Category: Political economy

A Rising Tide Lifts All Boats

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“A rising tide lifts all boats”.  When economic progress is steady, or at least not interrupted for too long, this saying seems to hold true.   When everyone benefits from progress, people invest their effort into getting ahead.  Today we face the greatest economic disruption in 75 years.  Without a clear path forward, people of all political views are turning their thoughts enviously towards the boats others.  International trade, labor, spending, health care and tax policies are all being reviewed through the lens of protecting current advantages or redistributing funds.

The classic focus of redistribution is on the “rich” and the “poor”.  Bankers and corporate executives have lost the “entrepreneurial” and “value added” shields of the last 30 years.  Citizens are now concerned about the distribution of income and are willing to consider tax and regulatory changes that would have been unthinkable a decade ago.

The share of income captured by the top 1% of earners receives the most attention.  From 1917-1941, through boom, bust and preparation for war, the top 1% earned 15% of all income.  This changed dramatically during WWII and afterwards, leading to a 35 year period from 1953-1987, where income at the top was cut in half, with 8% of the total going to the top 1%.  Top 1% income grew rapidly in the late 1980’s, reaching 13% and then 15% by 1999 and 17% by 2007. 

The spread of income within the center of the population has also broadened in the last 40 years.  In real 2007 dollars, average household income has increased 30% since 1967, from $40,000 to $52,000 per year.  Families at the 20th percentile have also seen a 30% increase, rising from $17,000 to $22,000 per year.  The dollar and percentage growth at the higher percentiles has been much greater.  Households at the 80th percentile have gained 55%, with incomes rising from $67,000 to $104,000.  Those at the 90th percentile have gained 66%, boosting incomes from $85,000 to $141,000.

There is no “natural” or “optimal” distribution of income.  The US has historically had a greater concentration of wealth or income than other economically advanced nations.  As shown by the top 1%, the concentration can change dramatically through time.  However, most economists agree that there is a level of marginal taxation on income, wealth, dividends and capital gains that significantly reduces incentives for hours worked, innovation, risk taking and entrepreneurship.  

Small changes to the taxation and incentive structure of the US economy are not likely to cause too much damage.  Significant tax increases could do significant short-term and long-term damage to the economy and to those at the lower end of the economic pyramid who depend upon the rising tide to lift their boats in the long run.

Good Riddance to Utopian Views of 2000

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Much of the anxiety being expressed in the political arena today stems from the discovery that the turn of the millennium consensus views of steady assured progress were exaggerated, or just plain wrong.  The events of the last decade have shown that simple, deterministic conclusions are usually wrong.  This is not the first time that western society has had its “progressive” bubble burst.  Even the recent triple play natural disasters (hurricane, tsunami and earthquake) have a parallel in the Lisbon earthquake of 1755, which lead Voltaire to attack the belief that man was living in “the best of all possible worlds”.

In 2000, we thought that representative government would prevail as an increasing number of countries became functional democracies and established democratic traditions.  Cuba was the special exception.  Even China was seen as a potential convert.  Progress was being made in Eastern Europe, Asia, Africa and Latin America.   We now see that China’s leaders intend to maintain power, that progress in Russia and Eastern Europe is fragile and that a new Bolivarian revolution justifies dictatorships.

In 2000, the division of state and religious spheres was clear and settled in Europe, allowing a variety of religions to work within a set of rules.  The Pope spoke out for radical changes to society, but had limited impact.  Some progress in conflict areas lead to hope for progress, as nations from Turkey to Indonesia to Ireland found solutions.  The “consensus” was an illusion.  Islam, Christianity and other religions are not content to work within the context a secular humanist state.  We now see that “true believers” do not fit within the tidy scheme.

In 2000, a decade after the fall of the “iron curtain”, the U.S. stood tall as the only superpower, even after cashing in the peace dividend.  The US, Europe and the UN began to make significant progress in handling the remaining “trouble spots”, in areas that seemed unfamiliar and insignificant.  We now see that Brazil, Russia, India and China would like to join the US, Europe and Japan in a multi-polar world.  The shifting alliances of earlier centuries are the model of our future.

In 2000, after dodging the ironic Y2K threat, the world saw an unlimited future of technological progress.  The older physics, chemistry and energy based economy continued to grow at a healthy pace.  Agricultural and biological innovations promised to feed the world and heal the sick.  Information technology continued to evolve through the internet, telecommunications and knowledge management.  Even the environment was improving, as 30 years of focus on clean air, clean water and eliminating toxic waste had a cumulative positive impact.  We’re still making progress, but concerns about energy and water shortages, Frankenfoods, genetic manipulation and climate change become greater with time, as no simple “solutions” have appeared.

In 2000, international economic progress was in full-stride.  Individual, regional and global trade agreements increased trade and cross-country investment.  International financial crises were managed and outlier countries were guided through an agreed upon recovery plan.  European economic integration continued to deliver benefits with each new step.  Today, we struggle to find common ground for major trade deals.  A variety of crisis recovery models seem valid.  Further European economic integration is possible, but the benefits are not so certain.  International sensitivity to trade, labor, environmental, property rights and investment differences is growing.

In 2000, a mixed capitalist economic model dominated.  There were two flavors, traditional European and Atlantic, but these were differences in style and degree, not in fundamental substance.  Success stories in all areas of the world indicated that this model could and would be replicated.  Today, there are several varieties of state capitalism (Russia, China, France, Japan, and Venezuela) that offer alternatives.

