Tuesday, August 31, 2010

A Remedy to Our Economic Troubles

Two years after the economy plunged into crisis, it has still not come close to recovering. Last month’s unemployment numbers bear witness to that sobering fact. Instead of bemoaning the dire situation, or predicting a bad economy for the foreseeable future, I wish to propose a solution.

While the economy may have gone south, there is still no shortage of capital to invest. American companies are sitting on over $1.24 trillion. The reason they are hoarding the money instead of spending it is that they are unsure about what the future will hold. This is certainly true when it comes to public policy. Taxes on the wealthiest 1% might rise, or they might not. Obamacare might impose sweeping changes on the healthcare system, or it might be repealed when Republicans take control of Congress. There is only so much public policy can do to secure a good economic future. But it could in theory promise stability.

So to give investors and businesses a sense of stability, we could freeze tax rates on income, capital gains, and dividends for the next five years. Because of the deficits we are currently running, tax rates would revert back to Clinton era levels for the next five years. Businesses and investors would know exactly what is going to happen for the next ten years, and this sense of stability might be enough to get them lending and spending again.

Of course, a strong recovery in a consumer economy like ours will only come when regular Americans feel comfortable spending again and that will likely take a while. Still, freeing up banks and businesses to grant more credit and hire more people could only lead to a virtuous cycle.

The main problem would be getting political leaders to agree on a solution. If Republicans take over Congress, they will have to pursue tax cuts and repeal of Obamacare to please their base. The same logic will cause Democrats to pursue the opposite agenda. But there may yet be hope as David Cameroon’s coalition government which includes both Conservatives and Liberal Democrats shows. One of the first pieces of legislation the coalition put forward was to make each parliament stand for five years before elections. Hence, investors and businesses can make the reasonable assumption that there will not be wild swings in terms of public policy if a Labor government were to win election in a year.

Something tells me this all might be a pipe dream though.

Wednesday, August 25, 2010

How Much Was Your Kindergarten Teacher Worth?

How much is a good kindergarten teacher worth? A lot more than you might think, at least according to this article in the New York Times, which suggests that we should be paying good teachers $320,000 a year.

Perhaps this provides an interesting commentary on our market system. At its core, capitalism is based on value. People value goods, entertainment, or whatever else, and are willing to pay a certain amount for it. As it turns out, they’re willing to pay Jay-Z more than they are the aforementioned quality kindergarten teacher.

Is the mere fact that people happen to value something enough to justify how much certain occupations make on a philosophical level? Maybe not. It certainly isn’t logic we apply consistently. Take drug dealers. Lots of people (too many) value the utility they get from crack and heroine. Yet, we don’t celebrate successful drug dealers or condone paying them large salaries. Just the opposite. We do everything we can to put them in jail. You might say that we do all this because objectively, having lots of drugs on the streets ultimately hurts society in myriad ways. But to embrace an objective measure of value is to dispute one of the cornerstones of our capitalist system, namely that the best economic system is one in which decentralized consumers make millions of decisions about what they value.

But then again, maybe the relatively low salaries for the kindergarten teacher stem from a failure of our market system to function as designed instead of a problem with the system in theory. If nothing else, the current financial crisis has raised the question of how rational consumers and investors really are. People make irrational, overly exuberant decisions over the time frame of just a year or two. It only stands to reason that they can do so over a 20 or 30 year time span. To value a teacher properly, we have to think about how much money a good teacher will bring in.

But kindergarten students don’t make money a year after they have that teacher; they make money 20 years later when they get a profession. As the study showed, the kindergarten teacher can have a dramatic effect on earnings (as much as $1,000 a year by age 27). To properly value a teacher, people need to be able to make a reasonable guess at how much a good teacher can bring into society in the form of increased productivity, as well as lower costs for welfare and policing because more kids from poor backgrounds have a shot at a decent living. That process will always be fraught with difficulty. Do we rely on test scores? Parent evaluations? A special formula which combines several factors?

Before we render any judgments on our compensation system more such studies must be done. I look forward to seeing them.

Wednesday, August 18, 2010

Obama Was Right About the Mosque

Just as he did last year with the fracas over the arrest of friend Henry Louis Gates by Cambridge police, Barack Obama has managed to get himself into a racially charged controversy with no prospect of benefit.

On the merits, Obama was right to stand up for the right of Muslims to build a Mosque. One of the best cases for that comes from George W. Bush’s speechwriter Michael Gerson. I would add that the demonization of the proposed Mosque couldn’t come at a worse time. In order to effectively check Iran, we need to make sure Sunni Arabs in the Middle East are on our side. Whatever the motives of critics of the Mosque, the move will be seen as anti-Arab and anti-Muslim.

