Tag Archives: socioeconomics

An answer to Brexit & Trump: Rebuild our infrastructure

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At the core of the dissatisfaction driving support for Brexit, Donald Trump (and Bernie Sanders) is economic dislocation that reduced the jobs and wages of those who worked in the manufacturing and construction industries. The solution is NOT to return to retail manufacturing, where the U.S. can’t compete with China; nor is it to extract more fossil fuels in a highly volatile energy market or to build houses for another financial bubble. Instead we can address their needs while solving a different crisis–fixing our crumbling infrastructure, and even get some other ancillary benefits. We would have both construction and heavy manufacturing jobs with good wages, aimed right at the Brexit/Trump constituencies. And there would be little foreign competition while we put the U.S. economy on better footing to compete in other sectors.

The American Society of Civil Engineers estimate that America needs $3.6 trillion of investment in replacing our infrastructure such as roads, waterworks, power and gas lines and the rest that makes American go. This sounds like a big number, but it’s only a bit more than half of what all federal, state and local governments spend annually. Of course, we would never pay for all of this at once. In our current low-interest environment, at 3% bond financing over 30 years, the annual cost would be $180 billion, which is less than 3% of total spending.

The key is to use disciplined deficit spending, i.e., bonded indebtedness, to finance this program. Funds should be earmarked specifically for this program at the federal, state and local levels. One source of funds could be a wealth tax. A tax rate of 0.2% (yes, two tenths of a percent) on registered securities and real estate could cover the annual debt repayments.

We could tie this program to two other possible goals:

  • To ensure that the income from holding the bonds accrue to a wider segment of the population, we could limit purchase of the bonds to the Social Security Administration and widely-held municipal bond mutual funds.
  • We could staff the program with young people serving in a compulsory national service. The national service would give 18-20 year olds their first jobs and bring together a mix of different backgrounds and cultures. As the draft did in World War II, they could gain a better understanding of others beyond their current experiences.

 

 

 

Today’s rise of populism and loss of economic opportunity

Robert Reich, the former Secretary of Labor, now UC Berkeley professor, and Friend of Bill (Clinton) wrote about how he found he agreed with the basic points of Tea Party supporters:

For example, most condemned what they called “crony capitalism,” by which they mean big corporations getting sweetheart deals from the government because of lobbying and campaign contributions…The more conversations I had, the more I understood the connection between their view of “crony capitalism” and their dislike of government. They don’t oppose government per se. …Rather, they see government as the vehicle for big corporations and Wall Street to exert their power in ways that hurt the little guy. They call themselves Republicans but many of the inhabitants of America’s heartland are populists in the tradition of William Jennings Bryan.

Eliana Johnson, a conservative columnist at the National Review, made a similar observation on NPR:

I actually think Donald Trump is really an embodiment of blue-collar frustration with what are really a bipartisan elite consensus on a number of issues that Republicans and Democrats in Washington agree on. One is free trade, and you see Donald Trump and Bernie Sanders taking similar positions there reflecting frustration. Another is immigration, where Donald Trump is an ardent opponent of letting more immigrants into the country. And I think you see the far left and the far right coming together on that issue. And so Barack Obama is certainly an embodiment of elite Washington opinion, but it’s really, I think, frustration among the grassroots of both parties about issues, really, that Republicans and Democrats agree on and where they feel they are not getting a hearing.

The first question is what is at the heart of the frustration among the white middle-class that is at the core of the Tea Party, and support for Donald Trump. Essentially the white middle class sees that the social compact that guaranteed a comfortable life style with little uncertainty by simply working steadily has come apart. The Great Recession accelerated a trend that was already gaining steam as unemployment and underemployment for older white men increased. Job security for a group that historically has enjoyed the greatest job security is disappearing. And they’re angry about it.

