Category: Economics
Net Neutrality
The Federal Communications Commission is working on a decision to either stay the course on net-neutrality, or to permit internet service providers (ISPs) to charge websites for faster, preferential delivery speeds – thus also permitting ISPs to deliver non-preferred websites at slower speeds.
“Net Neutrality” conceives the internet as a “dumb” network, which doesnt know who’s sending what to whom, and thus treats everything from Wikipedia to Netflix to Craigslist to pornography to this blog the same, with respect to transmission speed and quality. An alternative scenario might let ISPs (like Time Warner or Comcast) charge Skype or Youtube to deliver their data faster… for a price – but as a consequence, everyone else will be delivered slower.
The economics of net neutrality are tricky. On the one hand, there’s a very basic free market notion that finite resources should be allocated to whoever values them more. If some websites place greater value on faster content delivery, and given that the volume and speed of data on the net are finite, then it makes sense to let the market decide who moves faster. Letting ISPs put a price on speed will allow whoever values it the most to obtain it. (This arrangement has always been permitted for end users, who can choose to pay more for faster up- and downloading speeds.) ISPs claim that unless they can establish these faster “toll roads,” they will not make enough money to continue to make investments needed to upgrade their services and increase bandwidth.
The problem with establishing faster internet “toll roads” is that internet innovation has always been driven by the quality of services and content, which has always depended on ideas and technology, not a special fee-arrangement with ISPs. If you want to drive traffic to your site, you have to make your content or your services more attractive. (Advertising helps too!) It has never been possible to compensate for inferior content and services with faster delivery speeds.
It’s also worth taking a closer look at ISP claims that the current net-neutrality model doesnt work for their business. ISPs today make their money by charging end-users to connect to the internet. Cable companies typically charge $30-50 per month for broadband service. In the US, there tends to be little competition for broadband – within a given market, there may be just one or two carriers. Such market conditions are highly favorable to ISPs, allowing them to vastly inflate consumer prices. Compared to consumers in other advanced countries, Americans are commonly charged ten times more for broadband, receiving slower, less reliable service for their extra cost.
Net neutrality is a good thing. It rewards innovation, and it lets the internet live up to its best promise: to be an even playing field, where we all connect on equal terms – and may the best mousetrap win. American ISPs are already fat pigs in cushy markets – if they cannot thrive on monopoly profits from consumers, then they should be excluded from the retail ISP business entirely, and forced to sell their bandwidth wholesale, to allow for real competition.
Refs:
http://www.newyorker.com/news/john-cassidy/whos-sticking-internet-users
http://fortune.com/2014/06/26/is-municipal-broadband-more-important-than-net-neutrality/
A Big Deal on Climate
The details are barely in, but it seems, at long, long last, that the number 1 and number 2 world economies – also the number 2 and number 1 world polluters – have finally come to an agreement on carbon emissions. This is such a big deal, and such good news, that conservatives are tripping over themselves to take a giant dump on it – as a preemptive first strike, since this deal is poised to take a giant dump on them.
That’s because conservatives for years have used China as a shield to avoid serious discussion of the issues related to climate change. Cap and trade, the subsidization of renewable energy sources, new EPA standards on greenhouse gases: name a climate-change initiative, and you can line up conservatives around the block to oppose it, with China the first and last word they utter. They’ve been telling us for years that the US would be a sucker to work toward any reduction in emissions, because the US would merely be encouraging Chinese polluters – with the logic that whatever the US doesnt pump into the atmosphere, the Chinese will pump extra to compensate, taking American jobs and profits along the way.
China, for their part, have long opposed adhering to a common set of standards with the developed West, reasonably asserting that (1) present atmospheric CO2 levels are chiefly attributable to the past activity of Western economies, not China; and (2) unfettered Chinese development has lifted hundreds of millions of people from poverty, and promises to lift hundreds of millions more – just as it did in the West over the past two centuries.
The rest of the world has thus been held hostage to the intransigence of the world’s two largest economies and polluters. After all, any deal on climate change that doesnt include the US and China leaves out nearly half the world’s emissions and half the world’s economy.
