Learning to Live with Moral Hazard

Yes, some undeserving will be rewarded, but we can get over that

Summary (in case you don’t want to read the whole thing)

People wanted (and to some extent needed) more things but weren’t making enough money to pay for it; so they made up the difference by borrowing. Many people went too far and ended up bankrupt or at least in serious trouble, affecting the broader economy. The very nature of the capitalist system encouraged them to do so, though. It’s unreasonable to hold it against them when making policy. People aren’t helpless and shouldn’t be entirely absolved, but neither should they be held totally responsible.

Background

At first, people were lucky if they could make just enough goods to stay alive. As they got better at making goods, they became able to produce more than they needed. Then the financial crisis happened.

Okay, actually a lot of stuff happened in between the genesis of economic surplus and the bursting of the debt bubble. But the former thing led pretty much inevitably to the latter.

Producing more than they needed, people began to trade their extra goods for other people’s goods. People realized that it would be more efficient to have one easily-portable thing that could be used to buy anything; i.e., money. Since this new thing could buy anything, it soon became more valuable than actual goods, which in order to trade had to be of some value to a potential buyer. But a buyer didn’t need a special reason to value money, since he could in turn spend the money on whatever. So people went from learning how to make more goods than they needed, to learning how to make more money than they needed. Hence interest, stocks, bonds, and now derivatives and hedge funds. Making money for the purpose of making more money.

Eventually the economy came to be based more on making money than making things that were useful in themselves. But useful things were still produced, and quite abundantly, as the money-makers invested in technologies that made more goods with less time and work, so that people had the time and resources to focus on making more money. But this created a problem as a great disparity opened up between people who had money to invest and those who made just enough to pay for basic needs. The more money wealthy investors had, the easier it was to make more, and accumulate greater wealth (and power over the economy and politics).

This was not the birth of social inequality, of course, which had existed since people began settling down instead of constantly moving around in search of food. But now there was no longer any natural limit on the degree of inequality that could be generated, as more money could always be made, and used as leverage against people with no extra money, to prevent them from being able to negotiate for better pay for the work they did. Some people controlled so much wealth that they didn’t have to negotiate with regular folk at all, as they could easily find someone willing (that is, desperate) to work for them for whatever paltry wage he had no choice but to accept in order to pay the wealthy for the privilege of living on their land. Regular folk very belatedly acquired the right to vote in order to have some say over their governance, but you had to have money to have any real influence, so government ended up being largely a servant for the wealthy. People could really only select a leader from a list decided upon by the wealthy elites. So government became a driver of greater inequality rather than a check on it, a reality only partially mitigated by progressive reforms such as fair labor practices laws and collective bargaining rights, which by making the economic situation more tolerable for the masses, actually secured the capitalist system by protecting it from popular revolt. The concentration of wealth continued to increase, but so did the living standards of even the poorest people, so the system kind of worked for everybody. 

Back to the Present

Thus a highly productive capitalist economy (generating surplus, if also much waste) has meant living standards have risen, even for the poor. But wages, for a quarter-century, have been basically flat, for the vast majority of workers. The last twenty five years of the 20^th century saw the success of an aggressive political movement to roll back many of the progressive policies that gave ordinary people security and bargaining power. Secure full-time union employment has given way to temporary part-time jobs with no benefits or collective bargaining rights. Wealth has become more heavily concentrated among the richest people than since just before the Great Depression.

But the culture has made it harder to settle for just good enough. The American Dream is essentially to be middle class. The material standards that qualify a person to be middle class have increased: two cars rather than one; a large house rather than a small one; a college degree, not just a high-school diploma. Each qualification means more expense. But individuals aren’t making much more money than people in similar positions were 30 years ago, allowing for inflation. Families partly made up the gap by married women working. But largely the increase in living standards has depended on massive borrowing. Which might have seemed fine until recently, though in retrospect such thinking seems positively foolish.

