Common Sense and the “Fiscal Cliff”

The "Fiscal cliff" is a byproduct of stubborn, myopic, and undisciplined government institutions, both in the executive and legislative branches, in the last 12 years or so.

Common sense, active agency, and effective participation and responses are seriously expected from the political players in the two chambers of the congress and the president.

Here are examples of what the government should consider:

1. Raise the income tax rate gradually, let's say at 1% every other year over the next 4-6 years, on people earning more than a quarter a million dollars, to a maximum income tax rate of 37% to 38% at the end of this process. A transparent and long-term tax plan should reduce businesses' uncertainty/anxiety, and increase the level of transparency, which in turn, increase spending and production and enhance sustainable economic growth.

2. Eliminate tax exemptions gradually (over the next 4-6 years) on income between $.25 million and 1 million. Eliminate all tax exemptions on incomes higher than 1 million dollar. In addition, all tax loopholes must be closed/eliminated.

3.  Reform the entitlement programs.  Americans are living longer! Ongoing medical inventions and advancements, and higher standards-of-living lengthen life expectancy; however, at increasing costs. Medicare and Social Security benefits should be reformed, to ensure their sustainability and the sustainability of the US government budget, national debt, and the U.S. economy. One example of the proposed reforms is the gradual increases in the retirement age that correspond to the increase in life expectancy.

4. Reduce/reform the excessive regulations that discourage firms (U.S. and foreign firms) from hiring or expanding in the USA. This policy should expand the U.S. economy, and switch expenditures and production from foreign goods and businesses to U.S. goods and businesses, respectively. The energy sector is a good candidate for such a reform.

5. The Federal Reserve Bank should stop injecting more money into the market through the ongoing $40 billion monthly purchases of MBS (mortgage-backed securities). The effect of injecting more money into the market is diminishing over time. There is already more than enough money supply in the market.  The increase in money supply in the U.S. market is offset by a drop in the velocity of money in the U.S., such that the effective money circulation in the economy is almost constant. The Fed’s challenge is not to increase money supply, but to increase the circulation (lending and borrowing) of money.

  

The above policy suggestions/ recommendations should have little to no recessionary effects; a much better scenario than the expected free-fall from the “fiscal cliff”. In the best scenario, the above policy suggestions can lead to a long lasting economic expansion, higher employment rate, and lower unemployment rates in the near future and long run. In addition, they should reduce the budget deficit and reduce the rate of increase of national debt (and even switch the deficit into a surplus and therefore lower the national debt, in the near future). Furthermore, the increase in net exports (through the expenditure switching effects of lowering business regulations) should reduce the U.S. current account deficit.

These are examples of policy instruments/actions that both Democrats and Republicans should debate, not only to avoid the fiscal cliff, but also to sustain economic growth and to improve the quality of life of the people in the U.S.

The Buffett Rule

Judge William Whitbeck argues in his guest column (Grand Rapids Press, June 3, 2012, p. D4) that the "Buffet rule" should not be adopted because life is unfair. This is a poor excuse for an argument. While life is undoubtedly unfair (though it's not really clear that Whitbeck believes that the rich do not deserve their high incomes), we nevertheless expect that our laws and tax policies will be fair. That an appeals court judge would not understand this is appalling.

 

The basic principle of justice or fairness is that equals should be treated equally. Our current tax code does not do so. People who work for a living are taxed at a higher rate than people with the same incomes who do not earn their income from work, but receive it from investments. This is a failure to treat equals equally. It is fundamentally and transparently unjust and unfair.

 

There are additional reasons for the perception of unfairness. Traditional Judeo-Christian values privilege work as a source of income, and cast suspicion on "making money off of money." See for example the biblical prohibition of usury. Our tax code turns this on its head by privileging investment income over wages. The degree of inequality in our country has increased dramatically over the last thirty years. If our economy could grow and prosper in the fifties and sixties with much less inequality, why do we tolerate this greater inequality now?

