This post was originally a lengthy rant about the state of the two major political parties. Suffice it to say that I’m not very happy with either one of them.

I completely understand the dissatisfaction with things as they are that’s behind the Tea Party movement. I think it’s very closely related, the twin in fact, of the dissatisfaction that propelled Barack Obama to the presidency.

I’m concerned about the pragmatics. I don’t think you can get there from here.

Matt Yglesias has discovered that inflation increases poverty and that jobs reduce it. He attributes it (at the very least obliquely) to partisan reasons:

There was some discussion on Twitter earlier today about one of my favorite themes—the large reduction in poverty associated with the Great Society and the uptick in poverty circa 1980.

That “circa” is important. The increase starts in the late 1970s and declines beginning in 1982. His conclusion is apparently that the tax reforms of the early Reagan Administration increased poverty (before they were enacted!). Mine is, as noted above, that inflation is hard on poor people and those with low marginal productivity of labor. He continues:

We then had a giant reduction in poverty among this group in the 1990s which was a combination of strong economic performance, “welfare reform,” and also the fact that the Clinton administration really wanted to make welfare reform work so threw lots of stuff—EITC expansion, SCHIP, etc.—at making it work.

Progressives fought the repeal of AFDC to the bitter end. Certainly “strong economic performance” was a factor in the reduction of poverty—check the unemployment and total employed figures for the period. I’d certainly be interested in disaggregating the effects of the “lots of stuff” he mentions from increased employment.

I simply don’t see the world in that way, with all good things coming from Democratic policies and administrations and all bad things from Republican policies and administrartions. Right now in the comments section of this post of mine there’s a debate along those lines going on. Here’s the argument:

I actually think the problem stems in large part from a corrosive cynicism about government. This derision, this contempt, this “government is the problem” attitude results unsurprisingly in a government that doesn’t work because whether it works well or poorly it gets the same beating.

[…]

Why? Why can Germany and France and even the UK have competent government and we can’t?

I have an answer for you: Republicans. Republicans since the 80’s have told us that government is always, always, always the problem. And now we expect competent government? From whom? From the people who deny the possibility of competent government? Isn’t that like expecting miracles from atheists?

I’m skeptical of that explanation but I’m willing to entertain it. How would one go about proving it? Disproving it?

I would think that, if that were true, states that lean Democratic would have solid, competent functioning state governments while states that lean Republican would be the reverse. Is that the case?

In Illinois the governor’s mansion and both houses of the state legislature have been in Democratic control for quite a while. In Indiana it’s almost the complete reverse (the Indiana House of Representatives has a narrow Democratic majority). Illinois’s state government is a train wreck. Four of the last six governors (3 Democrats; 1 Republican) have been convicted of corruption of one form or another. By most accounts Indiana’s state government is pretty solid.

I’m a registered Democrat. I don’t feel comfortable defending Republicans. I think there’s a lot to complain about in today’s Republican Party but, then, I think there’s a lot to complain about in today’s Democratic Party, too. I’m not an ideologue and both parties have been moving in that direction for decades.

I think that being wary or outright hostile to the federal government has been a feature of American politics since there has been an American politics. Can it be attributed solely to the Republican Party?

At any rate, how would you go about testing the hypothesis? Simply noting that France doesn’t have the same problems that we do doesn’t cut it. France has also been creating a national identity by suppressing minorities cf. Basques, Bretons for centuries. The differences between the United States and France go far beyond the Republican Party.

I wanted to draw your attention to a lengthy post at Barry Ritholtz’z The Big Picture. The post is a re-printing with permission of a condensation of Gary Shilling’s monthly newsletter for September. Read it and you’ll be getting much of what Dr. Shilling’s subscribers are paying $20+ for. The upshot of the report is that Dr. Shilling believes we’re in for a lengthy period of slow or no growth (something I’ve been saying around here for some time) or even a double dip or second recession. Here’s a meaty section to chew on:

Despite the huge employment losses since the end of 2007, many of those jobs are unlikely to return. Of the 7.7 million net nonfarm jobs eliminated between December 2007 and July of this year, 86% were in construction, manufacturing, wholesale and retail trade, finance and leisure and hospitality. These six sectors accounted for 44.5% of nonfarm payrolls in July, only about half as much as their losses. Furthermore, job losses in those industries spawned employment losses in service and other sectors that depend on them. Home building, for example, spurs employment in the production of appliances, furniture, home furnishings and homeowner insurance and provides revenues that support state and local employment.

Construction, manufacturing, and finance are more likely to shed additional jobs than they are to start hiring any time soon. The sectors that are adding employees, i.e. government, healthcare, and education, are totally or heavily dependent on tax dollars (or borrowing). That’s not the stuff of which recovery is made.

The post is full of interesting charts and graphs. I found the chart of personal consumption as a percent of personal income quite interesting. It tracks demographic trends quite closely.

These days I find myself getting increasingly frustrated whenever I hear people talk or read something people have written about whether to allow the “Bush tax cuts” to expire or not. I was against the tax cuts when they were originally being discussed nine years ago because I thought they were the wrong tax cuts.

