Archive for the ‘Finance’ Category

Gimmicks and Tricks

Sunday, March 29th, 2015

We do not rely on gimmicks or creative accounting tricks to balance our budget.

This statement is in the introduction of the Republicans 2015 House budget.

This document declares that the most important thing that the country can do is balance the budget.

If you are doing a double-take at this point, so was I. Balance the budget? What about the party that last month said that they should make the poor their top priority. Or the party that said six months ago that the most important thing was to defeat ISIS? Or the party that for the past five years has been trying to repeal Obamacare?

Nope, we are now dealing with the party that says balancing the budget is the most important thing.

So I guess it should be no surprise this Republican budget not only fails to balance, but also includes a spectacular set of gimmicks and creative accounting tricks.

Here’s my list.

Dynamic Scoring – this is the CBO rule change passed by Republicans in September. What this means is that the CBO must now include economic impacts when determining the cost of a particular bill. In the past, the CBO simply projected cost and revenue without any attempt to determine how a particular piece of legislation would affect the economic models that are already in place. Using this new scoring, the Republican budget “gains” an additional $147B in mystery money.

Overseas Contingent Operations – This is a $90B Defense slush fund to allow Republicans claim that they are still abiding by the Sequestration cuts when they really aren’t. To make matters worse, $20B of the $90B is supposed to be offset by future spending cuts which were unspecified.

Obamacare Repeal – Republicans propose to repeal all of the benefits of Obamacare and the taxes that pay for them. The budget assumes that this is a wash, but there are $1T in tax revenues that aren’t accounted for, and the last CBO scoring had Obamacare reducing the deficit.

Missing $500B – The budget claims to save $5.5T over 10 years, but the fine print suggests that Congress is only responsible to find $5T in savings.

Other Mandatory Programs – Republicans cut $1T from this category without specifying which programs were going to be cut and by how much.

Medicare and CHIP fix – This long overdue bi-partisan plan will cost $141B over the next 10 years. It was not included in the Republican budget.

What about the poor?
Those are the people both Mitt Romney and Ted Cruz said should be better represented by the Republican Party. This budget includes deep cuts to food stamps and Medicaid. Rough estimates are that this budget would double the number of Americans without health insurance and that’s before the additional promised $1T in cuts. The stark reality is that there isn’t that much left to cut unless you include Social Security and Medicare.

Spending on government programs other than Social Security and Medicare would fall to 7.2 percent of GDP in 2025 — 40 percent below the average of 12.2 percent of GDP over the past 40 years, and far below the previous post-World War II low (which was 9.4 percent of GDP in the late 1990s). In short, the federal government outside Social Security and Medicare would gradually become a shell of its former self.

Fiscal Responsibility?
During the financial crisis, Republicans pointed at the big deficits and big stimulus programs as irresponsible. In the context of deficits hitting 10% of GDP, the Tea Party took up the cry for a balanced budget.

Today the deficit is 2.7% of GDP, exactly where the Simpson-Bowles deficit reduction committee suggested it should be by 2015. As long as the economy continues to grow at or near 3% a year, the debt as a percentage of GDP will go down without any additional government spending cuts.

Summary
If the Republicans were serious about reducing the debt and balancing the budget, they would not have resorted to smoke, mirrors, and bad math. Instead this is a political document intended to appease the radical right of the party. If they did succeed in passing it, it would never survive the President’s veto. If it did somehow make it into law, Republicans themselves would fail to implement the social program cuts contained in the budget. There are too many Republican senators up for re-election in blue states in 2016.

Instead this budget was best described by conservative Republican congressman Ken Buck.

I don’t know anybody who honestly believes we’re going to balance the budget in 10 years. It’s all hooey.

There you have it – another example of how seriously Republicans take their new responsibility to govern.

Jeb Bush’s Social Darwinism

Saturday, March 14th, 2015

The effort by the state, by the government, ought to be to try to create catastrophic coverage, where there is relief for families in our country, where if you have a hardship that goes way beyond your means of paying for it, the government is there or an entity is there to help you deal with that. The rest of it ought to be shifted back where individuals are empowered to make more decisions themselves.

This is how assumptive 2016 Republican Presidential candidate, Jeb Bush, summarized his replacement for Obamacare.

While we don’t have all of the details, there is a lot to parse in this particular statement.

At first blush, the discussion of catastrophic coverage is at the heart of the Republican message.

Bush advocates replacing the ACA “with a model that is consumer-directed, where consumers, where patients, have more choices … where the subsidies, if there were to be subsidies, are state administered … where people have more customized types of insurance based on their needs; and it’s more consumer-directed so that they’re more engaged in their decision making, and they have more choices than what they have today.”

This was the same message the Romney presented when asked about healthcare for the poor during the 2012 campaign.

Well, we do provide care for people who don’t have insurance. If someone has a heart attack, they don’t sit in their apartment and — and die. We pick them up in an ambulance, and take them to the hospital, and give them care. And different states have different ways of providing for that care.

That is the healthcare system that we had. One where those who couldn’t afford insurance could receive the most expensive form of care our healthcare system had to offer. Those that attempted to pay those bills often ended up bankrupting themselves. Most of those bills were passed on to those with insurance through higher hospital costs.

Catastrophic Coverage
Catastrophic coverage as envisioned by Mr. Bush is just one step away from this model. The stated goals are to make insurance more affordable by introducing high deductibles and cost sharing. In the minds of conservatives, this makes people more thrifty healthcare consumers, since much of the cost of everyday care is coming out of their pockets. The reality is that high deductible plans in many cases are not much different from no coverage at all. They discourage people from seeking preventative care.

While high deductible plans may flow some additional dollars into the hands of hospitals for the expensive emergency room visits that will result from failure to employ preventative care, it will not mitigate the financial risk of those who have a medical emergency. That’s because, as this graph shows, fewer than half of those who are likely to purchase these plans have the money to pay the deductible if in fact they DO experience a medical emergency that their plan covers.

high deductible

Individual Customization
The second problem in Bush’s unraveling of Obamacare is wrapped in the clothing of “more customized types of insurance based on their needs”. This is another conservative hot botton. They have a philosophical problem with the way that insurance works. They feel that people should be free to purchase only the amount of insurance they feel they need without regard to the risks or costs. They don’t seem to have a problem with Banks requiring homeowners to insure their homes up to a particular standard in order to get a mortgage. But they do have a problem with the government setting minimum standards on the sorts of healthcare coverage insurance companies must offer. Bloomberg explains that government standards preserve large risk pools which effectively reduce the costs for everyone.

Republicans are really saying that people should be free to avoid carrying insurance for problems they don’t expect to have (a bout of depression, maybe, or a stroke that requires rehabilitation) or don’t want to help pay for (pediatric and maternity care for men with no children, say). The former view shifts costs onto the unlucky; the latter shifts costs onto women and parents. Both undercut the purpose of insurance, which is pooling risk. Neither saves money. Yet in the abstract the argument sounds compelling. And it’s going mostly unchallenged.

