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Wednesday, December 22, 2010
 Obama the bipartisan negotiator...

Topic: Semi-random Thoughts

Republicans: "We want to launch all nuclear weapons and blow up the world! We demand that our goals be met!"

Obama: "In the interest of bipartisanship, I have agreed to reach across the isle to put together a centrist bill with our Republican friends and colleagues. In order to sustain school funding at 2008 levels through the end of 2014, I have agreed to a compromise with the Republicans in which we will blow up the world. The bill isn't perfect, and we didn't get everything we wanted, but in the real world you have to engage in a give and take, so I feel that this is the best bill we could get at this time.

Though our schools will be woefully underfunded and will be atomized by nuclear bombs, we are happy to announce that schools will remain funded due to these negotiations and my willingness to reach across the isle and compromise with our Republican friends."

CNN: "Looks like another big win for Barack Obama. Despite grumbling from radicals on the left within his own party, Obama shows a real determination to get things done."

@SarahPalinUSA: "Obamas failure 2 privatize schools shows once again hes a extreme Marxismist"

FOX News: "Once again Barack Obama is showing his extreme Marxist bent, and shows that the Democrats are willing to stop at nothing and won't compromise with the Republicans. He has now forced the Republicans' hand in taking America down the path of Socialism by continuing funding for the public school system.

In other news, the world will be destroyed in 3 days, thanks to Mitch McConnell's successful efforts to bring Jesus back to earth on his birthday!"

"Liberal" Blogger: "Barack Obama's deal with the Republicans to blow up the world in exchange for reducing public school funding is insane! Obviously we should not agree to this absurd demand by the Republicans, can't you see that blowing up the world will kill everyone? The Republican position is extremist and crazy. The president should be speaking out forcefully against the Republican agenda and demanding increased funding for public schools; after all, most Americans don't want us to blow up the world and they do want increased funding for public schools!" 

Robert Gibbs: "President Obama has to do this. If he doesn't nuke the world the schools will not be funded, and the poor and middle class WILL benefit from nuclear exposure.  The radical leftist naysayers will never be satisfied, they are living in a fantasy world."

Random Democrat: "Barack Obama is doing his best. We all need to rally behind keeping public school funding at 2008 levels indefinitely, this is much better than the alternatives. Do you want to let the Republicans win?"

ABC News/USA Today Poll Results: "The bipartisan agreement between Obama and the Republicans is a popular one. 78% of respondents had a favorable view of the agreement, across all party lines*.

*Poll questions:

1) Q: Do you support president Obama's centrist bipartisan agreement with the Republicans to continue funding for all American public schools? Results: 78% Yes; 15% No; 7% Unsure

2) Q: Do you you think we should launch all nuclear weapons to destroy the world? Results: 93% No; 3% Yes; 4% Unsure

3) Q: Do you think that American public schools should receive A) More funding B) Less funding C) Funding should remain at 2008 levels? Results: 86% A; 8% B; 6% C"


Posted by rationalrevolution.net at 7:00 AM EST | Post Comment | View Comments (8) | Permalink
Updated: Wednesday, December 22, 2010 2:12 PM EST
Friday, December 17, 2010
 How the Financial Industry Get's So Much Money

Topic: Commentary

There has been some buzz around a recent article by Tyler Cowen, The Inequality that Matters.  It is a decent article and makes some good points, but ultimately it misses the mark in my opinion.

The most obvious error made is a semantic one, one of my pet peeves, in which Cowen continues to use the term "top earners" and to talk about the super-rich "making" their money, even though the point of the article is that the super-rich aren't actually earning their incomes, or at least this is one "possibility" that Cowen "considers".

Cowen rightly points out that the highest income receivers in America disproportionately come from the financial sector.

"In that same year, the top 25 hedge fund managers combined appear to have earned more than all of the CEOs from the entire S&P 500. The number of Wall Street investors earning more than $100 million a year was nine times higher than the public company executives earning that amount."

But when he tries to provide explanations for their over sized  incomes he comes up extremely short. Firstly, Cowen focuses on the financial sector in relation to other high income receivers implying that the incomes of other high receivers are themselves justified, which they are not. The incomes of corporate executives and celebrities are not justifiable either, as I discussed in the article How Reagan Sowed the Seeds of America's Demise.

But when Cowen tries to explain how those in the financial industry get such huge incomes he falls flat. Cowen's big answers are that investors "go short on volatility" and they use other people's money to gamble. These things are true, but hardly revelations and they don't get to the heart of the issue.

First, when it comes to "going short on volatility", Cowen compares betting against the housing market (which is what many of the biggest hedge fund managers did in 2007 and 2008) to betting that a bad sports team would win a championship, it's not the conventional wisdom so it pays off big etc.

But this really isn't a good analogy. Cowen implies that betting against the housing market was some kind of huge risk or that it took genius to do it or that or that the big payoffs outweigh the losses, etc. This is all nonsense. First of all, it didn't take a genius to figure out that the housing market was going to crash, this was obvious, the only challenge there was having a sense of the timing. But having a sense of the timing isn't so difficult if you are a financial insider who sees the books of banks and knows what deals are being made and is managing the money of the biggest financial institutions. After all lets not forget that John Paulson, one of the biggest profiteers of the housing market crash, is acknowledged to have been involved in picking the the assets going into investment pools setup by other firms, which he was then betting against.

Even though neither Paulson nor the firms that created the toxic Abacus CDO were ever charged with anything, it points to the level of involvement and knowledge that these financial insiders have. They can much more easily time the market than your average guy because they have a far different level of information and are much more closely monitoring the situation, and that's being generous and assuming no funny businesses.

But even that isn't the point and totally fails to get to the root of the matter. The real question is this, why is it that firms like Goldman Sachs are able to reap such huge profits and to pay their employees so highly? In a competitive market profits should be driven down, yet profits for "Wall Street" have been going up dramatically over the past 30 years, most dramatically over the past 10 years. Well, what that tells us right off the top is that we aren't dealing with a competitive market.

What does Goldman Sachs do? Goldman Sachs is an investment bank; their primary function is ostensibly to help clients bring companies public, i.e. to manage IPOs, and to manage mergers and acquisitions, etc. Now, they also do a lot of stuff on the side, like trading and investment banking, etc. The function of the stock markets is supposed to be to help companies raise money via IPOs. That, really, is the sole "economic good" provided by stock markets, the "sharing of capital". However, that isn't where most of the money is made in the stock market, most of the money is made simply trading stocks around, which doesn't generate any real revenue and provides no direct benefit to the corporations whose stocks are being traded.

Now, when it comes to a company like Goldman Sachs, their revenue comes from two main sources: fees paid by clients and profits from trading. The first issue to address is the "fees paid by clients". Based on the level of the profits, the question is, why do clients agree to pay these fees, since clearly Goldman Sachs is skimming a lot off the top? In a competitive market we would predict that competition would come in a drive down prices, but this doesn't happen on Wall Street, the big players are the big players, they have been the big players for a long time and they remain the big players today, and there is very little real competition. Why? I suppose that there are multiple reasons, some of which are based on economic principles and some of which I suspect have to do with the laws on the books, collusion, backroom dealing and personal relationships, etc. I can't speculate on the latter issues, so I'll just stick to the issue of economic principles.

What exactly are stock exchanges? Well actually stock exchanges are the original "social networks". The stock exchanges are essentially the first major predecessors to the internet, and specifically they are the predecessors to social networking sites like Facebook. The value of all social networks and social networking platforms is predominately a product of membership in the network. The networks become more valuable and more attractive the more people join them.

In fact, social networks tend to create natural monopolies, however, our legal system doesn't recognize dominant social networks as monopolies. As discussed in this article Zuckerberg: Non-Evil Non-Genius, sites like Facebook benefit hugely from being the first in the market and then once a slight dominance is established in terms of membership, the membership itself become the most valuable aspect of the platform. People don't join Facebook because Facebook has better features than other alternatives, in fact Facebook sucks in terms of its implementation and user interface and user friendliness. As an application Facebook is horrible, it's horribly designed and it's record on user privacy is deplorable, but people use it and flock to it because that's where everyone else is. The membership is the primary draw, and thus Facebook is a type of natural monopoly, just like Microsoft Windows was a type of natural monopoly by attracting enough users to become a standard. Many people adopted Microsoft not because they loved Windows, but because they wanted to share documents with other people who only had Microsoft compatable documents and they wanted to use programs that only ran on Windows, because that's what was being used at work, etc.