There have been some interesting counter-arguments made. Namely, Ground zero should be a sacred place. Just as no German cultural center should be placed at Auschwitz, no Mosque should be placed where the twin towers fell. But this runs into a few problems. First, the Mosque is not literally on Ground Zero. It is some distance away. Second, I wonder if critics of the Mosque would apply this logic in other situations. For example, Timothy McVeigh was a confirmed Catholic. If the Catholic Church proposed building a church close to the Murrah building (where the Oklahoma city bombing took place), would there really be such an uproar? If not, it demonstrates a crucial point. It would show that Americans don’t impute McVeigh’s terrorism onto the whole Catholic Church. An implicit association between Al Qaeda and Islam seems like it drives opposition to the Mosque on some level for some critics. To them, building a Mosque must seem like honoring the murderers who flew planes into buildings.

Third, I think there is a definite difference between the religion of Islam, and a nationality like Japanese and German. That German or Japanese could as easily be a Catholic or a Lutheran. Because a German Lutheran massacred American GIs at Malmedy during the battle of the Bulge, would we say no Lutheran church should be there? If not, then we shouldn’t then use a double standard for Muslims. A number of those who hijacked the planes on 9/11 were Saudi Sunni Muslims. Should their actions prevent a second-generation Shiite who has relatives fighting in the war on terror from being able to build a Mosque where he chooses?

Politically however, weighing in on the debate can’t be good for Obama in the short term. It plays into a conservative critique that Obama is out of step with the average American, and certainly members of the Republican base. People who cheer Obama’s qualified support were likely mostly leftists who would have supported him any way. This can only inspire conservatives who already opposed Obama to double their efforts to take Congress in the midterm elections.

Sunday, August 15, 2010

Reason for Pessimism on Iran

An interesting article came out this week from Jeffrey Goldberg. Apparently, Israel could attack Iran in the next year. That doesn’t seem like a good eventuality.

Most analysts predict that any Israeli attack will only set the Iranian program back for a little while. Worse, as Iran rebuilds its program, it will be portrayed as a victim of Jewish aggression in the Muslim world. This could not come at a worse time either. Sunni Arab rulers don’t want a Shiite Iranian hegemon any more than Americans or Israelis do. But if pressed, I suspect the average Arab ( who dislikes Israel more than he does Iran) will rally around the Iranian regime.

Yet if attacking right now is bad, so is the prospect of doing nothing. Sanctions have not stopped Ahmadinejad from pursuing weapons, and there is not a serious opposition left to challenge him. The alternative to an Israeli attack is an American one, which has a better chance of setting the Iranian program back for a while. President Obama probably has more credibility to initiate an attack than any Western leader in recent memory. He has tried outreach and sanctions. He has gone through the UN. He spoke to the Muslim world at Cairo. He could say that he really didn’t want it to come to this, but that his hand was forced by a recalcitrant Iranian regime (which would be true). Any statement to this effect would be more believable coming from him than a Netanyahu or Bush.

The other option is containment, ie, living with a nuclear Iran. That’s awful for a few reasons. First, it’s not clear that Iran is as rational an actor as most states. As George Will noted in his column today, the Ayatollah Khomeini once said “We do not worship Iran, we worship Allah. For patriotism is another name for paganism. I say let this land burn. I say let this land go up in smoke, provided Islam emerges triumphant in the rest of the world.” Of course there are plenty of Iranian nationalists as well who rank Iran's interests above Islam's, but there seem to be enough fanatical Islamicists to really affect Iran’s decision calculus.

Second, containment will color everything in US foreign policy from now on. To see evidence of this, look no further than the history of containment against the Soviet Union. The US propped up dictators and overlooked human rights abuses all in the name of stopping global Communism. Do we really want to go down that road again?

So there it is. There are bad options and worse options on Iran. I fear nothing good can now come of the situation.

Wednesday, August 11, 2010

Read My Lips: Somebody's Taxes Are Going Up

Death and taxes are the only things certain in life once quipped Benjamin Franklin. Were he alive today, he’d also conclude that taxes are certain to be an issue in this fall’s battle for Congress. With the Bush tax cuts expiring this year, there is dispute about what to do. Democrats by and large want to retain tax cuts for those making less than $250,000 a year, while raising taxes on those making more than that. Republicans want to preserve the cuts for all Americans.