The next question is what is at the core of this trend. First a digression into what we do for “work.” Typically we can divide up what we work on into three areas: making things used by other people, directly serving people, and creating ideas and concepts that people can enjoy or use in the other two work areas. There are physical limits on the value that any one worker can create either in manufacturing or in services. A factory worker can produce only one car at a time and a consumer can buy and use only one car. A coffee barista can serve only one customer at a time, who in turn can only drink one coffee at a time. Nobel Prize winner William Baumol identified this “cost disease” 50 years ago, but he was focused only on services versus manufacturing. He observed that technology could help the factory worker make a car faster, but it wouldn’t be much help for a coffee barista.  But he hadn’t considered the role of workers who create ideas and concepts, simply because this wasn’t a big part of the economy then.

With the advent of computers and the Internet, along with other mass media, it’s now possible for a “worker” such as an entertainer, an athlete, an investment banker, or an app programmer, to create a “product” that can be consumed by millions with no limitations on how many can buy and use that product at one time. Distribution of the product is now almost costless. As a result, a single worker can create huge amounts of economic value single-handedly. That’s not the case with either manufacturing or services. The workers in the ideas and concepts industries can now command extraordinary salaries. Bay Area tech workers are earning an average of $176,275!

Who are these tech workers? Not older white middle class men with a high school education or less. Instead economic value is accruing to the younger, college educated (particularly in STEM fields) and the “middle class” is disappearing. The supporters of the populist causes and the demagogues who exploit those opportunities are those being left behind by this radical transformation of the economy.

The same thing happened at the turn of the twentieth century as the nation moved from an agrarian economy with a 38% of its population on the farm to an industrial powerhouse. William Jennings Bryant thrice ran for President as a populist, in his time railing against the gold standard and calling for “free silver.” His supporters were the farmers being left behind by rapid economic change.

As was the case then, the older dominant labor force working in traditional, stable industries today are not well equipped to adapt to the coming of disruptive changes. They have been extolled as the core of a virtuous workforce, as was the case with farmers then, so they have become part of the American pantheon. Just watch any pickup truck commercial. They understood the social compact as putting in a 40-hour week being sufficient to deliver a comfortable lifestyle. These workers understood that they wouldn’t have to change their careers or learn new skills to live the “American dream.” Unfortunately, that was a false promise. (We can’t really expect that everyone should understand how the economy works–at least not without major changes in our education and media systems.)

Now they look for “easy solutions” of the type long offered by politicians, and they are not disappointed by the offerings. Blocking immigration, imposing trade restrictions, and creating opportunity are all buzz word solutions without real substance or a likelihood for success in solving their problems (and may make the problems worse.)

The change a century ago led to economic benefits that few would dispute improved the well-being of most Americans; we would not have wanted to freeze the proportion of the U.S. economy devoted to agriculture. The final question then is what should be the appropriate policy responses to mitigate these harsh effects on a group that long enjoyed a favorable position in our economy while allowing for another beneficial economic transformation?

Repost: Californians Can Handle the Truth About Gas Prices

Sev Borenstein writes about the two sides of the argument on whether transportation fuels should be rolled into the cap-and-trade program in January 2015.

I have an observation that that has only been alluded to indirectly in the debate. The main point of the legislators’ letter calling for a delay in implementation is that low income groups may be particularly hit. The counter argument that we need the inclusion of transportation fuels under the cap to incent innovation seems to pit the plight of the poor against the investment risk of wealthy entrepreneurs. We haven’t really done a good job of addressing affordability of the transformative policies that can change GHG emissions. The proposal to use carbon tax revenues to rebate to low income taxpayers has been floated at the national level, but of course that died with the rest of the national cap and trade proposal. A similar proposal was made to mitigate electricity price impacts.

Our state legislators are rightfully concerned about the impacts on those among us who have the least. Nevertheless, that problem is easily addresses with the tools and resources that are already available to the state. Those families and households who now qualify for the CARE and FERA electric and natural gas utilities rate discounts can be made eligible for an annual rebate equal to the average annual gasoline consumption multiplied by the amount of the GHG allowance cost embedded in the gasoline price. This rebate could be funded out of the state’s allowance revenue fund. For example, if the price is increased by 15 cents per gallon and the average automobile uses 650 gallons per year, an eligible household could receive $97.50 for each car.