But Microsoft won the court case that attempted to define Windows as a natural monopoly, preventing the operating system from being labeled as such, and thus avoiding the regulation that comes along with the designation. The reality, however, is that virtually all of the super-rich are types of natural monopolists. Celebrities are a type of monopolist. Everyone can't be a celebrity for the same reason that when you go to watch a play you have hundreds of people watching a dozen people perform on a stage. Even if everyone in the audience was as good a performer as those on stage, it wouldn't work if everyone started performing in order to compete for attention, it only works when a few people have the attention and the majority observe.

If incomes and profits get very high for auto-mechanics then more people will become mechanics, increasing competition and driving down profits and incomes. Celebrities have huge incomes, so why don't market forces result in more people becoming celebrities, thus driving down the profits of celebrity? Because celebrity is a form of natural monopoly, and so is social networking, and and stock exchanges are a type of social network and so are investment banks.

Goldman Sachs reaps huge profits, so why don't market forces result in there being more investment banks who compete against Goldman Sachs and drive down prices, thus reducing profits, which, as Adam Smith outlined so long ago, is the whole point of markets in the first place, to drive down profits and thus increase the social good?

Because a part of investment banking is social networking and once dominant social networks are established their momentum can be  nearly unstoppable and the barriers to entry for competition are nearly insurmountable. The problem is that these types of businesses aren't widely acknowledged as natural monopolies, but they are. Most acknowledged natural monopolies today are things like utility companies and toll roads.

But that isn't the whole story. In terms of revenue from clients companies like Goldman Sachs have an advantage because they are natural monopolies, or natural oligopolies, and are thus able to extract rents for their services due to the power of the social network that they are able to tie clients into. However they also receive a large portion of their revenue from trading. People greatly misunderstand the revenue generated from trading by large institutional traders and investment banks.

The biggest misconception is the fact that most people don't understand just how unlevel the playing field is between professional traders and the average guy. This isn't like the difference between professional athletes and the average guy, the biggest advantages of the professional trader, especially today, have nothing to do with the natural abilities of traders and have everything to do with the information and tools at their disposal.

First lets take the example of the old school floor trader for the New York Stock Exchange. Floor traders are able to trade on their own accounts, and before various rule changes, including the adoption of decimal pricing instead of fractional pricing, floor traders were able to essentially make no lose deals. Floor traders were, and are in the NYSE, responsible for making the transactions when someone wants to buy or sell a stock (or whatever instrument these days). Let's say that you put in an order to sell your stock at $23.25, and the floor trader got this order, and they saw someone who wanted to buy that stock for $23.75. The floor trader could use his own account to buy your stock from you at $23.25, and then turn around and sell it to the other guy for $23.75, pocketing 50 cents a share on top of his commissions in the process.

Doing this wasn't a matter of being any kind of market genius, it was simply a matter of being able to see all the cards on the table, and it was an easy way to make money. Technically they aren't supposed to do that type of stuff anymore, but we are in a new era of sophistication now. Even without engaging in those types of obvious abuses, traders have a level of understanding of the market activity that the average person doesn't.

But, that was the New York Stock Exchange, which famously had/has all of those traders down there on the floor yelling and making deals. Then came the NASDAQ, and what sets the NASDAQ apart from other exchanges is that the NASDAQ is an all electronic exchange. There are no floor traders, all of the trades are executed electronically, which eliminates middle-men and thereby reduces the overhead cost of executing trades, and it also was supposed to address issues like traders gaming the system.

Ahh, but it hasn't. Now we have something called high-frequency trading, which effectively does the same thing as what the guys on the NYSE used to do, but now it is in fact much much worse, for now it's automated and essentially constant and automatic and all of the investment banks do it.

When you submit an order to buy or sell a stock on the NASDAQ your buy or sell price is supposed to be hidden information that the other party cannot know. If you submit an order to buy 100 shares at $23.75 for example, and there is also an order out there to sell 500 at $23.25, then the way it is supposed to work is that you buy 100 of those shares at $23.25, you get the best price available. The "person" selling at $23.25 doesn't know your price and thus doesn't know that they could have changed you more, etc.

This is where high-frequency trading comes in. Investment banks have computers that do nothing but sit there all day submitting bogus transaction requests. They submit orders to buy and sell stock every fraction of a second basically probing the asking prices in the market, which they aren't supposed to be able to know, but what they do is they submit fractionally higher and lower bids very quickly and then when one is accepted they cancel the transaction, this lets them know the asking prices of the bids in the market. Then once they have determined the spread on selling and buying prices of different bids, they step in and buy a block of shares at one price then sell it immediately to the other person at the other price. So, in the case of someone wanting to sell for $23.25 and someone wanting to buy for $23.75, computers would submit transactions to find those limits, then buy at $23.25 exactly and sell at $23.75 exactly, keeping the 50 cent spread themselves. It's a no lose transaction, there is no speculation taking place, there is no risk, and there is no real allocation of resources. The investment bank just steps in and extracts a fee for doing nothing and its stepping in benefited neither side of the deal, it's purely parasitic. And these large institutions have these programs running all the time, they are unmanned, there is no real strategy or anything it's just a pure profit machine that provides no benefit to anyone other than those running the programs and it serves as an added tax on the investors making the trade.

And this is just one aspect of how these banks are now using computers to engage in trading systems that are effectively just gaming the whole system. And make no mistake, the recently passed financial reform legislation that was passed by the Democrats does nothing to address these issues and doesn't tackle high-frequency trading at all.

But what really makes all of this work and makes the profits for those in finance so high, is the giant pool of money that they operate on. That giant pool of money is what has been created by the rest of society, including Americans and foreigners. Those in the financial institutions are getting hugely wealthy because the giant pool of money produced by the rest of society has grown rapidly and those in the financial institutions are getting a cut out of it, largely by using "heads we win, tails you lose" techniques both in terms of high-tech trading systems and of course in terms of government backed subsidies, in addition to the natural monopolies enjoyed among the various components of the financial system, from the stock exchanges to the highly connected investment banks. It is the collective production of society that has produced the wealth, not these bankers, hedge fund managers and traders, and yet they are the ones reaping the rewards by extracting massive rents on the system.

There are theoretical ways that the entire financial system could be radically changed however, in ways that would effectively eliminate the rent seekers. First is the stock exchanges themselves. As I said, stock exchanges were really the first major social networks, the first major predecessor to the internet, but guess what, now we have the internet, we don't actually need stock exchanges anymore. The whole point of a stock exchange is to serve basically as a giant chat room that allows all of the buyers and sellers of stocks to transact in a single market. Technically when you buy stock you have a certificate. You could go out on the street and sell that certificate if you wanted to, but we don't do that because out on the street you have no idea what other people would be willing to pay for it and you may not find anyone that wants to buy it, so we have exchanges, where everyone who wants to buy or sell "chats" in the same room. The exchange model is over a hundred years old, it made sense when we didn't have the ability to individually connect the way we do now. Now it is a fact that stock exchanges are functionality obsolete, they are totally unnecessary, but they still exist out of moment and regulation. Also note that stocks and other assets only trade on specific exchanges. Companies pay to get listed on a given exchange, and their stock only trades on that exchange. That could all be eliminated with open standards and the development of full market internet based direct trading where buyers and sellers interact directly with each other without middle-men. It's technically possible now, but clearly there are powerful interests, indeed some of the most powerful and wealthy people in the world, who would not let that actually happen. In this case, protecting the interest of the financial industry and the stock exchanges requires preventing the rise of a freer market system. A freer market without exchanges would benefit stock owners at the expense of the middle-men currently in place who graft off the top of every transaction.

As noted by Lord Adair Turner in What Good is Wall Street, investment bankers and traders are really just glorified utility operators. The objective of financial institutions is to channel capital from individuals and institutions to the places where it can, theoretically, do the most good. You put money into the pot and in theory the activity of those on Wall Street is to allocate your money to the businesses that can make the most use of it, allowing them to produce a return on that capital. That's the theory, and that's describing the activities of Wall Street in the best possible light. In reality most of the activity on Wall Street is just outright gambling with no real economic benefit.

But granting the utility of Wall Street activity, it is effectively equivalent to an operator at an energy company who has to rout electricity and turn on and turn off various power plants in order to optimize electricity usage throughout the day, to rout the electricity to where it is most needed. But do we pay such operators by the amount of electricity that flows through the system each day, are they paid by the kilowatt? No, they aren't, they are paid a wage like any normal worker. Do we pay operators at facilities for large cities exponentially more than operators for smaller areas that use less electricity? No, we don't. Operators for larger regions may get slightly higher pay, but its double or triple the pay of smaller operators at most, we don't pay operators 10,000 times more who work for New York city power companies than ones who work in Arkansas, but when it comes to finances it's a different story.

