Thursday, January 7, 2010

Keeping America's Edge, Part II

In my previous post, I started a detailed reading of Jim Manzi's piece in National Affairs. I got a short note from the author himself yesterday saying he looked forward to more. Well, Mr. Manzi, I've read the rest of the article. I admit to having high hopes for it, since I lean moderate-to-conservative on economic issues. Unfortunately, my reading of it reveals it to be little more than a Republican, anti-Obama screed against practically everything Obama has done to restore social justice and economic opportunity for those left behind by every other president since Reagan. Manzi substitutes socially democratic "Europe" for Obama, implying that this is where Obama wants to take us.

The problems I have with the piece stem from Manzi's assumption that what Reagan did to stimulate growth in our economy was inherently good and was not fraught with political and social upheaval. He may have succeeded based on his definition of success, but it was his embrace of supply-side economics that set on the course of massive deficit spending we have today. By cutting marginal tax rates he allowed the richest segments of our society to keep more of what they earned. I don't fault that, per se, but the assumption that it was somehow going to be pumped back into innovation and eventually "trickle down" to help the middle and lower income strata was just a self-serving myth that the corporate media put out there as readily as it does other right wing myths today. You see, the rich in general don't think it's at all in their interest to redistribute their own wealth to help the poor and middle classes. If that were the case, then the massive growth in the economy should not have resulted in such a massive explosion in the deficit (well, I am purposely omitting the huge military build-up Reagan implemented simultaneously to put the Soviet Union out of the superpower business, which was also a huge failure -- more on that later).

To illustrate my point, here's this section from the Manzi piece (my italics):
Growing inequality was a price we paid for the economic growth needed to recover from the '70s slump and to retain our global position.

Rising inequality would have been easier to swallow had it been merely a statistical artifact of rapid growth in prosperity that substantially benefited the middle class and maintained social mobility. But this was not the case. Over the same period in which inequality has grown, wages have been stagnating for large swaths of the middle class, and income mobility has been declining.

This is my point. The "price we paid for the economic growth" was that there was little to no benefit for those who lacked the financial, political, or social connections necessary to be successful. What they did get, instead, was a deregulated financial market that gave banks the opportunity to issue credit cards to people who hadn't had them before. The explosion in consumer indebtedness during that time was the financial Big Bang; personal debt, and the resulting defaults and bankruptcies, have been expanding ever since.

Another snippet:
So economic inequality is likely to cause problems with social ­cohesion — but far more important, it is a symptom of our deeper ­problem. As the unsustainable high tide of post-war American dominance has slowly ebbed, many — perhaps most — of our country's workers appear unable to compete internationally at the level required to maintain anything like their current standard of living. And a shrinking elite portion of the American population, itself a shrinking fraction of the world ­population, cannot indefinitely maintain our global position.

This is because the Reagan/Bush economic policies, embraced by Clinton who needed Republican support to govern, for the most part paid mere lip service to social cohesion as it redistributed wealth upward, not downward as "trickle-down economics" promised. This was the Big Lie of the Reaganomics era.

Manzi continues with a warning about the current administration's move toward Social Democracy, laying out statistics that point to huge sums being spent on social programs ("this will be a dramatic material shift -- not a merely symbolic gesture").

Well, not to be snarky about it, but DUH! The huge amounts of social spending Obama is undertaking is because the country needs to stop the bleeding. Too many Americans have fallen through the cracks over the past eight years. In fact, his own statement about the rise in inequality between upper and lower income levels justifies Obama's actions to right the American ship that has been listing starboard for years. The government must be the safety net for the neediest among us; unfortunately, the neediest among us has grown to the point where it feels very much like we're converting into a welfare state. If Obama believes for a minute that this is more than a temporary fix, I'd be surprised to hear it.

Manzi also seems to imply that government intervention in the automotive, financial, mortgage, insurance, and healthcare sectors has been a bad thing. Indeed, he suggests that, moving forward, high-risk tiers of financial activities must "unsparingly" be allowed to fail if circumstances mandate failure. I won't debate that, in an environment where markets are doing what they're supposed to be doing, letting the market fix itself is ideal. The problem was, with deregulation and increased global interconnectedness of the finance industry, the market was not doing what it was supposed to be doing; it was not behaving normally. The government, therefore, was not only the best solution, it was the ONLY solution. By selecting CEOs and putting caps on executive compensation, the government was replacing those who has essentially fucked things up for more than eight years. This was something that I believe the government weighed very carefully, as the political implications were dangerous. It's a huge gamble, in fact; if GM, AIG, B of A, Citigroup, and the rest do not bounce back relatively quickly, then the huge amounts of bailout money will hang around Obama's neck like a 10-ton albatross.

The logical result of Obama's government intervention and increased spending, plus energy and healthcare reforms, Manzi argues, will be coupled with higher taxes to create a European-style social democracy. Taxes are necessary; there simply will be no other way to pay for all of this spending. I agree, and I'm not against it. Particularly if the tax is heavily weighted on a Value Added Tax (VAT) to get the debt under control. California needs this too if it is going to survive. But, Manzi worries, it will cost us dearly in global dominance. Again... duh. Bitter pill, ain't it? But this is what we get when we spend beyond our means and let corporate greed run amok (and write our laws).