Finally, in 2000, there was a widespread belief that we had moved into a new economic model where the rough edges of capitalism had been tamed.  The business cycle could be managed through independent monetary policy (and a touch of fiscal policy).  Productivity, inflation and unemployment goals could all be attained.  Financial guidelines like price-earnings ratios had been superseded by a “new economy”.  And, risk and volatility had been tamed through portfolio theory, hedging and new financial instruments.

The world is not in worse condition today than it was a decade ago.  Only by moving past the unrealistically utopian views of the turn of the century can we make progress in addressing the challenges we face.

Indiana Redistricting Proposal Adds Value

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“For the want of a nail, the shoe was lost; for the want of a shoe the horse was lost; and for the want of a horse the rider was lost, being overtaken and slain by the enemy, all for the want of care about a horseshoe nail.”  —  Benjamin Franklin

 Now, more than ever, society must rely on real economic growth to make the pie larger and allow us to choose how to divide the pie.  In the hot policy areas – global warming, health care, unemployment, alternate energy, retirement security, national security, adequate food – all solutions depend upon our ability to grow the economy.

 The private sector, especially in the last 30 years, has demonstrated its nearly unlimited ability to create value.  The contrast between productivity growth in the competitive sectors (ag, manufacturing, distribution, communications, mining, transportation, media, banking, IT, services) and the others (government, social services, utilities, education, health care) is instructive.  About 60% of the economy delivers 3-5% annual productivity improvements, while the other 40% is stuck at 0-1%.

 The slow growth sectors are all in areas where market failure is the rule – sometimes because services are natural public goods and sometimes due to natural monopolies, externalities, or unequal information.  In each case, there is a key role to be played by the government in shaping these industries to pursue continuous improvement as happens naturally in other sectors.

 Unfortunately, our political system does not produce “philosopher kings” who cooperate to find optimal solutions.  In a two-party democratic system, the best that can be hoped for is that the two parties will define contrasting, yet centrist policies and employ politicians who can seek re-election by solving some problems rather than merely demonizing the other side.

 The gerrymandering of Indiana congressional, senate and representative districts every 10 years encourages a polarized political environment.  The party in power draws districts to maximize their representation by creating as many 55-60% safe districts as possible, while consolidating their opponents into as few 80-90% majority districts as possible.

 This process results in extreme left and extreme right candidates winning nearly all races.  Centrist candidates have no chance in stacked districts.  Centrist voters have no influence in stacked districts.  The political parties attract extremist candidates.  They attract extremist supporters.  Only in a small minority of districts do voters have a choice between two qualified centrist candidates who mainly differ by a modest degree on the political spectrum. 

 The Indiana Senate’s Republican Caucus, Secretary of State Todd Rokita and Carmel representative Mike Delph have floated various proposals to turn redistricting over to some form of non-partisan commission, required to take advantage of the computer software which can define boundaries to maximize the compactness of each district, without considering socio-economic, religious, racial or political factors. 

 A visual example of the current skewed districts versus neutral districts is shown at http://bolson.org/dist/IN/.

 Members of both political parties should be able to see that the skillful use of gerrymandering today is a recipe for failure.  Even California voters are now seeing that structures that lead to polarization can bankrupt a state.  Indiana voters who care about the future should pursue this “good government” initiative.

Civic Investment in Monuments

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I’ve noted a pattern in our local government investments.

CIB Conseco Fieldhouse, CIB Lucas Oil Stadium, Carmel Clay Parks Monon Center, Indianapolis Airport Authority Midfield Terminal, Carmel Regional Performing Arts Center and the CIB Convention Center Expansion seem to have the same issues.

They were built with public funds to meet public and private needs.  The bondholders are well secured by public revenue sources and commitments.  The operating revenues are less than what is required.  The users do not want to pay more.  Current political forces are criticizing historical decisions and current operations.  The public thinks that the politicians are incompetent and/or captured by special interests.  The public wants a simple solution that does not include more taxes.

The greatest problem is that these facilities inherently serve BOTH private and public purposes.  The CIB facilities serve customers, but also the nearby local businesses and our collective sense of importance in hosting the undefeated Colts.  The airport serves passengers, but also economic development.   The Monon Center offers an alternative health club, but also provides subsidized recreational programs.  The CRPAC offers ticketed cultural events, but also subsidizes local arts groups and stimulates the hospitality and retail arts industry.

In each case, the public is confused because it is not clear what part of the capital and operating costs are due to private and public uses.  It is not clear what part of the costs are being paid by the users and what is being picked up by the public through current and future taxes.

Political and civic leaders would be well served to clarify these “buckets” of costs, benefits and responsibilities in the future.  It is not easy to do and any well-defined fence will be inherently arbitrary and sub-optimal.  However, the political costs of an ostrich approach are now apparent.  I’m sure that many local leaders decided that this “direct” communications style would be impossible, because well-informed Hoosiers would choose to NOT invest in any ventures where each did not personally receive an ROI.   I point to the overwhelming success of the Wishard Hospital campaign as a counterexample.  I point to the recent consensus that requires schools and other local groups to seek voter approval as a situation of “what’s good for the goose is good for the gander”.

State leaders should review these investments and outline a state review process that meets the public needs.  There is an inherent bias towards overinvestment by civic and political leaders.  Many constituencies benefit greatly in the short-run from major projects.  The operating deficits are often a decade away.  The positive ego benefits of creating 50-300 year monuments is too attractive.

Future capital projects should be required to clearly explain public and private benefits, costs and funding sources.  The projects should protect taxpayers at a level equal to bondholders.  Contingency funds should be included to handle the typical 5 year business cycles.   Even with these constraints, our local leaders will be able to justify investments in viable projects.