The scale of the income in the financial industry is directly related to the scale of the economic activity, even though we don't pay power grid operators or water management operators in direct proportion to the scale of the flow through the networks they manage. Given that the financial industry is really a glorified utility, and that they benefit from monopolistic characteristics, the industry should bemuch more heavily regulated, including the use of price controls and major compensation restrictions.

There really is no question that the financial industry is extracting massive rents for, at best, providing no real value, and at worst the financial industry is in fact profiting from causing real economic damage. To argue that the events of the last 5 years, with the near collapse of the financial system and the housing bubble isn't an example of profiting from real and massive damage is to just plain ignore reality.

The massive profits in the financial industry are certainly only made possible by the large amount of real value created by the rest of society, which creates the massive pool of money that the financial industry extracts profits from, but the real question of why it is that competition doesn't drive profits down is the more complicated one. The only answers appear to be that players in the financial industry benefit from forms of natural monopoly, while not being regulated as monopolists, that there is indeed nefarious activity taking place both technically illegal insider trading as well as technically legal forms of insider trading, and the rise of computer driven trading schemes has created true virtual money machines that produce essentially risk free profits throughout computerized trading, which is a complete corruption of the markets. All of this in association with the virtual guarantee from governments that major losses will be propped up by tax payers has resulted in a no lose environment where the big players are able to extract massive rents unchallenged by either competition or the law.

See also: Wall Street by Doug Henwood


Posted by rationalrevolution.net at 7:43 AM EST | Post Comment | View Comments (2) | Permalink
Updated: Friday, December 17, 2010 10:21 AM EST
Tuesday, December 14, 2010
 The Myth of Center-Right America

Topic: Commentary

We have heard for years that America is a so-called "center-right" nation, meaning that the majority of the people favor "moderately conservative" policies. This has been said for decades, and is obviously repeated mostly by conservatives, but even so-called "unbiased" pundits and observers often make the same claim.

See:
Tracking the center-right nation meme
Media conservatives claim America is "center-right," but political scientists challenge reliance on voter self-identification
REPORT: America: A Center-Left Nation
Newsweek: America is a center-right country

There is a fragment of support for this claim, and that fragment of support is that when people are asked to identify their political persuasion as either "liberal", "moderate", or "conservative" more people identify themselves as moderate or conservative than liberal. For example in the 2008 election exit polls, in which there were broad Democratic wins, 22% of those polled identified themselves as "liberal", 44% as "moderate" and 34% as "conservative".

This has been true in America for decades, and though the polling data doesn't go back far enough I suspect that the results of a poll like this would have been similar throughout all American history. Even during the height of FDR's presidency or the JFK years I suspect that more people would have identified themselves as conservative than liberal.

However, these labels don't capture the reality of American's positions on real issues. At the same time that more Americans have identified themselves as "conservative" than liberal, more Americans have also actually favored so-called "liberal" economic positions than conservative ones. Again, poll after poll, going back decades, shows that when questioned on specific issues Americans overwhelmingly favor so-called "liberal" positions, especially on the economy, and yet the even bigger irony here is that many so-called "moderates" call themselves "fiscally conservative and socially liberal".

So what is really going on here? Well, the reality is that America is not a "center-right" nation, America is an economically populist and moderately socially conservative nation. If you ignore people's self-identification and look at where people stand on specific issues what you find is that there is generally strong support for economic populism and there are slight majorities in favor of a modestly socially conservative agenda. The reality is that people don't consider populism to be "liberal", and in truth, it isn't, though so-called "liberals" in America are generally the ones who favor and support economically populist positions.

Most Americans are actually Jacksonian Democrats. Andrew Jackson was born into poverty, was self educated, and rose to become the most powerful man in America through his military conquests, eventually becoming one of America's most popular presidents.

Jackson supported slavery, he waged war against the Native Americans and was engaged in one of the worst Indian Removal campaigns in American history, and he was a macho patriarchal figure, certainly no friend of women in the political sense. But, Jackson was a strong supporter of the little guy economically, as long as the little guy was a white male. Jackson railed against the bankers, he put checks on the power of the northern merchants and financial interests, he was a protectionist when it came to trade, he paid off the national debt, he opposed the electoral college and wanted more direct democracy, and he advocated strongly for the interests of small farmers.

When we look at the issues today what we find is that populist economic positions are overwhelmingly favored across the board in poll after poll. For example:

What is even more remarkable about these positions is that there is virtually no advocacy of any of these positions in the corporate media. There is either no discussion of many of these positions, or the predominate view expressed in the corporate media is opposition to these positions, yet they remain popular. If there was actually visible advocacy for these positions in mainstream media it's likely that support for them would be even stronger.

And yet, when you listen to pundits in the corporate media these positions are labeled "far left" and "radical". It is implied that these are fringe positions, which can't possibly even be considered. This is where we also get into "false centrism". A recent story on NPR provides the perfect example. The false centrists setup a false dichotomy where they declare that "positions on the left and right are extremist", and thus the sensible positions are somewhere in between. They imply that the act of compromise in and of itself produces more popular positions, but that is not true. The most popular position on securing Social Security is to eliminate the taxation cap. Compromise positions that cut benefits and either don't raise the cap at all or only raise it slightly are less popular. The most popular position is to eliminate the cap and make no cuts at all. In fact what bipartisan compromises often produce is not more popular policy, but policies that no one likes, which often end up being subverted to special interests in the process.

Again, a perfect example of this is the recent health care reform legislation passed by president Obama. The majority of people still want to see a "public option" as part of health care reform. Compromise didn't produce more popular or more mainstream legislation, it produced less popular legislation that eliminated a provision that was not only popular, but which was functionally superior as a cost control measure to bring down the cost of health insurance and to provide health insurance for high risk individuals. The "compromise" didn't produce something better, it produced something less popular and quantifiably less effective, serving really only to protect the interests of insurance industry profits.

America is not a "center-right" country, and it has never been. America is and has always been a populist country, for better or worse. What has happened over the past 30 years is a well known tale, the populist vote has been split on social issues thereby dividing the economic interests of the majority.


Posted by rationalrevolution.net at 6:23 AM EST | Post Comment | View Comments (5) | Permalink
Updated: Tuesday, December 14, 2010 7:22 AM EST
Saturday, December 11, 2010
 The Myth of Bipartisanship

Topic: Commentary

We often hear pundits and the president, talking about bipartisanship as though bipartisanship is an inherently good thing and as though the recent decline in bipartisanship is an indicator of some kind of breakdown of the political system.

There has in-fact been a quantifiable decline in bipartisanship over the past 20 years when compared to the prior 50 years, but the reality is that the bipartisanship of the period from the 1930s through the 1980s was an anomaly caused by the process of ideological re-alignment of the two parties.

The image below shows the degree of difference between the two parties based on votes over time.


source: http://www.brendan-nyhan.com/blog/2007/08/the-high-cost-o.html

This next image shows senate voting patterns historically going back to 1857. Follow the link below for more a more detailed look:


source: http://www.duke.edu/~dbs9/senatehistory.html
(Note: I don't agree with the definitions of "left" and "right" in the linked material, its far too simplistic)

People often confuse partisanship with ideology, but these two things are not the same. Partisanship refers specifically to party affiliation, whereas ideology refers to one's political beliefs and motivations. It makes sense for party affiliation to be aligned with ideology, and historically it has been. However, there was a period from the 1930s through the 1980s when there was a high degree of ideological diversity within the political parties, not for any noble reasons and not because there was some kind of growing political consensus taking shape, but because of ideological re-alignments taking place within the parties, largely based on regional shifts in the North and South.

This began, essentially with the rise of wage laborers as a political force and came to prominence with the presidency of Teddy Roosevelt in the early 1900s. Historically American politics has been ideologically divided into two main groups, largely because of the de-facto two party system. That breakdown from the time of the founding up to the beginning of the 20th century was effectively socially conservative economic populism (dominated by farming interests) vs socially progressive economic elitism (dominated by northern merchants and industrialists).

With the rise of industrialization an new class of propertyless worker became significant in numbers, largely in the cities, which were dominated by the Republicans. While the Republicans had traditionally dominated the metropolitan vote, the rise of "wage-laborering" city dwellers gave rise to the need to adopt some level of populist positions to go after that vote. The vote was then split between the interests of farmers, wage laborers, and non-farm business owners. Prior to the last 19th century there were essentially only farmers and non-farm businesses owners, there was no significant population of "wage-laborers", and the rise of wage-laborers in the cities, along with the decline of the number of farmers, setup a battle for this new vote. This created ideological conflict within the Republican party, because now the metropolitan vote wasn't just dominated by the business owner's vote, now the business owners had competition from the wage laborers.

This is what gave rise to the so-called "progressive" movement, the rise of socially progressive economic populism.