But everything changed when US President Barack Obama and Chinese President Xi Jinping announced that they reached agreement on greenhouse gas emissions. China has finally agreed to capping emissions, while the US has agreed to steeper reductions. And now there is every reason to be optimistic that the US, China, and the rest of the world can hash out the deal that has long eluded them, when the climate summit meets in Paris in late 2015.
Obama seems ready to do an end-run around the US Senate, which is now controlled by conservatives, and headed by Mr. Coal himself, Kentucky’s Mitch McConnell. Any further international deals on climate are likely to be styled as “Agreements” – as opposed to “Treaties” – further to a 1992 treaty, the United Nations Framework Convention on Climate Change. Treaties require 67 votes in the Senate, where even 50 are now impossible. In past decades, what was once the world’s preeminent deliberative body could have been relied upon to see past partisan posturing on the most critical issues of the day, to at least have an intelligent debate. No more: the cancer that is conservatism has made the US Senate so dysfunctional that it cannot even meaningfully address matters concerning the planet’s long-term ability to support life.
Refs:
http://news.yahoo.com/angry-gop-backlash-obamas-historic-climate-accord-171428262.html
http://www.nytimes.com/2014/11/13/opinion/climate-change-breakthrough-in-beijing.html
http://en.wikipedia.org/wiki/United_Nations_Framework_Convention_on_Climate_Change
http://en.wikipedia.org/wiki/Kyoto_Protocol
http://en.wikipedia.org/wiki/Post%E2%80%93Kyoto_Protocol_negotiations_on_greenhouse_gas_emissions
Deficits and the Party of Duh
Since the Field Guide last discussed the dramatic decline of the US budget deficit, the non-partisan Congressional Budget Office came in with its revised numbers for Fiscal Year 2014, which ended September 30th. According to CBO, the deficit for FY 2014 shrank to $486 billion, or 2.8% of GDP. Because the US economy grows, on average, at a rate of about 3% per year, deficits smaller than that can be sustained forever. The US fiscal crisis is over.
The turnaround of the nation’s finances under the Obama Administration has been remarkable. FY 2009, which began while Obama was yet Illinois’ junior senator, had a budget deficit of 9.8% of GDP – the highest since World War II. Under Obama, that figure has fallen every year, to at last slip below 3%. FY 2014’s deficit is in fact slightly smaller than the average of the past 40 years.
If conservatives were thoughtful by nature, they might be scratching their heads. According to their dogma, Obama’s increased taxes on the wealthy, and the ACA’s expanded social insurance for the poor, should have led to mounting deficits and economic stagnation. That’s what they’ve been predicting for the past 6 years – along with hyperinflation. But the fact that reality has returned the precise opposite of conservative predictions – decreasing deficits, economic growth, increasing employment and below-average inflation – has not caused conservatives to reconsider their beliefs.
Responding to facts, after all, is only something that rational people do. Conservatives in the end are dogmatists whose beliefs are fundamentally religious in nature – they dont care a whit about reality. This is how conservatives can continue clinging to the discredited notion that tax cuts pay for themselves, and that social insurance is a black hole of waste and inefficiency. Despite being wrong again and again, they are unable to learn and move on.
Shortly after Reagan came to office in 1981, he got through his signature legislative initiative: slashing taxes on the wealthy, while affording smaller tax cuts to everyone else. The nation’s finances never recovered. Though the economy rebounded – as was expected, following the sharp recession of the early 80s – deficits remained unsustainably high until Reagan left office in 1989, and were still averaging nearly 4% of GDP during the Bush years that immediately followed. To fully grasp the significance of Reagan’s policy failure, it helps to appreciate that the Carter’s administration never ran a budget deficit greater than 3% of GDP, despite a poor economy.
Clinton came to power as the unReagan: he raised taxes on the wealthy (without a single GOP vote in Congress), while also increasing government spending on stimulus programs that typically help middle income families. With conservatives predicting gloom and doom, the US economy responded with its longest sustained expansion in history, while the deficit shrank to zero.