Single Payor
What IS interesting in Bush’s plan is the suggestion that the government either directly or indirectly is the source, or underwriter of these catastrophic plans. This particular statement goes WAY further than Obamacare toward the single-payor socialism fears that birthed the Tea Party. Under Obamacare, the government does not issue insurance. The insurance comes from private companies. Those companies are regulated, but they ultimately get to set their own rates and determine in which markets they are going to participate and which populations they are going to target. The government only offers to subsidize the cost to purchase that insurance for those who don’t have the means to purchase that insurance on their own.

Obamacare is market-driven. The government works to make the insurance market in every state sufficiently lucrative that consumers in every state have choices. It has no mechanism to compel an insurance company to offer coverage in any particular state. Participation by insurance providers is entirely voluntary.

If the government is going to guarantee that every individual is able to purchase some form of catastrophic insurance at a rate that they can afford, who is going to provide that insurance? Who decides what that rate is? Who decides what the minimum coverage should be? How to do you handle the “free riders”, or does everyone get a minimum plan paid for by the government whether they like it or not? How does Bush plan to pay for all of this? A new tax?

That’s how Medicare works. One plan for everyone paid for by a payroll tax. We don’t require seniors to enroll in Medicare, but 85% of seniors do. Medicare doesn’t cover all expenses, but it does allow most seniors to retire without the worry of having to pay increased medical costs.

Summary
Jebcare is not a REAL plan. It is simply a set of talking points that allow Jeb Bush to appeal to the reptile brain of the Republican Party without actually working out any of the details.

Republicans DO NOT want to offer any kind of subsidized care for anyone. This isn’t an issue of cost or efficiency. Obamacare has already demonstrated that this approach saves money and improves health.

This is about philosophy. Republicans are social Darwinists who feel that poverty is the appropriate punishment for bad decisions made by people or their parents. Disease, in their minds, is just another motivation for making better decisions that should be preserved if we want to have a more responsible society. The rich are the vanguard for this righteous society. Their success is proof of their character.

Those of you who read the Bible, might recognize some similarity to the Pharisees. They felt that poverty and disease were punishments God meted out on the sinful. Jesus rejected that whole philosophy. Instead he reminded his disciples that His work (and the future work of all Christians) was to enlighten the world to a new way of thinking where love is the rule.

And as Jesus passed by, he saw a man which was blind from his birth. And his disciples asked him, saying, Master, who did sin, this man, or his parents, that he was born blind? Jesus answered, Neither hath this man sinned, nor his parents: but that the works of God should be made manifest in him. I must work the works of him that sent me, while it is day: the night cometh, when no man can work. As long as I am in the world, I am the light of the world. Matt 9:1-5

There is obviously a lot of work still to be done.

Reaction to Obamacare Good News

Tuesday, March 10th, 2015

The CBO came out with one of their periodic reports on the Affordable Care Act (Obamacare).

Here is the headline of the report.

The ten year projected cost for the ACA has gone DOWN 11%.

The first reason for that cost reduction is that the cost of insurance premiums is rising at a lower rate than what was originally projected. As a result, the cost to subsidize insurance for those who can’t afford to pay the full amount on their own is going down.

The second reason is fewer people overall are signing up for insurance that includes government subsidies (Medicaid or subsidized private insurance). That’s because companies are not canceling healthcare coverage for their employees at the rate originally projected by the CBO. That reduction is about 3M people.

The net is that by 2025, there will be more people with insurance than the CBO originally projected, which is also good news.

cbo graph
There is some controversy on why healthcare costs are growing more slowly. The administration suggests that it is the result of cost saving provisions of the ACA. Conservative sources suggest that it is the result of a weak economy and have been predicting a bounce back as economic growth heats up again. The CBO commented on this in their report.

such a bounce back seems less likely in light of the further slowing of spending growth observed in the most recent data.

BTW, this report only focuses on the cost side of the leger. The agency discontinued their analysis of the budget impact of this particular bill. Instead they pointed to their normal comprehensive deficit reporting as a source for those looking more detailed information. They did, however, provide this guidance when they made their announcement last summer.

the agencies have no reason to think that their initial assessment that the ACA would reduce budget deficits was incorrect.

What is also reliable are the conflations by conservative media sources who refuse to acknowledge that the law is actually working.

Here’s a sample.

Forbes (a long time ACA opponent) chooses the headline “CBO Downgrades Obamacare’s Enrollment And Subsidy Projections” for this same news. Rather than focus on the big news which is the cost savings and the fact the corporations are not laying off employees because of the law, they suggest that the law is failing to meet the original projects that the CBO put in place. Rather than admit that slowing growth in premium costs is a good thing, Forbes says “Obamacare’s premiums: Much higher than before, but lower than CBO projections”. Then they go on to quote their own statistics from a conservative think tank rather than the CBO in order to support that claim. They finish up the article with a suggestion of how much better things would be if a different plan were in place.

The Washington Times is always good for a laugh. Their headline reads, “Obamacare exchange customers set for significant premium spikes, CBO predicts”. They go on to cherry pick the CBO report in an effort to make their case. But the CBO did not predict a spike in premiums. They predicted that premiums would rise SLOWER than what they had previously predicted.

So I guess we should not be surprised that those who choose to live inside the right wing news bubble will continue to insist that the law, as Jeb Bush recently described it, is a “monstrosity”.

Jeb’s plan is replace Obamacare with government-backed catastrophic coverage for those who experience a medical crisis. For everything else, folks should just pay out of their pocket. The challenge, of course, is that the best medicine and cheapest care is the preventive care that is practiced in the primary care physician’s office. The most expensive and least effective care is that practiced in the Emergency Room as the result of a medical crisis.

We’ll dig into Jeb’s plan in another post.

The bottom line is that this is more good news for the country. The ACA is working even better than originally envisioned. The predicted avalanche of layoffs as corporations come under the ACA requirements regarding insurance did not happen. The “spikes” in premiums did not happen. Premiums are going up at the lowest rate in recent history. And finally, the predicted explosion in federal deficits as a result of the subsidies included in the bill hasn’t happened. The projected costs of the bill are going down because healthcare is becoming more efficient under ACA rules.

The real tragedy of our current partisan political environment is that we can’t even welcome good news anymore. All news goes through the filter of whether or not it is good for your particular political tribe with precious little thought about what might be good for the country.

No One Is Satisfied With This Recovery

Sunday, March 1st, 2015

Republicans blamed slow economic growth on Obama in 2014. They won an election on that claim. They also trumpeted their mandate to reverse the policies that they said were preventing stronger economic growth. Then a strange thing happened. The public realized that things weren’t nearly as bad as Republicans claimed. Obama’s popularity rebounded and Republicans were left flat footed. If Obama’s policies were in fact controlling economic growth, the strong fourth quarter economic growth meant that Obama DID know what he was doing.

Republicans could no longer deny the reality that the economy was growing. Nor could they prevent Obama and Democrats from taking the credit, since they had successfully convinced voters that they deserved the blame.

