Lesson 6. Sandersonian Economics

I was watching Hogan’s Heroes re-runs the other day when a genie in a bottle suddenly appeared and waved a magic wand over my glass of JD. Suddenly I was watching a video interview of Bernie Sanders. As some of you may already know Bernie Sanders is running for President of Bloomington’s People’s Republic. No, that’s not right. Mr. Sanders is a Democratic candidate for President of the United States. Since I am not prone to voting for Democrats for President I mostly have ignored Sanders and have focused on imagining naked mudslinging fights between Hillary Clinton, Donald Trump, and Geraldo.

Anyway since I seemed to be captured by my new recliner chair and couldn’t find the eject button, I sat there and watched Mr Sanders answer a bunch of questions. And it hit me. This guy is good. He is the real thing. He says he is a Socialist and he really is. Yet unlike other Socialists who invade neighboring countries and otherwise make Vlad the Impaler seem cute and cuddly, Sanders was bright, and thoughtful, and persuasive. Wow he was good. Hillary does not stand a chance against this guy.  

You are waiting for a punchline but there isn’t one. Instead of a punchline is an economics lesson. Sanders is interesting and persuasive and will continue to attract potential voters. But like last week’s post wherein I worried about politicians putting the tough stuff off until later, this post worries that the things that make Sanders so appealing are pipe dreams or worse, false dreams. Suppose you wake up from a vivid dream in which Taylor Swift asked you to run away from your wife and family so you could be her business manager. You wake up and immediately run away from your wife and family. Wow what a mistake when you learn that she does not even need a business manager.  

If that didn’t convince you, then yawn, it helps to have a lesson about macroeconomics. In macro everything is driven by economic growth. Economic growth is the Tom Cruise of Macro.  I would put that in caps but readers have been known to throw things after seeing stuff in all caps. Germans, Greeks, and even people living in Burnsville North Carolina believe this. Economic growth is like an elixir that fixes almost everything. Stronger economic growth means stronger job growth and higher wages.

Liberals and conservatives agree with the importance of economic growth. Conservatives like Milton Friedman ignored the short run and said it would probably fix itself. Liberals like John M. Keynes and Paul Krugman sweat and fret whenever we have short-term problems slowing economic growth. Krugman shouts to Janet Yellen – man the rudders and full steam ahead…or something like that. If there is a recession then priority #1 (in all caps) is to do whatever can be done to get economic growth back to normal or beyond.

Conservatives and liberals will throw half-eaten snow cones at each other with respect to which policy to use to restore growth. But notice – they both want more growth. Growth is what we want. In a growth economy everything is easier – finding jobs, quitting jobs, buying expensive bourbons, etc.

But if you listen to Sanders, there is little said about economic growth. Sanders wants to penalize rich people. Sanders wants to help the average guy. Sanders wants to reduce income inequality. Sanders want more justice. Sanders wants environmental sanity. And it is hard to argue with his logic. Rich guys are getting richer. Poor guys are not. The average guy/gal is having a really tough time keeping up. Environmentalists keep the pedal to the metal with respect to the data.

So to me – Joe Macro – I agree that there are a lot of problems and challenges out there. I agree that we have witnessed a reallocation of goods and a redistribution of income. I agree that there are many tough difficulties and challenges. But the biggest challenge is to not throw the baby out with the dirty bathwater. 

Sandersonian economics says – if we tax the rich and/or give more transfers to the poor, income distribution will be improved. It sounds obvious enough. If it was good enough for Robin Hood then why can’t it work on 93 Valentime Lane?

That’s a good question and ought to be answered. Just because Sanders and Paul Krugman say it is so, that doesn't make it true. For one thing does the Sanders policy really have a permanent impact on the rich/poor balance? Does the policy effectively overturn the things that prevent the poor from getting richer?  Second, taking from the rich and/or giving to the poor might negatively impact economic growth and that slowdown might hurt the poor more than the rich. Third, given the tenacity and complexity of all the problems Sanders seeks to address, do we really trust Sanders and Congress to go about using our national resources wisely to eradicate them?

I admit and agree that globalization, industrialization, environment, China and major global and national shifts are impacting Americans. Our history is full of examples of similar challenges (when textiles moved south or when energy prices quadrupled in the 1970s, etc). We need to address our challenges and mitigate the problems that are so lucidly explained by Sanders. But we should not be lulled into believing that identifying a problem is the same thing as solving it. 

If Sanders wants my vote he will go beyond simple slogans. Sandersonian economics should explain why his way of attacking the most pressing problems will work and why he won’t end up making us all worse off when his programs damage our ability to grow. Or he needs to explain why his programs will not slow economic growth. Or maybe it is easier to say what the public wants to hear and no more. 

The new four-letter word – Socialism.

Okay, so Socialism isn’t a four-letter word – but maybe I got your attention. I hate to be the first one to pass along this information to some of you – but we live in a socialist country here in the good old USA. Now I really have your attention.

As in my other postings – the bottom line of this one is to ask why name-calling and concept-hurling replace real discussion and analysis. I discuss four issues that could be dealt with in a straightforward way and should comprise the elements of a real discussion.