You’d think this experience would be the slam-dunk/death-knell of Voodoo Economics – if, after all, tax cuts demonstrably worsen deficits, while tax increases shrink them to nothing, while coinciding with unsurpassed economic growth, how could conservatives persist in their folly? But the charm of conservatives is their inability to learn from experience, no matter how obvious or unequivocal its lessons. And thus Bush Duh continued with the same conservative foolishness, cutting taxes on the rich, which gave away the nation’s hard-won surplus, replacing it with deficits stretching far into the future, culminating in a lackluster economy and the nation’s worst fiscal straits in more than 60 years.
Under Obama, the US has expanded its social safety nets and raised taxes on the wealthy, while lowering the deficit and growing the economy. In other words: it’s the same old story – and if conservatives in the Party of Duh had any connection to reality, they wouldnt be surprised at all.
The Field Guide is off mid-week for Veterans’/Armistice/Decoration Day – we’ll return with new material on Friday.
Kansas Voodoo
Perhaps even conservatives can only be fooled so many times before they get wise. In Kansas, Democrat Paul Davis has pulled even with Republican incumbent Sam Brownback in the race for governor. Davis has even received the endorsement of numerous Republican officials across Kansas, who find Brownback’s dalliance with Voodoo Economics too spooky for their taste.
Credit for the term “Voodoo Economics” goes to George Bush. While he was competing for the 1980 GOP presidential nomination, he applied it to describe Ronald Reagan’s economic proposals, which relied on the notion that tax cuts pay for themselves. To George Bush, and to most of us, Reagan’s policies seemed like a crackpot idea at the time. Our experience over the past 30 years have borne out Bush’s skepticism.
Fiscally, the US never recovered from Reagan’s tax cuts. Deficits remained sky high for twelve years, right through the departure of his successor from the White House in 1993. That not-so-grand experiment only ended with Clinton’s tax increases, which, instead of bringing the disasters predicted by conservatives, delivered the longest economic expansion in US history, and replaced Reagan and Bush’s deficits with surpluses projected far into the future.
Under Bush Duh, the US again endured the folly of Voodoo Economics. His tax cuts gave away the surplus to the very rich, and left the country’s fiscal health permanently compromised. The cure only came via Obama’s tax increases on the wealthy – and the sustained economic recovery that’s (again) happened with conservatives (again) predicting gloom and doom.
But these experiences werent enough to deter Kansas from embarking on the very same, failed supply-side Voodoo. Conservative Sam Brownback was elected governor in 2011, and in 2012 pushed through a massive tax cut, slashing the top income tax rate by 25%, and eliminating income taxes on small businesses entirely. Brownback was hoping for a little of that ol’ black magic: to see state tax revenue grow, even though almost all Kansans were going to be paying a lower tax rate.
For all its voodoo, Kansas is now in deep budgetary doo-doo – because Voodoo Economics has failed Kansas too. With tax receipts falling short of expenses by hundreds of millions of dollars, education, along with other government services have been slashed, and the state’s credit rating has been downgraded. And in addition to all that red ink, Kansas is adding jobs at a slower pace than the national average. With inept governance, deficits, and weak job growth, one might regard today’s Kansas as a time capsule of the Bush Duh years – from which even Kansas Republicans seem eager to escape.
Beg, Borrow and Sue
Some beggars wouldnt merely be choosers – they would be plaintiffs. In 2008, AIG was flat on its back, about to take its last breath before going into the corporate afterlife. (The Supreme Court tells us that corporations can hold religious beliefs – so who’s to say their souls dont live on beyond Chapter 11….) AIG’s liabilities outstripped its assets by tens of billions of dollars. Insolvent, AIG would have had little choice but to be dissolved via bankruptcy, its assets liquidated to pay creditors, who would have received pennies on each dollar of debt. Despite AIG’s thousand-dollar share price on the eve of the financial meltdown, its shareholders would have lost their entire investment, their shares zeroed out, without a cent left over.