Teddy Roosevelt was the first major Republican political figure to come to the side of the wage-laborers and to be a socially progressive economic populist. This began fracturing the Republican party ideologically.

The same thing was happening on the other side as well. The Democrats had traditionally been the economically populist "farmer's party", but with the rise of wage-laborers in the cities, the traditional economic populism of the Democrats found support among the wage-laborers. In addition, many wage-laborers in the cities had recently moved to the cities from farms and came from traditionally Democratic families.

This is what gave rise to the socially progressive metropolitan Northern Democrats, from which FDR sprang. These figures were also socially progressive and economically populist, likewise going after that urban wage-labor vote.

Prior to the Great Depression, however, the parties remained relatively ideologically pure, the Democrats dominating the South and the Republicans dominating the North. But with the Great Depression the solid economic populism of the Democratic party trumped everything, and so blacks from the South who had traditionally voted Republican now voted Democrat out of economic interests, and likewise wage-laborers and small businessmen from the North who had traditionally voted Republican also now voted Democrat out of economic interests. Essentially, everyone who wasn't wealthy, regardless of whether they were socially conservative or socially progressive, voted Democrat.

This mixed the social conservatives and social progressives up into the same party. Now the Democratic Party was a "big tent" on social issues with progressive Northern Democrats voting along with conservative Southern Democrats. However, because FDR was himself a progressive Northern Democrat and because he was in office for 12 years he had a huge impact on the national direction of the party, and it was FDR who sowed the seeds of the Democratic party's transformation from a Southern conservative party to a national progressive party.

From the 1930s through 1970s that transformation was taking place, and as that transformation took place a counter transformation took place on the Republican side, with the Republican party transforming from a Northern progressive party to a Southern conservative party. But both parties retained their ideological roots on economic issues, the Democrats being populists and the Republcians being the party of "big business".

The bipartisanship of the 1930s-1980s was really just a byproduct of this realignment. Due to the fact that it took a few generations for traditionally conservative Democrats to die out or leave the party, what we had from the 1930s to the 1980s were vestiges of the Democrat's conservative past lingering in the party. The same goes on the Republican side, with vestiges of the Republican's progressive past lingering on.

These people still voted along ideological lines. The ideological lines remained just as heavily drawn the whole time, the only difference was that the composition of the parties was changing ideologically.

This is where the difference between cross-party agreement and cross ideological agreement becomes important. We talk about bipartisanship because there is an implication that if legislation can get bipartisan support it must mean that it's not controversial, because "everyone" can agree that it's good. But we can't really compare the bipartisanship of the 1930s-1980s with today, because the parties back then were much more ideologically diverse. What really tells you if legislation is "controversial" or not isn't whether it gets bipartisan support, but whether it has support across the ideological  spectrum, and the truth is that there was just as much division ideologically from the 1930s through to the 1980s as there is now, it's just that the parties weren't as ideologically distinct, because of the period of ideological realignment.

So what does all this mean? It means that going on and on about the bipartisanship of the past is at best largely meaningless, and is generally mis-representative Talking about the bipartisanship of the past implies that there weren't ideological conflicts in the past, which is patently false, there were, and progressive policies had to be fought for along ideological lines. It just so happens that those ideological lines weren't the same as the party lines. There was less conflict between the parties, but there was more conflict within them.

On an additional note, while partisanship is arguably increasing today compared to the past 50 years, both parties could actually be considered more ideologically similar today than they were in the past as well, due largely to the changing balance of power in the American political system. As wealth has become more concentrated among the super-rich, the political power has become more concentrated as well. As a result, both parties are chasing after the same base of power, the interests of the super-rich and the corporations. A major distinction has to be noted. Prior to "The Great Realignment" from the 1930s-1970s American economic populism was rooted in the political power of the farmers. Now, however, having come out of the realignment, that power is gone, there is no longer any base of independent farmers which is politically powerful, since today only 2% of the population are farmers, and most farms are now run by large corporations, making them more like normal corporations than traditional farms in terms of their interests. In addition, the rise of retired seniors has changed the political landscape. The interests of working-class populism now resides among wage-laborers, but wage-laborers are weaker politically than the farmers were, and retired seniors have conflicting interests with working wage-laborers. So unfortunately the forces of economic populism, while still dominate in terms of numbers in America, are politically much weaker. So, despite the return of partisanship, the reality is that the differences between the two parties are smaller today than in the pre-realignment past, with greater fighting over less significant differences and with the differences being more pronounced on less economically impactful social issues.


Posted by rationalrevolution.net at 7:23 AM EST | Post Comment | View Comments (23) | Permalink
Updated: Saturday, December 11, 2010 7:28 AM EST
Friday, December 3, 2010
 Unemployment and Education

Unemployment numbers are out again today and many people are discussing the total unemployment rate of 9.8%, an increase of .2% over the previous month, but the bigger story is in the details. Not only has the total unemployment rate gone up, but it went up even for people with college degrees. The unemployment rate for people with college degrees has historically been lower than for those without, and has remained relatively low throughout the recession, but the numbers for November show the unemployment rate for people with college degrees hitting its highest point in decades, 5.1%.

But the issue is not just that the unemployment rate for people with college degrees has gone up, that is really a symptom of a larger problem. The larger problem is that the difference in the unemployment rate between people with college degrees and those without them has gone up. Back in 2000 the difference in the unemployment rate between those with only a high school education and those with college degrees was 2 percentage points (3.5% to 1.5%). Today the difference is 4.9 percentage points (10% to 5.1%). The unemployment gap between the college educated and those without college degrees has gone up significantly just over the past 2 years.

But its not just the past 2 years. Over the past 30 years there is a bigger trend, with the unemployment rate gap between those with college degrees and not trending up over that time.

The problem here is partly self-induced structural unemployment. Structural unemployment is when there are job vacancies but there aren't enough workers to fill them, and there are workers looking for work but there aren't enough jobs that fit their skill-set.

Now certainly the unemployment problem isn't completely structural in America right now, but it is partly and the structural component of unemployment is essentially completely self-induced, caused in large part by the outsourcing of manufacturing jobs to foreign countries.

Those who defend the outsourcing practices that have taken place in America over the past 30 years have noted that a job that is outsourced doesn't necessarily equal a job lost, because outsourcing itself enables new types of job creation. This is partly true, but it isn't the whole story. When new jobs are created as a result of outsourcing, they obviously aren't the same types of jobs, and typically what happens is that (and I don't have the exact numbers here, no one does) for something like every 5 manufacturing jobs outsourced, one new administrative or sales job is created in America. Those new jobs created as a result of outsourcing typically require higher levels of education.

Many advocates of the "structural unemployment" explanation for the current unemployment crisis argue that this structural unemployment is simply a reflection of the new reality that we "live in a high tech world now" and it requires more education to be able to contribute.

This is completely false. It's not that our economy no longer relies on the contributions of people without college degrees, it's that we have shipped those jobs over seas. Our economy still relies heavily on the labor of people with little or no education. We still consume trillions of dollars worth of goods produced by people with nothing more than the equivalent of a high school education or less, it's just that these people live in India, China, South America, Mexico, Guam, etc.

And the problem now is that as this self-inflicted structural unemployment goes on unabated, it exacerbates economic problems for everyone and contributes to overall unemployment caused by lack of demand for goods and services. But the self-inflicted structural unemployment isn't the only problem, its just one of the components of the larger problem of the declining share of national income going to workers over the past 30 years. There really is no question that the current economic crisis and the current unemployment conditions are caused both directly and indirectly by the wealthy, and that the currently wealthy have benefited and gained a large portion of their wealth via the mechanisms and decisions that have caused the current economic crisis.

How have the wealthy caused the current crisis and benefited from its creation?

1) Over the past 30 years employee compensation as a percentage of corporate revenue has steadily declined, leaving non-executives with an ever smaller share of the value that they create, while funneling an ever growing share of the value created by employees to executives and share holders, whose incomes have exploded over the past 30 years.

2) By choosing to outsource manufacturing and call-center jobs to foreign countries where wages are lower and there are fewer environmental and safety regulations, etc., executives and investors have reaped larger incomes by eliminating American workers and replacing them with lower paid foreign workers while pocketing the difference themselves.

3) The entire mortgage-backed security issue and the sub-prime loans that drove the housing bubble and bust were all engineered by America's wealthiest bankers and financiers, and despite the massive problems caused by these shenanigans, they still profited hugely, in large part due to government bailouts.

Those who believe that a "planned economy" is a bad thing need to understand that the United States has a planned economy right now, but the planners aren't government officials, they are Wall Street investors, who have planned and dictated the form of our economy over the past 30 years, of which  the case of A123 Systems is a perfect illustration. A123 Systems is a company trying to manufacture new high-tech batteries in America, but which was unable to get private investors if they insisted on manufacturing in the United States. They would only provide funding if they agreed to move manufacturing to Asia. Ultimately they received some starting capital from the government to allow them to get started in America, via Obama's stimulus package.