The first key issue at hand is what raising taxes on at least some Americans might mean for the economy. The argument that doing so would hurt the economy is simple. The wealthy invest in, and start some businesses. Furthermore, their wealth means that they have the ability to consume a large amount if they so choose. Taking away money for them to invest when the economy is so weak could only hurt businesses already tottering on the edge. That would of course worsen unemployment numbers, and by extension, the entire economy.

There is also an argument to be made that raising taxes on the wealthy might help the economy, though it is somewhat more technical. Yes, you heard that right. First, raising taxes in conjunction with some reductions in long-term entitlement spending and pensions could allay worries that investors have about government debt. The federal government might be ok now, but remember some individual states are really struggling. Many are at risk of losing their AAA credit ratings in the future. Those who do invest will demand a higher interest rate, which will in turn cost state taxpayers more money in the future. Thus, raising taxes as a show of fiscal responsibility could assure that these states have access to credit at a decent rate when they need it.

Second, raising taxes and transferring the money to the middle and working classes would put more money into the pockets of those most likely to spend it, which would boost consumer demand. The wealthy might choose to sit on their money or sock it away in 401ks and IRAs, activities which would stimulate the economy less than direct consumption.

Economists should be engaged in this debate for the foreseeable future. Politically, I’m not sure that running on tax cuts for the wealthy will be a winner at the ballot box for Republicans, since Democrats want to keep cuts for those making less than $250,000. Democratic strategists will surely craft ads alleging that Republicans want to cut the taxes of the same Wall Street CEOs that caused the financial crisis hurting middle America, even as they want to decrease funding on programs like unemployment compensation at a time when so many are worried about the prospect of becoming unemployed or know someone who is.

Besides, not too many people can really relate to the problems of the affluent. Less than 5% of all Americans make more than $250,000 a year. Democrats have effectively neutralized the issue for 95% of the population. And Republicans won’t even win unanimous support among those wealthy whom the cuts would help the most. If I were a Republican strategist, I’d urge the party to focus its energy on criticizing Obama’s handling of the economy instead of fighting for the wealthy.

Friday, August 6, 2010

Hospices and Healthcare

Healthcare is sure to figure prominently in the fall elections as Republicans run against "Obamacare." Many candidates might revive last summer's charges of death panels and "pulling the plug" on grandma. That is partially why I found this article so interesting in the New Yorker. It asks us a much-needed and under-discussed question. At what point should we focus on comfort care instead of keeping patients alive as long as possible?

It is likely that steering patients with terminal illnesses to end-of-life care instead of intensive care would save a good deal of money. With Medicare and Medicaid costs consuming a large portion of the budget, expect discussions of how much we should fund intensive care to proliferate. And this will put politicians of all stripes in a tough situation. Conservatives are planning to use the budget deficit as an issue in their fall campaign for Congress. Furthermore, they want to cut the deficit sharply by reducing spending, not by increasing taxes. The real meat of the budget are programs like Medicare as I said earlier. It won't be enough just to cut food stamps and pell grants. And hawks will be loath to cut defense, so by process of elimination, they'll have to make some meaningful cuts to Medicare. So if conservatives are to match their rhetoric, they will have to contemplate cost-saving measures such as promoting end-of-life care. Ironically, they could have to promote the very "death panels" they decried last summer. Should they find that unappetizing, they will have to do something drastic like means-test the program so upper-middle class and the middle class elderly no longer qualify for benefits. Imagine the howls of protest that move would bring from senior citizens, who vote in large numbers. Either way, they lose.

Liberals who want to keep the Bush tax cuts for families making less than $250,000 a year won't have enough revenue to pay for their priorities and will be in a similar position. They will also have to keep answering an important question: how extensive should a government's role be in promoting the welfare of its citizens? It is said that Americans oppose any attempt to ration healthcare to the elderly because they wouldn't want to see their own grandmother denied care. But when faced with paying higher taxes that liberals support because they're reluctant to cut entitlement spending, we'll find out how much Americans are willing to pay to help someone else's grandmother.

The more interesting dimension here is ethical. As a doctor or family member dealing with a patient or loved one who has an incurable illness, what's the right thing to do? On one hand, life is precious and we want to make the most out of it that we can. We would never want to condemn anyone to death when they have a chance at life. But at some point, that instinct must be weighed against the pain that a drawn-out process of treatment would cause the patient. Interestingly, there is little difference in the amount of time people live who choose hospice care, and the amount people who choose intensive care live. In fact, those opting for hospice care live longer in some cases according to the previously cited New Yorker article.

As a family member, one has to ask why he or she urges heroic, life-saving measures for a patient. Is it because he or she can't bear the thought of living without the loved one? Or is truly to protect the best interests of a patient. These are gut-wrenching questions. Questions I pray I never have to ask myself.