You’d think those shareholders would be mighty grateful to the US government, which bailed out AIG to the tune of $182 billion. Though AIG’s share-price was pummeled, it’s still around fifty bucks today, which is fifty bucks more than it’d be without the bailout. But some of those shareholders are not grateful – and they are suing the US government because, in their opinion, the bailout AIG received wasnt generous enough.
It’s true that while AIG’s creditors got a sweetheart deal, AIG itself did not. But it wasnt left to die, as was Lehman Brothers, which on September 15th, 2008 departed this world for the dark night of Chapter 11, never to return. Lehman had been the nation’s 4th largest investment bank, and its destruction was a body blow to an already-teetering US economy. The federal government learned its lesson, and resolved to save AIG – the world’s largest insurance company – but it would do so on terms onerous enough to serve as fair warning to other financial firms. The fear was that if AIG’s deal was too good, others might be tempted to make similarly risky bets, with the expectation that the government would bail them out if things didnt pan out. Instead of a golden parachute, AIG got a no-frills heimlich maneuver – but it’s not like the US government owed it to AIG to do anything at all.
AIG itself is not a party to the lawsuit. As AIG CEO Robert Benmosche said in an interview, “It’s not acceptable socially for AIG to have taken this money and think that we could come back and sue the government because [they] made too much money on the deal.” But not all AIG shareholders share Benmosche’s qualms. The suit is led by former AIG CEO Maurice Greenberg, a one-time billionaire, now scraping by on assets worth a paltry $300 million. For Greenberg and his co-plaintiffs, the $182 billion bailout they received from US taxpayers wasnt charity enough – they have demanded that US taxpayers cough up an additional $50 billion.
To grasp the enormity of AIG’s bailout, it helps to compare it to other government spending programs. For example, AIG’s bailout is enough to cover all US government expenditures on welfare (TANF) and food stamps (SNAP) – combined – for two years! The $50 billion that AIG shareholders are suing for would by itself nearly cover the annual cost of the EITC program (a subsidy for the working poor).
Beyond the inanity of conservative talking points, these figures reveal America’s true takers. While millions of working American families receive a pittance in public support, wealthy AIG investors have had their trough filled by US taxpayers – which wont stop them from suing till that trough overflows.
Refs:
http://www.reuters.com/article/2013/06/26/us-aig-bailout-lawsuit-idUSBRE95P1G120130626
http://www.cnbc.com/id/100544872
http://www.cnbc.com/id/100367504
http://www.insurancejournal.com/news/national/2011/11/21/224905.htm
The Field Guide is off Monday for Columbus Day – we’ll be back with new material on Wednesday, October 15th.
Democrat In, Deficit Gone – Again
The latest projections have the US budget deficit falling to 3% of GDP in fiscal year 2015, which started this past Wednesday, October 1st. 3% is the magic threshold for deficits. Under that level, they are theoretically sustainable forever, because the US economy, on average, grows by that amount every year.
On inauguration day, January 20th, 2009, the Obama administration inherited a projected budget deficit of $1.2 trillion for fiscal year 2009. (“FY 2009” began October 1, 2008, while Obama was still a senator.) Fiscal stimulus packages and other legislation passed soon thereafter added an additional $200 billion, to create what would become FY 2009’s largest-ever deficit in US history ($1.4 trillion). As a fraction of US GDP (9.8%), it was and is the largest deficit since WWII.
It’s remarkable how much the US fiscal outlook has since improved. Following FY 2009, the US experienced three more years of trillion-dollar deficits – albeit each year’s deficit was smaller than that of the year before. The deficit for FY 2014, which ended on Tuesday, September 30th, is expected to be less than $650 billion. It’s projected to shrink to about $450 billion in FY 2017, when Obama leaves office – about 2% of GDP. (For the past several years, actual deficits have proved smaller than Congressional Budget Office projections.)