Who’s to Blame and What to Do About It

It is easy to say (as many conservatives tend to) that people didn’t have to buy all those fancy things. They could have lived more modestly, saving extra cash for their future, as past – presumably more sober-minded and responsible – generations did. Settled for smaller houses, fewer toys for the kids (and adults) and such. Which is literally true, if still an unsatisfactory response to the related problems of growing financial insecurity and economic inequality. The problem with their argument is only that it stops there. It’s a valid point, but it also ignores a lot of important facts. There is a tendency to assume that individual virtue alone can protect people from bad economic outcomes, and discount or minimize larger economic and social forces that influence people’s actions.

People surely had better save their money and not borrow what they are unlikely to be able to pay back, but just as surely, people (most, anyway) will spend and borrow to the limits of their ability (i.e. how much a bank will lend them) and get themselves into the kind of trouble that threatens the whole economy, not just their own personal finances. In doing so, people are not being wise or fully responsible. But it’s asking too much to say they ought to be. Even well-meaning people will necessarily make bad decisions and get themselves into trouble. The disagreement is over the question of what to do when this happens and affects the broader economy.

There is not a neat line dividing responsible borrowing from the dangerous kind. There is a spectrum. Along that spectrum lay choices between competing values: we want to save for the future, but we also want a house with enough room in case Mom has to move in with us; we want to save for our retirement, but paying more for a premium college education for little Johnny could pay off in the long-run. And so on and so forth.

To be sure, some people – at the bad end of the spectrum – make pretty obviously irresponsible choices. It seems unfair that others should be required to bail them out when they do. But my claim is that most people are not on that end of the spectrum. Most are somewhere in the middle between saving as much as possible and spending as much as you can borrow. The critical point is that people sit along all points of that spectrum and any policy we make regarding sound economic decision making and problem-solving is inevitably going to be justly accused either of punishing the innocent or of absolving the guilty – because of the absence of that neat line between the two. It’s too difficult to separate everyone. If we decide, for example, to bar foreclosures, we are surely letting some irresponsible people; but we’re also helping deserving people who just had really bad luck. For some, punishing the guilty appears to be more important than protecting the innocent. For others, it’s the other way around. Either way we will necessarily fail to mete out perfect justice.

The point? Let’s quit worrying about the moral hazards of bailouts and focus on promoting general prosperity. Else we’ll face problems more serious than the unwelcome side effects of letting people off the hook.

See, We Should Have Just Done Single Payer

The problems of the health insurance mandate

I do not have a simple response to the recent ruling by a federal judge that the new health care law is unconstitutional. One the one hand, it seems reasonable to require that everyone be insured. People’s decisions in this matter are not purely private; they affect everyone because medical costs are necessarily socialized. On the other hand, the new law’s opponents might have a point that the Constitution does not empower Congress to force people to buy something, even if their decision not to do so negatively affects others.

The “individual mandate” was aimed at those who could afford to buy insurance, but choose not to. Some will wait until they get injured or sick and then purchase insurance, while others who have been paying into the system all along will bear the cost of any emergency care they may need. At issue in this lawsuit was whether this act of omission amounts to a substantial effect on interstate commerce that the government can constitutionally regulate.

Opponents of the mandate contend that Congress cannot regulate against a person’s decision not to purchase something. Even if people’s refusal to buy insurance did affect interstate commerce, to allow the mandate might concede to Congress virtually unlimited power to force to people to buy things the government thinks they had better have.

This does not strike me as a very strong argument. Judge Hudson’s contention that the government could force people to eat asparagus seems not only far-fetched but a logical stretch. Not only is it unlikely that the government would do such a thing, but it would be difficult to argue that such small decisions fall under the authority of the Commerce Clause – compared to the major effect (in the aggregate) of the decision to go uninsured. That is to say, there is a strong case to be made that health insurance really is something everyone needs and there are major consequences to society if people go without it.

The problem is, if the mandate is struck down, the rest of the law may not work. People will be able to wait until they get sick and then apply for insurance coverage that the law guarantees them. This could lead to increased premiums.