The rest of this post looks at the first of several pivots in messaging that Republicans are attempting.

Rather than insult the intelligence of the voter, Republicans are claiming that Obama’s “recovery” is tepid and has not benefited the middle class or the poor. Thus the statement by Mike Camp, recently retired Republican congress person from Michigan that “No one is satisfied with this recovery.” The fact is that the wealthy are just fine with this recovery because times have rarely been better for them. But now Republicans claim to have finally found religion and are shocked at how poorly everyone else has been doing.

The remarkable hypocrisy in this statement is that until this pivot occurred, Republicans condemned the very concept of income inequality as class warfare. Now Republicans at every level have decided that the concentration of wealth in the top 1% of wage earners is not only a problem, but evidence of failed Democratic policies.

The reality is that concentration of wealth at the top was the deliberate construction of Republican tax cutting plans that started with Reagan. This is the first step to prosperity described in various terms as Supply Side Economics, trickle-down economics, and supporting the job creators. The idea was that if those at the top got to keep more of “their” money. They would invest more of that money back into the economy. The resulting growth would more than offset any loss in tax revenue.

The problem is that it never happened. What happened instead is that these tax policies made the problem worse. The wealthy invested their money in electing more Republicans, government spending and tax revenues went down, unemployment went up, employers were able to freeze the wages of workers because of increased competition for scarce jobs, republican controlled states reduced the power of unions, and businesses were able to find a new normal where profits increased because of reduced costs even though top line sales were flat.

The middle class was squeezed out of the consumer economy and any significant participation in corporate profits. Instead we had a wealth-based economy where demand was driven by the stock market.

The GOP, however, doesn’t seem embarrassed by their hypocrisy. Those who predicted doom and gloom if taxes were raised on the “job creators” are now saying, “Sure, unemployment is down and growth is up, but it doesn’t really count if only ‘job creators’ are enjoying the real prosperity.”

One of the key actors in this theater of the absurd is Paul Ryan. He has been one of the most vocal defenders of the Republican notion that lower taxes and lower government spending would unleash pent up demand and power a golden era of economic growth. He is now accusing the Obama administration of practicing the very economic policies Ryan advocated in 2012 and blaming Obama for the outcome.

The Obamanomics that we’re practicing now have exacerbated inequality…They’ve exacerbated stagnation. They’re made things worse. The wealthy are doing really well. They’re practicing trickle down economics now.

This is the same guy who advocated sweeping budget reform that would have dramatically reduced government spending for the poor, converting Medicare into a voucher program, and privatized social security.

The Republicans are clearly trying to run away from their past history, blame the President for doing what they were proposing, while failing to propose what they would have done differently.

Here are a few examples.

  • Obamacare is working. It is a great benefit to the uninsured and under insured. It has slowed the overall growth of healthcare costs, and loosened the grip that corporations have on their workers because of the lack of affordable healthcare alternatives. Republicans continue to promise to repeal this law without offering any viable alternative.
  • Stimulus and the Fed. These are the two forces which prevented the great recession from becoming the great depression. Republicans opposed both but offered no viable plan on what they would have done differently.
  • Financial and auto industry bailouts. Both very successful. Both opposed by Republicans. Their claim is that we should have “let it burn”, putting more people of work, further depressing wages, but providing both industries an opportunity to rebuild.
  • Minimum wage. Obama supports it. Republicans oppose it.
  • Infrastructure investments. Obama supports it. Republicans oppose it.
  • Immigration reform. Obama supports it. Republicans oppose it.
  • College Finance Reform. Obama supports it. Republicans oppose it.
  • Summary
    Republicans don’t really have any new ideas. There isn’t some big bold plan to boost the income or opportunity for the poor and the middle class. The reason why is that the only viable way to make dramatic changes is to increase government spending for the middle class and the poor financed by increased taxes on the wealthy. Since this party is backed by the wealthy, there is precious little else of substance that they CAN do. So what Republican are really going to try to do is suggest that their smaller government, smaller taxes, weaker unions, and stronger corporations policy IS in fact also middle class friendly. How? By giving everyone a chance to become wealthy, since those are the only people for whom the current system is working.

    Fact checking Obama and Republicans

    Saturday, January 24th, 2015

    Here’s a little exercise to demonstrate that I hold facts above party affiliations. Let’s look at that State of the Union address as a starting point to see how truthful President Obama was.

    Then let’s look at Republican responses.

    Those responses reflect a battle in the Republican party that is likely to continue for at least the next two years.

    I’m relying on factcheck.org and politifact.com

    President Obama

    Here are the statements that they felt weren’t accurate:

    more than half of manufacturing executives have said they’re actively looking to bring jobs back from China
    A survey showed most “expressed interest” in it, but are not “actively looking” at doing it.

    the only advanced country on Earth that doesn’t guarantee paid sick leave
    Canada and Japan also don’t mandate paid short-term sick leave.

    The U.S. has gained 11 million private sector jobs in five years.
    This was actually true but somewhat misleading because dramatic public sector cuts in part as a result of Republican supported federal spending cuts reduced the net jobs growth to 6.4 million.

    more of our people are insured than ever before
    That’s based on some preliminary numbers. We don’t have the full 2014 federal numbers yet

    Here are the topics that they felt were accurately discussed:

    our deficits cut by two-thirds
    Our unemployment rate is now lower than it was before the financial crisis
    creating jobs at the fastest pace since 1999
    the only advanced country on Earth” that doesn’t guarantee “paid maternity leave to our workers
    America is No. 1 in oil and gas
    America is No. 1 in wind power
    Factories are opening their doors at the fastest pace in almost two decades

    Jodie Ernst

    Inaccurate

    We heard the message you sent in November loud and clear, and now we’re getting to work to change the direction Washington has been taking our country.
    Exit polling suggests that voter’s primary concern was the economy (45%). This is evidenced by the fact that as the economy improved since the election, Obama’s approval ratings have also improved dramatically to over 50%. Republicans have focused their attention on veterans, the Keystone pipeline, Obamacare, and an abortion bill.

    frustration with Washington’s dysfunction
    While Congress has a historically low popularity rating of 11%, voters returned 95% of their representatives to office. They apparently expect their existing representatives to act differently.