What people seem to forget is that consumption has a number of different components. First, there’s the sort of consumption that people usually think about: personal consumption. That’s when you or I buy a house, a hat, or a cheeseburger. But that’s not the only sort. There’s also business consumption and government consumption.

When a business buys a desktop computer or installs a new phone system, it’s consumption. And when the federal government buys anything or, indeed, spends anything, that’s consumption, too. During the recession of the early Aughts there were precious few signs that either consumer spending or government spending had decreased but business spending, business consumption was flagging. That’s why I thought the right sort of tax cut was one that supported business consumption rather than personal consumption.

However, that’s not what I find frustrating. Obviously, people have never heard of Subchapter-S Corporations.

Most small businesses are sole proprietorships. These are frequently very small, gross revenues of under $200,000. When people say that only 2% of small businesses would be hurt by letting the “Bush tax cuts” lapse that’s largely because such a large percentage of small businesses are these tiny sole proprietorships.

However, most of these very small businesses don’t hire very many people, either.

My guess is that most of those 2% of small businesses that would be hurt are S-corps. An S-corp is a corporation in which the profits of the corporation are treated as personal income by the principles. I’ve been a principle in S-corps at times in the past. Because of their accounting capital accumulation by S-corps can be pretty difficult. What we routinely did was plow our profits back into the corporation. In effect they were only nominally personal earnings at all.

Unless the corporation is growing extremely quickly an increase in the personal tax rate could suck a lot of the “capital” out of these corporations. My guess is that there’s a rush to convert S-corps into C-corps right about now.

IMO what should really happen is that we should abolish the corporate income tax altogether and increase the individual income tax on higher earning income individuals in a revenue neutral way to prevent the deficit from getting any worse. That would chop an enormous amount of inefficiency and overhead out of our system and we’d see people making business decisions for economic reasons rather than tax-avoidance reasons. Exercises like the regular extension of investment tax credits would be a thing of the past.

In this post I’m going to be a perpetrator of something I complained about in a post last week. I’m going to agree with something that somebody else wrote as though I disagreed with it, possibly in a disagreeable manner. Consistency is the hobgoblin of the petty mind.

It’s been my experience in life that the way you can tell a highly experienced, competent, authoritative person, an expert, from a beginner is not in his or her ability to set goals or even in the ability to identify the problems with a goal but in the ability to break an objective up into smaller parts, figure out how to execute the individual components in an effective manner, and achieve the goal. I’m coming to believe that the problem with our public sphere is that we have far too many college sophomores and not nearly nearly highly experienced, competent, authoritative individuals.

This morning in an op-ed in the Wall Street Journal, five silverbacks of the Republican establishment, George P. Shultz, Michael J. Boskin, JOhn F. Cogan, Alan Meltzer, and John B. Taylor offer their principles for an economic revival. The op-ed is, alas, behind the Journal’s paywall. These are the principles they advocate:

• Take tax increases off the table.
• Balance the federal budget by reducing spending.
• Modify Social Security and health-care entitlements to reduce their explosive future growth.
• Enact a moratorium on all new regulations for the next three years, with an exception for national security and public safety.
• Monetary policy should be less discretionary and more rule-like.

They offer good explanations for why each of these is desireable and in all honesty I’m in broad agreement with these as principles. It’s the practice that I’ve found elusive and that I think is at the root of our problems. There is genuine disagreement between and within the political parties on these issues and, far from showing signs that the differences are being resolved, the differences look more fractious than ever.

Here’s my question: how? It reminds me of the old story of the Maine farmer who, when asked for directions by some lost travellers, after mulling the situation over for a bit responded, “You cahn’t get the-ah from he-ah”. If we could figure how to do any of those any of those things (let alone muster a consensus for doing them), we wouldn’t be in the pickle that we’re in now.

Mind you, these are grown-ups in the Republican Party. They are nobody’s idea of yahoos, no-nothings, or partisan firebrands. But is that all they’ve got? A college bull session could come up with the like.

I’ve just published a foreign policy-related post at Outside the Beltway:

“Chinese Currency Manipulation”

In this post I highlight a pair of articles, one an interview with Treasury Secretary Tim Geithner and the other a column by Paul Krugman, complaining at China’s reluctance at letting its currency trade at market values. I make some proposals for addressing the issue including insisting that China live up to its commitments it made when it was admitted to the WTO. If they’re going to enjoy the benefits of membership, they should do what they promised to do in order to gain membership.

Reading the James Kwak post that I responded to below has made me start thinking about turning points that have brought us to the situation in which we now find ourselves. I can think of a number of them and most occurred in the 1970s:

• Nixon’s price controls and suspension of the convertibility of gold (1971)
• Failure to address the problems created by Medicare and Medicaid when expansion of the healthcare system made the transition between increased utilization and plain old price increases (~1972)
• Failure to address the problems of excessive dependency on oil following the Arab Oil Embargo (1973)
• China’s abandoning its policy of autarky (1979)
• The Chrysler bailout (1979)
• Breaking up the Bell System (1984)
• China pegs yuan to dollar (~1994)

I could add a number of technological developments to this list, e.g. the IBM PC (1981) and the connecting of the NSFNET to MCI Mail (1987), and, as I’ve mentioned before, I think that demographic issues are absolutely central to the situation in which we now find ourselves.