The government could have avoided this dilemma by going in another direction – that is, toward universal single-payer health insurance, or Medicare for All. No one would be required to purchase a private health insurance plan; they would be automatically covered and the government, rather than an insurance company or the individual, would be billed for medical services. This is the resolution I would prefer. Of course, it does not have sufficient support right now. In the mean time, I will continue to root for the law’s success as a lesser evil.

Yes, government does (help) create wealth

In the United States, the notion of government as a provider of the resources necessary for wealth creation is met by many on the right with something like an allergic reaction. "Why should government redistribute wealth?" they demand.

To answer their complaint, a false assumption must first be corrected. The false assumption is that the government does not participate in the distribution of wealth in a market economy. But of course, government surely does play a role in distributing wealth in a market economy. A person doesn’t get rich or stay rich without the services provided by government, including its protection of intellectual property. In other words, the heavy concentration of wealth among the very richest people could not happen without government to begin with. So when government redistributes wealth, it is merely correcting a problem it helped create.

This argument does not settle the issue of how much redistribution ought to be done, of course. That has to be decided democratically. But conservatives are wrong to suggest that redistribution is simply arbitrary meddling by the state in a purely voluntary market system. There is no such thing. The state is necessarily implicated in the existing distribution of wealth, whether it be to the advantage of the rich or the poor. To support conservative policies is to endorse the advantage of the rich.

Of course, for conservatives, the heavy concentration of wealth among the rich few is not a problem for the state to address; indeed, it is not a problem at all. It is simply a result of some people being smarter and harder-working than others. But as I argued before, smarts and hard work alone do not get us the degree of inequality we see – government helps. Without it, there would be no way to get your due if someone reneged on their contract or stole your idea and made money off of it that rightly should be yours. To acknowledge the role of government in fostering wealth creation is not to deny the importance of intelligence and work ethic. It is simply to acknowledge that a market economy requires the support of a strong government able to enforce the rules. No one person, however smart or hard-working, can create such favorable social conditions on his or her own.

Contrary to right-wing myth, government does create wealth. That is to say, society collectively enables individuals to prosper by providing a system of laws that protect property rights as well as physical security. When those who prosper most in that system are taxed the most to support it, they are not being penalized. They are paying to support the system that nurtures them.

The Dilemma of Progressive Taxation

The issue of tax is a difficult one because equally important principles pull in different directions. A tax system should be fair and progressive; that is, it should not be more burdensome for poorer people. It should take the most from those who have the most to spare. Yet you also want a tax system that raises sufficient revenue by encouraging (or at least, not discouraging) the productivity that creates the money to be taxed.

Following the fair-tax view means taxing disposable income at a much higher rate than the income that barely covers food and housing. That suggests a steeply progressive income tax, starting at zero for people making less than poverty-level income and rising gradually to something like 40 percent for the richest two percent of people or so. (If the tax cuts passed under President Bush expire, the top marginal rate will be close to 40%.)

But the competing view warns that higher marginal tax rates discourage businesses from making job-creating investments. I’m more likely to make an investment if I get to keep 90 percent of the profits than if I only get to keep 60 percent. In a high-tax environment I might decide it’s not worth it to put that capital at risk. You could complain that this argument caters to people’s greed, but that complaint does no good in practice. If we care about raising enough revenue for a social-welfare-oriented government, we have to make sure we’re not discouraging the very wealth creation that makes such a government possible.

You can believe (as I do) that right-wingers exaggerate higher taxes’ discouraging effect on productivity, and still appreciate that higher marginal tax rates affect incentives. If I get to keep more from making an investment, I am more likely to make that investment. It would seem naïve and wishful-thinking to argue that marginal taxes can be raised toward 100% without reducing wealth-producing incentives.