 

Eliminating this rate differential would not make the tax code "even longer, more complicated, and more monstrous," as Whitbeck claims. Taxing all income at the same rates would make the code simpler and make compliance easier, as anyone who has filled out a Schedule D could testify. This move would return us to the principles of the 1986 Reagan tax reform.

 

The Buffet Rule would raise revenue in the long run, contra Whitbeck. Changing capital gains rates result in temporary shifting of capital gains realizations between years, but when rates are steady, higher rates yield higher revenues. This is a help in dealing with our federal deficit problem.

 

It is hard to feel sorry for the "rich people in their gated communities who already pay" a large proportion of our taxes. The taxes they pay are not that large compared to their share of national income, or the benefits they receive from our system of political economy. They have lately come under the illusion that they can buy their way out of society with their private security, private jets and helicopters, skyboxes, private schools, "concierge medicine", and the like. But they still need the rest of us, and if we're not treated fairly, it will become increasingly difficult to make our system work. That will hurt everybody, even the one percent.

Food Deserts?

The existence of food deserts, and their connection to urban obesity is part of the social-science/food activism canon, and yet some new research calls this consensus into question.  Apparently, previous research has not clearly established the story food activists (and politicians) have been telling.

That said, I have not examined the quality of these new studies, or of the old ones.

Year-Round Schooling Publicity

Our paper that is forthcoming in the American Economic Journal: Economic Policy just got some publicity on one of the Wall Street Journal blogs.  All publicity is good publicity, maybe, but good publicity is great.

Stephen Moore's idea of fairness

I am more and more disappointed by the quality of the stuff that get printed on the opinion pages of the Wall Street Journal. A particularly egregious example is the piece by Stephen Moore called "A Fairness Quiz for the President" that appeared on Tuesday. It includes some plainly inaccurate statements. For example, he claims that "in 27 states workers can be compelled to join a union to keep their jobs." This was outlawed in 1947. Workers may have to pay a fee to the union for representing them in negotiations with the employer, but they are not forced to join. And of course, they are not forced to work in a unionized workplace at all. His assessment of the administration's economic policy takes 2007 as its benchmark, when Obama did not take office until January 2009. On energy subsidies, he takes the very not-conservative view that tax expenditures (special industry breaks and loopholes) are not subsidies when they benefit the oil industry. He claims that most Americans are "denied the free choice" to send their children to elite private schools as the Obamas do. But anybody with the money can send their kids to private school (I'm sure the Obamas pay), and financial aid is available for many without the money. Tax dollars are not being used to subsidize those who now can't afford to repay their mortgages, as Moore claims. You have to be current on you mortgage to get benefits under any of the current programs. You'll find more howlers like this if you look.

But worse is the twisted idea of fairness that Moore seems to hold. He claims it is unfair that the richest 10% of Americans pay 65% of the income taxes. But of course they should pay a disproportionate share, because they receive a disproportionate share of the income, and have an even more disproportionate share of discretionary income. He claims it is not fair for people to pay estate tax when they die. But what exactly is supposed to be fair, or even economically efficient, about people inheriting millions of dollars that they did nothing to earn? The estate tax is one of the fundamental foundations of capitalism. It preserves the incentives for the scions of wealthy families to work and save and contribute to the economy, rather than becoming leeches on their families. It also prevents the emergence of a hereditary aristocracy, and the revival of a feudal political and economic system. It promotes equality. It is the essence of fairness.

Is it fair that those who work pay taxes to support unemployment benefits? Is it fair that young people have to pay into Social Security? Of course it is! Workers paying those taxes now will need those benefits if and when they are laid off or retire. They are paying a premium for a form of social insurance that the market will not provide.

If this strange notion of fairness is common now (and almost 4000 people recommend this article on the WSJ website), I fear for our country. True moral understanding is vanishing among us, beginning with elementary truthfulness, but including democracy and equity.

Why Virtue Ethics?