Many of the items above have antecedents and are interrelated. So, for example, Nixon did what he did because Johnson had done what he had. Then there’s the enactment of Medicare and Medicaid in 1965.

Note that, unlike many people, I don’t think the issues of taxes and deregulation are particularly central to the problems we have. Rather I think that they’re responses to other more central issues.

Other suggestions? Questions? Disagreement?

I don’t think the final chapter on all of this has been written and, while I’m discouraged, I don’t think the future is necessarily a gloomy one. I do think that the problems we have now have been building for very long time, are likely to take a very long time to undo, and the incentives that are in place (particularly for our political leadership) make it unlikely that we’ll start taking the steps we urgently need to.

I strongly suspect that I will never read James Kwak’s and Simon Johnson’s book, 13 Bankers. If it’s as described by James Kwak in his post this morning:

In 13 Bankers, Simon and I argue that the key forces behind the transformation of the financial sector and the resulting financial crisis were political, not simply economic. To this argument, at least two good questions spring to mind: Why finance? And why then? Hacker and Pierson have good answers to both of these questions. Their answer to the latter question is better than (though not inconsistent with) the answer we gave in our book.

To the former question, their argument is simple: business interests in all sectors organized a takeover of political power that pushed organized labor and other groups protecting middle-class interests to the sidelines and made possible decades of policies that have enriched the super-rich at the expense of everyone else, including the merely affluent. Finance was simply the biggest and most profitable of these sectors–and, we would emphasize, the one best able to hold the government hostage in a financial and economic crisis.

The answer to the second question is a bit more involved but particularly important. Many people, including Simon and me, have observed that American politics and the American economy reached some kind of turning point around 1980, which conveniently marks the election of Ronald Reagan. (We also pointed to other factors such as the deregulation of stock brokerage commissions in 1975 and the high inflation of the 1970s.) Other analysts have put the turning point back in 1968, when Richard Nixon became President on the back of a wave of white, middle-class resentment against the 1960s. Hacker and Pierson, however, point the finger at the 1970s. As they describe in Chapter 4, the Nixon presidency saw the high-water market of the regulatory state; the demise of traditional liberalism occurred during the Carter administration, despite Democratic control of Washington, when highly organized business interests were able to torpedo the Democratic agenda and begin the era of cutting taxes for the rich that apparently has not yet ended today.

I agree with the timing he suggests but I find other things about his exegesis puzzling. For example, he characterizes the Nixon presidency as “the high-water market of the regulatory state” and notes the efforts of banks and other businesses to gain advantage through lobbying and political contributions. Do they not see the connections between these two?

Those in a position to exercise such influence know with a certainty born of experience that it’s cheaper to buy politicians and regulators than it is to comply with regulation. A stronger regulatory state goes hand in glove with greater influence of big business. Not only is buying influence more cost effective than compliance, it’s an opportunity to prevent upstarts and beat down smaller competitors, inevitably much less able to wield the tools that established power brings.

In the light of this I ask a series of rhetorical questions:

1. Have they never heard of regulatory capture?
2. In the light of the intimate relationship between increased regulation and greater influence for big businesses why would they propose increased regulation as a means of dealing with bigger businesses?
3. What difference between the actions of the later Bush Administration and the early Obama Administration have driven them to conclude that there’s a marked difference between the two?
4. Why is this time different?

As I’ve said before here the reforms we really need are not increased regulation or more regulators but a different approach to regulation and different incentives for regulators. Barring that we can only see increasing concentration of power in Washington and in the boardrooms of the largest companies, reduced creativity, and a stagnating economy.

Yesterday afternoon my wife, niece, and I had the delight of entertaining Amba in our home. Her blog, Ambivablog, has been on my rather select blogroll for a very long time. Along with other very interesting writers she now posts at a group blog, Ambiance. I cooked brunch for all of us and we dined, drank tea, and chatted the afternoon away.

As has been my experience in meeting bloggers with whom I’ve corresponded for many years, I found Amba even more intelligent, engaging, and charming in person than is reflected in her writing, always beautifully crafted. And as has been my experience in meeting in person those whose thoughts I’ve shared in the blogosphere for so many years, meeting her was much more like seeing an old friend again than it was like welcoming a stranger.

I don’t know whether it’s apparent from my writing but in person although I try to be as kind and considerate as possible I’m also frequently fairly direct. I ask direct questions. In this case I took the opportunity of Amba’s visit and the occasion of the ninth anniversay of the attacks on September 11, 2001 to give my niece the opportunity of hearing a first-hand account of the events of that terrible day. Amba and her husband, Jacques, lived a bit more than mile from the World Trade Center at the time, heard the planes fly over their heads, and could testify to what it felt to be a New Yorker on that fateful day. A first-hand account, face to face, with a perceptive and sensitive individual who actually lived the experience is worth a thousand written accounts.