Are We Becoming Europe?

I met a sociologist once who commented that he had visited at Princeton University while on sabbatical. He said, "I used to hate the rich; now I hate them with cause." I understood what he meant, for the rich, especially those who grew up rich, seem to feel entitled to all sorts of benefits and expect others to behave deferentially to them. It might seem then, that I would be ready to raise taxes on the rich. But, other things are involved than merely trying to punish the rich for being rich.  While greed is one of the seven deadly sins, so is envy.  (My former colleague, Victor Claar, has written and spoken on envy in recent years.)

If we are to receive the benefits of a stable government, we have to pay taxes.  But, as noted in a book years ago entitled, THE LAW AND THE PROFITS, governments do not have a tight budget constraint. If they want to spend more they can either tax or borrow more. What should be the amount of people's income that go to taxes? There is no "correct" answer, but one that gets worked out through our political process. 

Recently, Steven Rattner had an op-ed in the New York Times, in which he argues for higher taxes on the rich. He writes, "Don't forget that the taxes on capital gains and dividends are absurdly low."  I don't know on what he bases that other than personal opinion, and maybe he is correct. But, he completely ignores that the dividends have already been taxed as corporate profits. Rattner wants all of the extra revenue to come from the wealthy, even thought the wealthy already pay the vast majority of federal income taxes. When forty percent of households pay no federal income tax, what skin do they have in the game?

Another piece in the NY Times is by Eduardo Porter. He argues that we should increase the share of GDP that goes to taxes in order to maintain a better safety net than we now offer. Progressivity isn't the key but broader taxes that collect more revenue as well as more generous welfare programs. He argues that that is what the richer countries in Europe do and we should too.

These two pieces are just a sample of editorials and op-ed pieces in which an argument for larger government is offered. Porter is more forthright in his plan by saying we should be more like Europe. But, the European countries are having a harder time maintaining their programs, and this is not just the case for the basked cases like Greece. Germany has made reforms that have  loosened labor markets; France is still resisting such liberalization, but is also seeing downgrades to its debt.

A book I am reading, and will do a review of when finished, is The Redistribution Recession by Casey Mulligan. He shows that the generosity of the benefits we offer the unemployed and others has increased substantially since 2007. A result is that many unemployed would need a high-paying job to be better off than they are receiving govenrment benefits.  We may be moving closer to Europe whether intended or not. For a couple of decades unemployment in Europe remained higher than in the U.S. The Great Recession altered that briefly. The question now is whether we will follow Europe's path, which has included persistently higher unemployment and slower economic growth.

Peter Diamond on How to Set-Up a Commission to Generate Tax and Spending Reform

Peter Diamond has an op-ed in today's New York Times. He argues that supercommittees are not the way to get tax and spending reform. Instead, he says that the method used by Congress on base closings is better.  Give the committee its marching orders--goals and so forth. But, more  importantly, don't have any sitting members of Congress on the committee. Then, when the report is submitted to Congress, it is an up or down vote.  He notes that in the Simpson-Bowles commission, almost all of the sitting members of Congress on the commission voted against the report.  What is needed is a committee that is less political, i.e., isn't concerned about reelection.  Then hard choices can be made and Congress has to say yes or not, keeping further tinkering by Congress out of the picture.  It makes sense to me, but will congressmen and senators give up trying to curry favors with their constituents and friends?

Review of Gorton's Newest Book--Misunderstanding Financial Crises

I just read Gary Gorton's new book and it is excellent.  I have written on Gorton's earlier book, SLAPPED BY THE INVISIBLE HAND, and this new book, MISUNDERSTANDING FINANCIAL CRISES: WHEY WE DON'T SEE THEM COMING, is also invaluable in understanding the recent financial crisis.  Once again, Gorton focuses on the shadow banking system and how there was a bank run in August 2007 involving this system.  He also discusses many of the financial crises in the past in the U.S., and how we had them in the free banking era, the national banking era and after the Fed was created.  Gorton argues also that economists ignore history too much and this causes us to consider each crisis as unique when there are many similarities among the crises.