But this logic creates a problem for the fair-tax view. If higher marginal taxes discourage productivity, resulting in less wealth for everyone, we should perhaps not only enact a flat tax, but a downright regressive tax code, perhaps by taxing earned income (above a poverty threshhold) at a flat rate while taxing capital gains and dividends less or not at all. Encourage people to get richer by making it a tax liability to remain poor. This is the extreme case, of course. It’s very unlikely to happen, although the very conservative people who dominate the Republican Party would gladly move us in that direction.

For example, a state may decide to attract a large company to set up shop there by offering a lower tax rate. If the state fails to do so, the company may take its business – and its jobs – to another state. The logic of this argument leads to the elimination of tax altogether. States can keep competing for business by lowering taxes until there are no taxes left. Indeed, states could even pay companies to come to them.

But since governments still need revenue, they will have to raise it by taxing people who lack the political clout to resist it. It’s harder for a working-class family to move to a lower-tax state. Nor can they very well avoid the sales taxes that conservatives prefer over progressive marginal taxes on income and assets. The advantage of taxing poorer people is that it’s harder for them to avoid the taxes. So even though you’re taxing people who don’t have much money, you’re still taxing enough people to make revenues significant in the aggregate.

If you believe, as many appear to, that our government spends far too much on social welfare programs, you could resolve this dilemma by cutting taxes across the board, leaving just enough revenue for things even the hardest-nosed conservatives agree government must do. If you believe, as I do, that social welfare policy should err on the side of generosity lest we engender a society of fantastic wealth for the few amid grinding poverty for the many, we have to find another kind of balance. In the next post, if I can find the energy, I will explore ways of doing that.  

Cut Government Spending -- For Other People, Of Course

It seems to be conventional wisdom that balancing the budget will require some combination of spending cuts and tax increases. There are still those on either extreme who like to think that we can spend as much as we like, or cut taxes as much as we please, without compromising fiscal soundness. But more prudent minds understand that getting what we want without going bankrupt will take some kind of sacrifice.

The problem is that not enough people appear willing to make that sacrifice if they’re the ones affected by it. The mostly-older folks rallying at Tea Parties rail against out-of-control spending, but try cutting their Medicare and Social Security and then see how eager they are for smaller government. Republican leaders warn about growing debt from increased social spending, but try getting the defense hawks among them to go along with significant cuts in new weapons systems. Conservatives insist they want less dependence on government, but try cutting the mortgage-interest tax deduction that amounts to a massive subsidy for middle-and-upper-income people.

To be sure, America’s social support for the elderly, a world-dominant national defense, and widespread home ownership are worthy priorities. But they are also among the biggest costs to government. If we are serious about minimizing deficits, we are going to have to go after areas where the greatest spending is done.

Much rhetoric about excessive government spending focuses on programs that help the poor. But much federal spending benefits more affluent people. Social Security and Medicare are not limited to the poor; many tax write-offs benefit middle-class people; more examples could easily be cited. It’s easy to pontificate about how poorer people should help themselves and depend less on the state. But it’s only honest to consider the many ways better-off Americans benefit from government too, often at great cost. In seeking to reduce that cost, there are better places to start than cutting benefits for those who are already struggling to get by, while continuing to cut taxes for the wealthiest people.

My Post-election Rant

I have this idea – admittedly, perhaps a naïve one – that our representatives in legislatures should be, um, representative; that is, representative of the population. The people who make our laws should be in many senses similar to us, such as in socioeconomic and cultural background. They should represent a broad perspective on what life is like for the people they claim to represent.

So when I look at the portraits of the leading Republicans about to take over Congress and see nothing but white male faces (basically, people just like me, only a generation or two older and a lot richer) I doubt their ability to represent an increasingly diverse country. Somehow this concern about lack of diversity – lack of representation of women and minorities in the highest positions of power – is taken by the right as a form of prejudice. How dare anyone doubt that these privileged men with excellent pay and benefits and great pensions can faithfully represent the interests of people working for barely more than minimum wage and no benefits or sick leave?