To put this in historical perspective, consider that between FYs 1982 and 1993, Reagan and Bush ran precisely one deficit of less than 3% of GDP – and six that were 4.4% or greater. But under Carter and Clinton, every deficit was less than 3% of GDP. Half of Bush Duh’s eight years saw deficits surpass 3%, culminating in FY 2009’s record-setting $1.4 trillion in his last year in office. The pattern could not be more apparent. During the 32 year period 1977-2009, the annual US budget deficit was less than 3% for all 12 years that Democrats held the White House – but over 3% for 14 out of 20 years that conservative Republicans held it. And under Obama the deficit has only ever shrunk.
Obama’s fiscal stewardship is impressive. CBO now projects Obama will become the first two-term president in US history under whom budget deficits will shrink year-over-year, every year. (Bill Clinton and Andrew Jackson came close, each with declining deficits in their first seven years in office.)
The icing on the cake is what finally pushed US deficits under the 3% threshold: Medicare. Under the ACA, growth in healthcare costs have fallen to their lowest rate ever recorded, and Medicare is leading the way, with the public insurer returning slower cost-growth than private insurers.
The Obama administration has returned the US from typical conservative Republican fiscal irresponsibility to moderate Democratic sensibility – enduring conservative recriminations all along the way. It’s the same thing Clinton experienced while he was turning red ink into surpluses. Just as Al Gore cast the tie-breaking vote to enact the tax increase that put the US on track for the Clinton boom and balanced budgets, so Nancy Pelosi and Harry Reid used a side-door reconciliation scheme to enact the ACA, which was the last step the US needed to get under the 3% threshold – without a scintilla of GOP support.
Conservatives for Pele
Many cultures throughout human history, baffled by the origins and causes of natural phenomena, have come to devise bizarre and exotic explanations for them. Lacking a thoroughgoing understanding of planetary formation, plate tectonics and fluid dynamics, even cultures as advanced as the Romans had Vulcan, god of fire, from which the English word volcano is derived. And while tossing virgins into craters is largely a Hollywood invention, many cultures have practiced low-impact sacrifices, including Hawaiians to Pele and Indonesians to Mount Bromo.
In the West, several centuries of scientific tradition have eliminated most such practices. A few persist, however – among the most remarkable is conservatives’ belief that, during recessions, natives should sacrifice government services and jobs to appease mighty Inflation, a modern-day analog to Pele.
Science progresses in a similar fashion across most disciplines. Data are collected; theories are offered to explain the data. Those theories are then used to generate new predictions. New data are collected, and if it squares with prediction, then the theory is said to have been substantiated, and is strengthened. But if the it goes off in some other direction, the theory must be retooled, if not discarded.
The problem with conservative macroeconomists is that, as their models have been contradicted again and again by newly arriving data, they hold fast to their theories – a practice more akin to religion than science; as their theories become more and more like religious beliefs. Philadelphia Fed President Charles Plosser is the poster child for scientists-turned-theologians. He began worrying publicly about “imminent” inflation back in April 2008. Six and a half years later, while US inflation has averaged 2% annually, Plosser is still worrying, unfazed that his one-time theories – now, more aptly described as dogmas – have fallen and cannot get up.
Martin Feldstein, Reagan’s first chief economic adviser, has a similar record. Feldstein, who left the Reagan Administration because they werent sufficiently conservative, started worrying about inflation in 2009, and is still beating the drum. The repeated failure of his economic models to predict the low inflation that the US has seen over that period has not motivated him to find a model that actually works.
Theories exist to explain the data we have, and to predict the data we hope to gather. That’s it. A theory that fails in both respects should not be kept around to stink up the house like some beloved-but-incontinent family dog. Bad theories need to be euthanized to let the discipline move forward. Clinging to old, failed theories can have terrible consequences. The practice literally killed George Washington, whose doctors bled him to death to “treat” his cold. Doctors bled patients for centuries, until sound scientific methods demonstrated the procedure’s destructiveness.
