as many if not more jobs than repairing hurricane damage in
new orleans, so if you are concerned with the long term, we
need clean energy. Nuclear energy isn't so clear cut. It doesn't cause global warming, but it's waste lasts damn near forever, but i'd choose nuke over coal any day myself.
* Job loss - mandatory severance pay could be something congress could do to soften the landing of those who lose their jobs
* Katrina - well I for one would not live below sea level near the sea, this is a risk the citizens of new orleans and the insurance companies will have to decide for themselves. Of course FEMA pays for flood damage so us taxpayers are the insurance company. I'd advocate something strange then like building house boats for residents of new orleans with strong anchor chains at the ready since they are basically living in a drained harbor. And I am not that serious but sort of serious about this that it's bound to just happen again at some point especially since global warming will get worse even if we all start driving hydrogen cars tomorrow. jobs vs. environment is only in the short term not the long term, and katrina has shown us this, because katrina is resulting in the Bush Administration not being able to pay down the budget deficit as much as they wanted, which we can see is raising interest rates, contrary to reaganomics theories, and this is shifting investment overseas, so our tax cuts for the winners in America our trickling overseas, creating more losers in America.
* healthcare wasn't mentioned - i believe it is an area that we should do outsourcing. If i had the capital, i'd start my own HMO which flew patients overseas to cheaper health care. Some people do it already on their own -- heart surgery is just as successful in india but 10 times cheaper for instance. And we should be importing nurses rather than letting the market pay them $130,000 per year due to limited supply. Importing doctors as well.
* job training - the government does a good job with student loans. i just applied for one last night in fact using the government web site, it was very easy and efficient to fill out the application. i'm going back to college at age 43 to get a teaching credential so i can teach math, as math teachers are highly in demand, and i myself have a high demand for stable employment and a pension, something i've never had. self employed, i am using technology to my advantage, and i've been able to become a homeowner finally, but i've had to cut out health coverage as i am in a very competitive field. i'd rather teach than spends gobs of time being my own salesman in a super competive industry where "cut out the middleman" is a game constantly played and where the middleman becomes you at some point.
November 8, 2005 10:38 AM | Reply | Permalink
On the other hand, i'm retraining to become a teacher, and i plan to live in the desert in so calif, because of affordable homes and job openings for teachers, as the desert is the only area of so calif with any open space left to grow communities, unless you consider homes getting smaller and growing upwards as you have in new york, rather than outwards.
So i guess that makes me a hypocrite of my own opinion regarding population. A sizeable number of students i'll be teaching will also I think be children of immigrants or at least their grandparents will have been immigrants, many coming to America illegally.
So the issue of population is a pertinent one. It seems to me that both population and technology max out at some point. That they can't continue forever. Some day robots may be the labor force, and humans will be on permanent vacation. But i'm not sure what the economic classes will look like in this futuristic scenario. How crowded the nation will be. etc.
November 8, 2005 10:45 AM | Reply | Permalink
An excellent post, and I agree with most of it. I agree with JB’s points on voodoo nonsense. I'm especially glad somebody finally got to issues of substance, since David Sirota still can't seem to do so.
However, JB’s post did dodge a critical issue on capitalization, which sort of undermines everything else, or at least leaves a glaring hole.
JB rightly mentions three roads to economic prosperity, with number two being: "(2) an increase in the rate of capital formation." In response he discusses personal savings and taxation, which is fine. However, he neglects to mention the market reality that as things stand, only companies able to maximize competitiveness by any means, including outsourcing, layoffs, and rapid foreign market expansion for example, are attractive to investment.
Point being, unless very strong (some would cry draconian) protectionist measures were taken, US companies would be at a severe disadvantage for capitalization compared with competitors including equally capable Western European and Asians. In response many would simply reshape themselves offshore inducing a massive flight of capital even worse than is happening presently, and with that would also go (1) an increase in the supply of labor (tech/white collar) and therefore (3) an increase in the rate of technological advance would also be lost.
JB also wrote: Do you want higher growth? If so, please recognize that population and technology are much more important than the rate of investment which was odd under the title of “against false trade-offs.”
The idea we can chose technology or population growth over capitalization is false. They go hand in hand. Population growth without technology or capitalization leads to a massive service economy with declining quality of life as relative declining wealth generated from innovation is spread ever wider. There is some truth to supply side even of a lot of it is baloney.
In regards to technology, China for example wants to rival the US university system, outputting huge numbers of scientists in an age where numbers are mattering more in research than any cultural free-thinking advantages we may allegedly possess. On that front, Chinese are also training their hard science grads in Western style free-thinking.
I’d really like to hear the progressive solution to capitalization. And I’m a bit tired of seeing the issue dodged or dismissed out of hand.
We can’t simply dismiss or avoid the issue of capitalization in a serious conversation on trade and economic policy generally. It’s intellectually false and politically false since Reaganomics to try and ignore the issue. It’s a serious problem and unless it’s taken seriously all the discussion on economic policy is a big waste of time, because capitalization is the bottom line from the POV of both business and long term economic viability.