Most people on this planet, including those of us in the USA, live in a mixed economic system. The mix involves varying degrees of capitalism and socialism – generally meaning that economic decisions involving production, distribution of income, and allocation are partly based on interactions among private actors in markets (capitalism) and partly by government (socialism). China might have a Communist political system with one party, but for 20 or more years it has been slowly privatizing and liberalizing in many ways so as to move decisions from the government to private persons and companies. Much of industry remains in China’s government control and its economic system is more socialized than the USA, but it is a mixed system. The USA is mostly a capitalist system but it has very evident and significant government control.

So what is going on with the four-letter word thing? – you are socialist – nah nah nah nah. No I am not – nah nah nah nah.

The issue is that recent political events suggest a movement towards a more socialized economic system in the USA. Thus the balance of market/government is changing in the USA. So it is much easier to call each other names than it is to use logic and facts to support/defend a movement in the mix in one direction or the other.

Clearly it is more interesting than it sounds on the surface. There always has been and always will be a desire to make sure that the less fortunate are not left behind in the wake of free market outcomes. The extension is that there is no theoretical formula which spells out what less fortunate means. Even poverty has no empirical and universally agreed upon numerical threshold. Thus, there will always be those who believe that economic outcomes of the marketplace could be improved by reallocating some of the benefits to those who did less well. Since this does not happen automatically under capitalism, there is a role for the political process and government. And notice that what passes as politically acceptable changes over time. Three hundred years ago, government did very little for people. Upshot – the demand for redistribution should be expected to change over time.

That sounds good. Most moral philosophies would support helping one’s neighbor. So the question is mostly – when is enough enough? And that is where the fun starts. I like the phrase – don’t throw the baby out with the dirty bath water. This colorfully gives rise to the idea of intentionally doing a good thing (getting rid of the dirty bath water) without negative unintended consequences (also throwing out the baby). So how do we minimize the unintended consequences? The first issue has to do with making sure the government interventions are effective – that is, they not only redistribute the income but they try to remediate problems that might prevent people from doing better on their own. In this regard we often hear the dictum, “Don’t give a man a fish – teach him how to fish.” The second issue concerns disincentive effects of the policies on those who earn and produce the most. Clearly if the policies induce the most productive elements of society to produce less, income might be more equal but the average income of society will be lower. Finally, the third issue revolves around the use of debt to attain income distribution goals. Clearly someone has to pay. How much of today’s income redistribution should be paid for by our children?

I fear I may have angered one particular group and I want to say one more thing to them. There are people alive today who witnessed personally or heard/read about their family members and/or friends being harmed by socialist political regimes – past or present. My mother was a refuge from Hungary. There is a point at which my economic discussion and the three issues above lose relevance – when economic socialism turns into dictatorial political socialism. So I should add a fourth issue to the above paragraph that asks whether or not increasing economic socialism could lead to ruthless dictatorial regimes. If the answer to that is YES, then that would trump the first three.

I am sure I left something critical out – and that’s why we have room for comments.

Robn Hood Rides again

In the spirit of not overly irritating one party or ideology over the other -- let's agree that Robn (Reid, Obama, Biden, Nancy) succeeded to do what some have wanted to do for years -- legislate a bill that attempts to change the distribution of income in the USA -- or as the President frequently says, "Spread the Wealth Around."

Forget that what was passed in the House yesterday is called Healthcare -- just notice what the bill did in terms of redistributing income from the rich to the poor. If you want an analysis with some of the specifics and some numbers, go to Bloomberg (http://www.bloomberg.com/apps/news?pid=20601010&sid=apU2CQDSEG9g ).

You can also go to a very through analysis of the bill by Deloitte at ( https://www.deloitte.com/view/en_US/us/Insights/centers/center-for-health-solutions/health-care-reform/health-care-reform-memo/315a3bd377587210VgnVCM100000ba42f00aRCRD.htm?id=email )

While almost every aspect of the bill has implications for redistributing income away from richer people and corporations -- here are a few of the key ones --

$103 billion Medicare Payroll Tax increase for families with incomes above $250,000

$88+ billion excise tax on insurance companies and brand name Pharmaceutical companies

2.3% tax on medical device companies (no dollar amount estimates) -- notice this is on all revenues -- not levied against profits.

$70 billion on premiums for expensive healthcare insurance

$466 billion in subsidies for health insurance for poor families

Isn't this amazing that they were able to make such large and permanent changes in income distribution (after taxes and subsidies)? So if you believe that income redistribution is important -- then you are very proud of ROBN. They accomplished what few other governments have been able to do. Of course, if you are on the other side of the issue then you are going to have a different set of feelings.

One more point before I let my friends nibble me to death. We all know there is a difference between tax changes and tax incidence. The REAL question, whether it relates to income redistribution or health care, is how this bill will IMPACT us in the coming decade. I won't extend this single post with the hundreds of impact issues because I know the next year will be filled with lots of good articles. I will throw out one tidbit -- to what extent has the CBO estimated the number of the 4 million households who might have earned $250,000 or more who will suddenly report income of $249,000 when the taxes are due. And how will this tax avoidance impact the macroeconomic system in the USA?