    We see the hurt caused by canceled healthcare plans and higher monthly insurance bills
    We’ll also keep fighting to repeal and replace a health care law that’s hurt so many hardworking families

    Fewer than 1 million people ended up with no healthcare coverage at all last year. That is consistent with the normal churn in the market place from previous years. The primary cause is job change. Average premium increases are at historic lows. The number of uninsured is also at historic lows meaning that more people are gaining insurance than losing it. The Kaiser poll taken right after the election shows only 29% support repeal. Only 9% indicated that the law figured into their vote.

    the Keystone jobs bill
    Keystone’s construction could support thousands of jobs and pump billions into our economy,
    The pipeline will create only 50 long term jobs. It will create thousands of temporary construction jobs for the year or two it takes to build the pipeline. That construction will contribute $3.4B to the economy. That’s comparable to the costs to build the new Cowboy and Yankee stadiums combined. Roughly .02% of GDP. In other words a negligible amount.

    we’ll work to correct executive overreach
    Obama is on pace to issue fewer executive orders than any president since 1900.

    cut wasteful spending
    Recent reports indicate that Jodi Ernst’s extended family received over $460K in federal farm subsidies. Recent studies also support the claim that federal spending cuts have slowed economic growth and prolonged high unemployment.

    we’ll defend life, because protecting our most vulnerable is an important measure of any society
    Ireland is the only European country than bans abortion. The other countries that ban abortions in Latin America, the Middle East, Africa, and Indonesia have large Catholic or Muslim populations. They include Yemen, Syria, Iran, and Afghanistan. Likely not the societies that Ms. Ernst intended to reference.

    Accurate

    President Obama has been delaying this bipartisan infrastructure project for years, even though many members of his party, unions, and a strong majority of Americans support it
    many families feel like they’re working harder and harder with less and less to show for it
    neighbors agonize over stagnant wages and lost jobs

    Ted Cruz

    not a word was said about radical Islamic terrorism
    Obama vowed to combat “violent extremism” and asked for congressional authority to use force against the Islamic State.

    Obama “could not bring himself even to bring” up the president’s executive action on immigration
    Obama said he would veto legislation that attempted to undo his immigration order

    Rand Paul

    “liberal elites” wanted to regulate “what light bulbs we can use.”
    President George W. Bush signed the bill that phased out traditional incandescent bulbs, in favor of more energy efficient ones.

    Summary

    The message 2014 voters meant to send was, “fix the economy”. Republicans have used their gains in this election as an endorsement of their larger agenda, but exit polls and even election results don’t support that position. This, however, reveals a weakness in Republican philosophy. It’s magic thinking. Their deep investment in their world view puts them in a bubble. They see a lot of other people who are in the bubble with them, but they don’t see how many people are outside that bubble. Even worse, they can’t understand why anyone would choose to be outside their bubble, and so comfort themselves with narratives about dependency or democratic deception.

    Those outside the bubble, however, are reacting to facts on the ground. The solid economic growth news since that election resulted in a dramatic increase in President Obama’s approval ratings. His numbers are comparable to Ronald Reagan at the same point in his second term. Republicans successfully made the economy Obama’s responsibility in 2014. Now they are paying the price for that political gain.

    The real reasons behind this solid growth are historically low interest rates, lower oil prices, a strong dollar, a robust stock market, recovering housing industry, increasing tax revenues, and increased government spending. The debt is going down (as a percentage of GDP), growth in healthcare spending is slowing, and the financial condition of programs like Medicare and Social Security are improving.

    There are still foreign challenges, but we are very close to hammering out a deal with Iran. We have an historic agreement with China to reduce greenhouse gases. There is also a lot of momentum for Pacific Rim trade deals. Sanctions against Russia combined with the collapse of OPEC have dealt a crippling blow to their economy and stalled any future expansion plans much more effectively than any military response could have. Jihadism remains a worldwide concern. Pressure from a broad military coalition has stalled the advance of ISIS. Financial pressure has affected their ability to govern the areas they do control. Because of the collapse of OPEC and the recent changes in leadership, we are in a better position than ever to pressure Saudi Arabia to withdraw their financial support for Wahhabism and the madrasas that teach it.

    The result has been an energized Obama on the offensive. That was the most obvious take away from the State of Union address.

    Republicans have a majority in both houses of Congress, but are still struggling to build an effective governing coalition between moderates and radicals. This is further complicated by the 2016 Presidential election cycle. No better example than the number of Republican responses to the State of the Union address. I counted six.

    Jodi Ernst’s speech wasn’t much of a rebuttal. Instead it was an attempt to promote Republicanism as a kinder gentler philosophy grounded in the nostalgia of rural Iowa. Jodi is this year’s version of Sarah Palin. My prediction is she will follow a similar arc. She will demonstrate similar weaknesses as she eventually has to discuss issues outside her comfort zone and respond to questions from those who will aggressively fact check her statements.

    Ted Cruz made a spectacle of himself with his clumsy attempts to post his response on YouTube. The contents of that speech continued his straw man pattern of attacks against Obama. Every time he falsely accuses Obama of some action, and then attacks that imaginary weakness, he loses credibility with young voters.

    Rand Paul is in a similar position. He has narratives that he feels work in his favor. He continues to repeat those narratives whether they are relevant to the current conversation or not.

    I don’t think Republicans will be able to sort out their differences before the 2016 presidential primary season starts. Instead their squabbles will continue to play out both in Washington and on the campaign trail.

    Here are two recent examples.

    A moderate group of Republicans (mostly women) were able to water down an anti-abortion bill promoted by Republican conservatives. They are terrified that a conservative social agenda will derail Republican hopes for 2016. Here are some relevant quotes from that group.

    “Week one, we had a speaker election that didn’t go the way that a lot of us wanted it to,” Rep. Charlie Dent (R-Pa.) said. “Week two, we were debating deporting children, and again, not a conversation a lot of us wanted to have then. And week three, we’re now debating rape and abortion — again, an issue that most of us didn’t campaign on or really wanted to engage on at this time. And I just can’t wait for week four.”

    Rep. Jackie Walorski (R-Ind.) was one of the women who raised objections to the initial measure. “We have a responsibility,” she said, “as the elected body representing our constituents, to protect the most vulnerable among us and ensure that women facing unwanted pregnancies do not face judgment or condemnation but have positive support structures and access to health care to help them through their pregnancies.”

    Then there are those promoting a conservative social agenda.

    “That GOP leadership, that establishment, they’ve got to get their stuff together. I love what they believe in, I believe in it too. But they’ve got to get tough, man. You know what? It’s not just the New England Patriots who are dealing with deflated balls right now,” Sarah Palin

    “If we nominate a candidate in that mold, the same people who stayed home in 2008 and 2012 will stay home in 2016 and the Democrats will win again,” Ted Cruz talking about Mitt Romney

    The reason Republicans lost in 2014 is that their message of social conservatism, xenophobia, magic thinking, and randian individualism was rejected by women, young people, minorities, and educated professionals. It shouldn’t be surprising that the Tea Party faction of the Republican Party rejects this assessment. They feel that the reason Romney lost is because he wasn’t conservative enough. The establishment wing of the Republican Party has failed so far to find the common ground that would allow them to advance an agenda soft on social issues and hard on financial ones.

    The improving economy presents a second serious problem for establishment Republicans. They have to figure out how to get on board. If this growth continues for the next six months without any significant financial legislation getting signed, it is going to be difficult for them to take credit. Their 2014 strategy of blaming the economy on Obama has backfired. Significant financial legislation, however, is going to require some compromise with Democrats. That means some increase in taxes or government spending or both. To get that passed will require a coalition of moderates and Democrats that can overcome Tea Party opposition. If they succeed in passing significant legislation over the objections of the Tea Party and their supporters, the Tea Party almost certainly will take another scorched-earth run at wresting control from the establishment in 2016.