I have been thinking and reading a bit lately about virtue ethics, especially focusing on applications to economics.  My motivation for doing so is complicated, but one way of explaining the motivation is to respond to Will Wilkinson's argument against virtue ethics, one brand of which is what he is calling Eudaimonism:

The eudaimonist says that eudamonia is the aim of life and the ultimate end of practical reason. Eudaimonia is often translated as "happiness," but it's better understood asflourishing or functioning excellently as the kind of thing one is. Acting in accordance with certain virtues is thought to be both instrumental to and constitutive of flourishing or excellent functioning. Both Long and Vallier accept a version of the unity of the virtues thesis, according to which the content the virtues can be fixed only by reference to the content of the others. 

My trouble is that it is hard to make sense of eudaimonia within a Darwinian worldview, and that there is no good argument to the effect that eudaimonia, whatever it is, ought to be the aim of action. 

You are not an instance of a natural kind. You are a member of a genetic line. You have no essence. If you can be said to have a natural telos, it is to maximize inclusive fitness. But that is not only not in any sense a rationally mandatory aim, it's a completely stupid aim. Making copies of your genome is, in an important sense, what you are for. But it has next to nothing to do what what you ought to try to do with yourself.

Relatedly, there is no non-stupid natural fact of the matter about what it would mean for you to realize or fulfill your potential, or to function most excellently as the kind of thing you are. 

The problem with his argument, as you may immediately see, is that humans are an instance of a natural kind, we do have an essence.  Humans do have a natural telos, and it is not to maximize inclusive fitness.  Moreover there is a non-trivial vision of what it would mean for humans to realize their potential, to function excellently, and it is central to what it means to act ethically.  That is, without rejecting Darwinian biology or natural selection, I still have to reject the larger Darwinian worldview that Wilkinson takes as his starting premise.

Our tradition has good answers to these fundamental questions.  That is, virtue ethics, as many have discovered, provides an ethical language that fits extremely well with Christian theology.  My hope is thus that integrating virtue ethics with economics will help make progress integrating theology with economics.

Consumer Complicity and Competition

Perhaps John was not intentionally calling me out in his last post, but I have to register an argument in favor of Barrera's view, though I have not yet read Barrera's book.

In a competitive market, producers can be constrained to either participate in the market using the lowest-cost production methods, or not participate at all.  This is why we like competition.  This competition has a dark side, however, when low-cost production methods involve some sort of ethical compromise.  In industries that are not competitive, producers might be said to bear some large amount of the moral culpability for legal but unethical production practices, but in competitive markets, it seems, we have to either maintain that no-one is culpable, or that the culpability is wider, encompassing the entire industry, and perhaps the government and consumers as well.

Ideally industry organizations or governments would regulate business practices so that competitive pressure is directed toward ethical production practices.  This type of regulation, incidentally, is the topic of a paper abstract I have submitted to the ASE world congress.  Absent this type of regulation, and especially when the state does not share all of the ethical convictions of a religious community, it seems that consumers, by paying attention only to prices and product quality, are morally complicit in, individually or collectively, the ethical harm.  Even if one consumer cannot change the practices of an industry, they can support, with their dollars, alternative production methods.

John uses the contraceptive example, but my area of focus is, of course, the food industry.  It would be odd to say that agriculture, and animal husbandry, is an industry that Christians should not participate in, and yet industrial animal agriculture, with all of it's ethical problems, is the only way to make a living for most farmers.  Competition in the market for poultry and pork necessitates that farmers either sell at 50% above the market price, or adopt the standard industry practices.  It is possible that similar arguments could be made about labor treatment in other agricultural markets as well.  If we want to condemn these practices, and I do think we need to condemn some of them, then we will usually end up pointing fingers back at ourselves, either as consumers, for supporting firms that are competitive because they are unethical, or as voters, for not properly regulating these industries.

There is more to be said here.  The biggest hole in this argument so far is that I have not discussed the possibility of industry self-regulation.  I will have to deal with this in my paper, but it is a larger topic that would take me in a different direction.