For leading conservatives, though, even having empathy for such folks – especially if you’re a judge! – is dubious. Empathy may lead to making laws and policies that cater to the most disadvantaged in our society, causing the people to become spoiled and lazy. As a Republican lawmaker said not long ago, if you feed a stray cat, it keeps coming back for more. (Yes, he was comparing poor people to stray animals.)

If mere empathy for the disfavored in society is a dangerous thing, how much worse the suggestion that members of traditionally disfavored groups – minorities, women, minority women – might actually deserve proportional representation in government! Oh, the humanity!

Presumably the wealthy white men about to resume their control of Congress really have the best intentions toward serving all Americans, including those least privileged socially and economically.  But clearly they have failed to convince very many people outside of their demographic that their intentions are sincere. The Republican victory of last week relied heavily on the old and the white.

Lack of diversity is not an easy issue to address. Some may be content for elite institutions in business, academe and government to have very few women or minorities at the top, as is still the norm. But even for those who accept that this norm is not desirable, the solutions are not obvious or simple. Should we say, for example, that the government should have 50 percent women and 25 percent minorities? Such a radical policy would seem unlikely to generate the necessary support.

But an aspiration need not be an official policy. Where quotas have been mandated, controversy is understandable. It is absurd, however, to contend that discrimination by race is the same morally whether it is done to promote opportunities for minorities or to prevent them. Yet that is exactly what Chief Justice John Roberts said in ruling that a school district could not use race as a factor when deciding students’ school placement in order to promote more diverse schools: “The way to stop discrimination on the basis of race is to stop discriminating on the basis of race.” For the chief justice, discrimination that promotes a more diverse student body is no better than discrimination that excluded blacks from white schools before integration in the 1950s. This is such an outrageous contention that I cannot find the words to describe it. If you have sound reason to reject policies designed to increase school diversity, that is one thing. But if you don’t appreciate the difference between Jim Crow laws and affirmative action, you have no business in government, let alone on its highest court.

Lest I be misunderstood, I do not deny grounds for disagreement among reasonable people about affirmative action, or indeed any policy designed to help historically underprivileged people. Nor do I believe that the Republicans about to resume control of the House of Representatives mean any harm to underprivileged citizens. But people can hardly help representing the interests of those who supported them; and, in doing so, neglecting the interests of others. Republicans certainly represent (more aggressively than their rivals on the left) the interests of people with a lot of money. It is naïve to pretend otherwise. People living from paycheck to paycheck are not overly concerned about the tax rate on capital gains or inherited estates worth more than a million dollars, tax cuts that have long been high on the Republican agenda. It is hoped, of course, that by making the rich even richer, everyone else will benefit too. We’ll see, I guess.

When President Obama and the Democrats ran everything, there was concern that what is called the business community was being maligned and neglected (despite the small-business tax cuts the president signed into law). Wealthy Americans, it was alleged, were being unfairly attacked. Perhaps so, but they had the resources to defend themselves. With Republicans back in charge of the House, those neglected are likely to be those less able to defend themselves.    

Intro to a Left Conservative

Left conservative? Well, I believe in hard work and discipline. I believe kids are best reared by two parents. I believe students should address teachers as “Sir” or “Ma’am” and follow their directions without asking “Why?” I think schools should rediscover the virtues of rote learning, drill, basic skills, and an emphasis on content knowledge instead of teaching kids all about format and expecting content knowledge to follow naturally (it doesn’t). So I’m conservative.

But I also believe it’s a bad idea to let wealth become so heavily concentrated that a small fraction of the population gets to control political and economic policy while a majority with only a nominal political voice struggles to stay afloat. I think it’s a bad idea to let big industry essentially do as it pleases with minimal regulation. I think we’re doing ourselves no favors letting carbon dioxide build up in our atmosphere until the resulting climate changes become too severe to prevent catastrophe, all because we think we’re entitled Americans who shoudn’t have to make sacrifices for the sake of our environment. I think it’s unjust to expect workers to toil without the benefit of a unions to bargain for better wages and working conditions. So I’m also left.