    Have to careful what you wish for, but as a progressive, I’m not sure that I could have come up with a better scenario to guarantee another Democratic victory in 2016.

    The New Party of NO

    Tuesday, December 2nd, 2014

    “We need to quit, you know, kind of rattling the economy with things that are perceived by the voters as disturbing,” Mitch McConnell

    A funny thing just happened.

    After six years of obstruction, the Republican Party is finally in the position where they can be blamed for their own misconduct.

    The result is that they are starting to change their behavior.

    History
    Mitch McConnell has acknowledged that he is the author of the obstructionist strategy that Republicans adopted in 2009. They were fresh off an historic loss to the nation’s first African American President. At the time, there was plenty of discussion of a post-partisan post-racial era that would recapture the golden New Deal age of Democratic dominance.

    McConnell’s insight was that if Republicans refused to participate in the process of government, they could convince enough of the public that this new charismatic leader was at least partly to blame. He recognized that when an idea enjoys the support of both parties, it also receives the equivalent to the Good Housekeeping Seal of Approval from mainstream voters. Anything that passed without that seal was suspect.

    Republicans rode that suspicion to a 2010 victory.

    Effectively grinding government to a halt was risky. It meant that Congress would fail at even routine tasks. It created the most dysfunctional government since the Civil War with historically low approval ratings for Republicans. But it also succeeded.

    Republicans intended to destroy the American legislative process, and they did. Republicans set out to exacerbate partisan tensions, and they did. Republicans hoped to make Obama less popular by making it vastly more difficult for him to get anything done, and they did. Republicans hoped to parlay public discontent into electoral victories, and they did. Republicans made a conscious decision to prevent the president from bringing the country together, and they successfully made the national chasm larger.

    Obama went from a figure of hope and change to the president who hasn’t signed a major bill into law since 2010. In 2014, Democrats were running for cover and Republicans were rewarded for their strategy.

    Now What
    The real reward from the 2014 elections is an opportunity to govern. On closer investigation, voters did not reject Obama’s policies. Many of those policies either in direct ballot initiatives or exit polling reports are very popular.

    Voters also did not endorse McConnell’s obstructionist strategy.

    Quite the opposite. Voters want a government that works and they have now put Republicans in a position where they have to demonstrate that they can do a better job.

    Obama again has demonstrated his acute political sense. Rather than play the traditional role of powerless executive, he realizes that he is finally free to enact large portions of his agenda. He is betting, just like Mitch McConnell did, that the voting public will reward whichever party gets the most done in the next two years, and he has a head start.

    He has already taken landmark action on immigration and the environment. He has a huge Pacific Trade agreement in the works. There is also the possibility of a nuclear agreement with Iran. The economy is recovering faster than the rest of the world and the Saudi’s will keep oil prices low for the next two years to discourage competition. He can’t move on things that require appropriations like infrastructure or legislation like tax reform. But there are plenty of other areas where he can and has been active, all the while calling out the Republican majority to do their job and pass something substantive that he can sign.

    The incoming Republican majority now has a choice. They can focus all of their energy on slowing Obama down, or they can take up the challenge that Obama has given them and begin passing their own legislation to address the issues that concern voters.

    Both strategies have risk. In the first case, they are ignoring voters and hoping that there is still some life in the obstructionist strategy. In the latter case, they have to demonstrate that government CAN be a force for good, but only if Republicans are in charge. To accomplish that, they will need the same thing that they have withheld for the past six years from Obama – bi-partisanship.

    Summary
    Actions speak much louder than words. The actions of the incoming Republican majority suggest that the message of the last election was not a rejection of Obama’s policies as they have said. It was instead an opportunity to demonstrate that they can in fact govern, and a warning that they will be punished again in 2016 if they fail.

    While it is interesting that John Boehner can describe a nine month spending bill as “long-term”, what it does say is that the new Republican controlled Congress will forgo holding the government hostage at least until September, 2015. That is a good sign.

    Fix the Roads

    Friday, September 12th, 2014

    The elder Mayor Daley’s political credo was that as long as you picked up the garbage, plowed the snow, and fixed the roads, Chicago voters wouldn’t care what other political shenanigans went on. He was a practical politician in a city that famously “worked”.

    The same can’t be said for the current state of Michigan. Even though Republicans control the Senate, the House, and the Governor’s mansion; they can’t seem to come up a plan to fund road reconstruction.

    This is not a new problem.

    The whole country went into recession in 2001 but the Michigan economy didn’t start growing again until 2009. Road funding suffered during that period of time as did funding for many public services.

    Then there is the general trend of more efficient vehicles. That means the state is effectively getting less money in fuel taxes per mile driven on the roads. Michigan is not, however, the only state with that problem.

    Last year’s severe winter, however, elevated Michigan’s problem to a crisis.

    Experts say that many of the deteriorating roads in the state have now passed the point where they can be effectively repaired. Instead they must be completely rebuilt.

    The estimated additional cost to simply keep the current situation from getting worse is somewhere around $1B.

    The cost to bring the roads back to a national standard is twice that.

    Part of the problem in Michigan is that we have some of the lowest tolls and fines for overweight vehicles in our part of the country. We charge overweight vehicles a $50 flat fee while all of the surrounding states charge fees based on weight, mileage, and even bridges crossed. This situation is part of the “friendly” auto manufacturing climate that has grown up in this state over decades.

    Paradoxically, Michigan also has the sixth highest gas taxes in country.

    But it ranks last in per capita road spending.

    That’s because, at least in Michigan, the sales tax on gas goes into the general fund rather than the road fund.

    While this makes funding more challenging, the basic realities remain. The state has to spend significantly more money on the roads than it has been spending. Fortunately the citizens in Michigan recognize this and overwhelmingly support increased taxes to fix the roads.

    The solution is obvious. You’ve got to raise taxes on somebody to generate another $1B – $2B in revenue. So why isn’t it getting done?

    In simplest terms – Ideology

    The republican legislative majorities occurred during the Tea Party wave election of 2010.

    They are now faced with the reality that there is no practical way to fund the roads without raising taxes. They already cut funding to schools and eliminated senior citizen state tax breaks to fund a billion dollar business tax reduction – knowing that they still had this issue to deal with.

    The governor, to his credit, put a tax hike proposal on the table.

    So did the Republican Senate Majority leader, who happens to be term limited and as a result can’t run for election again.

    They all received the support of the Democrats, but all failed to get sufficient Republican votes to pass.

    It is now so bad, that the Senate Majority Leader has admitted that he is out of ideas.

    “We’ve come close to getting the votes necessary to fix this longstanding problem. But quite frankly, we’re looking at all ideas now – newer ideas,” said Richardville. “And we’re not afraid to entertain anything from anyone.”