Yes there is structural unemployment in America today, and it is by design, it is a product of conscious decisions made by the wealthiest Americans.


Posted by rationalrevolution.net at 11:37 AM EST | Post Comment | View Comments (1) | Permalink
Updated: Friday, December 3, 2010 11:45 AM EST
Tuesday, November 23, 2010
 The Myth of "Free-Markets"

Topic: Commentary

I was happy to see a post on Democracy now titled "Why the Free-Market is a Myth", but then upon reading the explanation provided I was disappointed because the explanation provided was so woefully inadequate, so I guess I'll cover the issue here.

In the interview Chang states that there are no "free-markets" because there are actually lots of regulations and no body would want to get rid of all of the regulations, like child-labor laws, because presumably, some regulations are "morally good".

Yes, well this much is obvious, but this has nothing to do with the myth of free-markets. The myth of free-markets is the very notion that there ever could be a "free-market", even from just a technical perspective.

Now, addressing the issue of "free-markets" depends on how you define what a "free-market" is. This is more difficult than one might think because the definition of "free-market" has changed over time, indeed one could argue that the most common definition of a "free-market" today is in some ways the opposite of what it used to be.

If one defines a "free-market" simply as a market without government regulations, then of course Chang's comments make some sense, but defining a "free-market" simply as without regulation is also of little use. If we take the definition that a free-market is simply "Business governed by the laws of supply and demand, not restrained by government interference, regulation or subsidy," this implies that private "interference, regulation, and subsidy" doesn't exist, and that without government "interference, regulation, and subsidy" either "interference, regulation, and subsidy" will not exist or by definition whatever "interference, regulation, and subsidy" that does exist is still considered "free" simply because it's not government imposed; in other words a market that has "interference, regulation, and subsidy" imposed on it by the mafia would still be a "free market" under this definition. As one can see, such a definition makes little sense.

But let's take another common definition of the term, in this case from Investopedia:

"A market economy based on supply and demand with little or no government control. A completely free-market is an idealized form of a market economy where buyers and sellers are allowed to transact freely (i.e. buy/sell/trade) based on a mutual agreement on price without state intervention in the form of taxes, subsidies or regulation."

The tricky part of this definition is "buyers and sellers are allowed to transact freely". This part of the definition goes directly to the heart of classical definitions of "free-market", whereas the neoclassical definition of "free-market" focuses on "little or no government control".

But these two components of the definition are at odds. It is not necessarily the case that with "little or no government control," "buyers and sellers are allowed to transact freely".

This really gets to the heart of the matter, because what many "free-market" advocates are really advocating is a market in which there are no government controls to prevent private entities from preventing buyers and sellers from "transacting freely" and from imposing their own "interference, regulation, and subsidy". The contradiction of the "free-market", the reason that the idea of a "free-market" is itself a paradox and cannot ever really exist, is that there have to be regulations in order to ensure that "buyers and sellers are allowed to transact freely".

The myth of the "free-market" is that without regulations a "free-market" would exist. This isn't the case, there are no real situations in which a true "free-market" would ever exist on any large scale. If one only defines a "free-market" as a market free from government regulation, then yes of course "free-markets" can exist, but if one defines a "free-market" as a market where buyers and sellers are "allowed to transact freely" and prices are "governed by the laws of supply and demand" then this will never truly exist on any large scale.

Certainly we can acknowledge "degrees of freedom", and we can acknowledge that government imposed price controls are certainly a restriction on markets, but to assume that a market with no government imposed restrictions would be "free" is just another fallacy. It falsely implies that prices cannot be manipulated by non-governmental entities, it is akin to the suggestion that anarchy provides more freedom than a state with police powers, which is to imply that there is more "freedom" in Somalia than in your average American down town. It all depends on how you define freedom. In Somalia you certainly have more freedom to rape someone, but you also necessarily have less freedom from rape. Can police powers be too imposing so that they restrict freedom more than they ensure it? Of course, but it's all a matter of degrees, not absolutes. We can't have a completely free society just like we can't have completely free markets. There will always be restrictions, either by laws and rules or by those who impose their will upon others. We recognize this in society at large, but some people fail to recognize this in economics. Those who argue for "free-markets" are no different from people who would argue that we shouldn't have laws against theft and rape and fraud, etc. Clearly people arguing against those laws we would recognize not as people who support freedom, but as people who want to be free to steal and rape and commit fraud against others.

Classical economists like Adam Smith and David Ricardo did advocate free-markets as opposed to the mercantile system of the feudal period, but they did so only in so far as "free-markets" served the public good.

We can look at specific examples, including one provided by Adam Smith. Below Smith argues against regulation of corn prices, to allow corn traders to determine the price of corn, arguing that even when traders buy low and sell high, thereby driving prices up in the short term, they still provide a benefit by having the effect of "evening out" the price of commodities over time.

"Secondly, it supposes that there is a certain price at which corn is likely to be forestalled, that is, bought up in order to be sold again soon after in the same market, so as to hurt the people. But if a merchant ever buys up corn, either going to a particular market or in a particular market, in order to sell it again soon after in the same market, it must be because he judges that the market cannot be so liberally supplied through the whole season as upon that particular occasion, and that the price, therefore, must soon rise. If he judges wrong in this, and if the price does not rise, he not only loses the whole profit of the stock which he employs in this manner, but a part of the stock itself, by the expense and loss which necessarily attend the storing and keeping of corn. He hurts himself, therefore, much more essentially than he can hurt even the particular people whom he may hinder from supplying themselves upon that particular market day, because they may afterwards supply themselves just as cheap upon any other market day. If he judges right, instead of hurting the great body of the people, he renders them a most important service. By making them feel the inconveniencies of a dearth somewhat earlier than they otherwise might do, he prevents their feeling them afterwards so severely as they certainly would do, if the cheapness of price encouraged them to consume faster than suited the real scarcity of the season. When the scarcity is real, the best thing that can be done for the people is to divide the inconveniencies of it as equally as possible through all the different months, and weeks, and days of the year. The interest of the corn merchant makes him study to do this as exactly as he can: and as no other person can have either the same interest, or the same knowledge, or the same abilities to do it so exactly as he, this most important operation of commerce ought to be trusted entirely to him; or, in other words, the corn trade, so far at least as concerns the supply of the home market, ought to be left perfectly free."
- Adam Smith - Wealth of Nations Book 4 Chapter 5

Smith's argument here, whether ultimately correct or not, is that in this case a "free-market" would serve the public good by evening out the price of corn over the year. He argues that independent corn traders without regulation would serve that interest better than government imposed price controls which attempt the same goal.

However, in a truly unregulated market there would be nothing to prevent a well capitalized trader from coming in and buying all of the corn to monopolize the market, thereby holding prices at ransom and driving up prices astronomically even in the short term. The idea that "free-markets" are good is predicated on the assumption of a large and distributed market place of individual actors, where no actor is able to have a significant singular influence. The idea being that competition between the sellers will drive the market to "fair" prices, and "profits" will actually be low.

This is basically true, but the problem is that without regulation there is no way to ensure that such a situation will exist. Even if a market starts out with a large number of actors, history shows that markets can quickly become consolidated so that a market of many actors can be driven down to only a few or even one actor over a short period of time, and once that happens then sellers can "dictate" the prices. History also shows that even with many actors and compeition, speculation can result in market forces that act against the public good, market bubbles being perfect examples of this.

There are plenty of examples of private interests undermining free-markets in our current economic system. A common example is the practice of suppliers paying fees to retailers for exclusive product rights. Tickemaster is one perfect example of this, but even companies like Coke-a-Cola and Pepsi pay restaurants and retail stores fees to prevent them from carrying competitors products.

It's hard to ague that this constitutes "free-market" practices under any definition of "free-market" other than simply "a market without government regulation". In this case what we have is not government manipulation of prices, but private manipulation of prices.

In the case of Ticketmaster, what they do is they pay venues an up-front fee for exclusive ticket selling rights. By doing this, Tickemaster gains a monopoly on the tickets for a given event. Ticketmaster can then set "transaction fees" without competition.

This is where things get even more complicated philosophically. Certainly there is a difference between a "free-market" and a "perfect market". What many "free-market" advocates do is they support "free-markets" even when a "free-market" deviates more from a theoretical "perfect market" than a regulated market, in other words, even when a "free-market" is objectively contrary to the public good.