Some commentators have mockingly dubbed the policies of inflation-phobic economists as “sado-monterism.” It’s expressed as a preference for high interest rates and budget cuts in the face of a weak economy, in the absence of inflation or even its threat. It is in fact very much like bleeding a sick patient, in that it strikes at the economy’s very ability to correct itself, by making capital scarce and spending weak when both are needed most.
Belief in gods of volcanoes and inflation survive via the same process: shoddy reasoning. Economists like Plosser and Feldstein, and the entire governing council of the European Central Bank, are probably no more or less dishonest or well-intentioned than the people who worshiped Pele. Like 18th century Hawaiians, they’re just exceptionally poor scientists.
Refs:
Plosser 2008: http://blogs.wsj.com/economics/2008/04/18/fedspeak-highlights-plosser-on-inflation-and-fed-actions/
Plosser 2013: http://www.marketwatch.com/story/plosser-inflation-risks-unless-fed-tightens-2013-01-11
Plosser 2014: http://www.cnbc.com/id/101938255
Feldstein 2014: http://online.wsj.com/news/articles/SB10001424052702303978304579471472849459860
http://www.salon.com/2014/04/21/paul_krugman_on_the_latest_major_victim_of_sadomonetarism/
http://www.nytimes.com/2014/09/12/opinion/paul-krugman-the-inflation-cult.html
http://www.forbes.com/sites/johntharvey/2014/09/17/wheres-the-hyperinflation/
http://en.wikipedia.org/wiki/Pele_%28deity%29
This post’s title is a tribute to Boys for Pele, among the greatest pop albums ever recorded.
The Blockade is Hamas’ Best Friend
Hamas, it would appear, has little to offer young people. And yet it has only grown in popularity since its founding during the 1st intifada in 1987, beating its rival Fatah in Gaza’s 2006 elections. Observers fail to appreciate that young Gazans rationally join Hamas because they lack better options. Hamas affiliation promises power, money and status, which, because of the Israeli blockade, are not readily had through education and employment.
The blockade is Hamas’ best friend. It all but destroys Gaza’s economy, making it impossible for people to support themselves through ordinary work. Gazans used to be able to cross into Israel to get better paying jobs. They used to be able to work in Gaza and export goods to foreign markets. The blockade destroys both of those options. If you are a Gazan and want to get ahead, work and school wont help much. Acquiring better job skills is only useful if you can sell those skills. Joining Hamas simply pays better.
Perversely, the more the blockade constricts the supply of everyday items – food, fuel, water, medicine – the more it enriches Hamas, because they control the little that gets in. Imagine if, in the US, organized crime didnt just control the supply of illegal drugs – imagine they imported and distributed everything from Pepsi to Tylenol to gasoline. That’s what the blockade does for Hamas – it turns Gaza’s Islamist ruling party into Gaza’s wholesaler for everything. And the worse things get for ordinary Gazans – the pricier that drinking water, wheat flour and medicine become – the more money goes to Hamas, and the more reason people have to join them. This is on top of the aid funneled through Hamas by the UN and other international organizations, to keep Hamas awash in cash, and thus more attractive to join – not to mention better armed. (Foreign aid, despite its good intentions, often serves to sustain bad governments, by giving them a ready source of income, and making them less answerable to their beleaguered population.)
Take away the blockade and let goods and people move unfettered into and out of Gaza, and Hamas loses big. Yes, thousands of rockets will enter Gaza and be fired into Israel. Newsflash: they already are! In the last year of Israel’s physical occupation of Gaza, Hamas (and others) fired more than 1000 rockets and RPGs into Israel. After the blockade in 2007, the total number of attacks continued to climb: more than 2800 in 2007, and more than 3700 in 2008. Attacks dropped off after Israel (and Egypt) tightened the borders even more – but they rebounded soon after, exceeding 2200 in 2012. The first 8 months of 2014 have already seen more than 4000 such attacks.
To gain some perspective on these numbers, consider that since 2001, Israel has been subject to about 19,000 rocket and mortar attacks – but only 28 Israelis have been killed. Gazans who have died in Israeli retaliation number in the thousands – most of whom are innocent, and many of whom are children.