    So faced with a real crisis regarding Michigan roads and the prospect of another brutal winter that will damage even more roads beyond the point of repair, Tea Party Republicans refuse to vote for any plan that raises taxes or fees on anybody.

    I can’t think of any clearer example of the folly of the ideology that has overtaken the Republican Party. There are consequences to a philosophy that believes no tax can be justified and economic growth will offset any loss of revenue. It is impossible for economic growth to generate sufficient additional tax revenue to solve this problem. The deteriorating roads are impacting economic growth today preventing the promised stimulation from low business taxes.

    As Mayor Daley understood, voters expect government to provide a set of basic services. Voters are also wise enough to realize that they have to pay for these services.

    Hopefully voters will recognize that this party is unable to govern because of their “no tax” philosophy and vote them out.

    Magic Thinking and Personal Interest

    Thursday, June 19th, 2014

    We’ve talked about confirmation bias in the past and how we are all susceptible. Confirmation bias is when we accept those things that support our particular view of the world and reject those things which call that view into question. A version of this is Moral Intuition. That’s when we respond to a particular issue emotionally and then use our rational brain to create arguments supporting what we have already decided must be true because it aligns with our moral foundations.

    These biases lead to Magic Thinking. That is when we invent or accept views completely unsupported by science or fact because this particular view is consistent with our world view.

    Here’s an example of Magic Thinking.

    God makes political choices
    This is a simple one to work through. God, as described in the Bible, is all-loving, all-knowing, all-powerful, and perfect. He created us in His image and likeness which means in His eyes we are perfect too. He supplies our every need. So why would this God involve Himself in politics at all? It is akin to praying that God influence the outcome of a sporting event. Why would He bother? It is our responsibility to “work out our own salvation with fear and trembling”. Then Paul goes on to say, “For it is God which worketh in you both to will and to do of his good pleasure.” Events unfold to further God’s will, not to satisfy our own particular personal plan. That will is His desire for us to increase in grace and in our understanding of Him. So the unfolding of God’s plan is generally the path that does the most good and blesses everyone. There are no losers in God’s plan. Winning is strictly a human concept. It is Magic Thinking to expect a prayer for victory to be answered. A much more effective prayer is one that humbly seeks direction and alignment with the plan that is already in place for us.

    Magic Thinking is dangerous for our democracy because it transforms important issues from facts to belief. Beliefs are highly emotional subjects. So any attempt to debate them is divisive. That’s because beliefs by their nature are personal. So when you question a belief, you are also calling into question the intelligence and honesty of the person holding that belief.

    Some who seek to manipulate the public in order to advance their own agendas put a lot of effort into transforming political positions into beliefs.

    Here are some other examples.

    Climate Change
    From a scientific perspective, there is wide agreement that the climate is changing and that the change is PRIMARILY caused by human activity. That doesn’t mean that all scientists agree on everything. There are certainly a small number of climate scientists who have dissenting views. It also doesn’t mean that the scientific models are perfect. They aren’t because our planet is a complex system. But those models continue to improve as climate scientists better understand how our planet is responding to the increased heat being retained by our atmosphere.

    Magic Thinking claims that climate change is some sort of liberal conspiracy. The politics of personal interest is the best way to disprove that. Self interest in the scientific community is strongly biased toward disproving accepted theories. That’s how scientists make a name for themselves in their peer community. The scientific method REWARDS the person who is able to demonstrate that a popular theory is flawed. That reward is shared with those who can duplicate the experiments which support the new theory. In other words, a dissenting view supported by good research is always welcome in the scientific community.

    There is also no proof that scientists who disagree with the generally accepted theories about climate change suffer financially. In fact, it is much the opposite. Those small number of dissenters from the majority view are richly rewarded for their positions by the powerful interests who oppose actions restricting the use of fossil fuels.

    The politics of personal interest also provide a simple explanation for conservative opposition to any government actions to reduce emissions of greenhouse gases. The majority of the money financing conservative politicians who deny climate change comes from organizations linked to the Koch Brothers. Their wealth is based on fossil fuels. Their personal interests are opposed to any restrictions on the use of fossil fuels.

    They have successfully deployed the same techniques originally developed by the Tobacco Industry to create doubt and confuse science and belief. If anything, it is testimony to the ethics of the scientific community that most climatologists have resisted the temptations of participating in the lucrative practice of junk science.

    Free Markets
    The Magic Thinking here is that free markets can regulate themselves. So any failure for free markets to operate successfully is attributed to too much government intervention rather than companies that have become too big to fail.

    The reality is that while it is certainly possible for government to overreach, there is no evidence that free markets can effectively operate without regulation.

    The politics of personal interest are a reliable measure of where this argument came from too. Who stands to benefit the most from a deregulation? Those entities that had been previously regulated, their management, and their stock holders. Who back the conservative politicians who promoted the agenda of deregulation? The same group.

    One need look no further than China for examples of how industries behave in economies where there are no regulations. The environment is polluted. Workplaces kill workers. Products kill customers.

    The Magic Thinking is on the part of individuals who have been convinced by these larger monied interests that deregulation benefits them. Just ask the people in Charleston, West Virginia where “business friendly” state regulations allowed a toxic chemical storage facility to be built upstream from their drinking water intake pipes. Magic Thinking in this case is the Libertarian view that the marketplace will punish bad corporate behavior. The facts are that at least in our version of capitalism, short term profits always trump long term unfunded liabilities (externalities).

    What happens instead is that the offending company profits from their bad behavior. Those profits flow to company management and shareholders. When the externalities finally catch up with the company, the real costs of production are revealed. The cost of the damage done to either the environment, the workers, or the customers far outweighs the assets of the company. The company declares bankruptcy and taxpayers are often left holding the bill. Lawyers may make a little money attempting to recover some costs from those who profited, but most of those profits are long gone and will never be recovered.

    Immigration
    Just like climate change, this country is facing an undeniable demographic reality. Our population is aging. If we fail to embrace immigration, we will suffer the same bleak economic outlook that Japan has been struggling with the past decade. Combine that with the major demographic shifts in the electorate that were the foundation for Obama’s two Presidential victories and Republicans are facing a stark choice. Either embrace immigration reform or die as a relevant national party.

    The Magic Thinking is that conservative Republicans can continue to be a force in the House because of gerrymandering and the lower voter turnouts during off year elections. As long as they can retain that majority, they don’t need the White House or the Senate. They can do this by suppressing the vote, preventing immigrants from becoming citizens, playing wedge politics with their base, and outspending the opposition.

    The reality is that conservatives are simply going to run out angry white voters. When they do, it will be hell to pay for the tactics that they employed to hold onto the power that they had.

    Abortion
    The facts are the no one can say when life begins. We can recognize when something is living, but there is no agreement when something starts living.

    The rest of the facts are that Roe V. Wade did not decide when life begins. It also had nothing to do with personhood. It was decided based on the rights of the mother. Her rights take precedence until the point in time that the fetus can survive independently. There is NOTHING that the current right to life movement can do to change that perspective short of a constitutional amendment.