About 30% of households are currently eligible for CARE or FERA. On a statewide basis, the program would cost about $650 million, which is comparable to the cost for CARE for a single utility like PG&E or Southern California Edison. Those legislators who are most concerned can coauthor legislation to put this program in place.

(BTW, I think the DOE fuel use calculator is outdated–on my many trips to LA I haven’t seen these types of fuel economy changes. My average MPG is pretty much the same no matter how much traffic there is on I-5.  But that’s just a fun fact aside…)

A few weeks ago, Jim blogged about the concerns that cap-and-trade will drive up gas prices in California.   In late June, those concerns resulted in a letter from Assemblymember Perea and 15 other Democrats asking the California Air Resources Board to delay this expansion of the cap-and-trade program to include transportation fuels from January 1, 2015 to January 1, 2018.  And a couple weeks ago, the ARB Chair, Mary Nichols, sent a reply explaining why ARB was not going to do that.

Meanwhile, the oil industry and some other groups opposed to fuels in the cap-and-trade program have been making inaccurate statements that the change will cause huge increases in gasoline prices.  The ARB and some other supporters of fuels under the cap have responded with their own inaccuracies, saying that including fuels in the program needn’t raise gas prices at all and suggesting that any increase is the fault…

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Nudge and counter-nudge: one combatant

The Atlantic reviewed Cass Sunstein’s latest book on using public policy to redirect individual’s choices. Some complain that the government shouldn’t be influencing daily life in this manner.  However, we already have many other private groups, most businesses, attempting to redirect daily decisions in their favor. But there at least good reasons why we might decide as a larger society to instill counter nudges that lead to overall improved economic decisions and outcomes.

The first is moral hazard where two parties have different amounts of information or levels of incentives. A classic example is a real estate agent and a home buyer. The agent is paid on the percentage of the house price and knows much more about the local market. These conspire to lead to a higher house price on average than would occur in a frictionless market.

The second is the principal-agent problem. In this case, the economic decision-maker is not the actual consumer or producer in the transaction. The health care industry is one classic case where patients defer most of their decisions to a physician, who also happens to be the benefiting service provider. Another case is the split-incentives in the rental housing market where the landlord could make energy-efficiency investments that reduce a tenant’s energy bill, but the tenant actually pays the bill. (I’ll write more on this in a future post.)

Some of this might not be needed with acted like the mathematical automaton that Milton Friedman envisioned, but we do have significant limitations on our abilities to make rational economic decisions. A decentralized price system is probably the best means of allocating use of scarce resources among us. Yet that doesn’t mean that society, through its government, shouldn’t agree to manipulate that price system to arrive at a more preferred set of individual decisions. Thus we should nudge and counter nudge as Sunstein suggests.

Not talking past each other on California’s transportation fuels cap & trade implementation

Last week, 16 Democratic legislators sent a letter to ARB Chair Mary Nichols asking for a delay in adding transportation fuels to the AB 32 cap and trade program starting January 1, 2015. The legislators raise concerns about how a 15 cent per gallon increase could impact the state’s poor.

I was asked by EDF to sign on to a letter in response. That letter focuses on how much of the anticipated innovation arising from AB 32 is dependent on implementing this phase of cap and trade. However, I think the proposed letter misses an important point by the legislators.

Our state legislators are rightfully concerned about the impacts on those among us who have the least.  Nevertheless, that problem is easily addressed with the tools and resources that are already available to the state. Those families and households who now qualify for the CARE and FERA electric and natural gas utilities rate discounts can be made eligible for an annual rebate equal to the average annual gasoline consumption multiplied by the amount of the GHG allowance cost embedded in the gasoline price.  This rebate could be funded out of the state’s allowance revenue fund. For example, if the price is increased by 15 cents per gallon and the average automobile uses 650 gallons per year, an eligible household could receive $97.50 for each car.

About 30% of households are currently eligible for CARE or FERA. On a statewide basis, the program would cost about $650 million, which is comparable to the cost for CARE for a single utility like PG&E or Southern California Edison. Those legislators who are most concerned can coauthor legislation to put this program in place.