A perfect market is a theoretical market where there is infinite competition and each actor is essentially omniscient, i.e. knows everything about every aspect of the market and all products in the market.  Under these conditions we predict that profits will be zero, everything will exchange at cost.

So if we hold that in a perfect market there will be zero profits, i.e. that zero profits is the ultimate efficiency, then the means of generating profits is to steer the market away from perfectness, in other words to intentionality attempt to reduce competition, hinder access, and reduce the information of the other actors in the market. Adam Smith did not advocate allowing private interest to reduce competition, hinder access, and reduce the information of the other actors in the market, indeed quite the opposite.

What we know about market behavior, however, is that this is exactly what we find in the real world in an "unregulated market". In an unregulated market the actors engage in behavior that is intended to reduce competition and restrict information or provide misleading information, both about their specific products and about the market as a whole.

And so this is what many "free-market" advocates are really advocating for, the ability to reduce competition, hinder trade, and mislead others. It's hard to argue that this constitutes a "free-market" under any definition but the strictest definition of a market without any government regulation. It's like arguing that a society where people are free to hold slaves has more freedom than a society that has restrictions against slavery.

Let's finish with a specific example of how the ability of "buyers and sellers to transact freely" can be restricted without government regulation. Suppose that we have an area of unowned land, across which people travel to exchange goods. Now, in an unregulated environment where there is, at a minimum, just private property right enforcement and nothing else by the government, someone could acquire that land and erect a wall thereby disrupting trade. They could then put a passage in the wall and charge a private toll for passage across the barrier. It's hard to argue that this fits the description of allowing "buyers and sellers to transact freely". What has happened here is that in an unregulated environment a private entity has created a barrier to trade and is using that barrier to trade to levy a rent on trade, and this rent itself violates the principle of allowing "buyers and sellers to transact freely". Certainly they could transact more freely prior to the imposition of the rent, and a government which used regulation to prevent this type of rent charging would in fact be protecting the ability of "buyers and sellers to transact freely", but in so defending this aspect of a "free-market" it would violate the principle of barring government regulation.

And this is why there is no such thing as a true "free-market", and can never be. The principles of a free-market are at odds with one another. Allowing "buyers and sellers to transact freely" requires government regulation.


Posted by rationalrevolution.net at 5:58 AM EST | Post Comment | View Comments (2) | Permalink
Updated: Tuesday, November 23, 2010 6:18 AM EST
Wednesday, November 17, 2010
 The real deal with Social Security

Topic: Commentary

Having just reviewed the debt reduction report put out by Obama's fiscal commission, I must say that it's really not that bad.

I'm only going to address the Social Security portion of it here, since that's getting the most attention, and I may go back and address other portions of it later.

I'll quote from the presentation (which is just a slide show):

  • Add a new special minimum benefit to keep full-career minimum wage workers above the poverty threshold.
  • Wage-index the minimum benefit to make sure it is effective both now and in the future.
  • Provide a benefit boost to older retirees most at risk of outliving other retirement resources.
  • Gradually move to a more progressive benefit formula
  • Index retirement age to increases in longevity
  • Hardship exemption for those unable to work beyond 62
  • Switch to a more accurate measure of inflation (chained CPI) for calculating COLAs
  • Include newly hired state and local workers in Social Security
  • Gradually increase the taxable maximum to capture 90 percent of wages by 2050
  • Allow greater flexibility in how benefits are claimed
  • Direct SSA to design a way to provide for the early retirement needs of workers in physical labor jobs
  • Improve information on retirement choices

They also listed some additional options, one of which was to uncap the disability portion (1.8% of payroll) of the Social Security tax (this funds payments to disabled workers prior to retirement age).

The overall projected impact of these proposals (not including the optional ones) is projected as shown below:


What this graph is saying is that the proposals would slightly increase the payout to those in the lowest quintile over the current promised benefits, but it would significantly increase the payout over the supposed actual "payable" benefits. They are using a very  conservative scenario where the payable benefits fall below the promised benefits as of 2037.

If you ignore the distinctions between what's projected to be payable and what's currently promised, their proposal slightly increases benefits for the poorest people and reduces benefits "progressively" for everyone else.

The first thing to point out is the proposal to increase the taxable maximum to capture 90% of wages by 2050. This is somewhat interesting. According to this report the Social Security payroll tax currently captures 86% of wages, with the remaining 14% being above the cap. It is projected that using the current system and current levels of income disparity growth that by 2050 the Social Security tax would only be capturing 82.5% of payroll, with the rest being above the cap.

Now, the call to change the formula so that 90% of payroll would be captured by 2050 is perhaps better than doing nothing, but its still a far cry from what should really be done, which is to remove the cap completely and to do it much more quickly than by 2050. It's something that should be done perhaps over 5 years, not 40 years.

Overall I would say that some of these benefit ideas are good ones, like creating a new minimum benefit, and developing new ways to insure that people in manual labor jobs can claim early retirement without a penalty, etc. I also think that the outlined reductions in promised benefits are mostly fine the way that they have laid them out as well, though perhaps a little too aggressive. It is true that right now benefits are scheduled to increase too much in my opinion and paying for these benefit increases only hurts workers right now.

However, I'm against increasing the retirement age for anyone, for multiple reasons. For one thing, it obviously would mean that fewer people would see any benefits, because if you die before you collect then you essentially get nothing. For another thing, I think that even with exceptions for people in manual labor jobs, the net effect would be to push more elderly people onto other government assistance programs in their late 60s, which might make Social Security more solvent, but wouldn't help the overall budget.

Here is the other issue when talking about Social Security and "reducing the debt". There is currently $2.5 trillion in the Social Security "trust fund". Now regardless of what you think about the trust fund, the fact is that this represents $2.5 trillion in taxes that were collected from payroll incomes below the taxation cap, primarily over the past 25 years.

Over the past 10 years roughly $150 billion has been put into the trust fund every year, meaning that Social Security has collected an excess of roughly $150 billion every year for the past 10 years.

The money in the "trust fund" has been "borrowed" by the federal government every year, so what this means is that this excess $150+ billion has been used like general revenue to fund the federal government. That $150+ billion has represented roughly 6% of total federal revenue each year and that 6% comes entirely from low and middle wages. What this means is that the Social Security surplus has been acting like an offset to the federal income taxes, and the Social Security tax is a highly regressive tax that only hits low and middle wages, so what's been happening for the past 25 years is that low and middle wage earners have been subsidizing federal revenues. Without that $150+ billion coming in from social Security every year we would either have had to borrow that money from other sources, or raise other taxes, and if we had to raise other taxes, almost certainly it would have come from income taxes, which are more progressive and therefor this has acted as a stealth tax cut for the wealthy this whole time.

We are currently discussing the expiration of the Bush tax cut for the top 2%, which are projected to cost $700 billion over the next 10 years, but consider that the Social Security excess that has been paid over the past 10 years has been in excess of $1.6 trillion. This really amounts to a $1.6 trillion tax cut on the wealthy, or at least around a $1 trillion tax cut on the wealthy, over the past 10 years, paid for  entirely by the poor and middle class, on wages under ~$100,000 a year (as of 1999 the cap was $72,600). Over the past 10 years the wealthy have had their taxes subsidized by the poor and middle class by roughly twice the amount of the Bush tax cut that we are currently debating, and in fact this subsidy has been going on for the past 25 years, not just the past 10.

So, when we talk about changing the Social Security benefits to "reduce the debt", what this really means is defaulting on the $2.5 trillion that's in the "trust fund". It means changing the benefits so that instead of paying back the $2.5 trillion over the next 40 years, less than $2.5 trillion will be paid back. This is advocated as a means of avoiding tax increases on high incomes (since surely where the bulk of the burden would lie), but the fact is that this $2.5 trillion represents a $2.5 trillion tax subsidy to on high incomes over the past 25 years in the first place, so if its not paid back by taxes on high incomes then what's really happened is that we just used a tax on low incomes only as a stealth income tax for all these years, and that's that.

This, among other reasons, is why fully removing the cap on the Social Security taxes is essential. Simply changing the formula so that the cap rises a little faster is not enough, and simply removing the cap on the disability portion of the Social Security tax is not enough.

While Social Security is a good system overall, it is currently a highly regressive system that is putting an undue burden on the poor and middle class. The Social Security payroll tax is the single largest tax that most Americans pay on their income, and it only hits income under ~$100,000.

What really needs to be done to fix Social Security is:
  • Remove the cap on the Social Security tax
  • Apply the Social Security tax to all forms on income, not just payroll income (capital gains, etc.)
  • Modestly reduce the rate of benefit increases, something between the current formula and what this deficit commission has proposed
  • Reduce the tax from its current rate of 12.4% down to around 6%
Taking the first three steps is what enables the last step of reducing the tax rate. The biggest funding problem with Social Security all along has been that due to increasing income inequality it has continuously captured a smaller and smaller portion of total national income because less and less of the national income falls below the taxation cap, but just removing the cap on payroll income still won't fix that problem, because there are shifts between the portion of income going to payrolls and going to capital gains as well, and so as a larger portion of national income is realized via capital gains, or "unearned income", this will still cause the same problem unless the tax is applied to all income.