Keeping weapons out by occupation or blockade has been tried and failed. The blockade actually makes things worse because it gives Hamas that much more cash to buy weapons. This is why ending the blockade is Israel’s best long-term bet for peace and political change.
Not only should Israel end the blockade, it should also rebuild Gaza’s airport and seaport, allow an unlimited number of workers in and out to work in Israel, and invest in rebuilding schools and hospitals. Doing this will make it profitable for Gazans to live their lives in the ordinary way: acquire skills, and sell one’s labor, or the fruit thereof, to the highest bidder. Present Israeli policy only guarantees a future of yet more violence.
Refs:
http://en.wikipedia.org/wiki/Blockade_of_the_Gaza_Strip
N.b. While Hamas is a serious nuisance for Israel, it poses an existential threat to Egypt’s government, which only recently deposed the Islamist Muslim Brotherhood, a natural ally of Hamas. Most of the above arguments apply equally to Egypt, whose long-term security would be enhanced by open borders and free trade with Gaza. However the blockade of Gaza is entirely the work of Israel. Any country can, legally, close its borders to another country. Egypt and Israel have both done so with respect to Gaza. Israel however goes the extra mile by blockading Gaza’s Mediterranean coast, and keeping Gaza’s airport inoperative. While the border closures are legal (if poorly considered), the air and sea blockade is not.
How Israel Sustains Hamas
About 10 years ago, Senator Barack Obama gained national attention when he talked about the social stigma young blacks acquire when they “act white” by devoting too much time to schoolwork. Around the same time a young academic was making a name for himself with his work on the economics of “acting white” versus “acting black.” One of the questions his research addressed was why, given that “acting black” is associated with poor socio-economic outcomes, do so many urban youths nonetheless neglect their studies.
Among his findings, economist Roland Fryer demonstrated that in certain circumstances people rationally choose to strive for popularity within a community by conforming to local cultural norms – instead of seeking to escape that community via good grades and mainstream cultural norms. Or as one commentator put it, “some individuals can receive social benefits large enough to outweigh benefits they might otherwise receive via education and wages. In a purely rational sense, these individuals prefer peer acceptance to the benefits of education.”
In a certain environment, the long-term promise of college and a career dont outweigh the short-term social cost of “acting white.” Reciprocally, the short-term rewards for “acting black” are not easily sacrificed for the long-term gains potentially realized by being a more conscientious student. Fryer’s research has yielded great insights on the persistence of American urban subcultures associated with poverty, violence, drug abuse, low educational attainment, and poor long-term life outcomes. And it is no less powerful in helping to understand the popularity of Hamas in Gaza.
One begins by asking why Hamas is so successful at recruiting young men to its cause. Assuming that young men everywhere have similar interests – power, popularity, money, women, etc. – the obvious answer is that Hamas offers young men a shorter path toward their goals than other options. The big problem, common also to America’s poorest urban areas, is that in Gaza there’s scant opportunity to improve one’s life via education and hard work. People rationally choose to go about improving their lot through undesirable means, such as affiliation with Hamas.
The good news from Fryer’s research is that people are sensitive to their options – one might therefore be able to steer them away from making bad choices simply by providing them with superior alternatives. (There’s an analogous line of research in the social sciences showing that, across the globe, women with more education tend to have fewer children – that if you give women the option of choosing school and career, fertility drops like a rock.)
Israeli policies toward Gaza created and now unwittingly sustain Hamas. The blockade leaves young Gazans with few possibilities for work or commerce. It used to be one could acquire skills and sell one’s labor in Israel, or produce goods for export to Israel or elsewhere. But the blockade forecloses either of those two ordinary avenues, leaving individuals with few options to obtain the things they want, literally driving the population into the arms of Hamas.