    Magic Thinking, however, suggests that the Justices make a bad decision. They simply didn’t have the facts that we have today. If we just get some different justices on the bench, the decision will get reversed. It’s not going to happen.

    The politics of self interest call into immediate question why this issue continues to fester for decades after this decision was made. The people who benefit from this continued controversy are the advocacy groups (for both sides) and the politicians who are able to raise money by aligning themselves with one group or the other. It is not unlike divorce lawyers to make their money asserting the rights of their client, when they know full well that judges are loath to give one parent sole custody of the children, support an inequitable property split, limit child support, or these days provide alimony. If both parties in a divorce were told what the likely settlement would be, they would start to work out the details on their own rather than invest money in lawyers attempting to “win”. The same is true here. No one will win. It will instead be a trench war that will only stop when the next generation refuses to continue to fund special interest groups.

    The Poor
    Poverty is a complicated subject. The facts are that programs like Social Security and Medicaid have dramatically reduced poverty among the elderly. We already dug into the economic costs of poverty and the benefits to reducing it.

    The Magic Thinking, however, is that poverty is the fault of the poor. They must have made a bad decision somewhere in their lives for them to end up in the position that they now find themselves. As a result, any attempt to help them escape poverty does nothing to resolve the more fundamental character weakness that got them in this condition to begin with.

    Ayn Rand has written the “Bible” for this particular form of Magic Thinking. The challenge is that those who advocate this gospel of “personal responsibility” and “greed is good” are also dealing in belief rather than fact.

    Conclusion
    Magic Thinking masks the politics of personal interest. Those special interests are well versed in the tactics required to transform political points of view into beliefs. Once a political position becomes part of an individuals belief system, they are no longer open to a fact based discussion. Those who embrace these beliefs will only accept the facts that support their beliefs. They will reject the facts that call those beliefs into question. They will defend their positions using the stock arguments of Moral Intuitionism. Those include media bias, conspiracy theories, flawed polling, and junk science.

    The result is an increasingly polarized electorate, gridlocked government, and crumbling economic and physical infrastructure. The only times that we are able to make any changes are during the first two years of any new administration when the majority party can actually pass parts of their agenda by imposing their will on the minority.

    This is no way to run a country.

    The Crime of Poverty

    Sunday, April 27th, 2014

    There was a rich man who dressed in purple garments and fine linen and dined sumptuously each day. And lying at his door was a poor man named Lazarus, covered with sores, who would gladly have eaten his fill of the scraps that fell from the rich man’s table. Dogs even used to come and lick his sores. When the poor man died, he was carried away by angels to the bosom of Abraham. The rich man also died and was buried, and from the netherworld, where he was in torment, he raised his eyes and saw Abraham far off and Lazarus at his side. Luke 16:19-23

    There was a cost to income inequality even in Jesus time. This cautionary tale, however, seems to have been forgotten today, just as it was over 2000 years ago.

    Income inequality is real and is larger now than in any other time in our industrialized history.

    In practical terms, this is the result of government policies which favor the rich.

    We’ve already discussed ways that income inequality can be reversed – primarily by reversing the government policies which caused its rise in the first place.

    Let’s look for a moment at the other end of the spectrum – the real costs of poverty.

    The direct result of concentrating more of the nation’s income in the hands of the wealthy is that less money is going into the hands of the poor.

    Less money in the hands of the poor has caused an increase in crime, specifically homicides and robbery in poor neighborhoods. In the 2002 report entitled “Inequality and Violent Crime”, the World Bank says,

    Income inequality … has a positive and significant effect on homicide rates … the results for robberies are similar to those for homicides.

    AND

    …when poverty falls … either because income growth rises or the distribution of income improves, then crimes rates tend to fall.

    Seems a simple conclusion – poverty and crime are connected.

    But the conservative response based on the “fairness” moral foundation, is that the poor are responsible for their own condition because of bad choices. If they break the law they should go to jail. The reality, however, is that our prisons are now overcrowded with people convicted mostly of non-violent minor drug crimes.

    The United States has 25% of the world’s prisoners but only 5% of the world’s population. Incarceration rates over the last 20 years have risen while crime rates have dropped 40%. The direct taxpayer cost is $64B/year. The indirect costs are a generation of primarily minority men who are absent from their families and have difficulty finding work when they have served their time. That’s because, though drug use has no racial preference, 75% of the people in prison for non-violent drug offenses are black.

    As a precursor to the rest of this discussion. It costs between $30K and $60K a year to house, feed, and guard each prisoner in our prison population. Roughly 50% of those released from prison will return within three years.

    Criminologists have found that the single most effective tool to reduce recidivism is education. If we took the money that we are currently spending to keep non-violent offenders behind bars and spent it instead to provide support for them while they learned the skills necessary to secure a living-wage job, everyone benefits. Everyone, that is, except the corporations who profit from the prison industry.

    The prison industry is only one example of the economic forces that are arrayed against the poor. The poor have no control over the economic bias that exists in this country. Their opportunity to change their circumstances is dramatically limited by violence, poor nutrition, poor schools, poor transportation, limited low wage jobs, single parent families, the high cost of child care, and all of the companies who have figured out how to profit from these conditions.

    The conservative response is that we shouldn’t “reward” the poor for making bad decisions. Any attempt to level the playing field is regarded by many conservatives as “enabling” poverty rather than empowering the poor. The result is government programs “designed” to encourage work which actually punish the poor for having children. Support, for example, is tied to the number of children in the house rather than adults. But that support does not include the cost of child care and support is reduced by the amount of money earned. So many families find that when the costs of childcare are factored in, they can’t afford to work and also put food on the table. The supports are also not enough to allow one adult to work and the other to stay home with the children. The choice for many single mothers is to kick fathers, who may not be able to find a job because of past criminal records, out to support themselves while they stay home with the kids at least until they are old enough to go to school.

    These programs could certainly be improved, But let’s look for just a moment at a more radical solution. What would it cost us as a country to simply eliminate poverty?

    It is an intriguing idea. Just provide everyone sufficient support that they are no longer encumbered by the basic issues of survival in our society. Every adult, regardless of their background, is guaranteed a minimum stipend sufficient to support themselves.

    In a September 2013 article for the American Prospect, Matt Bruenig stated:

    Eradicating or dramatically cutting poverty is not the deeply complicated intractable problem people make it out to be. The dollars we are talking about are minuscule up against the size of our economy.

    It would take only 1 percent of GDP, or a fourth of what we spend on defense every year, to lift every American below the poverty line up above it… In 2012, the number was $175.3 billion. That is how many dollars it would take to bring every person in the United States up to the poverty line.

    What would happen if everyone in this country suddenly had enough to eat, had a safe place to live, and could afford to work and raise a family?

    Violent crime rates would fall. That would save on what we currently invest in medical services, law enforcement, prison systems, and other civic support systems.