Not only should the tax be applied to all income for that reason, but given that almost a quarter of national income is realized via capital gains, by not taxing this income it forces the tax on payrolls to be higher. If the burden can be spread across more of the national income then the tax can be lower.

So in conclusion, the proposals on Social Security put out by Obama's deficit commission (aka cat food commission) actually are not that bad. In fact I would call them mostly an improvement over the current state of affairs, however I strongly disagree with raising the retirement age and I disagree with making the benefit formula significantly more progressive (weening the middle class off of Social Security). Likewise, the recommendations don't go nearly far enough in expanding the tax base of Social Security, and indeed its recommendations appear to be designed to stave off larger efforts to fully remove the Social Security taxation cap and more broadly expand the tax base.


Posted by rationalrevolution.net at 6:59 AM EST | Post Comment | View Comments (5) | Permalink
Updated: Thursday, November 18, 2010 9:48 PM EST
Friday, November 5, 2010
 The state of political confusion

Topic: Commentary
The policies and positions of Democrats and Republicans, and their portrayal in the media, have created a state of major political confusion in America. Let's face it, the reality is that the two party system defines American politics, and no matter how bad it is, the reality is that the vast majority of the population thinks of politics along the two party lines.

I do believe that the two party system shapes how we even think about politics in America. It's why most issues get boiled down into "liberal" vs "conservative" and "left" vs "right". You don't see this as much in countries with proportional representation and multi-party systems because with more parties and more representation the issues aren't defined in a binary fashion.

But that's not the focus of what I want to talk about. The focus here is how the odd mix of policy positions taken by the Republicans and Democrats for political reason has created much confusion among the electorate, particularly among progressives.

We've had the Democrats pass a "historic" health care reform package... but it's based on a plan drafted by the Republicans and the Heritage Foundation and the Democrats caved in to the demands of opponents of legal abortion, insurance companies, hospitals, and the pharmaceutical industry in order to get it passed.

The Republicans now are, at least out of one side of their mouth, defending Medicare against spending cuts, and just previously under George Bush they expanded it with the Part D prescription drug benefit.

Barack Obama is supporting increased investment in education... but it's largely by strengthening No Child Left Behind, and cannibalizing the public school system in favor of charter schools run by private for-profit corporations, and even allowing money to go to schools run by faith based organizations.

There are more Republican women in the headlines running for political office than Democrats.

Obama and the Democrat passed $787 billion worth of economic stimulus and has extended unemployment benefits in order to deal with the recession... but the stimulus relied heavily on tax cuts and traditional Republican approaches to economic stimulus, and the extended unemployment benefits only highlight the lack of any real programs to put people back to work, including public works programs like those used by FDR.

What I've found, just based on anecdotal observation, is that there are many confused Democrats and progressives. People don't know whether to defend Obama and the Democrats or not. They don't know whether to be supportive of the health care reforms or not. There is a natural reflex to defend Obama and the Democrats when conservatives say absurd things about them, and when they say things that are clearly false.

I think this confusion is reasonable, and that it's really hard for the average person to get a handle on what's going on politically right now. The corporate media certainly doesn't help matters at all. All I know is that there are still a lot of people who call themselves liberals and progressives out there who are supporting Obama and the Democratic party. The biggest impulse I see is to defend the health care reforms. I see this creating constant consternation, with liberals and progressives feeling the need to come to the defense of forcing everyone to buy private insurance, largely from for-profit insurers. Are there some good provisions in the bill? Of course there are a few good things, it's not all horrible, but it's extremely far from a progressive piece of legislation, and I think that it makes the situation worse overall long-term by having given more power to private insurers and more deeply integrating them into the fabric of government. We'd be better off siding with the conservatives on the position that the federal government should not be able to compel individuals to buy products from private corporations, because this would pave the way for single payer. Actually I think that conservatives know this and it's why they will really be all bark and no bite on this issue. They don't really want repeal, they are just saying they do to please the base, but in reality they like the mandate, heck it was their idea in the first place. Defending the mandate just makes progressives look absurd. Why are progressives defending being forced to buy insurance for the same private carriers that were abusing the American people before, and without any meaningful price controls on the system? Instead of flip-flopping and trying to argue with conservatives that the legislation is good, we should just agree with them that it's bad and draw contrast by making the case for a single payer system instead.

The same is the case with the so-called stimulus. Instead of trying to defend Obama's "stimulus spending" we should be agree with conservatives that the stimulus as it was implemented was a bad idea, because it relies too much on tax cuts and didn't do enough direct job creation.

On extending unemployment we should again agree that two years of unemployment isn't reasonable, and instead the government should be creating public works programs to put people to work instead of just extending unemployment, etc., etc.

By constantly defending the actions of the Obama administration, progressives and liberals end up arguing against progressive policies to defend the anti-progressive policies of the Democratic party.

But having said all, it again comes back to confusion. Right now it seems that there are still a lot of "team players" in the Democratic party who will defend the party's actions no matter what they do. It's important for progressives not to get sucked into "team player" mentality and to remain objective and stick to the issues. Take the legislation out of party context and just think about it by itself, as if you didn't know which party was advocating it. Would you still support it then? If not then don't support it now either, and don't support those that backed it. Don't get sucked into the us vs. them game. When conservatives attack Obama and the Democrats or their legislation, don't just reflexively defend them, point out your disagreements as well (if you have any).


Posted by rationalrevolution.net at 9:09 AM EDT | Post Comment | View Comments (4) | Permalink
Thursday, November 4, 2010
 What the elections really tell us (the media is corrupt)

As usual it seems that most people are focusing on the wrong issues when it comes to interpreting the results of the November 2nd elections. The most important thing that these elections, and the reaction to them in the mainstream media (I really need to stop using that term, from now on its corporate  media), really tells us is how the corporate media is complicit in once again deceiving the public and  shaping public perceptions.

When I started this website back in 2002 (the precursor to this site was a free site in 2002), it was because of the corporate media's misrepresentation of the facts leading up to the war in Iraq, and the ways in which the corporate media towed the Republican line and was complicit in essentially deceiving the American public and acting as an arm of official state propaganda.

Now, the cause of this has been much analyzed and it seems that the primary reason that the corporate media failed to be objective and to instead just spout the propaganda that it was fed was a mix of pure stupidity and naivete on the part of "reporters", pure laziness and a corporate media that no longer seeks to spend money on investigating facts but would rather just pass on press releases, a willingness to be led, and, importantly, the fact that the corporate media has a vested interest in the economic status quo and thus their "reporting" is colored by a major bias toward presenting information that supports the political and economic status quo and thus provides security for the corporations and the wealthy.

The reality is that the corporate media has only gotten less objective and has become more biased and more controlled as an instrument of propaganda for corporations and the wealthy since 2002, when they clearly played an important role in disseminating Republican propaganda and aiding and abetting the deception of the American public.

Unfortunately I don't have time to dig up all kinds of details and examples right now, but there are some big picture observations to be made.

The obvious place to start is with the so-called "Tea-Party". This "movement" has been coddled and helped along the whole way because of its alignment with the interests of the wealthy and corporations, and the media played a significant role in this. The reality is that a "leftist" movement similar to the Tea Party could never have this type of success in America because a similar type "leftist" movement wouldn't get bank rolled and wouldn't get the media attention that the "Tea Party" got.

But the Tea Party is only a small issue. The bigger issue is just economic reporting in general. Basic economic facts aren't reported in the corporate media. I'm not even talking about analysis here, just plain basic facts, such as the incomes of top hedge fund managers (most people don't know that hedge fund managers that profited from the housing bubble had multi-billion dollar incomes in 2007 and 2008). Reporting on the real level of income and wealth inequality in America today. (Studies show that virtually all Americans vastly underestimate the level of economic inequality in America)

And, most relevant to these recent elections, most Americans think that federal taxes have been increased over the past two years by Barack Obama, when in fact Obama has enacted major tax cuts. Most Americans think that the widely reported on $787 billion stimulus package of Barack Obama was all spending, when in fact almost $300 billion of it was tax cuts, with much of the other $500 billion being used to prevent states from having to raise taxes or raise taxes more than they did.

People believe this because of a combination of #1 being told that it's true and #2 not being given any information to the contrary.