Market complicity and contraception insurance

I've been reading Al Barrera's new book Market Complicity and Christian Ethics, to review it for Faith and Economics. Al makes an elaborate argument in the style of Catholic Scholasticism that any time we make a purchase that facilitates some kind of harm to others, however indirectly, we are culpable for that harm. The degree of guilt depends on the directness of the causation. So buying a sweatshirt implicates us in the sweatshops of Saipan, and buying a Japanese car makes us guilty for the plight of the unemployed American autoworker.

As a Protestant and an economist, I find this position rather extreme. As a Protestant, I resist being held guilty for decisions made by others without my direct participation, decisions that could have gone another way. As an economist, I have done research on this issue (for my dissertation, a long time ago) and found that boycotting bad companies has no effect on their behavior without some direct political action to go along with a collective boycott. Without such action, my personal boycott has no discernible effect.

Reading Al's book helps me understand the Catholic bishops' position on the requirement that non-church religious institutions must provide insurance coverage for contraception to their employees. The bishops hold that contraception is immoral, and they don't want to indirectly facilitate others' decisions to use it by buying the insurance. This would involve them in the guilt of contraceptive use.

But understanding the position does not mean I agree with it. I do not believe the bishops are guilty of contraception because they buy health insurance that includes contraceptive coverage. Nor do I believe that contraception is immoral. In this I stand with not only almost all Protestant Christians, but also almost all Catholic laypeople, who research shows use contraception at the same rate as the rest of the population, in spite of the bishops' teaching.

The Obama Administration has in this case chosen to stand with those who see this new rule as promoting the health of women, rather than those few Catholics who see contraception as wrong and market complicity as real. The larger meaning is this: the biggest part of Jesus' public ministry involved healing people. It seems that is what he spent most of his time doing. Seeing to people's health is an important ministry, and health care and health insurance are not just regular private economic goods like chocolates and bicycles and car repairs. Finally we are committing ourselves to taking care of each other as a community. We will get some things wrong in the process, but the commitment is of surpassing importance. The bishops should stand up for that commitment.

The Sugar Bowl and the Culture of Entitlement

The University of Michigan won this year’s Sugar Bowl football game against Virginia Tech. This is the first time in many years that the Sugar Bowl (a BCS bowl game) has hosted two teams not ranked in the top ten. Many people thought that there were more worthy teams with better records that deserved to be in that game—Boise State, Kansas State, or maybe even Michigan State. But the invitations went instead to teams with lesser performance this season, but lots of “tradition” and reputations for selling lots of tickets and attracting lots of attention.

This controversy surfaces a set of issues that currently plagues discussions of economic issues, particularly inequality. Folks in positions of power in the business world contend that the enormous sums they receive are earned by their hard work, excellent skills, and sound judgment. They criticize rank-and-file workers who expect raises in line with productivity increases for having a “sense of entitlement”, expecting pay they have not earned. But the rank-and-file do not see the differences in pay as earned, particularly when they see executives rewarded for failure, and when many of them seem disconnected from their companies and their jobs. Rather, ordinary folks (the 90 percent, as the “Occupiers” would say) see the process of determining pay as akin to the process of BCS bowl invitations. The rewards don’t go to those who work hard and perform, but to those with the big titles, big reputations, and “tradition” (old school ties, family connections and the like).

Economic rewards in our society have become increasingly disconnected from performance, responsibility, skill, judgment, or any other reasonable justification over the last 30 years. Inequality has increased as a result. Ordinary people now perceive this. Unless the situation changes, there will be an increasing scramble for political and economic power at all levels of society, so that power can be translated into higher incomes. It will get ugly. The way to change the situation is to move toward a society in which economic rewards are in fact based on qualities that we want to encourage, rather than just on position, title, and tradition.

A good place to start, because of its symbolic value as much as its real effects, would be a big boost in the estate tax. But that’s an issue for another day.