Gorton calls the era from the creation of the FDIC and deposit insurance for banks to the early part of the new century as The Quiet Period--a long time period in which we did not have a financial crisis involving the banking system as a whole.  The deposit insurance meant that depositors would not have to race to the bank to pull out their funds when concern over the liquidity of the banks existed because their funds were safe.  This ended the problem of bank runs as traditionally defined.  But financial innovations in response to inflatoin in the 70s as well as competition, changed the environment and the shadow banking system emerged that involved investment banks, other large financial insitutions, corporations and hedge funds.  It was this system that experienced the bank run in 2007.  At the end, Gorton provides some arguments for what can be done to prevent a similar run in  the shadow banking system in the future, noting that Dodd-Frank does not provide the solution.  He also makes clear the important distinction between the function of capital in the system when times are normal versus times of crisis.  Increased capital requirements do not solve the problem when the system is in crisis.

I recommend the book highly. It is less technical than his earlier book and seems more unified since the earlier book involved chapters that had been articles in journals.  I think that a real solution to the problems of periodic financial crises involving banking will not be solved without taking into consideration the arguments in this book.

There is also a recent article on the shadow banking system that can be found here.

A Noneconomic Analysis of the Election

A couple of interesting op-ed pieces on the election, although they are not written by economists or economic in content. I was struck by some similarities in the arguments. The first is by a colleague in the political science department at Hope--Jeff Polet. The second is by a syndicated columnist, Jonah Goldberg. They both point to a long-standing movement in American politics to break away from the constitutional emphasis on checks and balances and a politics that reflects a variety of mediating institutions to one more organic or following what Bismark did in Germany. 

The Electoral College and Federalism

Today is election day and the polls all suggest that the presidential race is very close.  It is possible that Romney could win the popular vote and still lose the electoral vote, or vice versa. A tie in the Electoral College is even possible depending on how a few states go. Given that every four years we hear some pundits argue that it is time to do away with the Electoral College and just use the national popular vote to decide the presidency, I anticipate we will hear similar calls after the election.

To me, the Electoral College is one of the last vestiges of the idea of federalism in our system.  While we may be American citizens, we also are citizens of a specific state.  The United States is a federal system of a collection of states and not one massive nation along the lines of France. While we have done away with many aspects of federalism, including constitutional change that generated direct election of senators and non-constitutional changes such as the Department of Education and programs like No Child Left Behind, I find federalism very appealing.  The basic idea is that government should be as close to the people as possible.  It is impossible for the federal governemnt to be close to the people, but there are things only the federal government can and should do, such as national defense.  The local government should do all that it is capable of doing, but when the geographic area is too small for a task, then the county or state should do it, and only when the state level is too small should the federal government be involved.  This idea may seem quaint today, but would generate a more representative government than what we have.  My vote today has no impact on the presidential election but could determine a local school board election.  I can call up the mayor of Holland but would never get through to the president, and probably not to a senator.

Finally, when I hear calls for doing away with the Electoral College, I ask, why not do away with the Senate then also?  Why should South Dakota have as many senators as California?  Isn't this also antiquated if the Elector College is antiquated?  But the Senate was put in place, at least in part, so the large states couldn't run roughshod over the smaller states.  There are movements encouraging eating local and so on; I say, let our politics be local whenever possible.

Referendum on Obamacare

Today's Wall Street Journal has an op-ed by Christopher DeMuth on Obamacare and the election. He sees the election as a referendum on Obamacare as well as liberty. He notes that most Americans pay little attention to the federal government except when elections roll around because government doesn't affect  most people in a regular way. Exceptions are highly regulated industries, and some incentives for taking on mortgage debt. But, if the president is reelected and Obamacare is strenthened, we will regularly deal with the government.  I think it is worth reading.

Three Noteworthy Pieces in Today's Journal

Three interesting articles and op-ed pieces in today's WSJ.  The first article is by David Wessel and provides background for the fiscal cliff and budget talks. There is also a video that can be seen that is interestings. There is also an op-ed piece on global climate change and Hurricane Sandy. It points out that in many ways we have fewer hurricanes and less-destructive hurricanes than in years past. The third is an op-ed piece by Alan Blinder. He argues that the recovery has been slow but steady and that to have expected better is to have been mistaken.  I have a couple of quibbles with Blinder's piece though. First, he is pretty much a standard Keynesian and emphasizes government spending more than I think is appropriate. But another is more political. He mentions the Simpson-Bowles plan, noting that Pres. Obama did not embrace it but neither did Paul Ryan. The difference is that the commission was appointed by Pres. Obama and he failed to endorse or support the recommendations. The plan just fell flat. As president, he should have been providing leadership on the issue but failed to do so.  To equate Ryan's no-vote with Obama's lack of support and leadership is misguided.