Major prime time media outlets, and not just FOX, all media outlets, including MSNBC, CNN, ABC, NBC, etc. allow blatantly false economic talking points to go unchallenged; they just report what someone says or let a guest on a show say something false, and they never correct it or point out that it is false.

Again, I don't have time to go into details on this, but I watch the nightly news, etc. I remember coverage of the The American Recovery and Reinvestment Act, aka the "stimulus package". 95% of the time that I saw any coverage of this in the corporate media the size of the package, $787 billion was put out as a grave thing like it was just astronomical, they talked about some projects it would fund, like highway construction, and they never mentioned that it contained any tax cuts. If they did then they didn't say what portion of it was tax cuts.

The commentary on the "stimulus" in the corporate media continuously focused on it as a means of trying to "spend our way out of a recession". But it never was that.

And why does this matter? Because the reality is that many Americans still believe that "cutting taxes" is the "best way" to promote "economic growth". Well it's not, and the Obama stimulus proves once again that it's not. But the public hasn't learned that lesson because they aren't even aware that that's what Obama did. And now the reaction to the "election" is to claim that the "leftist policies" of Obama have to be rejected and that we need to "move to the right", since a mass of people who had no idea of what was going on in the first place elected a bunch of people who had been lying to them for years, enabled by the corporate media, after the Democratic president just tried using all of the methods that the people voting for the Republicans claim should be used.

The reality is that before Barack Obama was ever elected the Republicans had already written the script they were going to use against him. When Obama got into office, however, his actions didn't fit the narrative. But instead of changing the script to address Obama's real actions, the conservatives just stuck to the script and railed against the straw-man they had created in their narrative. That much can be expected, but the real crime here is that the corporate media went along with the whole ruse and instead of calling the Republicans out or reporting on real facts, the corporate media just read along with the script and helped to uphold the false narrative. Instead of reporting on the collusion of both the Democrats and the Republicans in the protection of corporate interests and protection of the wealthy, the media assisted in calling a center-right president and Democratic congress "socialist".

The real story of this election is that the corporate media has not reformed its ways, it's only gotten worse since the invasion of Iraq, and they have shown once again that the media narrative is able to trump reality.


Posted by rationalrevolution.net at 10:27 AM EDT | Post Comment | View Comments (2) | Permalink
Updated: Thursday, November 4, 2010 11:59 AM EDT
Wednesday, October 27, 2010
 Waiting for economic equality, not Superman

You may have been able to guess that the pop-documentary "Waiting For Superman" was largely corporate propaganda by the fact that the film got so much praise and coverage in the mainstream media. While I have not seen the full film I did watch coverage of it on MSNBC and the Today show, and have been reading up on it.

It appears that this film puts the "blame" for a supposed decline in American public school education squarely on teachers and traditional public schools. I'll leave a detailed analysis of the film and argument against its thesis to the excellent article The Myth of Charter Schools, but I want to focus in on one issue.

As stated in The Myth of Charter Schools, only roughly 20% of student achievement is a product of teacher influence, and roughly 60% is a product of factors outside the school. This should be pretty easy to understand. If you take a child that is performing well at one school, and you move them to a different school, that child will typically perform well at that school too. Likewise, children that do poor in any given school typically do poor in any other school as well.

The whole point of many of these charter schools, however, at least in initial concept, is precisely to provide environments where traditionally poor performing students can do better. Certainly schools have some impact, and teaching styles, school facilities, the curriculum and the overall learning environment can be designed in ways that improve the participation and performance of students.

But the real questions are: #1 is American primary education performance getting worse or getting better, #2 are traditional American public schools under-performing charter schools and private schools, #3 if they are then why are they, #4 how does American primary school education rank relative to other countries?

First, is American primary education performance getting worse or getting better? Actually it's still getting better. The reality is that while American education has been improving all along, it's just not improving as quickly as some other foreign countries. More Americans graduate from high school today than at any time in America's past, so we are doing a better job at keeping more students in school longer and seeing that they complete primary school education.

Now, the fact that more people stay in school means that by 12th grade, there are more people still in school today who would previously have dropped in years past, and they are still taking standardized tests. Whereas in 1950 less than 50% of the population had a high school education, and most of the people who didn't have one were less intelligent and poorer performers, today almost 90% of the population has a high school education. This means that more poor performers are staying in longer. The inevitable result of this is that there is a larger and larger drag on "average performance". The more people you keep in school, generally the lower you can expect average test scores to be, all else being equal.

Secondly, are traditional American public schools under-performing charter schools and private schools? Yes and no. Certainly there are individual traditional schools that under-perform individual private and charter schools, but the reverse is also true. Taken in aggregate and, importantly, adjusted for economic background, there are no significant differences between traditional public school performance and private and charter school performance.

And here is the key, which gets to question number 3. If traditional public schools do under-perform then why?

The initial concept of charter schools was that charter schools would be set-up to specialize in meeting the needs of special needs children and poor performers in traditional public schools in order to allow traditional public schools to focus on meeting the needs of the majority of students. The view was that something like 80% of the student population could be well served by traditional schooling, while some 20% of the population would benefit from more a specialized environment. Under this scenario, one would expect charter schools to under-perform traditional schools, because the whole point was for them to deal with the poorer performing students.

But then something happened. Then the federal government began allowing private for-profit corporations to take over and manage "charter schools". The goal of these corporations, obviously, is to make a profit, and you increase profits by expanding your market and you expand your market by demonstrating that you "increase performance".

Now obviously you aren't going to have much appeal by being the school for the 20% of the "dumb kids"; in order to expand your market-share you need to go after that 80% of the mainstream student population. So that's what happened, charter schools began "competing against" the traditional schools, instead of being a means of augmenting and assisting traditional schools.

Now in order to really expand you need to show that your system "out performs" the traditional schools, and even better you need legislation that will force traditional schools to be shut down and have the teachers fired in order to acquire those new "customers".

Well, you start by first rigging the game. The first thing you do is you are more selective in your student population, because after all average test scores are largely a product of who you are testing, not how you are teaching. So the charter schools now, instead of taking on the most problematic students, seek to take on the best students and leave the more problematic ones in the traditional schools. And this is all what is happening now with the help of Bush's "No Child Left Behind" and Barack Obama's doubling down on the same program, with Obama's added enforcement measures and program of shutting down of schools that don't show continuous improvement.

Overall, however, what the data shows is that comparable charter schools aren't out performing traditional public schools,

And when we look at the charter schools that do perform well they typically spend many more dollars per student than comparable traditional schools are allotted, and they are more selective either in who they enroll or in who they retain.

The truth is that America's falling position in international academic performance is a symptom of the same root causes that are at the core of nearly every aspect of American decline, growing economic inequality. Studies show that one of the strongest predictors of academic performance is family income, and that things like unemployment of parents, even among students of traditionally high family incomes, can significantly impact performance. When we look at performance on international standardized tests what we find is a direct correlation between income inequality and student performance.


The graph above is based on select test scores. I was having a problem finding data, so I just grabbed the best set I could find. This is then compared to an inverse relativity of the GINI index for those same countries. The test scores go from highest to lowest and GINI index goes from lowest to highest, which is why I had to use an inverse (in the graph a lower GINI value means higher inequality). Relativities were used to make the values comparable.

Certainly we can all agree that improving public education is an important goal, and we should look at things like merit pay as components of doing that, but the reality is that problems in the American public school system are largely symptoms of the dissolution of the American middle class, and of growing economic inequality in America. We can't fix public education in America without addressing the root causes of the problems. The root causes of the problems aren't found within the schools, the root causes of the problems are external to the schools. There are many valid criticisms of American public education, but charter schools do little to address them.

The solution offered by "Waiting for Superman" is essentially turning the American public school system over to publicly funded private for-profit corporations, who in reality have shown no better performance than traditional public schools. The only result of the "charter school" movement will be to further fragment the curriculum, with different schools teaching different views of the world, to allow further infringement of religion into "public" education, and to enrich a minority of people on the public dime. The movement toward charter schools is once again a nexus of the interests of corporate profits and conservatives who see it as a way of introducing their view of the world into the curriculum, allowing a more conservative view of history and science to be taught.

To be sure there are some good charter schools. The whole point of charter schools is that they can all be very different. There are some that are more science based and do have better curricula than traditional public schools, and not all are run by for-profits, but its a mix and that fragmentation is exactly what is used to appeal to different groups to gain initial support.

Like virtually every problem in the American economy and society today, the problems with public education really all come down to growing economic inequality in America, and nothing is going to significantly improve the system until that root cause is addressed and economic inequality is reduced.


Posted by rationalrevolution.net at 7:32 AM EDT | Post Comment | View Comments (5) | Permalink
Updated: Wednesday, October 27, 2010 10:05 AM EDT

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