    Corporations win because without poverty, Americans have more purchasing power. Democrats win because income inequality is credibly addressed. Republicans win due to a combination of reduced government costs and credible fiscal responsibility at all levels of income.

    It is a simple, pay me now or pay me later, discussion. The challenge with this discussion, however, is that it touches the conservative moral foundation of “fairness”. Somebody getting something that they didn’t deserve.

    Therein lies the fundamental challenge of our political age.

    Conservatives believe that poverty in and of itself is a crime. Those who find themselves in poverty have no one but themselves to blame. The hardships associated with poverty are both a just punishment for bad choices as well as the disincentive that the poor need to change their circumstance.

    If anyone doubts this, we need look no further than those who defended Mitt Romney after his famous “47%” speech.

    In the rest of the Bible story, the rich man, now in eternal torment, begged Abraham that if he couldn’t be saved, at least warn his five brothers who still had time to mend their ways. Sending someone to them from beyond the grave would certainly do the trick.

    He said, ‘Then I beg you, father, send him to my father’s house, for I have five brothers, so that he may warn them, lest they too come to this place of torment.’ Luke 16:27,28.

    Abraham replied that Moses and the prophets HAVE been warning people.

    Then Abraham said, ‘If they will not listen to Moses and the prophets, neither will they be persuaded if someone should rise from the dead.’ Luke 16:31

    What we know now is that God did ALSO send someone who DID return from beyond the grave and DID provide the same warning.

    Then shall they also answer him, saying, Lord, when saw we thee an hungered, or athirst, or a stranger, or naked, or sick, or in prison, and did not minister unto thee? Then shall he answer them, saying, Verily I say unto you, Inasmuch as ye did it not to one of the least of these, ye did it not to me. And these shall go away into everlasting punishment: but the righteous into life eternal. Matthew 25:44-46

    And you know what? Abraham was right, the wealthy and the politicians and voters who support them have not listened to Jesus either.

    The choice is really simple.

    You can defend the position that poverty is the incentive that the poor need to alter their circumstances – but you do so at great peril to your own salvation.

    OR

    You can follow Jesus commands, embrace the poor, and generously tend to their needs. Great rewards have been promised those who follow this path.

    Economic Costs of Income Inequality

    Saturday, January 25th, 2014

    As a quick summary, the huge gap between the rich and poor is a fairly recent phenomena driven by changes in government policy that started with Ronald Reagan. We are now in uncharted territory. We have never had the level of income inequality that we are currently experiencing. There has been a huge transfer of wealth from poor and middle class families with no end in sight. Poor and middle class wages over the past 15 years have gone down while the wages of the wealthy have increased.

    I will do my best to stay away from discussions of morality in this post and focus on how this affects our economy.

    Narrow Spending Base

    A majority of economists surveyed by the AP in December felt the current level of income inequality was unhealthy.

    “What you want is a broader spending base,” said Scott Brown, chief economist at Raymond James, a financial advisory firm. “You want more people spending money.”

    That’s because discretionary spending by the wealthy tracks the stock market. When the market is up, they spend. When the market is down they don’t. This makes consumer spending much more volatile than it has been in decades past. This volatility leads to slower economic growth because businesses are less willing to invest as demand increases for fear that the demand spike is only temporary.

    “The broader the improvement, the more likely it will be sustained,” said Michael Niemira, chief economist at the International Council of Shopping Centers.

    Scott Brown agrees that the current levels of income inequality are slowing economic growth, “there’s not much denial of that … and you’re starting to see some research saying, yes, it does slow the economy.”

    Warped Economy

    It isn’t only that the spending base has narrowed.

    The way that the wealthy spend their money is different from the way that middle and lower classes consume. That difference tends to increase the concentration of wealth at the top of the income range rather than spread it throughout the whole economy.

    Here’s how that works.

    Because the wealthy have already satisfied their basic needs, they spend their discretionary income on goods whose value stems from the talent of other top earners. Let me say that again in a slightly different way. The wealthy spend their discretionary income on goods and services that only they can afford. The producers of those goods and services are able to charge a premium for their services because they produce the best of whatever it is that differentiates them for everyone else. As a result, these “best of breed” producers also become wealthy.

    Here’s how the NYT describes it.

    Wealthy people don’t choose just any architects, artists, lawyers, plastic surgeons, heart specialists or cosmetic dentists. They seek out the best, and the most expensive, practitioners in each category. The information revolution has greatly increased their ability to find those practitioners and transact with them. So as the rich get richer, the talented people they patronize get richer, too. Their spending, in turn, increases the incomes of other elite practitioners, and so on.

    Technology has also made the best performers far richer than they could have been even a decade ago. That’s because the best musicians, athletes, and artists can now reach audiences of virtually unlimited size. Artisans can ship their products anywhere in the world. Which allows them to dominate their markets in ways never imagined possible.

    Education markets are warped because the wealthy can afford the tutors, camps, travel, and exclusive prep schools that provide their children a distinct advantage in the competition for slots at the world’s best colleges and universities. Hunter Prep School in NYC was created to provide a public alternative to private prep schools for NYC children. In the 70’s the demographics of Hunter pretty much reflected the demographics of NYC. Now almost 80% of the Hunter students are children of alums. Their parents DID succeed because their Hunter education got them into Ivy League schools which turned into lucrative jobs on Wall Street. They were able to send their children to exclusive elementary schools and after school programs to prepare them for the Hunter entrance exam. It’s a perfectly understandable response, but that response is effectively destroying the meritocracy on which Hunter was originally based. In its place is an oligarchy, which is what Hunter was supposed to weaken.

    Finally income inequality is warping the political process. The wealthy have more access to legislators than the middle class or the poor. The 2012 Republican Primary is a great example. Two of the three candidates in the final run for the nomination (Santorum and Gingrich) received virtually all of their funding from just one person. Gingrich from Sheldon Adelson. Santorum from Foster Friess. Not surprisingly, Gingrich’s platform reflected Adelson’s strong support for Isreal. Santorum’s platform reflected Friess’ conservative Christian views.

    Summary

    Income inequality is real.

    It has accelerated over the past 30 years to the point that the wealthy represent the only group enjoying an increasing income share. Everyone else is financing that increase with their own decreasing shares.

    Concentrating so much purchasing power in the hands of such a small number of people weakens our economy and slows economic growth.

    It warps the consumer economy by creating a feedback loop where the rich only spend their money with organizations and individuals who are also rich. This isn’t necessarily the overt intent of the rich, but it is the practical outcome of their rigging the system for their own benefit.

    It warps our educational system by limiting access to the best schools to those who parents can afford to send them to the best elementary and prep schools. The wealthy aren’t any smarter than anyone else. They are just way better educated, financed, and connected.

    It warps our political process by making the votes of the wealthy more valuable that the votes of everyone else. Those votes have supported a system of lower taxes and reduced regulation which became the foundation for their success.

    Next up, a brief analysis of how moral foundations also warp our view of the rich. Then a discussion of the economic value of a more level playing field and then finally what government can do to encourage a more level playing field.