Manzi shows his true colors, however, in this passage:
[W]e must unwind some recent errors that fail to take account of [America's] circumstances. Most obviously, government ownership of industrial assets is almost a guarantee that the painful decisions required for international competitiveness will not be made. When it comes to the auto industry, for instance, we need to take the loss and move on. As soon as possible, the government should announce a structured program to sell off the equity it holds in GM. Similarly, the federal government should relinquish direct control of banks and insurance companies. Moreover, one virtue of the slow rollout of spending under the stimulus bill is that most of it can be stopped — and should be. Any programs that have been temporarily increased under the terms of the law should be forced back down to pre-stimulus levels, and attempts to make the increases permanent should be resisted in the absence of a sustainable fiscal regime. Avoiding economically extravagant cap-and-trade legislation and, to the extent possible, a government takeover of health insurance would also help us avoid unforced errors.


Well, what's more than "almost a guarantee" is that, left unaided, the industrial assets would have collapsed and pulled the economy into a depression. Obama shows no indication that he will stifle innovation and growth in these industries, but is merely implementing the necessary levels of control to encourage responsible growth. But what really bugs me here is: to whom does Manzi think the government ought to sell its stakes in GM, AIG, and the banks? To the same private equity/hedge fund firms that screwed things up before? No thank you! The level of government spending might, in the opinion of the Congressional Budget Office, be unsustainable, but equally so is turning over trillions of dollars of government investments to private hands before those private hands have been taught how to be responsible citizens again. Finally, "economically extravagant cap-and-trade legislation" and "government takeover of health insurance" (not happening, by the way) are tired and inaccurate Republican talking points. I thought Manzi was above that.

Manzi wants to fix these so-called problems and balance innovation with social cohesion by adopting a "modernized version of a New Deal-era innovation." He proposes tiers of financial activities: the more high-risk, the more unregulated, and "almost any non-coercive transaction should be legally permitted." I agree with this, but this cannot be determined (at least at first) by the market. The market would almost always err on the side of complete openness and would vigorously argue for government non-intrusion. That would be like forgetting the lessons of the past two years, and I would say that such openness should be gradually implemented under strict government supervision to ensure compliance and responsible corporate activity. And I agree that the high-risk tiers whould be allowed to fail if they are open to any investor with minimal restrictions. The trick will be to get them to minimize the interconnectedness across multiple sectors of the economy. This will put restrictions on conglomerates and inhibit monopolization of industries.

The emphasis Manzi places on privatizing education as a solution to our problems is fortunate; it is his best idea. School choice, which is a political hot potato right now, could force schools to be better educators so they can get higher test scores and more funding. Right now, for example, the Los Angeles Unified School District has a large magnet school program. Parents can shop schools for their children that suit their academic needs best and position children for better opportunities in secondary schools and college. Schools go all out during the fall to attract students to their programs, and the demand far outstrips the supply of available slots. However, funding for the magnet programs is guaranteed to be better than for the neighborhood schools, by virtue of the benefits of the magnet program alone. The problem with the program is its mandate that the programs be populated primary by minorities, about 60-70%. On a recent trip to a local magnet program for our son Max, Lisa and I noticed that the students in the program were nearly 95% minority. When I brought this imbalance up with another parent, she said she had applied to that program because it nearly assured her white child's admission into the program. Still, admission was based on a lottery system, but because the school had to increase white enrollment to 30%-40%, the lottery would probably be weighted against minority applicants (this time, until perhaps the enrollment was weighted too much in the other direction). I suppose this is the most practical way to handle school competition in a diverse society, but I long for a more merit-based system.

Immigration reform is another solution. We can attract the best of the best with some major shifts in our attitudes about immigration. Huge shifts, in fact! But first we must "re-establish control over our southern border," according to Manzi. Another indication that he's less than post-partisan. We should implement reforms even though the border remains uncomfortably porous and do better at enforcing the laws we currently have.

I think Manzi is definitely onto something and I applaud his very nuanced approach to the problems we face. By avoiding partisan talking points, however, he'll be more convincing to non-conservative readers. Chait takes him to task, as I pointed out yesterday. One of his readers posted a response that I thought was particularly cogent:
How do you know this drop in productivity was due to adopting the welfare state? That’s just a huge assumption. Why couldn’t it be the industrialization of countries with pools of cheap labor?

And if you are comparing the US to Europe it seems to me that, even if the drop was tied to adding a welfare state, that Europe comes out ahead. They equal our global productivity AND they have a welfare state. Or to look at it another way, we spend all this money to ensure global dominance, the main purpose of which is to promote our economic interests—but we can only equal Europe in output, who spend way less on global dominance.

This is a fascinating debate, and I'm glad to have read Manzi's piece. I encourage others to do the same. The problems we face are monumental and no single political party (or school of thought) is going to have a monopoly on the answers. Debate should be healthy, intelligent, and most of all, civil. Either that, or resign ourselves to ever-increasing hostility on both sides.

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