Refs:
http://educationnext.org/actingwhite/
http://en.wikipedia.org/wiki/Acting_white#Case_studies_and_research
http://insight.kellogg.northwestern.edu/article/acting_white_or_just_acting_rationally/
http://en.wikipedia.org/wiki/Gaza_Strip#Economy
http://en.wikipedia.org/wiki/Blockade_of_the_Gaza_Strip
Inequality’s Cure is Good for All
Inequality’s myriad problems dont end with justice and politics – it’s bad for the economy too. Everyone, rich and poor, does worse over the long haul when the distribution of wealth and-or income is too extreme.
The empirics behind this assertion are solid. Economies with extreme inequality grow more slowly and are more prone to recession. To understand why this is so, consider an economy with twenty families, each with an annual income of $50,000. They are likely to spend every last dollar they have – and maybe borrow and spend a few dollars they dont have too. By comparison, consider two families, each with $500,000 in annual income. Total income is the same – but those two families are likely to spend much less, and save a significant fraction of their income.
In the aggregate, when a huge share of national wealth and income are sucked up by a handful of wealthy families, you get a very high savings rate, and relatively low spending. And that’s exactly what the US economy looks like today. And too much saving is a problem because my spending is your income; therefore my savings is your lost income. One reason the US economy has expanded so anemically following the Great Recession (one-half the ordinary rate) is the enormous concentration of wealth and income in the hands of the rich, who are not inclined to spend it – their high savings rate is killing everyone else’s income. Corporations – perceiving, correctly, that people of ordinary means lack the income to buy more – are sitting on a mountain of cash, unwilling to invest.
So we know that inequality is bad for growth, and we’ve even identified the mechanism that holds growth back. But the remaining issue is whether we can get from here to there – from an unproductive distribution of wealth to one that’s more growth-friendly – without damaging the economy with our redistributive efforts. And the latest research shows that we can.
Classical economists – AKA conservatives – believe that the economy runs like a Swiss watch: its every operation self-correcting and self-sustaining. In the way that the universe weirdly bestowed just the right physical forces in just the right strengths to make life possible (if not probable!), classical economists believe human nature is somehow weirdly wired to facilitate an economy like a grand perpetual motion machine, without centralized governing agencies. According to classical theory, anything a central planner tries to do to “improve” an economy will necessarily do more harm than good. Analogous to the second law of thermodynamics, their effort to enhance one aspect of an economy will result in degrading the system as a whole to an even greater degree.
For good reason, no one fully subscribes to classical economics. Anyone who did would have to oppose public education as a grand waste of resources – since the education of children might as well be left to private markets, as is baking, brewing and butchering.
Conservatives like to claim that there’s nothing to be done about inequality – because any attempt to fix it will do more harm than good. But like the rest of classical economics, this assertion’s relationship with reality is growing ever more tenuous. The latest research shows that we can, in fact, take positive steps to reduce inequality without harming the economy as a whole. Classical economics is wrong here too.
The upshot is that the government should not be timid about tackling inequality head-on – by increasing marginal tax rates on the wealthy, big estates, and investment income; and by reducing taxes on working people, whose incomes have been stagnant for decades. In the long run, everyone comes out ahead. This is consonant with the Liberal Field Guide’s concept of Self-Interested Liberalism. Modern liberalism, after all, is not about selfless generosity. Inequality is bad for everyone. Combating it through fiscal policy is good for all of us. Liberal policies like educating poor children, guaranteeing healthcare to everyone, and combating inequality make us all better off – rich, poor and in between.
Refs:
inequality bad for growth: https://www.globalcreditportal.com/ratingsdirect/renderArticle.do?articleId=1351366&SctArtId=255732&from=CM&nsl_code=LIME&sourceObjectId=8741033&sourceRevId=1&fee_ind=N&exp_date=20240804-19:41:13
fixing inequality will not do more harm than good: http://blog-imfdirect.imf.org/2014/02/26/treating-inequality-with-redistribution-is-the-cure-worse-than-the-disease/
http://carltonthurman.me/2014/04/11/the-self-interested-liberal-and-trickle-up-economics/
http://www.nytimes.com/2014/08/08/opinion/paul-krugman-inequality-is-a-drag.html
Carlton Thurman's Liberal Field Guide 