I do agree more investment is needed in (c) support scientific research and technological innovation, that full employment is a good idea, and that many aspects of voodoo economics are just plain silly. Having said that, the problem of capitalization remains and is serious.
November 8, 2005 10:53 AM | Reply | Permalink
Dr Galbraith, are you familiar with the Basic Income Guarantee plan? It is an improved version of the EITC when it comes to poverty-reduction and could scuttle the need for a significant minimum wage law in the US, as studies like that done by Neumark and Wascher have shown that minimum wage laws in the US have had questionable effectiveness in reducing poverty compared to more targeted Living Wage laws.
Would you agree that the real issue in globalization is the increasing inter-connectedness where governance in one country affects(for good or ill) others in another country and raises a demand for changes in int'l governance?
Are you familiar with how randomization has been used in Progressa/Opportunidades in Mexico? I think the same sort of randomization could be used to evaluate the effectiveness of minimum wages at poverty-reduction in the under-developed world and I think that we could pair the use of such randomization to phase in the wage-floors with a global minimum wage to reduce the level of competition among under-developed countries.
I also think it would be interesting if we could look into requiring indices for the work-conditions of making the product, indices that would include the average real-value of hourly-wages paid to the workers. This would cater to altruistic consumers that would be willing to pay maybe 10% more for a product that is produced in more worker-friendly conditions. It would also mandate for such conditions to be adequately monitored in all factories that sell their products in the US.
Just some ideas I've been generating over at the Anti-Manicheist that I thought you might find interesting....
dlw
November 8, 2005 1:13 PM | Reply | Permalink
I generally understand and agree with you, James.
Especially about misuse of terms. But on that point - you wrote:
Egalitarian societies outclass unequal ones in many dimensions of economic performance; they do not suffer any deficit in growth rates.
What do you mean by "egalitarian societies"? Aren't you talking about pro-socialist and pro-communist societies? Or do you have a dream that some form of capitalism can be egalitarian without first being at least partially
socialist?
I've commented to David Sirota specifically before that I think even liberal and progressive are redefinitions (maybe not for economists like yourself, but many distinctions will be lost on the less informed). It seems to me that liberals are civic minded capitalists, and progressives are socialists who are afraid of the label.
If you hide the ideas that might be labelled, by your political opponents or by the less informed, as socialism, under a different label and carefully chosen words, your risk obfuscating the ideas to the point of uselessness.
Second, on the issue of technological advance. Do you agree that it is a double-edged sword, in that its macroeconomic effects include the devaluation of labor?
And finally, on this business of capitalization. I was an early contributor to the Linux kernel, which is the centerpiece of what is now called the open-source software movement. On some level, the open-source movement may be viewed as an anecdotal anomaly, but the truth of the matter is that there are two operating systems used pretty much universally in our modern technological world: one produced by a criminal monopoly (Microsoft), the other from the grassroots of highly skilled technologists like myself who could not wait for the market or the powers that be to provide us with an alternative, and with no specific capitalization whatsoever. Because there are only these two artifacts that can even be considered viable in the near term (i.e., the next decade or more), and because their effect is so ubiqitous, what this situation is and how it came to be should matter to economists and politicians alike.
Indeed, Linux is now as much a tool of multinationals as it is still a grassroots movement, but it came to full maturity and viability without that sort of involvement, by and large. The current involvement of the multinationals (e.g., IBM and HP) is that their futures depend on it, and depend as well on its populist roots being nurtured.
But they don't do that as well as they could, or dare I say, as well as they should.
I have trained Indian and Chinese software developers on the fine points of OS-level software development. In addition to working directly with more of them than my own fellow citizens, I used to routinely get email from Indian employees of HP and similar companies, working in India, asking me to tutor them over the Internet in how to write the kinds of software I had contributed. But would HP hire me directly to do the very work they were asking me to train them to do, for nothing? Forget about it.
I can't blame HP or their ilk; they believe they have to compete. I can't blame the Indians or the Chinese - they're doing what WE should be doing - using the power of government to foster technological advance. And it should have to "trickle down" to people like me - it should start with people like me.
There are some things that governments simply have to be involved in. I am more than happy for my work product to be in the public domain; I am not happy having no income of any sort while I do it.
I do a public service. I should be making a public income. So that's socialism - well, I'm a socialist, long since.
The FTAA talks reportedly were rocky, in my understanding because of US farm subsidies. Aren't farm subsidies socialism? And we can still maintain the pretense that capitalism has any future whatsoever?
November 8, 2005 1:57 PM | Reply | Permalink
This also requires the assumption that there is a shortage of capital right now, something that is far from agreed upon - if anything there is a shortage of demand for capital, hence the low intrest rates.</em>
November 8, 2005 3:13 PM | Reply | Permalink
Actually, I didn't discuss immigration. There is some indication that immigration can increase economic growth in the US, primarily because they are in the habit of working hard and because even poverty here is first-class compared with where they came from.
But I was thinking of the world as a whole.
November 8, 2005 7:33 PM | Reply | Permalink